FEDERAL NATIONAL MORTGAGE ASSOCIATION FANNIE MAE
10-Ks and 10-Qs
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended March 31, 2010 | ||
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OR
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o
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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.) |
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3900 Wisconsin Avenue, NW
Washington, DC (Address of principal executive offices) |
20016
(Zip Code) |
Registrant’s telephone number, including area code:
(202) 752-7000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes
þ
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer
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Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
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As of March 31, 2010, there were 1,117,363,226 shares
of common stock of the registrant outstanding.
Table of Contents
TABLE OF
CONTENTS
i
Table of Contents
ii
Table of Contents
MD&A
TABLE REFERENCE
iii
Table of Contents
iv
Table of Contents
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
We have been under conservatorship, with the Federal
Housing Finance Agency (“FHFA”) acting as conservator,
since September 6, 2008. As conservator, FHFA succeeded to
all rights, titles, powers and privileges of the company, and of
any shareholder, officer or director of the company with respect
to the company and its assets. The conservator has since
delegated specified authorities to our Board of Directors and
has delegated to management the authority to conduct our
day-to-day
operations. Our directors do not have any duties to any person
or entity except to the conservator and, accordingly, are not
obligated to consider the interests of the company, the holders
of our equity or debt securities or the holders of Fannie Mae
MBS unless specifically directed to do so by the conservator. We
describe the rights and powers of the conservator, key
provisions of our agreements with the U.S. Department of
the Treasury (“Treasury”), and their impact on
shareholders in our Annual Report on
Form 10-K
for the year ended December 31, 2009 (“2009
Form 10-K”)
in “Business—Conservatorship and Treasury
Agreements.”
You should read this Management’s Discussion and
Analysis of Financial Condition and Results of Operations
(“MD&A”) in conjunction with our unaudited
condensed consolidated financial statements and related notes,
and the more detailed information contained in our 2009
Form 10-K.
This report contains forward-looking statements that are
based upon management’s current expectations and are
subject to significant uncertainties and changes in
circumstances. Our actual results may differ materially from
those reflected in these forward-looking statements due to a
variety of factors including, but not limited to, those
described in “Risk Factors” and elsewhere in this
report and in “Risk Factors” in our 2009
Form 10-K.
Please review “Forward-Looking Statements” for more
information on the forward-looking statements in this report.
You can find a “Glossary of Terms Used in This
Report” in the “MD&A” of our 2009
Form 10-K.
INTRODUCTION
Fannie Mae is a government-sponsored enterprise that was
chartered by Congress in 1938 to support liquidity, stability
and affordability in the secondary mortgage market, where
existing mortgage-related assets are purchased and sold. Our
most significant activities include providing market liquidity
by securitizing mortgage loans originated by lenders in the
primary mortgage market into Fannie Mae mortgage-backed
securities, which we refer to as Fannie Mae MBS, and purchasing
mortgage loans and mortgage-related securities in the secondary
market for our mortgage portfolio. We acquire funds to purchase
mortgage-related assets for our mortgage portfolio by issuing a
variety of debt securities in the domestic and international
capital markets. We also make other investments that increase
the supply of affordable housing. Our charter does not permit us
to originate loans and lend money directly to consumers in the
primary mortgage market.
Although we are a corporation chartered by the
U.S. Congress, our conservator is a U.S. government
agency, Treasury owns our senior preferred stock and a warrant
to purchase 79.9% of our common stock, and Treasury has made a
commitment under a senior preferred stock purchase agreement to
provide us with funds under specified conditions to maintain a
positive net worth, the U.S. government does not guarantee
our securities or other obligations.
EXECUTIVE
SUMMARY
Our
Mission, Objectives and Strategy
Our public mission is to support liquidity and stability in the
secondary mortgage market and increase the supply of affordable
housing. As we discuss below, we are concentrating our efforts
on two of our objectives:
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supporting liquidity, stability and affordability in the
mortgage market and minimizing our credit losses from delinquent
loans. Please see “Business—Executive Summary—Our
Business Objectives and Strategy” in our 2009
Form 10-K
for more information on our business objectives, which have been
approved by FHFA.
Providing
Mortgage Market Liquidity
We support liquidity and stability in the secondary mortgage
market, serving as a stable source of funds for purchases of
homes and multifamily housing and for refinancing existing
mortgages. We provide this financing through the activities of
our three complementary businesses: Single-Family Credit
Guaranty, Housing and Community Development (“HCD”)
and Capital Markets. Our Single-Family and HCD businesses work
with our lender customers to purchase and securitize mortgage
loans they deliver to us into Fannie Mae MBS. Our Capital
Markets group manages our investment activity in
mortgage-related assets, funding investments primarily through
proceeds we receive from the issuance of debt securities in the
domestic and international capital markets. The Capital Markets
group is increasingly focused on making short-term use of our
balance sheet rather than on long-term buy and hold strategies
and, in this role, the group works with lender customers to
provide funds to the mortgage market through short-term
financing, investing and other activities
.
These include
whole loan conduit activities, early funding activities, dollar
roll transactions, and Real Estate Mortgage Investment Conduit
(“REMIC”) and other structured securitization
activities, which we describe in more detail in our 2009
Form 10-K
in “Business Segments—Capital Markets Group.”
During the first quarter of 2010, we purchased or guaranteed an
estimated $191.4 billion in loans, measured by unpaid
principal balance, which includes approximately $40 billion
in delinquent loans we purchased in March 2010 from our MBS
trusts, as we discuss below. Our purchases and guarantees
financed approximately 516,000 conventional single-family loans,
excluding delinquent loans purchased from our MBS trusts, and
approximately 61,000 multifamily units.
We remained the largest single issuer of mortgage-related
securities in the secondary market during the first quarter of
2010, with an estimated market share of new single-family
mortgage-related securities of 40.8%, compared with 38.9% in the
fourth quarter of 2009. In the coming months, we expect our
market share may be adversely impacted by a shift of the market
away from refinance activity if interest rates are higher and
the Federal Housing Administration (“FHA”) continues
to be the lower-cost option, and in some cases the only option,
for loans with higher
loan-to-value
(“LTV”) ratios. In the multifamily market, we remain a
constant source of liquidity and have been successful with our
goal of expanding our multifamily MBS business and broadening
our multifamily investor base.
During 2008 and early 2009 we made changes in our pricing and
eligibility standards that were intended to promote sustainable
homeownership and stability in the housing market, and that have
resulted in the loans we have acquired since their
implementation having, on average, a strong risk profile. The
single-family loans we purchased or guaranteed in the first
quarter of 2010 had an average original LTV ratio of 69%, an
average FICO credit score of 758, and a product mix with a
significant percentage of fully amortizing fixed-rate mortgage
loans. As with all our loans, we expect the ultimate performance
of these loans will be affected by macroeconomic trends,
including unemployment, the economy, and home prices. We expect
that the loans we purchased or guaranteed in the first quarter
of 2010 may have relatively slow prepayment speeds, and
therefore remain in our book of business for an extended time,
due to historically low interest rates during the first quarter
of 2010, which resulted in our first quarter 2010 acquisitions
having a weighted average interest rate of 4.9%. Whether our
acquisitions for all of 2010 exhibit the same credit profile as
our recent acquisitions will depend on many factors, including
our future pricing and eligibility standards, our future
objectives, mortgage insurers’ eligibility standards, our
future volume of loans acquired under our Refi
Plus
tm
initiative, and future activity by our competitors, including
FHA and Freddie Mac. Improvements in the credit profile of our
acquisitions since January 1, 2009 reflect changes we made
in our pricing and eligibility standards, as well as changes
mortgage insurers made to their eligibility standards. In
addition, FHA’s role as the lower-cost option, or in some
cases the only option, for loans with higher LTV ratios further
reduced our acquisition of these types of loans.
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The credit profile of our first quarter 2010 acquisitions was
further enhanced by a significant percentage of our acquisitions
representing refinanced loans, which generally have a stronger
credit profile because refinancing demonstrates the
borrower’s ongoing commitment to make their mortgage
payment and desire to maintain homeownership. Refinancings
represented 78% of our first quarter 2010 acquisitions. While
refinanced loans have historically tended to perform better than
loans used for initial home purchase, Home Affordable Refinance
Program (“HARP”) loans may not ultimately perform as
strongly as traditional refinanced loans because these loans,
which relate to non-delinquent Fannie Mae mortgages that were
refinanced, may have original LTV ratios of up to 125% and lower
FICO credit scores than traditional refinanced loans.
Reducing
Credit Losses
Challenging housing market and economic conditions continue to
expose Fannie Mae to significant risk of credit losses. As of
March 31, 2010, the percentage of loans in our conventional
single-family guaranty book of business that were seriously
delinquent, which means the loans were three or more months past
due or in the foreclosure process, was 5.47%, and our combined
loss reserves, which reflect our estimate of the probable losses
we have incurred in our guaranty book of business as of
March 31, 2010, were $60.8 billion.
To reduce the credit losses we ultimately incur on our book of
business, we are focusing our efforts on the following
strategies:
| • | Reducing defaults to avoid losses that would otherwise occur; | |
| • | Pursuing foreclosure alternatives to reduce the severity of the losses we incur; | |
| • | Managing foreclosure timelines efficiently to reduce our foreclosed property expenses; | |
| • | Managing our real estate owned (“REO”) inventory to reduce costs and maximize sales proceeds; and | |
| • | Pursuing contractual remedies from lenders and providers of credit enhancement, including mortgage insurers. |
Reducing Defaults.
We are working to reduce
defaults through improving servicing, refinancing initiatives
and solutions that help borrowers retain their homes, such as
modifications.
| • | Improved Servicing . Our mortgage servicers are the primary point of contact for borrowers and perform a key role in our efforts to reduce defaults and pursue foreclosure alternatives. We seek to improve the servicing of delinquent loans through a variety of means, including improving our communications with and training of our servicers, increasing the number of our personnel who manage our servicers, directing servicers to contact borrowers at an earlier stage of delinquency and improve telephone communications with borrowers, and working with some of our servicers to establish “high-touch” servicing protocols designed for managing higher risk loans. | |
| • | Refinancing Initiatives . Our refinancing initiatives help borrowers obtain a monthly payment that is more affordable now and into the future or a more stable loan product, such as a fixed-rate mortgage loan in lieu of an adjustable-rate mortgage loan, which may help prevent delinquencies and defaults. In the first quarter of 2010, as in the fourth quarter of 2009, we acquired or guaranteed approximately 417,000 loans that were refinancings, as mortgage rates remained at historically low levels. Our refinancing volume for the first quarter of 2010 includes approximately 142,000 loans refinanced through our Refi Plus initiative, which provides expanded refinance opportunities for eligible Fannie Mae borrowers. On average, borrowers who refinanced during the first quarter of 2010 through our Refi Plus initiative reduced their monthly mortgage payments by $145. Of the loans refinanced through our Refi Plus initiative, approximately 54,000 loans were refinanced under HARP, which permits borrowers to benefit |
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| from lower levels of mortgage insurance and higher LTV ratios than those that would be allowed under our traditional standards. |
| • | Home Retention Solutions . Our home retention solutions are intended to help borrowers stay in their homes. We refer to these solutions, and other actions taken by our servicers with borrowers to resolve the problem of existing or potential delinquent loan payments, as “workouts.” Our home retention solutions include loan modifications, repayment plans and forbearances. In the first quarter of 2010, we completed home retention workouts for over 105,000 loans with an aggregate unpaid principal balance of $20.3 billion. On a loan count basis, this represented a 111% increase over home retention workouts completed in the fourth quarter of 2009. In the first quarter of 2010, we completed approximately 94,000 loan modifications, compared to approximately 42,000 loan modifications in the fourth quarter of 2009. Our modification statistics do not include trial modifications under the Home Affordable Modification Program (“HAMP”) until they become permanent modifications. A notable percentage of the 94,000 modifications we completed in the first quarter of 2010 were conversions of trial modifications under HAMP to permanent modifications under the program. |
It is too early to determine how successful the loan
modifications we completed during the first quarter of 2010 will
ultimately be. Approximately 47% of loans we modified during the
first nine months of 2009 were current or had paid off as of six
months following the loan modification date, compared to
approximately 37% of loans we modified during the first nine
months of 2008. Please see “Risk
Management—Single-Family Mortgage Credit Risk
Management—Management of Problem Loans and Loan Workout
Metrics” for a discussion of the significant uncertainty
regarding the ultimate long term success of our modification
efforts.
As Table 1 demonstrates, although our single-family serious
delinquency rate increased during the first quarter of 2010 and
remains high, our single-family serious delinquency rate grew at
a much slower rate during the first quarter of 2010 than during
each quarter of 2009. This slowing in the rate of increase of
our serious delinquency rate is partly the result of the home
retention workouts we completed during the quarter, as well as
the foreclosure alternative workouts we discuss below. We
believe that growth in our serious delinquency rate during the
first quarter was also slowed by improved employment trends in
the economy.
Pursuing Foreclosure Alternatives.
If we are
unable to provide a viable home retention solution for a problem
loan, we seek to offer foreclosure alternatives, primarily
preforeclosure sales and
deeds-in-lieu
of foreclosure. These alternatives reduce the severity of our
loss resulting from a borrower’s default while permitting
the borrower to avoid going through a foreclosure. In the first
quarter of 2010, we completed approximately 17,300
preforeclosure sales and
deeds-in-lieu
of foreclosures, compared with approximately 13,500 in the
fourth quarter of 2009. We have increasingly relied on
foreclosure alternatives as a growing number of borrowers have
faced longer-term economic hardships that cannot be solved
through a home retention solution, and we expect the volume of
our foreclosure alternatives to increase in 2010.
Managing Foreclosure Timelines Efficiently.
We
are working to manage our foreclosure timelines efficiently to
reduce our foreclosed property expenses. As of March 31,
2010, 29% of the loans in our conventional single-family
guaranty book of business that were seriously delinquent were in
the process of foreclosure.
Managing our REO Inventory.
Since January
2009, we have strengthened our REO sales capabilities by
significantly increasing the number of resources in this area,
and we are working to manage our REO inventory to reduce costs
and maximize sales proceeds. During the first quarter of 2010,
we acquired approximately 62,000 foreclosed single-family
properties, up from approximately 47,000 during the fourth
quarter of 2009, and we disposed of approximately 38,000
single-family properties. The carrying value of the
single-family REO we held as of March 31, 2010 was
$11.4 billion, and we expect our REO inventory to increase
significantly throughout 2010.
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Pursuing Contractual Remedies.
We conduct
reviews of delinquent loans and, when we discover loans that do
not meet our underwriting and eligibility requirements, we make
demands for lenders to repurchase these loans or compensate us
for losses sustained on the loans, as well as requests for
repurchase or compensation for loans for which the mortgage
insurer rescinds coverage. During the first quarter of 2010,
lenders repurchased approximately $1.8 billion in loans
from us, measured by unpaid principal balance, pursuant to their
contractual obligations. We are also pursuing contractual
remedies from providers of credit enhancement on our loans,
including mortgage insurers. We received proceeds under our
mortgage insurance policies for single-family loans of
$1.5 billion for the three months ended March 31,
2010. Please see “Risk Management—Institutional
Counterparty Credit Risk Management” for a discussion of
our high balance of outstanding repurchase and reimbursement
requests and outstanding receivables from mortgage insurers, as
well as the risk that one or more of these counterparties fails
to fulfill its obligations to us.
A key theme underlying our strategies for reducing our credit
losses is reducing delays. We believe that repayment plans,
short-term forbearances and loan modifications can be most
effective in preventing defaults when completed at an early
stage of delinquency. Similarly, we believe that our foreclosure
alternatives are more likely to be successful in reducing our
loss severity if they are executed expeditiously. Accordingly,
it is important to work with delinquent borrowers early in the
delinquency to determine whether a home retention or foreclosure
alternative will be viable and, where none is, to reduce delays
in proceeding to foreclosure and obtaining recoveries.
Minimizing delays prior to foreclosure and focusing on
maximizing sales proceeds and recoveries from lenders and credit
enhancers also accelerate our receipt of recoveries.
The actions we have taken to stabilize the housing market and
minimize our credit losses have had and may continue to have, at
least in the short term, a material adverse effect on our
results of operations and financial condition, including our net
worth. See “Consolidated Results of
Operations—Financial Impact of the Making Home Affordable
Program on Fannie Mae” for information on HAMP’s
financial impact on us during the first quarter of 2010 and the
$7.6 billion we incurred in impairments in connection with
HAMP during the quarter. These actions have been undertaken with
the goal of reducing our future credit losses below what they
otherwise would have been. It is difficult to predict how
effective these actions ultimately will be in reducing our
credit losses and, in the future, it may be difficult to measure
the impact our actions ultimately have on our credit losses.
Credit
Performance
Table 1 presents information for the first quarter of 2010 and
for each quarter of 2009 about the credit performance of
mortgage loans in our single-family guaranty book of business
and our loan workouts. The workout information in Table 1 does
not reflect repayment plans and forbearances that have been
initiated but not completed, nor does it reflect trial
modifications under HAMP that have not become permanent.
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Table
1: Credit Statistics, Single-Family Guaranty Book of
Business
(1)
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||
|
Full
|
Full
|
|||||||||||||||||||||||||||
| Q1 | Year | Q4 | Q3 | Q2 | Q1 | Year | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
|
As of the end of each period:
|
||||||||||||||||||||||||||||
|
Serious delinquency
rate
(2)
|
5.47 | % | 5.38 | % | 5.38 | % | 4.72 | % | 3.94 | % | 3.15 | % | 2.42 | % | ||||||||||||||
|
Nonperforming
loans
(3)
|
$ | 222,892 | $ | 215,505 | $ | 215,505 | $ | 197,415 | $ | 170,483 | $ | 144,523 | $ | 118,912 | ||||||||||||||
|
Foreclosed property inventory:
|
||||||||||||||||||||||||||||
|
Number of properties
|
109,989 | 86,155 | 86,155 | 72,275 | 62,615 | 62,371 | 63,538 | |||||||||||||||||||||
|
Carrying value
|
$ | 11,423 | $ | 8,466 | $ | 8,466 | $ | 7,005 | $ | 6,002 | $ | 6,215 | $ | 6,531 | ||||||||||||||
|
Combined loss
reserves
(4)
|
$ | 58,900 | $ | 62,312 | $ | 62,312 | $ | 64,200 | $ | 53,844 | $ | 40,882 | $ | 24,498 | ||||||||||||||
|
During the period:
|
||||||||||||||||||||||||||||
|
Foreclosed property (number of properties):
|
||||||||||||||||||||||||||||
|
Acquisitions
(5)
|
61,929 | 145,617 | 47,189 | 40,959 | 32,095 | 25,374 | 94,652 | |||||||||||||||||||||
|
Dispositions
|
(38,095 | ) | (123,000 | ) | (33,309 | ) | (31,299 | ) | (31,851 | ) | (26,541 | ) | (64,843 | ) | ||||||||||||||
|
Single-family credit-related
expenses
(6)
|
$ | 11,926 | $ | 71,320 | $ | 10,943 | $ | 21,656 | $ | 18,391 | $ | 20,330 | $ | 29,725 | ||||||||||||||
|
Single-family credit
losses
(7)
|
$ | 5,062 | $ | 13,362 | $ | 3,976 | $ | 3,620 | $ | 3,301 | $ | 2,465 | $ | 6,467 | ||||||||||||||
|
Loan workout activity (number of loans):
|
||||||||||||||||||||||||||||
|
Total home retention loan
workouts
(8)
|
105,026 | 160,722 | 49,871 | 37,431 | 33,098 | 40,322 | 112,247 | |||||||||||||||||||||
|
Preforeclosure sales and
|
||||||||||||||||||||||||||||
|
deeds-in-lieu
of foreclosure
|
17,326 | 39,617 | 13,459 | 11,827 | 8,360 | 5,971 | 11,696 | |||||||||||||||||||||
|
Total loan workouts
|
122,352 | 200,339 | 63,330 | 49,258 | 41,458 | 46,293 | 123,943 | |||||||||||||||||||||
|
Total loan workouts as a percentage
|
||||||||||||||||||||||||||||
|
of delinquent loans in our single-family guaranty book of
business
(9)
|
31.59 | % | 12.24 | % | 15.48 | % | 12.98 | % | 12.42 | % | 16.12 | % | 11.32 | % | ||||||||||||||
| (1) | Our single-family guaranty book of business consists of (a) single-family mortgage loans held in our mortgage portfolio, (b) single-family Fannie Mae MBS held in our mortgage portfolio, (c) single-family Fannie Mae MBS from unconsolidated trusts, and (d) other credit enhancements that we provide on single-family mortgage assets, such as long-term standby commitments. It excludes non-Fannie Mae mortgage-related securities held in our mortgage portfolio for which we do not provide a guaranty. | |
| (2) | Calculated based on the number of conventional single-family loans that are three or more months past due and loans that have been referred to foreclosure but not yet foreclosed upon, divided by the number of loans in our conventional single-family guaranty book of business. We include all of the conventional single-family loans that we own and those that back Fannie Mae MBS in the calculation of the single-family serious delinquency rate. | |
| (3) | Represents the total amount of nonperforming loans, including troubled debt restructurings and HomeSaver Advance first-lien loans, which are unsecured personal loans in the amount of past due payments used to bring mortgage loans current, that are on accrual status. A troubled debt restructuring is a restructuring of a mortgage loan in which a concession is granted to a borrower experiencing financial difficulty. We generally classify loans as nonperforming when the payment of principal or interest on the loan is two months or more past due. | |
| (4) | Consists of the allowance for loan losses for loans recognized in our condensed consolidated balance sheets and the reserve for guaranty losses related to both single-family loans backing Fannie Mae MBS that we do not consolidate in our condensed consolidated balance sheets and single-family loans that we have guaranteed under long-term standby commitments. Prior period amounts have been restated to conform to the current period presentation. The amount shown as of March 31, 2010 reflects a decrease from the amount shown as of December 31, 2009 as a result of the adoption of the new accounting standards. | |
| (5) | Includes acquisitions through deeds-in-lieu of foreclosure. | |
| (6) | Consists of the provision for loan losses, the provision (benefit) for guaranty losses and foreclosed property expense. |
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| (7) | Consists of (a) charge-offs, net of recoveries and (b) foreclosed property expense; adjusted to exclude the impact of fair value losses resulting from credit-impaired loans acquired from MBS trusts and HomeSaver Advance loans. | |
| (8) | Consists of (a) modifications, which do not include trial modifications under HAMP or repayment plans or forbearances that have been initiated but not completed; (b) repayment plans and forbearances completed and (c) HomeSaver Advance first-lien loans. See “Table 38: Statistics on Single-Family Loan Workouts” in “Risk Management—Credit Risk Management” for additional information on our various types of loan workouts. | |
| (9) | Calculated based on annualized problem loan workouts during the period as a percentage of delinquent loans in our single-family guaranty book of business as of the end of the period. |
New
Accounting Standards and Consolidation of a Substantial Majority
of our MBS Trusts
Effective January 1, 2010, we prospectively adopted new
accounting standards on the transfers of financial assets and
the consolidation of variable interest entities. We refer to
these accounting standards together as the “new accounting
standards.” In this report, we also refer to
January 1, 2010 as the “transition date.”
Impact
on our Condensed Consolidated Financial Statements
Our adoption of the new accounting standards had a major impact
on the presentation of our condensed consolidated financial
statements. The new standards require that we consolidate the
substantial majority of Fannie Mae MBS trusts we guarantee and
recognize the underlying assets (typically mortgage loans) and
debt (typically bonds issued by the trusts in the form of Fannie
Mae MBS certificates) of these trusts as assets and liabilities
in our condensed consolidated balance sheets.
Although the new accounting standards did not change the
economic risk to our business, we recorded a decrease of
$3.3 billion in our total deficit as of January 1,
2010 to reflect the cumulative effect of adopting these new
standards. We provide a detailed discussion of the impact of the
new accounting standards on our accounting and financial
statements in “Note 2, Adoption of the New Accounting
Standards on the Transfers of Financial Assets and Consolidation
of Variable Interest Entities.” The table below sets forth
the most significant changes to our condensed consolidated
financial statements resulting from consolidation of these MBS
trusts.
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| Financial Statement | Accounting and Presentation Changes | |||
|
Balance Sheet
|
• | Significant increase in loans and debt and decrease in trading and available-for-sale securities | ||
| • | Separate presentation of the elements of the consolidated MBS trusts (such as mortgage loans, debt, accrued interest receivable and payable) on the face of our condensed consolidated balance sheets | |||
| • | Significant increase in allowance for loan losses and significant decrease in reserve for guaranty losses | |||
| • | Elimination of substantially all previously recorded guaranty assets and guaranty obligations | |||
|
Statement of Operations
|
• | Significant increase in interest income and interest expense attributable to the assets and liabilities of the consolidated MBS trusts, and separate presentation of the elements of the consolidated MBS trusts (interest income and interest expense) on the face of our condensed consolidated statements of operations | ||
| • | Reclassification of the substantial majority of guaranty fee income and trust management income to interest income | |||
| • | Decrease to the provision for credit losses (which consists of the provision for loan losses and provision for guaranty losses) and corresponding decrease in net interest income due to recognizing interest expense on the debt of consolidated MBS trusts and not accruing interest income on underlying nonperforming consolidated loans | |||
| • | Elimination of fair value losses on credit-impaired loans acquired from MBS trusts we have consolidated, as the underlying loans in our MBS trusts are already recognized in our condensed consolidated balance sheets | |||
| • | Portfolio securitization transactions that reflect transfers of assets to consolidated MBS trusts do not qualify as sales, thereby reducing the amount we recognize as portfolio securitization gains and losses. We also no longer record gains or losses on the sale from our portfolio of available-for-sale MBS securities that were issued by consolidated MBS trusts, because these securities are eliminated in consolidation | |||
| • | Elimination of fair value gains or losses on trading MBS issued by consolidated MBS trusts, which reduces the amount of securities subject to recognition of changes in fair value in our condensed consolidated statements of operations | |||
|
Statement of Cash Flows
|
• | Significant change in the amounts of cash flows from investing and financing activities | ||
Upon adopting the new accounting standards, we changed the
presentation of segment financial information that is currently
evaluated by management, as we discuss in “Business Segment
Results—Changes to Segment Reporting.”
Purchases
from our Single-Family MBS Trusts
With our adoption of the new accounting standards, we no longer
recognize the acquisition of a credit-impaired loan from the
majority of our MBS trusts as a purchase with an associated fair
value loss for the difference between the fair value of the
acquired loan and its acquisition cost, as they are now
consolidated
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and the loan is already reflected in our condensed consolidated
balance sheets at the time of acquisition. Without these fair
value losses, the cost of purchasing most delinquent loans from
Fannie Mae MBS trusts and holding them in our portfolio is less
than the cost of advancing delinquent payments to holders of the
Fannie Mae MBS. As a result, we have begun to significantly
increase our purchases of delinquent loans from single-family
MBS trusts to reduce our costs associated with these loans.
Under our single-family MBS trust documents, we have the option
to purchase from our MBS trusts loans that are delinquent as to
four or more consecutive monthly payments. In March 2010, we
purchased approximately 216,000 delinquent loans with an unpaid
principal balance of approximately $40 billion from MBS
trusts, which increased our Capital Markets’ mortgage
portfolio balance. As of March 31, 2010, the total unpaid
principal balance of all loans in single-family MBS trusts that
were delinquent four or more months was approximately $94
billion. In April 2010, we purchased approximately 229,000
delinquent loans with an unpaid principal balance of
approximately $46 billion from our MBS trusts. We expect to
continue to purchase a significant portion of the remaining
delinquent population within a few months subject to market
conditions, servicer capacity, and other constraints including
the limit on the mortgage assets that we may own pursuant to our
senior preferred stock purchase agreement with Treasury.
Summary
of our Financial Performance for the First Quarter of
2010
Our financial results for the first quarter of 2010 reflect the
continued weakness in the housing and mortgage markets, which
showed some signs of stabilization in the first quarter of 2010
but which remain under pressure due to high levels of
unemployment and underemployment.
Net loss.
We recorded a net loss of
$11.5 billion for the first quarter of 2010, primarily
driven by credit-related expenses of $11.9 billion and fair
value losses of $1.7 billion, which were partially offset
by net interest income of $2.8 billion. Including dividends
on senior preferred stock, the net loss attributable to common
stockholders we recorded for the first quarter of 2010 was
$13.1 billion and our diluted loss per share was $2.29. In
comparison, we recorded a net loss of $15.2 billion, a net
loss attributable to common stockholders of $16.3 billion
and a diluted loss per share of $2.87 for the fourth quarter of
2009. We recorded a net loss and a net loss attributable to
common stockholders of $23.2 billion and a diluted loss per
share of $4.09 for the first quarter of 2009.
The $3.6 billion decrease in our net loss in the first
quarter of 2010 compared with the fourth quarter of 2009 was
primarily due to:
| • | a $5.2 billion decrease in losses from partnership investments due to our recognition of $5.0 billion in the fourth quarter of 2009 in other-than-temporary impairment losses on our low-income housing tax credit (“LIHTC”) investments; and | |
| • | a $2.3 billion decrease in net other-than-temporary impairments on our available-for-sale securities. |
The decrease in losses was partially offset by an increase in
fair value losses, net of $1.1 billion and a
$2.7 billion decrease in revenue primarily due to our
adoption of the new accounting standards, which resulted in the
following impacts:
| • | Upon adoption we consolidated the substantial majority of Fannie Mae MBS trusts in our condensed consolidated balance sheet, which significantly increased the amount of nonperforming loans recognized in our condensed consolidated balance sheets and therefore our forgone interest. Prior to our adoption of the new accounting standards, these loans backed unconsolidated MBS trusts, and we reflected expectations about the collectibility of interest payments through our provision for guaranty losses. | |
| • | We eliminated substantially all of our guaranty-related assets and liabilities in our condensed consolidated balance sheet upon adoption of the new accounting standards, and therefore for consolidated trusts we no |
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| longer recognize income or loss from amortizing these assets and liabilities or from changes in their fair value. |
The $11.7 billion decrease in our net loss in the first
quarter of 2010 compared with the first quarter of 2009 was
primarily due to:
| • | a $9.0 billion decrease in credit-related expenses primarily because the credit quality of our guaranty book of business deteriorated at a much faster pace in the first quarter of 2009 than during the first quarter of 2010; and | |
| • | a $5.4 billion decrease in net other-than-temporary impairments on our available-for-sale securities driven by a change in the impairment accounting standard on April 1, 2009 that resulted in our recognizing only the credit portion of other-than-temporary impairment in our condensed consolidated statements of operations. |
The decrease in losses compared with the first quarter of 2009
was partially offset by a $2.2 billion decrease in net
revenue that was primarily due to the adoption of the new
accounting standards.
Net Worth.
We had a net worth deficit of
$8.4 billion as of March 31, 2010, compared with a net
worth deficit of $15.3 billion as of December 31,
2009. Our net worth as of March 31, 2010 was negatively
impacted by the recognition of our net loss of
$11.5 billion and senior preferred stock dividends of
$1.5 billion. These reductions in our net worth were offset
by our receipt of $15.3 billion in funds from Treasury on
March 31, 2010 under our senior preferred stock purchase
agreement with Treasury, as well as from a $3.3 billion
benefit due to the cumulative effect of our adoption of the new
accounting standards. Our net worth, which is the basis for
determining the amount that Treasury has committed to provide us
under the senior preferred stock purchase agreement, equals the
“Total deficit” reported in our condensed consolidated
balance sheet. In May 2010, the Acting Director of FHFA
submitted a request to Treasury on our behalf for
$8.4 billion to eliminate our net worth deficit as of
March 31, 2010. When Treasury provides the requested funds,
the aggregate liquidation preference on the senior preferred
stock will be $84.6 billion, which will require an
annualized dividend of approximately $8.5 billion. This
amount exceeds our reported annual net income for each of the
last eight fiscal years, in most cases by a significant margin.
Credit-Related Expenses and Credit Losses.
Our
credit-related expenses, which consist of the provision for loan
losses and the provision for guaranty losses (collectively
referred to as the “provision for credit losses”) plus
foreclosed property expense, were $11.9 billion for the
first quarter of 2010. Due to our adoption of the new accounting
standards, effective January 1, 2010, we no longer
recognize fair value losses on credit-impaired loans newly
acquired from MBS trusts that we consolidated, which affects our
provision for credit losses. During the first quarter of 2010 we
recognized a higher level of impairments as compared with the
fourth quarter of 2009 because loan modifications, which result
in the loans being treated as individually impaired, increased
substantially. In aggregate, the increase in individual
impairment, as well as the high level of nonperforming loans,
delinquencies, and defaults due to the general deterioration in
our guaranty book of business, resulted in our provision for
credit losses for the first quarter of 2010 of
$11.9 billion decreasing only slightly from our
$12.2 billion provision for credit losses in the fourth
quarter of 2009, despite the reduction in fair-value losses on
credit-impaired loans acquired from MBS trusts.
Credit-related expenses are included in our condensed
consolidated statements of operations. Our credit losses, by
contrast, are not defined within generally accepted accounting
principles, or GAAP, and may not be calculated in the same
manner as similarly titled measures reported by other companies.
We measure our credit losses as our charge-offs, net of
recoveries, plus our foreclosed property expense, adjusted to
eliminate the impact associated with our HomeSaver Advance loans
(unsecured personal loans used to bring mortgage loans current)
and our acquisition of credit-impaired loans from MBS trusts.
Our credit losses increased to $5.1 billion in the first
quarter of 2010 from $4.1 billion in the fourth quarter of
2009 and $2.5 billion in the first quarter of 2009. The
increase in our credit losses from the fourth quarter of 2009
primarily reflects the
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increase in the number of defaults, which was partially offset
by a slight reduction in loss severity. While the level of our
credit losses increased, it remained substantially lower than
our credit-related expenses during the first quarter of 2010,
due partly to our home retention and foreclosure alternative
efforts, and partly to changes in the foreclosure process in a
number of states and foreclosure processing backlogs in some
jurisdictions. During the first quarter of 2010, our loss
severity and average initial charge-off per default declined
slightly but remained high. Please see “Consolidated
Results of Operations—Credit-Related Expenses—Credit
Loss Performance Metrics” in our 2009
Form 10-K
for more detail on how we measure our credit losses.
Loss Reserves.
Our combined loss reserves,
which reflect our estimate of the probable losses we have
incurred in our guaranty book of business, decreased as of
January 1, 2010 compared to December 31, 2009 as a
result of our adoption of the new accounting standards. Our
combined loss reserves were $60.8 billion as of
March 31, 2010, compared to $53.8 billion as of
January 1, 2010 and $64.4 billion as of
December 31, 2009. Our loss reserve coverage to total
nonperforming loans decreased to 27.15% as of March 31,
2010 from 29.73% as of December 31, 2009.
Housing
and Mortgage Market and Economic Conditions
The housing sector, while still fragile, continued to show some
signs of stabilization and improvement in the first quarter of
2010. During the first quarter of 2010, the U.S. economy
continued to emerge from the severe economic recession that
started in December 2007, with the U.S. gross domestic
product, or GDP, rising by 3.2% on an annualized basis during
the quarter, according to the Bureau of Economic Analysis
advance estimate.
However, the housing market remains under pressure due to high
levels of unemployment and underemployment. Unemployment was
9.7% in March 2010, a decrease from 10.0% in December 2009,
based on data from the U.S. Bureau of Labor Statistics. The
Mortgage Bankers Association National Delinquency Survey
reported that, as of December 31, 2009, the most recent
date for which information is available, 9.67% of borrowers were
seriously delinquent (90 days or more past due or in the
foreclosure process), which we estimate represents approximately
five million mortgages.
The supply of single-family homes as measured by the
inventory/sales ratio remains above long-term average levels,
with significant regional variation. Some regions, such as
Florida, are struggling with large inventory overhang while
others, such as California, are experiencing nearly depleted
inventories in lower priced homes. Properties that are vacant
and held off the market, combined with the portion of the
estimated five million seriously delinquent mortgages not
currently listed for sale, represent a shadow inventory putting
downward pressure on both home prices and rents.
We estimate that, although home prices have improved in some
geographic regions, home prices on a national basis declined by
1.5% in the first quarter of 2010 and have declined by 18.4%
from their peak in the third quarter of 2006. Our home price
estimates are based on preliminary data and are subject to
change as additional data become available. As we have
previously disclosed, the decline in home prices has left many
homeowners with “negative equity” in their mortgages,
which means their principal balance exceeds the current market
value of their home. This provides an incentive for borrowers to
walk away from their mortgage obligations and for the loans to
become delinquent and proceed to foreclosure.
Preliminary data for the first quarter of 2010 indicate that
multifamily housing fundamentals are showing the first signs of
improvement. Unemployment, the slow economic recovery, and
below-average household formations continue to depress the
multifamily sector, with apartment property sales, occupancy
levels, and asking rents remaining at depressed levels. However,
the estimated national vacancy rate appears to have decreased in
the first quarter of 2010. In addition, asking rents appear to
have held steady and perhaps increased slightly, according to
preliminary third-party data, and apartment property sales
increased slightly during the quarter. The anticipated volume of
new multifamily loans remains uncertain. Although the number of
distressed multifamily properties remains elevated, properties
are not showing up on the sales market as
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lenders and servicers appear to be entering into workouts and
extensions, instead of pursuing foreclosures. This could result
in fewer multifamily properties being offered for sale or
refinanced and may constrain the amount of new multifamily loan
origination volume in 2010.
See “Risk Factors” in our 2009
Form 10-K
for a description of risks to our business associated with the
weak economy and housing market.
Outlook
Overall Market Conditions.
We expect weakness
in the housing and mortgage markets to continue throughout 2010.
Home sales fell during the first quarter of 2010. However, we
expect the temporary tax credit combined with a seasonal
increase in home sales in the second quarter and historically
low mortgage rates to support increased sales in the second
quarter of 2010 before the pace slows again in the third
quarter. We also expect home sales to start a longer term growth
path by the end of 2010, if the labor market shows improvement.
The continued deterioration in the performance of outstanding
mortgages, however, will result in the foreclosure of troubled
loans, which is likely to add to the excess housing inventory.
If, as we expect, interest rates rise modestly, the pace at
which the excess inventory is absorbed will decline.
We expect that during 2010: (1) default and severity rates
will remain heightened, (2) home prices will decline
slightly further on a national basis, more in some geographic
areas than in others, and (3) the level of foreclosures
will increase. We also expect the level of multifamily defaults
and serious delinquencies to increase further during 2010. All
of these conditions, including the level of single-family
delinquencies, may worsen if the unemployment rate increases on
either a national or regional basis. We expect the decline in
residential mortgage debt outstanding to continue through 2010,
which would mark three consecutive annual declines.
Approximately 78% of our single-family business in the first
quarter of 2010 consisted of refinancings. In the coming months,
we expect a shift of the market away from refinance activity if
interest rates increase, which will be somewhat offset by a
seasonal increase in home sales. We expect these trends,
combined with an expected decline in total originations in 2010,
will have an adverse impact on our business volumes during the
remainder of 2010.
Home Price Declines:
Following a decline of
approximately 2.9% in 2009, we expect that home prices on a
national basis will decline slightly in 2010 before stabilizing,
and that the
peak-to-trough
home price decline on a national basis will range between 18%
and 23%. These estimates are based on our home price index,
which is calculated differently from the S&P/Case-Shiller
U.S. National Home Price Index and therefore results in
different percentages for comparable declines. These estimates
also contain significant inherent uncertainty in the current
market environment regarding a variety of critical assumptions
we make when formulating these estimates, including: the effect
of actions the federal government has taken and may take with
respect to the national economic recovery; the impact of the end
of the Federal Reserve’s MBS purchase program; and the
impact of those actions on home prices, unemployment and the
general economic and interest rate environment. Because of these
uncertainties, the actual home price decline we experience may
differ significantly from these estimates. We also expect
significant regional variation in home price declines and
stabilization.
Our 18% to 23%
peak-to-trough
home price decline estimate compares with an approximately 32%
to 40%
peak-to-trough
decline using the S&P/Case-Shiller index method. Our
estimates differ from the S&P/Case-Shiller index in two
principal ways: (1) our estimates weight expectations by
number of properties, whereas the S&P/Case-Shiller index
weights expectations based on property value, causing home price
declines on higher priced homes to have a greater effect on the
overall result; and (2) contrary to the
S&P/Case-Shiller index, our estimates do not include known
sales of foreclosed homes because we believe that differing
maintenance practices and the forced nature of the sales make
foreclosed home prices less representative of market values. The
S&P/Case-Shiller comparison numbers are calculated using
our models and assumptions, but modified to use these two
factors (weighting of expectations based on property value and
the inclusion of foreclosed property sales). In addition to
these differences, our estimates are based on our own internally
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available data combined with publicly available data, and are
therefore based on data collected nationwide, whereas the
S&P/Case-Shiller index is based only on publicly available
data, which may be limited in certain geographic areas of the
country. Our comparative calculations to the
S&P/Case-Shiller index provided above are not modified to
account for this data pool difference.
Credit-Related Expenses.
We expect that our
credit-related expenses will remain high in 2010, as we believe
that the level of our nonperforming loans will remain elevated
for a period of time. We expect that, if current trends
continue, our credit-related expenses could be lower in 2010
than in 2009. Our expectations for single-family credit-related
expenses are based on several factors, including: (1) the
decrease in average loss severities compared to 2009 as home
price declines have begun to moderate and prices have stabilized
in some regions; (2) our current expectation that, as 2010
progresses, the pace at which loans become delinquent will
moderate which, coupled with an increase in the pace of
foreclosures and problem loan workouts, will result in a slower
rate of increase in, and possibly a leveling of, delinquencies;
and (3) that, as a result of our adoption of the new
accounting standards, we no longer recognize the acquisition of
a credit-impaired loan from the majority of our MBS trusts as a
purchase with an associated fair value loss for the difference
between the fair value of the acquired loan and its acquisition
cost, as they are now consolidated and the loan is already
reflected in our condensed consolidated balance sheets at the
time of acquisition.
Credit Losses.
We expect that our
single-family and multifamily credit losses will continue to
increase during 2010 as a result of anticipated continued high
unemployment and overall economic weakness, which will
contribute to an expected increase in our charge-offs as we
pursue foreclosure alternatives and foreclosures on seriously
delinquent loans for which we are not able to provide a
sustainable home retention workout solution.
Uncertainty Regarding our Long-Term Financial Sustainability
and Future Status.
We expect that the actions we
take to stabilize the housing market and minimize our credit
losses will continue to have, in the short term at least, a
material adverse effect on our results of operations and
financial condition, including our net worth. There is
significant uncertainty in the current market environment, and
any changes in the trends in macroeconomic factors that we
currently anticipate, such as home prices and unemployment, may
cause our future credit-related expenses and credit losses to
vary significantly from our current expectations. Although
Treasury’s funds under the senior preferred stock purchase
agreement permit us to remain solvent and avoid receivership,
the resulting dividend payments are substantial. Given our
expectations regarding future losses and draws from Treasury, we
do not expect to earn profits in excess of our annual dividend
obligation to Treasury for the indefinite future. As a result of
these factors, there is significant uncertainty as to our
long-term financial sustainability.
In addition, there is uncertainty regarding the future of our
business after the conservatorship is terminated, including
whether we will continue in our current form, and we expect this
uncertainty to continue. On April 14, 2010, the Obama
Administration released seven broad questions for public comment
on the future of the housing finance system, including Fannie
Mae and Freddie Mac, and announced that it would hold a series
of public forums across the country on housing finance reform.
Treasury Secretary Geithner testified in March 2010 that the
administration expects to present its proposals for reform to
Congress “next year.” We cannot predict the prospects
for the enactment, timing or content of legislative proposals
regarding longer-term reform of Fannie Mae, Freddie Mac and the
Federal Home Loan Banks (the “GSEs”). Please see
“GSE Reform and Pending Legislation” in our 2009
Form 10-K
for a discussion of legislation being considered that could
affect our business, including a list of possible reform options
for the GSEs.
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
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extent to which we use management judgment and estimates in
applying these policies is integral to understanding our
financial statements. We describe our most significant
accounting policies in “Note 1, Summary of Significant
Accounting Policies” of this report and in our 2009
Form 10-K.
We evaluate our critical accounting estimates and judgments
required by our policies on an ongoing basis and update them as
necessary based on changing conditions. Management has discussed
any significant changes in judgments and assumptions in applying
our critical accounting policies with the Audit Committee of our
Board of Directors. See “Risk Factors” and “Risk
Management—Model Risk Management” for a discussion of
the risk associated with the use of models as well as
“MD&A—Critical Accounting Policies and
Estimates” in our 2009
Form 10-K
for additional information about our accounting policies we have
identified as critical because they involve significant
judgments and assumptions about highly complex and inherently
uncertain matters, and the use of reasonably different estimates
and assumptions could have a material impact on our reported
results of operations or financial condition. These critical
accounting policies and estimates are as follows:
| • | Fair Value Measurement | |
| • | Allowance for Loan Losses and Reserve for Guaranty Losses | |
| • | Other-Than-Temporary Impairment of Investment Securities |
Effective January 1, 2010, we adopted the new accounting
standards on the transfers of financial assets and the
consolidation of variable interest entities. Refer to
“Note 1, Summary of Significant Accounting
Policies” and “Note 2, Adoption of the New
Accounting Standards on the Transfers of Financial Assets and
Consolidation of Variable Interest Entities” for additional
information.
We provide below information about our Level 3 assets and
liabilities as of March 31, 2010 compared to
December 31, 2009 and describe any significant changes in
the judgments and assumptions we made during the first quarter
of 2010 in applying our critical accounting policies and
significant changes to critical estimates as well as the impact
of the new accounting standards on our allowance for loan losses
and reserve for guaranty losses.
Fair
Value Measurement
The use of fair value to measure our assets and liabilities is
fundamental to our financial statements and is a critical
accounting estimate because we account for and record a portion
of our assets and liabilities at fair value. In determining fair
value, we use various valuation techniques. We describe the
valuation measurement techniques and inputs used to determine
the fair value of our assets and liabilities and disclose their
carrying value and fair value in “Note 16, Fair
Value.”
Fair
Value Hierarchy—Level 3 Assets and
Liabilities
The assets and liabilities that we have classified as
Level 3 in the fair value hierarchy consist primarily of
financial instruments for which there is limited market activity
and therefore little or no price transparency. As a result, the
valuation techniques that we use to estimate the fair value of
Level 3 instruments involve significant unobservable
inputs, which generally are more subjective and involve a high
degree of management judgment and assumptions. Our Level 3
financial instruments consist of certain mortgage- and
asset-backed securities and residual interests, certain mortgage
loans, acquired property, partnership investments, our guaranty
assets and
buy-ups,
our
master servicing assets and certain highly structured, complex
derivative instruments.
Table 2 presents a comparison, by balance sheet category, of the
amount of financial assets carried in our condensed consolidated
balance sheets at fair value on a recurring basis and classified
as Level 3 as of
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March 31, 2010 and December 31, 2009. The availability
of observable market inputs to measure fair value varies based
on changes in market conditions, such as liquidity. As a result,
we expect the amount of financial instruments carried at fair
value on a recurring basis and classified as Level 3 to
vary each period.
Table
2: Level 3 Recurring Financial Assets at Fair
Value
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
|
|
2010 | 2009 | ||||||
| (Dollars in millions) | ||||||||
|
Trading securities
|
$ | 6,724 | $ | 8,861 | ||||
|
Available-for-sale
securities
|
35,830 | 36,154 | ||||||
|
Derivatives assets
|
146 | 150 | ||||||
|
Guaranty assets and
buy-ups
|
11 | 2,577 | ||||||
|
Level 3 recurring assets
|
$ | 42,711 | $ | 47,742 | ||||
|
Total assets
|
$ | 3,293,755 | $ | 869,141 | ||||
|
Total recurring assets measured at fair value
|
$ | 193,140 | $ | 353,718 | ||||
|
Level 3 recurring assets as a percentage of total assets
|
1 | % | 5 | % | ||||
|
Level 3 recurring assets as a percentage of total recurring
assets measured at fair value
|
22 | % | 13 | % | ||||
|
Total recurring assets measured at fair value as a percentage of
total assets
|
6 | % | 41 | % | ||||
The decrease in assets classified as Level 3 during the
first quarter of 2010 includes a $2.6 billion decrease due
to derecognition of guaranty assets and
buy-ups
at
the transition date as well as net transfers of approximately
$2.5 billion in assets to Level 2 from Level 3.
The assets transferred from Level 3 consist primarily of
Fannie Mae guaranteed mortgage-related securities and
private-label mortgage-related securities.
Assets measured at fair value on a nonrecurring basis and
classified as Level 3, which are not presented in the table
above, primarily include
held-for-sale
loans,
held-for-investment
loans, acquired property and partnership investments. The fair
value of these Level 3 nonrecurring financial assets
totaled $11.2 billion during the first quarter of 2010, and
$21.2 billion during the year ended December 31, 2009.
Financial liabilities measured at fair value on a recurring
basis and classified as Level 3 consisted of long-term debt
with a fair value of $653 million as of March 31, 2010
and $601 million as of December 31, 2009, and
derivatives liabilities with a fair value of $6 million as
of March 31, 2010 and $27 million as of
December 31, 2009.
Allowance
for Loan Losses and Reserve for Guaranty Losses
We maintain an allowance for loan losses for loans classified as
held for investment, including both loans held by us and by
consolidated Fannie Mae MBS trusts. We maintain a reserve for
guaranty losses for loans held in unconsolidated Fannie Mae MBS
trusts we guarantee and loans that we have guaranteed under
long-term standby commitments. We report the allowance for loan
losses and reserve for guaranty losses as separate line items in
our condensed consolidated balance sheets. These amounts, which
we collectively refer to as our combined loss reserves,
represent probable losses incurred in our guaranty book of
business as of the balance sheet date. The allowance for loan
losses is a valuation allowance that reflects an estimate of
incurred credit losses related to our recorded investment in
loans held for investment. The reserve for guaranty losses is a
liability account in our condensed consolidated balance sheets
that reflects an estimate of incurred credit losses related to
our guaranty to each unconsolidated Fannie Mae MBS trust that we
will supplement amounts received by the Fannie Mae MBS trust as
required to permit timely payments of principal and interest on
the related Fannie Mae MBS. As a result, the guaranty reserve
considers not only the principal and interest due on the loan at
the current balance sheet date, but also an estimate of any
additional interest payments due to the trust from the current
balance sheet date until the point of loan acquisition or
foreclosure. We maintain separate loss reserves for
single-family and multifamily loans. Our single-family and
multifamily loss reserves consist of a specific loss reserve for
individually impaired loans and a collective loss reserve for
all other loans.
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We have an established process, using analytical tools,
benchmarks and management judgment, to determine our loss
reserves. Although our loss reserve process benefits from
extensive historical loan performance data, this process is
subject to risks and uncertainties, including a reliance on
historical loss information that may not be representative of
current conditions. We continually monitor delinquency and
default trends and make changes in our historically developed
assumptions and estimates as necessary to better reflect present
conditions, including current trends in borrower risk
and/or
general economic trends, changes in risk management practices,
and changes in public policy and the regulatory environment. We
also consider the recoveries that we will receive on mortgage
insurance and other credit enhancements entered into
contemporaneously with and in contemplation of a guaranty or
loan purchase transaction, as such recoveries reduce the
severity of the loss associated with defaulted loans. Due to the
stress in the housing and credit markets, and the speed and
extent of deterioration in these markets, our process for
determining our loss reserves has become significantly more
complex and involves a greater degree of management judgment
than prior to this period of economic stress.
Single-Family
Loss Reserves
We establish a specific single-family loss reserve for
individually impaired loans, which includes loans we restructure
in troubled debt restructurings, certain nonperforming loans in
MBS trusts and acquired credit-impaired loans that have been
further impaired subsequent to acquisition. The single-family
loss reserve for individually impaired loans is a growing
portion of the total single-family reserve and will continue to
grow in conjunction with our modification efforts. We typically
measure impairment based on the difference between our recorded
investment in the loan and the present value of the estimated
cash flows we expect to receive, which we calculate using the
effective interest rate of the original loan or the effective
interest rate at acquisition for a credit-impaired loan.
However, when foreclosure is probable, we measure impairment
based on the difference between our recorded investment in the
loan and the fair value of the underlying property, adjusted for
the estimated discounted costs to sell the property and
estimated insurance or other proceeds we expect to receive.
We establish a collective single-family loss reserve for all
other single-family loans in our single-family guaranty book of
business using an econometric model that estimates the
probability of default of loans to derive an overall loss
reserve estimate given multiple factors such as: origination
year,
mark-to-market
LTV ratio, delinquency status and loan product type. We believe
that the loss severity estimates used in determining our loss
reserves reflect current available information on actual events
and conditions as of each balance sheet date, including current
home prices. Our loss severity estimates do not incorporate
assumptions about future changes in home prices. We do, however,
use a one-quarter look back period to develop our loss severity
estimates for all loan categories.
Combined
Loss Reserves
Upon recognition of the mortgage loans held by newly
consolidated trusts at the transition date of our adoption of
the new accounting standards, we increased our “Allowance
for loan losses” by $43.6 billion and decreased our
“Reserve for guaranty losses” by $54.1 billion.
The decrease in our combined loss reserves of $10.5 billion
reflects the difference in the methodology used to estimate
incurred losses under our allowance for loan losses versus our
reserve for guaranty losses and recording the portion of the
reserve related to accrued interest to “Allowance for
accrued interest receivable” in our condensed consolidated
balance sheets. Our guaranty reserve considers not only the
principal and interest due on a loan at the current balance
sheet date, but also any interest payments expected to be missed
from the balance sheet date until the point of loan acquisition
or foreclosure. However, our loan loss allowance is an asset
valuation allowance, and thus we consider only our net recorded
investment in the loan at the balance sheet date, which includes
only interest income accrued while the loan was on accrual
status.
Upon adoption of the new accounting standards, we derecognized
the substantial majority of the “Reserve for guaranty
losses” relating to loans in previously unconsolidated
trusts that were consolidated in our condensed consolidated
balance sheet. We continue to record a reserve for guaranty
losses related to loans in unconsolidated trusts and to loans
that we have guaranteed under long-term standby commitments.
16
Table of Contents
In addition to recognizing mortgage loans held by newly
consolidated trusts at the transition date, we also recognized
the associated accrued interest receivable from the mortgage
loans held by the newly consolidated trusts. The accrued
interest included delinquent interest on such loans which was
previously considered in estimating our “Reserve for
guaranty losses.” As a result, at transition, we
reclassified $7.0 billion from our “Reserve for
guaranty losses” to a valuation allowance within
“Accrued interest receivable, net” in our condensed
consolidated balance sheet.
CONSOLIDATED
RESULTS OF OPERATIONS
The section below provides a discussion of our condensed
consolidated results of operations for the periods indicated.
You should read this section together with our condensed
consolidated financial statements including the accompanying
notes.
As discussed in “Executive Summary,” prospectively
adopting the new accounting standards had a significant impact
on the presentation and comparability of our condensed
consolidated financial statements due to the consolidation of
the substantial majority of our single-class securitization
trusts and the elimination of previously recorded deferred
revenue from our guaranty arrangements. While some line items in
our condensed consolidated statements of operations were not
impacted, others were impacted materially, which reduces the
comparability of our results for the first quarter of 2010 with
results of prior periods. The
17
Table of Contents
following table describes the impact to our first quarter 2010
results for those line items that were impacted significantly as
a result of our adoption of the new accounting standards.
| Item | Consolidation Impact | ||||
|
Net interest income
|
• | We now recognize the underlying assets and liabilities of the substantial majority of our MBS trusts in our condensed consolidated balance sheets, which increases both our interest-earning assets and interest-bearing liabilities and related interest income and interest expense. | |||
| • | Contractual guaranty fees and the amortization of deferred cash fees received after December 31, 2009 are recognized into interest income. | ||||
| • | We now include nonperforming loans from the majority of our MBS trusts in our consolidated financial statements, which decreases our net interest income as we do not recognize interest income on these loans while we continue to recognize interest expense for amounts owed to MBS certificateholders. | ||||
| • | Trust management income and certain fee income from consolidated trusts are now recognized as interest income. | ||||
|
Guaranty fee income
|
• | Upon adoption of the new accounting standards, we eliminated substantially all of our guaranty-related assets and liabilities in our condensed consolidated balance sheets. As a result, consolidated trusts’ deferred cash fees and non-cash fees through December 31, 2009 were recognized into our total deficit through the transition adjustment effective January 1, 2010, and we no longer recognize income or loss from amortizing these assets and liabilities nor do we recognize changes in their fair value. As noted above, we now recognize both contractual guaranty fees and the amortization of deferred cash fees received after December 31, 2009 through interest income, thereby reducing guaranty fee income to only those amounts related to unconsolidated trusts and other credit enhancements arrangements, such as our long-term standby commitments. | |||
|
Credit-related expenses
|
• | As the majority of our trusts are consolidated, we no longer record fair value losses on credit-impaired loans acquired from the substantial majority of our trusts. | |||
| • | The substantial majority of our combined loss reserves are now recognized in our allowance for loan losses to reflect the loss allowance against the consolidated mortgage loans. We use a different methodology to estimate incurred losses for our allowance for loan losses as compared with our reserve for guaranty losses which will reduce our credit-related expenses. | ||||
|
Investment gains (losses), net
|
• | Our portfolio securitization transactions that reflect transfers of assets to consolidated trusts do not qualify as sales, thereby reducing the amount we recognize as portfolio securitization gains and losses. | |||
| • | We no longer designate the substantial majority of our loans held for securitization as held for sale as the substantial majority of related MBS trusts will be consolidated, thereby reducing lower of cost or fair value adjustments. | ||||
| • | We no longer record gains or losses on the sale from our portfolio of the substantial majority of our available-for-sale MBS because these securities were eliminated in consolidation. | ||||
|
Fair value gains (losses), net
|
• | We no longer record fair value gains or losses on the majority of our trading MBS, thereby reducing the amount of securities subject to recognition of changes in fair value in our condensed consolidated statement of operations. | |||
|
Other expenses
|
• | Upon purchase of MBS securities issued by consolidated trusts where the purchase price of the MBS does not equal the carrying value of the related consolidated debt, we recognize a gain or loss on debt extinguishment. | |||
See “Note 2, Adoption of the New Accounting Standards
on the Transfers of Financial Assets and Consolidation of
Variable Interest Entities” for a further discussion of the
impacts of the new accounting standards on our condensed
consolidated financial statements.
Table 3 summarizes our condensed consolidated results of
operations for the periods indicated.
18
Table of Contents
Table
3: Summary of Condensed Consolidated Results of
Operations
(1)
|
For the
|
||||||||||||
|
Three Months Ended
|
||||||||||||
| March 31, | ||||||||||||
| 2010 | 2009 | Variance | ||||||||||
|
(Dollars in millions,
|
||||||||||||
| except per share amounts) (1) | ||||||||||||
|
Net interest income
|
$ | 2,789 | $ | 3,248 | $ | (459 | ) | |||||
|
Guaranty fee income
|
54 | 1,752 | (1,698 | ) | ||||||||
|
Fee and other income
|
179 | 192 | (13 | ) | ||||||||
|
Net revenues
|
$ | 3,022 | $ | 5,192 | $ | (2,170 | ) | |||||
|
Investment gains, net
|
166 | 223 | (57 | ) | ||||||||
|
Net
other-than-temporary
impairments
|
(236 | ) | (5,653 | ) | 5,417 | |||||||
|
Fair value losses, net
|
(1,705 | ) | (1,460 | ) | (245 | ) | ||||||
|
Losses from partnership investments
|
(58 | ) | (357 | ) | 299 | |||||||
|
Administrative expenses
|
(605 | ) | (523 | ) | (82 | ) | ||||||
|
Credit-related
expenses
(2)
|
(11,884 | ) | (20,872 | ) | 8,988 | |||||||
|
Other non-interest expenses
|
(296 | ) | (358 | ) | 62 | |||||||
|
Loss before federal income taxes
|
(11,596 | ) | (23,808 | ) | 12,212 | |||||||
|
Benefit for federal income taxes
|
67 | 623 | (556 | ) | ||||||||
|
Net loss
|
(11,529 | ) | (23,185 | ) | 11,656 | |||||||
|
Less: Net loss (income) attributable to the noncontrolling
interest
|
(1 | ) | 17 | (18 | ) | |||||||
|
Net loss attributable to Fannie Mae
|
$ | (11,530 | ) | $ | (23,168 | ) | $ | 11,638 | ||||
|
Diluted loss per common share
|
$ | (2.29 | ) | $ | (4.09 | ) | $ | 1.80 | ||||
| (1) | Certain prior period amounts have been reclassified to conform to the current period presentation. | |
| (2) | Consists of provision for loan losses, provision (benefit) for guaranty losses and foreclosed property expense (income). |
Net
Interest Income
Table 4 presents an analysis of our net interest income, average
balances, and related yields earned on assets and incurred on
liabilities for the periods indicated. For most components of
the average balances, we used a daily weighted average of
amortized cost. When daily average balance information was not
available, such as for mortgage loans, we used monthly averages.
Table 5 presents the change in our net interest income between
periods and the extent to which that variance is attributable
to: (1) changes in the volume of our interest-earning
assets and interest-bearing liabilities; or (2) changes in
the interest rates of these assets and liabilities.
19
Table of Contents
Table
4: Analysis of Net Interest Income and
Yield
| For the Three Months Ended March 31, | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
|
Interest
|
Average
|
Interest
|
Average
|
|||||||||||||||||||||
|
Average
|
Income/
|
Rates
|
Average
|
Income/
|
Rates
|
|||||||||||||||||||
| Balance | Expense | Earned/Paid | Balance | Expense | Earned/Paid | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||
|
Mortgage
loans
(1)
|
$ | 2,989,957 | $ | 37,619 | 5.03 | % | $ | 431,918 | $ | 5,598 | 5.18 | % | ||||||||||||
|
Mortgage securities
|
149,053 | 1,751 | 4.70 | 346,923 | 4,620 | 5.33 | ||||||||||||||||||
|
Non-mortgage
securities
(2)
|
66,860 | 37 | 0.22 | 48,349 | 91 | 0.75 | ||||||||||||||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
40,061 | 21 | 0.21 | 64,203 | 104 | 0.65 | ||||||||||||||||||
|
Advances to lenders
|
2,512 | 18 | 2.87 | 4,256 | 23 | 2.16 | ||||||||||||||||||
|
Total interest-earning assets
|
$ | 3,248,443 | $ | 39,446 | 4.86 | % | $ | 895,649 | $ | 10,436 | 4.66 | % | ||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Short-term debt
|
$ | 191,419 | $ | 118 | 0.25 | % | $ | 330,434 | $ | 1,107 | 1.34 | % | ||||||||||||
|
Long-term debt
|
3,030,160 | 36,539 | 4.82 | 554,806 | 6,081 | 4.38 | ||||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
24 | — | 0.07 | 79 | — | — | ||||||||||||||||||
|
Total interest-bearing liabilities
|
$ | 3,221,603 | $ | 36,657 | 4.55 | % | $ | 885,319 | $ | 7,188 | 3.25 | % | ||||||||||||
|
Impact of net non-interest bearing funding
|
$ | 26,840 | 0.03 | % | $ | 10,330 | 0.04 | % | ||||||||||||||||
|
Net interest income/net interest yield
|
$ | 2,789 | 0.34 | % | $ | 3,248 | 1.45 | % | ||||||||||||||||
|
Selected benchmark interest rates at end of
period:
(3)
|
||||||||||||||||||||||||
|
3-month
LIBOR
|
0.29 | % | 1.19 | % | ||||||||||||||||||||
|
2-year
swap
interest rate
|
1.19 | 1.38 | ||||||||||||||||||||||
|
5-year
swap
interest rate
|
2.73 | 2.22 | ||||||||||||||||||||||
|
30-year
Fannie Mae MBS par coupon rate
|
4.51 | 3.88 | ||||||||||||||||||||||
| (1) | Interest income includes interest income on acquired credit-impaired loans, which totaled $587 million and $153 million for the three months ended March 31, 2010 and 2009, respectively. These interest income amounts also include accretion of $266 million and $65 million for the three months ended March 31, 2010 and 2009, respectively, relating to a portion of the fair value losses recorded upon the acquisition of the loans. | |
| (2) | Includes cash equivalents. | |
| (3) | Data from British Bankers’ Association, Thomson Reuters Indices and Bloomberg. |
20
Table of Contents
Table
5: Rate/Volume Analysis of Changes in Net Interest
Income
|
For the Three Months
|
||||||||||||
|
Ended March 31,
|
||||||||||||
| 2010 vs. 2009 | ||||||||||||
|
Total
|
Variance Due to: (1) | |||||||||||
| Variance | Volume | Rate | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Interest income:
|
||||||||||||
|
Mortgage loans
|
$ | 32,021 | $ | 32,189 | $ | (168 | ) | |||||
|
Mortgage securities
|
(2,869 | ) | (2,378 | ) | (491 | ) | ||||||
|
Non-mortgage
securities
(2)
|
(54 | ) | 26 | (80 | ) | |||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
(83 | ) | (30 | ) | (53 | ) | ||||||
|
Advances to lenders
|
(5 | ) | (11 | ) | 6 | |||||||
|
Total interest income
|
29,010 | 29,796 | (786 | ) | ||||||||
|
Interest expense:
|
||||||||||||
|
Short-term debt
|
(989 | ) | (336 | ) | (653 | ) | ||||||
|
Long-term debt
|
30,458 | 29,789 | 669 | |||||||||
|
Total interest expense
|
29,469 | 29,453 | 16 | |||||||||
|
Net interest income
|
$ | (459 | ) | $ | 343 | $ | (802 | ) | ||||
| (1) | Combined rate/volume variances are allocated to both rate and volume based on the relative size of each variance. | |
| (2) | Includes cash equivalents. |
Net interest income decreased in the first quarter of 2010 as
compared with the first quarter of 2009 primarily as a result of
the interest expense recognized on long-term debt of the
consolidated MBS trusts being greater than the interest income
recognized on the underlying mortgage loans of the consolidated
trusts. While we do not recognize interest income on the
mortgage loans of the consolidated trusts that have been placed
on nonaccrual status, we continue to recognize interest expense
for the amounts owed to MBS certificateholders, which has
decreased our net interest income. Prior to the adoption of the
new accounting standards, interest income and expense on MBS
trusts not owned by Fannie Mae were not recorded as components
of net interest income but were considered in determining our
provision for credit losses. For the first quarter of 2010,
interest income that we did not recognize for nonaccrual
mortgage loans was $2.7 billion, which reduced our net
interest yield by 33 basis points, compared with
$223 million for the first quarter of 2009, which reduced
our net interest yield by 10 basis points.
We recognize the contractual guaranty fee and the amortization
of deferred cash fees received after December 31, 2009 on
the underlying mortgage loans of consolidated trusts as interest
income, which represents the spread between the yield on the
underlying mortgage assets and the rate on the debt of the
consolidated trusts. Upon adoption of the new accounting
standards, our interest-earning assets and interest-bearing
liabilities both increased by approximately $2.4 trillion. The
lower spread on these interest-earning assets and liabilities
had the impact of reducing our net interest yield for the first
quarter of 2010 as compared to the first quarter of 2009.
We report net interest income for our Capital Markets group in
“Business Segment Results.” The net interest income
for our Capital Markets group reflects interest income from the
assets that we have purchased and the interest expense from the
debt we have issued. See “Business Segment Results”
for a detailed discussion of our Capital Markets group’s
net interest income.
Guaranty
Fee Income
Guaranty fee income decreased in the first quarter of 2010
compared with the first quarter of 2009 because we consolidated
the substantial majority of our MBS trusts and we recognize
interest income and expense, instead
21
Table of Contents
of guaranty fee income, from consolidated trusts. At adoption of
the new accounting standards, our guaranty-related assets and
liabilities pertaining to previously unconsolidated trusts were
eliminated; therefore, we no longer recognize amortization of
previously recorded deferred cash and non-cash fees or fair
value adjustments related to our guaranty to these trusts.
Guaranty fee income for the first quarter of 2010 reflects
guaranty fees earned from unconsolidated trusts and other credit
enhancements arrangements, such as our long-term standby
commitments.
We continue to report guaranty fee income for our Single-Family
business and our HCD business as a separate line item in
“Business Segment Results.”
Investment
Gains, Net
Investment gains recognized in the first quarter of 2010 were
primarily the result of realized gains on sales of
available-for-sale
securities as spread tightening on agency MBS and a decline in
mortgage rates led to higher sales prices. The decrease in
investment gains in the first quarter of 2010 compared with the
first quarter of 2009 was due to a decrease in securitization
gains as a large majority of our portfolio securitization
transactions no longer qualify for sale treatment under the new
accounting standards. The decrease in investment gains was
partially offset by a decrease in lower of cost or fair value
adjustments on
held-for-sale
loans due to the reclassification of most of our
held-for-sale
loans to held for investment upon adoption of the new accounting
standards.
Net
Other-Than-Temporary
Impairment
Net
other-than-temporary
impairment for the first quarter of 2010 significantly decreased
compared with the first quarter of 2009, driven primarily by the
adoption of a new accounting standard effective April 1,
2009. As a result of this accounting standard, beginning with
the second quarter of 2009, we recognize only the credit portion
of
other-than-temporary
impairment in our condensed consolidated statements of
operations. The net
other-than-temporary
impairment charge recorded in the first quarter of 2010 was
driven by a decrease in the present value of our cash flow
projections on Alt-A and subprime securities. The net
other-than-temporary
impairment charge recorded in the first quarter of 2009 before
our adoption of this accounting standard included both the
credit and non-credit components of the loss in fair value and
was driven primarily by additional impairment losses on some of
our Alt-A and subprime private-label securities that we had
previously impaired, as well as impairment losses on other Alt-A
and subprime securities, due to continued deterioration in the
credit quality of the loans underlying these securities and
further declines in the expected cash flows.
Fair
Value Losses, Net
Table 6 presents the components of fair value gains and losses.
22
Table of Contents
Table
6: Fair Value Gains (Losses), Net
|
For the Three Months
|
||||||||
| Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Risk management derivatives fair value losses attributable to:
|
||||||||
|
Net contractual interest expense accruals on interest rate swaps
|
$ | (835 | ) | $ | (940 | ) | ||
|
Net change in fair value during the period
|
(1,326 | ) | (428 | ) | ||||
|
Total risk management derivatives fair value losses, net
|
(2,161 | ) | (1,368 | ) | ||||
|
Mortgage commitment derivatives fair value losses, net
|
(601 | ) | (338 | ) | ||||
|
Total derivatives fair value losses, net
|
(2,762 | ) | (1,706 | ) | ||||
|
Trading securities gains, net
|
1,058 | 167 | ||||||
|
Debt foreign exchange gains, net
|
23 | 55 | ||||||
|
Debt fair value gains (losses), net
|
(24 | ) | 24 | |||||
|
Fair value losses, net
|
$ | (1,705 | ) | $ | (1,460 | ) | ||
| 2010 | 2009 | |||||||
|
5-year
swap
interest rate:
|
||||||||
|
As of January 1
|
2.98 | % | 2.13 | % | ||||
|
As of March 31
|
2.73 | 2.22 | ||||||
Risk
Management Derivatives Fair Value Losses, Net
We supplement our issuance of debt securities with derivative
instruments to further reduce duration and prepayment risks. We
generally are the purchaser of risk management derivatives. In
cases where options obtained through callable debt issuance are
not needed for risk management purposes, we may engage in sales
of options in the
over-the-counter
derivatives market in order to offset the options obtained in
the callable debt. During the first quarter of 2010, there were
a small number of transactions of this type.
We recorded derivative losses in the first quarter of 2010 as a
result of: (1) a decrease in implied interest rate
volatility, which reduced the fair value of our purchased
options; (2) a decrease in swap rates, which reduced the
fair value of our pay-fixed derivatives; and (3) time decay
on our purchased options.
Our derivative losses in the first quarter of 2009 were
primarily driven by fair value losses on our option-based
derivatives due to the combined effect of a decrease in implied
volatility and the time decay of these options.
For additional information on our risk management derivatives,
refer to “Note 10, Derivative Instruments.”
Mortgage
Commitment Derivatives Fair Value Losses, Net
Commitments to purchase or sell some mortgage-related securities
and to purchase single-family mortgage loans generally are
derivatives and changes in their fair value are recognized in
our condensed consolidated statements of operations. We
recognized higher losses on our mortgage securities commitments
in the first quarter of 2010 compared with the first quarter of
2009, driven primarily by increased losses on commitments to
sell as a result of an increase in mortgage-related securities
prices during the commitment period.
Trading
Securities Gains, Net
Gains on trading securities in the first quarter of 2010 were
primarily driven by the narrowing of spreads on commercial
mortgage-backed securities (“CMBS”) as well as by a
decrease in interest rates.
23
Table of Contents
The gains on our trading securities during the first quarter of
2009 were attributable to the significant decline in mortgage
interest rates and the narrowing of spreads on agency MBS during
the quarter. These gains were partially offset by a decrease in
the fair value of our private-label mortgage-related securities
backed by Alt-A and subprime loans that we hold.
Losses
from Partnership Investments
Losses from partnership investments decreased in the first
quarter of 2010 compared with the first quarter of 2009 as we
did not recognize net operating losses or
other-than-temporary
impairment on our LIHTC investments in the first quarter of
2010. In the fourth quarter of 2009, we reduced the carrying
value of our LIHTC investments to zero. As a result, we no
longer recognize net operating losses or
other-than-temporary
impairment on our LIHTC investments. Losses from partnership
investments recognized in the first quarter of 2010 were due to
other-than-temporary
impairment on our other affordable housing investments.
Administrative
Expenses
Administrative expenses increased in the first quarter of 2010
compared with the first quarter of 2009 due to an increase in
employees and third-party services primarily related to our
foreclosure prevention and credit loss mitigation efforts.
Credit-Related
Expenses
Credit-related expenses consist of the provision for loan
losses, provision for guaranty losses (collectively referred to
as “provision for credit losses”) and foreclosed
property expense. We detail the components of our credit-related
expenses in Table 7.
Table
7: Credit-Related Expenses
|
For the Three Months
|
||||||||
| Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Provision for loan losses
|
$ | 11,939 | $ | 2,509 | ||||
|
Provision (benefit) for guaranty losses
|
(36 | ) | 17,825 | |||||
|
Total provision for credit
losses
(1)
|
11,903 | 20,334 | ||||||
|
Foreclosed property expense (income)
|
(19 | ) | 538 | |||||
|
Credit-related expenses
|
$ | 11,884 | $ | 20,872 | ||||
| (1) | Includes credit losses attributable to acquired credit-impaired loans and HomeSaver Advance fair value losses of $58 million for the three months ended March 31, 2010 and $1.5 billion for the three months ended March 31, 2009. |
Provision
for Credit Losses
We summarize the changes in our combined loss reserves in Table
8. Upon recognition of the mortgage loans held by newly
consolidated trusts on January 1, 2010, we increased our
“Allowance for loan losses” and decreased our
“Reserve for guaranty losses.” The impact at
transition is reported as “Adoption of new accounting
standards” in the table. The decrease in the combined loss
reserves from transition represents a difference in the
methodology used to estimate incurred losses for our allowance
for loan losses as compared with our reserve for guaranty losses
and our separate presentation of the portion of the allowance
related to accrued interest as our “Allowance for accrued
interest receivable.” These changes are discussed in
“Note 2, Adoption of the New Accounting Standards on
the Transfers of Financial Assets and Consolidation of Variable
Interest Entities.”
24
Table of Contents
Table
8: Allowance for Loan Losses and Reserve for Guaranty
Losses (Combined Loss Reserves)
|
For the Three Months
|
||||||||
| Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Changes in combined loss reserves:
|
||||||||
|
Allowance for loan losses:
|
||||||||
|
Beginning
balance
(1)(2)
|
$ | 9,925 | $ | 2,772 | ||||
|
Adoption of new accounting standards
|
43,576 | — | ||||||
|
Provision for loan losses
|
11,939 | 2,509 | ||||||
|
Charge-offs
(3)
|
(5,160 | ) | (637 | ) | ||||
|
Recoveries
|
374 | 35 | ||||||
|
Net reclassification of portion of allowance related to
interest
(1)(4)
|
(85 | ) | (49 | ) | ||||
|
Ending
balance
(1)(5)(6)
|
$ | 60,569 | $ | 4,630 | ||||
|
Reserve for guaranty losses:
|
||||||||
|
Beginning balance
|
$ | 54,430 | $ | 21,830 | ||||
|
Adoption of new accounting standards
|
(54,103 | ) | — | |||||
|
Provision (benefit) for guaranty losses
|
(36 | ) | 17,825 | |||||
|
Charge-offs
|
(61 | ) | (2,944 | ) | ||||
|
Recoveries
|
3 | 165 | ||||||
|
Ending balance
|
$ | 233 | $ | 36,876 | ||||
|
Combined loss reserves:
|
||||||||
|
Beginning
balance
(1)(2)
|
$ | 64,355 | $ | 24,602 | ||||
|
Adoption of new accounting standards
|
(10,527 | ) | — | |||||
|
Total provision for credit losses
|
11,903 | 20,334 | ||||||
|
Charge-offs
(3)
|
(5,221 | ) | (3,581 | ) | ||||
|
Recoveries
|
377 | 200 | ||||||
|
Net reclassification of portion of allowance related to
interest
(1)(4)
|
(85 | ) | (49 | ) | ||||
|
Ending
balance
(1)(5)(6)
|
$ | 60,802 | $ | 41,506 | ||||
|
Attribution of charge-offs:
|
||||||||
|
Charge-offs attributable to guaranty book of business
|
$ | (5,163 | ) | $ | (2,056 | ) | ||
|
Charge-offs attributable to fair value losses on:
|
||||||||
|
Acquired credit-impaired loans
|
(58 | ) | (1,410 | ) | ||||
|
HomeSaver Advance loans
|
— | (115 | ) | |||||
|
Total charge-offs
|
$ | (5,221 | ) | $ | (3,581 | ) | ||
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
|
Allocation of combined loss reserves:
|
||||||||
|
Balance at end of each period attributable to:
|
||||||||
|
Single-family
(1)
|
$ | 58,900 | $ | 62,312 | ||||
|
Multifamily
|
1,902 | 2,043 | ||||||
|
Total
|
$ | 60,802 | $ | 64,355 | ||||
|
Single-family and multifamily loss reserves as a percentage
of applicable guaranty book of business:
|
||||||||
|
Single-family
(1)
|
2.05 | % | 2.14 | % | ||||
|
Multifamily
|
1.02 | 1.10 | ||||||
|
Combined loss reserves as a percentage of:
|
||||||||
|
Total guaranty book of
business
(1)
|
1.99 | % | 2.08 | % | ||||
|
Total nonperforming
loans
(1)
|
27.15 | 29.73 | ||||||
25
Table of Contents
| (1) | Prior period amounts have been reclassified and respective percentages have been recalculated to conform to the current period presentation. | |
| (2) | Includes $1.8 billion related to loans of consolidated trusts as of December 31, 2009. | |
| (3) | Includes accrued interest of $579 million and $247 million for the three months ended March 31, 2010 and 2009, respectively. | |
| (4) | Represents reclassification of amounts recorded in provision for loan losses and charge-offs that relate to allowance for accrued interest receivable. | |
| (5) | Includes $903 million and $197 million as of March 31, 2010 and 2009, respectively, for acquired credit-impaired loans. | |
| (6) | Includes $34.9 billion related to loans of consolidated trusts as of March 31, 2010. |
Our provision for credit losses decreased in the first quarter
of 2010 compared with the first quarter of 2009 primarily due to
a slowing in the growth, relative to the first half of 2009, of
loans that are seriously delinquent, which is partly the result
of the home retention and the foreclosure alternative workouts
that we completed during the quarter. While we have purchased
significantly more delinquent loans from MBS trusts in the first
quarter of 2010 compared to the first quarter of 2009, we
experienced a significant decline in fair value losses on
acquired credit-impaired loans because of our adoption of the
new accounting standards. Only purchases of credit-deteriorated
loans from unconsolidated MBS trusts or as a result of other
credit guarantees generate fair value losses upon acquisition.
However, our provision for credit losses, although lower through
the first quarter of 2010, remained high and our combined loss
reserves remained high due to:
| • | A high level of nonperforming loans, delinquencies, and defaults due to the general deterioration in our guaranty book of business. Factors contributing to these conditions include the following: |
| • | Continued stress on a broader segment of borrowers due to continued high levels of unemployment and underemployment and the prolonged decline in home prices has resulted in higher delinquency rates on loans in our single-family guaranty book of business that do not have characteristics typically associated with higher risk loans. | |
| • | Certain loan categories continued to contribute disproportionately to the increase in our nonperforming loans and credit losses. These categories include: loans on properties in certain Midwest states, California, Florida, Arizona and Nevada; loans originated in 2006 and 2007; and loans related to higher-risk product types, such as Alt-A loans. | |
| • | The prolonged decline in home prices has also resulted in negative home equity for some borrowers, especially when the impact of existing second mortgage liens is taken into account, affecting their ability to refinance or willingness to make their mortgage payments, causing higher delinquencies as shown in “Table 36: Serious Delinquency Rates.” | |
| • | The number of loans that are seriously delinquent remained high due to delays in foreclosures because: (1) we require servicers to exhaust foreclosure prevention alternatives as part of our efforts to keep borrowers in their homes; (2) recent legislation or judicial changes in the foreclosure process in a number of states have lengthened the foreclosure timeline and (3) some jurisdictions are experiencing foreclosure processing backlogs due to high foreclosure case volumes. |
| • | A greater proportion of the loans in our guaranty book of business are subject to individual impairment rather than the collective reserve for loan losses. We consider a loan to be individually impaired when, based on current information, it is probable that we will not receive all amounts due, including interest, in accordance with the contractual terms of the loan agreement. Individually impaired loans currently include, among others, those restructured in a troubled debt restructuring (“TDR”), which is a form of restructuring a mortgage loan in which a concession is granted to a borrower experiencing financial difficulty. Any impairment recognized on these loans is part of our provision for loan losses and allowance for loan losses. The higher levels of workouts initiated as a result of our foreclosure prevention efforts during 2009 and into the first quarter of 2010, including HAMP, increased our total number of individually impaired loans, especially those considered to be TDRs, compared with the first quarter of |
26
Table of Contents
| 2009. Frequently, the allowance calculated for an individually impaired loan is greater than the allowance which would be calculated under the collective reserve. Individual impairment is based on the restructured loan’s expected cash flows, discounted at the loan’s original effective interest rate. Accordingly, as a larger portion of our loan population is modified and restructured in a TDR, the allowance and corresponding provision is likely to increase. |
While loans in certain states, certain higher risk categories
and our 2006 and 2007 vintages continue to contribute
disproportionately to our credit losses, the portion of our
combined loss reserves attributable to these loan categories has
declined slightly or remained flat as of March 31, 2010
compared with December 31, 2009. The Midwest accounted for
approximately 13% of our combined single-family loss reserves as
of March 31, 2010 and December 31, 2009. Our mortgage
loans in California, Florida, Arizona and Nevada together
accounted for approximately 51% of our combined single-family
loss reserves as of March 31, 2010, compared with
approximately 53% as of December 31, 2009. Our Alt-A loans
represented approximately 34% of our combined single-family loss
reserves as of March 31, 2010, compared with approximately
35% as of December 31, 2009, and our 2006 and 2007 loan
vintages together accounted for approximately 67% of our
combined single-family loss reserves as of March 31, 2010,
compared with approximately 69% as of December 31, 2009.
We acquired significantly more credit-impaired loans from MBS
trusts in the first quarter of 2010 compared with the first
quarter of 2009. However, with the adoption of the new
accounting standards, only purchases of credit-deteriorated
loans from unconsolidated MBS trusts or as a result of other
credit guarantees generate fair value losses upon acquisition
and accordingly our fair value losses on acquired
credit-impaired loans significantly decreased. During the first
quarter of 2010, we acquired approximately 289,000 loans of
which approximately 700 credit-impaired loans were acquired from
unconsolidated MBS trusts or as a result of other credit
guarantees and for which we recorded fair value losses of
$58 million upon acquisition. During the first quarter of
2009, we acquired approximately 12,200 loans from MBS trusts and
recorded fair value losses of $1.5 billion upon acquisition.
For additional discussions on delinquent loans and
concentrations, see “Risk Management—Mortgage Credit
Risk Management—Single-Family Mortgage Credit Risk
Management—Problem Loan Management and Foreclosure
Prevention.” For discussions on our charge-offs, see
“Consolidated Results of Operations—Credit-Related
Expenses—Credit Loss Performance Metrics.”
Our balance of nonperforming single-family loans remained high
as of March 31, 2010 due to both high levels of
delinquencies and an increase in TDRs. The composition of our
nonperforming loans is shown in Table 9. For information on the
impact of TDRs and other individually impaired loans on our
allowance for loan losses, see “Note 4, Mortgage
Loans.”
27
Table of Contents
Table
9: Nonperforming Single-Family and Multifamily
Loans
| As of | ||||||||
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
On-balance sheet nonperforming loans including loans in
|
||||||||
|
consolidated Fannie Mae MBS trusts:
|
||||||||
|
Nonaccrual loans
|
$ | 192,633 | $ | 34,079 | ||||
|
Troubled debt restructurings on accrual status
|
26,679 | 6,922 | ||||||
|
HomeSaver Advance first-lien loans on accrual status
|
4,430 | 866 | ||||||
|
Total on-balance sheet nonperforming loans
|
223,742 | 41,867 | ||||||
|
Off-balance sheet nonperforming loans in unconsolidated Fannie
Mae MBS trusts:
|
||||||||
|
Nonperforming loans, excluding HomeSaver Advance first-lien
loans
(1)
|
203 | 161,406 | ||||||
|
HomeSaver Advance first-lien
loans
(2)
|
1 | 13,182 | ||||||
|
Total off-balance sheet nonperforming loans
|
204 | 174,588 | ||||||
|
Total nonperforming loans
|
$ | 223,946 | $ | 216,455 | ||||
|
Accruing on-balance sheet loans past due 90 days or
more
(3)
|
$ | 1,079 | $ | 612 | ||||
|
For the
|
For the
|
|||||||
|
Three Months Ended
|
Year Ended
|
|||||||
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Interest related to on-balance sheet nonperforming loans:
|
||||||||
|
Interest income
forgone
(4)
|
$ | 2,726 | $ | 1,341 | ||||
|
Interest income recognized for the
period
(5)
|
1,227 | 1,206 | ||||||
| (1) | Represents loans that would meet our criteria for nonaccrual status if the loans had been on-balance sheet. | |
| (2) | Represents all off-balance sheet first-lien loans associated with unsecured HomeSaver Advance loans, including first-lien loans that are not seriously delinquent. | |
| (3) | Recorded investment of loans as of the end of each period that are 90 days or more past due and continuing to accrue interest, including loans insured or guaranteed by the U.S. government and loans where we have recourse against the seller in the event of a default. | |
| (4) | Represents the amount of interest income that would have been recorded during the period for on-balance sheet nonperforming loans as of the end of each period had the loans performed according to their original contractual terms. | |
| (5) | Represents interest income recognized during the period based on stated coupon rate for on-balance sheet loans classified as nonperforming as of the end of each period. |
Foreclosed
Property Expense (Income)
The shift from foreclosed property expense in the first quarter
of 2009 to foreclosed property income in the first quarter of
2010 was primarily driven by $562 million of fees
recognized from the cancellation and restructuring of some of
our mortgage insurance coverage. These fees represented an
acceleration of, and discount on, claims to be paid pursuant to
the coverage in order to reduce our future exposure to our
mortgage insurers. In addition, we had lower valuation
adjustments on our REO inventory in the first quarter of 2010,
reflecting the stabilization of home prices in some geographic
regions. This improvement was offset by an increase in REO
holding costs due to the continued rise in foreclosure activity
which resulted in higher REO inventory in the first quarter of
2010 compared with the first quarter of 2009.
28
Table of Contents
Credit
Loss Performance Metrics
Our credit-related expenses should be considered in conjunction
with our credit loss performance. As our credit losses are now
at such high levels, management has shifted focus away from the
credit loss ratio to measure performance and has focused more on
our loss mitigation strategies and reducing our credit losses on
an absolute basis. Historically, management viewed our credit
loss performance metrics, which include our historical credit
losses and our credit loss ratio, as indicators of the
effectiveness of our credit risk management strategies.
These metrics, however, are not defined terms within GAAP and
may not be calculated in the same manner as similarly titled
measures reported by other companies. Because management does
not view changes in the fair value of our mortgage loans as
credit losses, we adjust our credit loss performance metrics for
the impact associated with HomeSaver Advance loans and the
acquisition of credit-impaired loans. We also exclude interest
forgone on nonperforming loans in our mortgage portfolio,
other-than-temporary
impairment losses resulting from deterioration in the credit
quality of our mortgage-related securities and accretion of
interest income on acquired credit-impaired loans from credit
losses.
We believe that credit loss performance metrics may be useful to
investors because they are metrics widely used by analysts,
investors and other companies within the financial services
industry. They also provide a consistent treatment of credit
losses for on- and off-balance sheet loans. Moreover, by
presenting credit losses with and without the effect of fair
value losses associated with the acquisition of credit-impaired
loans and HomeSaver Advance loans, investors are able to
evaluate our credit performance on a more consistent basis among
periods. Table 10 details the components of our credit loss
performance metrics as well as our average default rate and loss
severity.
Table
10: Credit Loss Performance Metrics
| For the Three Months Ended March 31, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Amount | Ratio (1) | Amount | Ratio (1) | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Charge-offs, net of recoveries
|
$ | 4,844 | 62.9 | bp | $ | 3,381 | 45.2 | bp | ||||||||
|
Foreclosed property expense (income)
|
(19 | ) | (0.2 | ) | 538 | 7.2 | ||||||||||
|
Credit losses including the effect of fair value losses on
acquired credit-impaired loans and HomeSaver Advance loans
|
4,825 | 62.7 | 3,919 | 52.4 | ||||||||||||
|
Less: Fair value losses resulting from acquired credit-impaired
loans and HomeSaver Advance loans
|
(58 | ) | (0.8 | ) | (1,525 | ) | (20.4 | ) | ||||||||
|
Plus: Impact of acquired credit-impaired loans on charge-offs
and foreclosed property expense
|
380 | 4.9 | 89 | 1.2 | ||||||||||||
|
Credit losses and credit loss ratio
|
$ | 5,147 | 66.8 | bp | $ | 2,483 | 33.2 | bp | ||||||||
|
Credit losses attributable to:
|
||||||||||||||||
|
Single-family
|
$ | 5,062 | $ | 2,465 | ||||||||||||
|
Multifamily
|
85 | 18 | ||||||||||||||
|
Total
|
$ | 5,147 | $ | 2,483 | ||||||||||||
|
Average default rate
|
0.46 | % | 0.17 | % | ||||||||||||
|
Average loss severity
rate
(2)
|
35.40 | 35.60 | ||||||||||||||
| (1) | Basis points are based on the annualized amount for each line item presented divided by the average guaranty book of business during the period. | |
| (2) | Excludes fair value losses on credit-impaired loans acquired from MBS trusts and HomeSaver Advance loans. |
29
Table of Contents
The increase in our credit losses reflects the increase in the
number of defaults, particularly due to the prolonged period of
high unemployment, decline in home prices and our prior
acquisition of loans with higher risk attributes. However,
defaults in the first quarter of 2009 were lower than they could
have been due to the foreclosure moratoria during the end of
2008 and first quarter of 2009. The increase in defaults was
partially offset by a slight reduction in average loss severity
as home prices have improved in some geographic regions.
Table 11 provides an analysis of our credit losses in certain
higher risk loan categories, loan vintages and loans within
certain states that continue to account for a disproportionate
share of our credit losses as compared with our other loans.
Table
11: Credit Loss Concentration Analysis
|
Percentage of
|
||||||||||||||||||||
|
Single-Family Conventional
|
||||||||||||||||||||
|
Guaranty Book
|
Percentage of Single-Family Credit Losses | |||||||||||||||||||
| of Business Outstanding as of (1) |
For the Three Months Ended
|
|||||||||||||||||||
|
March 31,
|
December 31,
|
March 31,
|
March 31, | |||||||||||||||||
| 2010 | 2009 | 2009 | 2010 | 2009 | ||||||||||||||||
|
Geographical distribution:
|
||||||||||||||||||||
|
Arizona, California, Florida and Nevada
|
28 | % | 28 | % | 27 | % | 58 | % | 58 | % | ||||||||||
|
Illinois, Indiana, Michigan and Ohio
|
11 | 11 | 11 | 15 | 14 | |||||||||||||||
|
All other states
|
61 | 61 | 62 | 27 | 28 | |||||||||||||||
|
Select higher risk product
features
(2)
|
24 | 24 | 27 | 64 | 72 | |||||||||||||||
|
Vintages:
|
||||||||||||||||||||
|
2006
|
10 | 11 | 13 | 30 | 32 | |||||||||||||||
|
2007
|
14 | 15 | 19 | 37 | 34 | |||||||||||||||
|
All other vintages
|
76 | 74 | 68 | 33 | 34 | |||||||||||||||
| (1) | Calculated based on the unpaid principal balance of loans, where we have detailed loan-level information, for each category divided by the unpaid principal balance of our single-family conventional guaranty book of business. | |
| (2) | Includes Alt-A loans, subprime loans, interest-only loans, loans with original loan-to-value ratios greater than 90%, and loans with FICO credit scores less than 620. |
Our 2009 and 2010 vintages accounted for less than 1% of our
single-family credit losses. Typically, credit losses on
mortgage loans do not peak until the third through fifth years
following origination. We provide more detailed credit
performance information, including serious delinquency rates by
geographic region, statistics on nonperforming loans and
foreclosure activity in “Risk Management—Credit Risk
Management—Mortgage Credit Risk Management.”
Regulatory
Hypothetical Stress Test Scenario
Under a September 2005 agreement with OFHEO, we are required to
disclose on a quarterly basis the present value of the change in
future expected credit losses from our existing single-family
guaranty book of business from an immediate 5% decline in
single-family home prices for the entire United States. Although
other provisions of the September 2005 agreement were suspended
in March 2009 by FHFA until further notice, the disclosure
requirement was not suspended. For purposes of this calculation,
we assume that, after the initial 5% shock, home price growth
rates return to the average of the possible growth rate paths
used in our internal credit pricing models. The sensitivity
results represent the difference between future expected credit
losses under our base case scenario, which is derived from our
internal home price path forecast, and a scenario that assumes
an instantaneous nationwide 5% decline in home prices.
30
Table of Contents
Table 12 compares the credit loss sensitivities for the periods
indicated for first lien single-family whole loans we own or
that back Fannie Mae MBS, before and after consideration of
projected credit risk sharing proceeds, such as private mortgage
insurance claims and other credit enhancement.
Table
12: Single-Family Credit Loss
Sensitivity
(1)
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Gross single-family credit loss sensitivity
|
$ | 21,078 | $ | 18,311 | ||||
|
Less: Projected credit risk sharing proceeds
|
(3,006 | ) | (2,533 | ) | ||||
|
Net single-family credit loss sensitivity
|
$ | 18,072 | $ | 15,778 | ||||
|
Outstanding single-family whole loans and Fannie Mae
MBS
(2)
|
$ | 2,793,524 | $ | 2,830,004 | ||||
|
Single-family net credit loss sensitivity as a percentage of
outstanding single-family whole loans and Fannie Mae MBS
|
0.65 | % | 0.56 | % | ||||
| (1) | Represents total economic credit losses, which consist of credit losses and forgone interest. Calculations are based on approximately 97% of our total single-family guaranty book of business as of both March 31, 2010 and December 31, 2009. The mortgage loans and mortgage-related securities that are included in these estimates consist of: (a) single-family Fannie Mae MBS (whether held in our mortgage portfolio or held by third parties), excluding certain whole loan REMICs and private-label wraps; (b) single-family mortgage loans, excluding mortgages secured only by second liens, subprime mortgages, manufactured housing chattel loans and reverse mortgages; and (c) long-term standby commitments. We expect the inclusion in our estimates of the excluded products may impact the estimated sensitivities set forth in this table. | |
| (2) | As a result of our adoption of the new accounting standards, the balance reflects a reduction as of March 31, 2010 from December 31, 2009 due to unscheduled principle payments. |
Because these sensitivities represent hypothetical scenarios,
they should be used with caution. Our regulatory stress test
scenario is limited in that it assumes an instantaneous uniform
5% nationwide decline in home prices, which is not
representative of the historical pattern of changes in home
prices. Changes in home prices generally vary on a regional, as
well as a local, basis. In addition, these stress test scenarios
are calculated independently without considering changes in
other interrelated assumptions, such as unemployment rates or
other economic factors, which are likely to have a significant
impact on our future expected credit losses.
Federal
Income Taxes
We did not recognize an income tax benefit for our current
period pre-tax loss as it is more likely than not that we will
not generate sufficient taxable income in the foreseeable future
to realize our net deferred tax assets. We recognized an income
tax benefit in the first quarter of 2010 primarily due to the
reversal of a portion of the valuation allowance for deferred
tax assets resulting primarily from a settlement agreement
reached with the IRS in the first quarter of 2010 for our
unrecognized tax benefits for the tax years 1999 through 2004.
The tax benefit recognized for the first quarter of 2009 was
primarily due to the benefit of carrying back to prior years a
portion of our 2009 tax loss, net of the reversal of the use of
certain tax credits.
Financial
Impact of the Making Home Affordable Program on Fannie
Mae
Home
Affordable Refinance Program
Because we already own or guarantee the mortgage loans that we
refinance under HARP, our expenses under that program consist
mostly of limited administrative costs.
31
Table of Contents
Home
Affordable Modification Program
We discuss below how modifying loans under HAMP that we own or
guarantee directly affects our financial results.
Impairments
and Fair Value Losses on Loans Under HAMP
Table 13 provides information about the impairments and fair
value losses associated with mortgage loans owned or guaranteed
by Fannie Mae entering trial modifications under HAMP. These
amounts have been included in the calculation of our
credit-related expenses in our condensed consolidated statements
of operations for 2009 and the first quarter of 2010. Please see
“MD&A—Consolidated Results of
Operations—Financial Impact of the Making Home Affordable
Program on Fannie Mae” in our 2009
Form 10-K
for a detailed discussion on these impairments and fair value
losses.
When we begin to individually assess a loan for impairment, we
exclude the loan from the population of loans on which we
calculate our collective loss reserves. Table 13 does not
reflect the potential reduction of our combined loss reserves
from excluding individually impaired loans from this calculation.
Table
13: Impairments and Fair Value Losses on Loans in
HAMP
(1)
|
For the
|
For the
|
|||||||
|
Three Months
|
Year Ended
|
|||||||
|
Ended March 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Impairments
(2)
|
$ | 7,563 | $ | 15,777 | ||||
|
Fair value losses on credit-impaired loans acquired from MBS
trusts
(3)
|
4 | 10,637 | ||||||
|
Total
|
$ | 7,567 | $ | 26,414 | ||||
|
Loans entered into a trial modifications under the program
|
91,700 | 333,300 | ||||||
|
Credit-impaired loans acquired from MBS trusts in trial
modifications under the
program
(4)
|
44 | 83,700 | ||||||
| (1) | Includes amounts for loans that entered into a trial modification under the program but that have not yet received, or that have been determined to be ineligible for, a permanent modification under the program. Some of these ineligible loans have since been modified outside of the program. Also includes loans that entered into a trial modification prior to the end of the periods presented, but were reported from servicers to us subsequent to that date. | |
| (2) | Impairments consist of (a) impairments recognized on loans accounted for as loans restructured in a troubled debt restructuring and (b) incurred credit losses on loans in MBS trusts that have entered into a trial modification and been individually assessed for incurred credit losses. Amount includes impairments recognized subsequent to the date of loan acquisition. | |
| (3) | These fair value losses are recorded as charge-offs against the “Reserve for guaranty losses” and have the effect of increasing the provision for guaranty losses in our condensed consolidated statements of operations. | |
| (4) | Excludes loans purchased from consolidated trusts for the three months ended March 31, 2010 for which no fair value losses were recognized. |
Servicer
and Borrower Incentives
We incurred $95 million in paid and accrued incentive fees
for servicers and borrowers in connection with loans modified
under HAMP during the first quarter of 2010, which we recorded
as part of our “Other expenses.”
Overall
Impact of the Making Home Affordable Program
Because of the unprecedented nature of the circumstances that
led to the Making Home Affordable Program, we cannot quantify
what the impact would have been on Fannie Mae if the Making Home
Affordable Program
32
Table of Contents
had not been introduced. We do not know how many loans we would
have modified under alternative programs, what the terms or
costs of those modifications would have been, how many
foreclosures would have resulted nationwide, and at what pace,
or the impact on housing prices if the program had not been put
in place. As a result, the amounts we discuss above are not
intended to measure how much the program is costing us in
comparison to what it would have cost us if we did not have the
program at all.
BUSINESS
SEGMENT RESULTS
In this section, we discuss changes to our presentation for
reporting results for our three business segments,
Single-Family, HCD and Capital Markets, which have been revised
due to our prospective adoption of the new accounting standards.
We then discuss our business segment results. You should read
this section together with our condensed consolidated results of
operations in “Consolidated Results of Operations.”
Changes
to Segment Reporting
Our prospective adoption of the new accounting standards had a
significant impact on the presentation and comparability of our
condensed consolidated financial statements due to the
consolidation of the substantial majority of our single-class
securitization trusts and the elimination of previously recorded
deferred revenue from our guaranty arrangements. We continue to
manage Fannie Mae based on the same three business segments;
however, effective in 2010 we changed the presentation of
segment financial information that is currently evaluated by
management.
While some line items in our segment results were not impacted
by either the change from the new accounting standards or
changes to our segment presentation, others were impacted
materially, which reduces the comparability of our segment
results with prior periods. We have not restated prior period
results nor have we presented current year results under the old
presentation as we determined that it was impracticable to do
so; therefore, our segment results reported in the current
period are not comparable with prior periods. In the table
below, we compare our current segment reporting for our three
business segments with our segment reporting in prior periods.
Segment
Reporting in Current Periods Compared with Prior
Periods
| Single Family and HCD | ||||||||||
| Line Item | Current Segment Reporting | Prior Segment Reporting | ||||||||
| Guaranty fee income | • | At adoption of the new accounting standards, we eliminated a substantial majority of our guaranty-related assets and liabilities in our consolidated balance sheet. We re-established an asset and a liability related to the deferred cash fees on Single-Family’s balance sheet and we amortize these fees as guaranty fee income with our contractual guaranty fees. | • | At the inception of a guaranty to an unconsolidated entity, we established a guaranty asset and guaranty obligation, which included deferred cash fees. These guaranty-related assets and liabilities were then amortized and recognized in guaranty fee income with our contractual guaranty fees over the life of the guaranty. | ||||||
| • | We use a static yield method to amortize deferred cash fees to better align with the recognition of contractual guaranty fee income. | • | We used a prospective level yield method to amortize our guaranty-related assets and liabilities, which created significant fluctuations in our guaranty fee income as the interest rate environment shifted. | |||||||
| • | We eliminated substantially all of our guaranty assets that were previously recorded at fair value upon adoption of the new accounting standards. As such, the recognition of fair value adjustments as a component of Single-Family guaranty fee income has been essentially eliminated. | • | We recorded fair value adjustments on our buy-up assets and certain guaranty assets as a component of Single-Family guaranty fee income. | |||||||
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Table of Contents
| Single Family and HCD | ||||||||||
| Line Item | Current Segment Reporting | Prior Segment Reporting | ||||||||
|
Net Interest Income
|
• | Because we now recognize loans underlying the substantial majority of our MBS trusts in our condensed consolidated balance sheets, the amount of interest expense Single-Family and HCD recognize related to forgone interest on nonperforming loans underlying MBS trusts has significantly increased. | • | Interest payments expected to be delinquent on off-balance sheet nonperforming loans were considered in the reserve for guaranty losses. | ||||||
| Credit-related expenses | • | Because we now recognize loans underlying the substantial majority of our MBS trusts in our condensed consolidated balance sheets, we no longer recognize fair value losses upon acquiring credit-impaired loans from these trusts. | • | We recorded a fair value loss on credit-impaired loans acquired from MBS trusts. | ||||||
| • | Upon recognition of mortgage loans held by newly consolidated trusts, we increased our allowance for loan losses and decreased our reserve for guaranty losses. We use a different methodology in estimating incurred losses under our allowance for loan losses versus under our reserve for guaranty losses which will result in lower credit-related expenses. | • | The majority of our combined loss reserves were recorded in the reserve for guaranty losses, which used a different methodology for estimating incurred losses versus the methodology used for the allowance for loan losses. | |||||||
| HCD Only | ||||||||||
| Line Item | Current Segment Reporting | Prior Segment Reporting | ||||||||
| Losses from partnership investments | • | We report losses from partnership investments on an equity basis in the HCD balance sheet. As a result, net income or loss attributable to noncontrolling interests is not included in losses from partnership investments. | • | Losses from partnership investments included net income or loss attributable to noncontrolling interests for the HCD segment. | ||||||
|
Capital Markets
|
||||||||||
|
Line Item
|
Current Segment Reporting | Prior Segment Reporting | ||||||||
| Net interest income | • | We recognize interest income on interest-earning assets that we own and interest expense on debt that we have issued. | • | In addition to the assets we own and the debt we issue, we also included interest income on mortgage-related assets underlying MBS trusts that we consolidated under the prior consolidation accounting standards and the interest expense on the corresponding debt of such trusts. | ||||||
| Investment gains and losses, net | • | We no longer designate the substantial majority of our loans held for securitization as held for sale as the substantial majority of related MBS trusts will be consolidated, thereby reducing lower of cost or fair value adjustments. | • | We designated loans held for securitization as held for sale resulting in recognition of lower of cost or fair value adjustments on our held-for-sale loans. | ||||||
| • | We include the securities that we own, regardless of whether the trust has been consolidated, in reporting gains and losses on securitizations and sales of available-for-sale securities. | • | We excluded the securities of consolidated trusts that we owned in reporting of gains and losses on securitizations and sales of available-for-sale securities. | |||||||
| Fair value gains and losses, net | • | We include the trading securities that we own, regardless of whether the trust has been consolidated, in recognizing fair value gains and losses on trading securities. | • | MBS trusts that were consolidated were reported as loans and thus any securities we owned issued by these trusts did not have fair value adjustments. | ||||||
34
Table of Contents
Under the current segment reporting structure, the sum of the
results for our three business segments does not equal our
condensed consolidated results of operations as we separate the
activity related to our consolidated trusts from the results
generated by our three segments. In addition, because we apply
accounting methods that differ from our consolidated results for
segment reporting purposes, we include an
eliminations/adjustments category to reconcile our business
segment results and the activity related to our consolidated
trusts to our condensed consolidated results of operations.
Segment
Results
Table 14 displays our segment results under our current segment
reporting presentation for the first quarter of 2010.
Table
14: Business Segment Results
| For the Three Months Ended March 31, 2010 | ||||||||||||||||||||||||
| Business Segments | Other Activity/Reconciling Items | |||||||||||||||||||||||
|
Single
|
Capital
|
Consolidated
|
Eliminations/
|
Total
|
||||||||||||||||||||
| Family | HCD | Markets | Trusts (1) | Adjustments (2) | Results | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Net interest income (expense)
|
$ | (1,945 | ) | $ | 4 | $ | 3,057 | $ | 1,239 | $ | 434 | (3) | $ | 2,789 | ||||||||||
|
Benefit (provision) for loan losses
|
(11,945 | ) | 6 | — | — | — | (11,939 | ) | ||||||||||||||||
|
Net interest income (expense) after provision for loan losses
|
(13,890 | ) | 10 | 3,057 | 1,239 | 434 | (9,150 | ) | ||||||||||||||||
|
Guaranty fee income (expense)
|
1,768 | 194 | (279 | ) | (1,197 | ) (4) | (432 | ) (4) | 54 | |||||||||||||||
|
Investment gains (losses), net
|
2 | — | 792 | (155 | ) | (473 | ) (5) | 166 | ||||||||||||||||
|
Net
other-than-temporary
impairments
|
— | — | (236 | ) | — | — | (236 | ) | ||||||||||||||||
|
Fair value losses, net
|
— | — | (1,186 | ) | (35 | ) | (484 | ) (6) | (1,705 | ) | ||||||||||||||
|
Debt extinguishment losses, net
|
— | — | (55 | ) | (69 | ) | — | (124 | ) | |||||||||||||||
|
Losses from partnership investments
|
— | (58 | ) | — | — | — | (58 | ) | ||||||||||||||||
|
Fee and other income (expense)
|
47 | 35 | 104 | (7 | ) | — | 179 | |||||||||||||||||
|
Administrative expenses
|
(390 | ) | (99 | ) | (116 | ) | — | — | (605 | ) | ||||||||||||||
|
Benefit (provision) for guaranty losses
|
(11 | ) | 47 | — | — | — | 36 | |||||||||||||||||
|
Foreclosed property income (expense)
|
30 | (11 | ) | — | — | — | 19 | |||||||||||||||||
|
Other income (expenses)
|
(172 | ) | (6 | ) | 27 | — | (21 | ) (8) | (172 | ) | ||||||||||||||
|
Income (loss) before federal income taxes
|
(12,616 | ) | 112 | 2,108 | (224 | ) | (976 | ) | (11,596 | ) | ||||||||||||||
|
Provision (benefit) for federal income taxes
|
(51 | ) | 13 | (29 | ) | — | — | (67 | ) | |||||||||||||||
|
Net income (loss)
|
(12,565 | ) | 99 | 2,137 | (224 | ) | (976 | ) | (11,529 | ) | ||||||||||||||
|
Less: Net income attributable to noncontrolling interests
|
— | — | — | — | (1 | ) (7) | (1 | ) | ||||||||||||||||
|
Net income (loss) attributable to Fannie Mae
|
$ | (12,565 | ) | $ | 99 | $ | 2,137 | $ | (224 | ) | $ | (977 | ) | $ | (11,530 | ) | ||||||||
| (1) | Represents activity related to the assets and liabilities of consolidated trusts in our balance sheet under the new accounting standard. | |
| (2) | Represents the elimination of intercompany transactions occurring between the three business segments and our consolidated trusts, as well as other adjustments to reconcile to our condensed consolidated results. | |
| (3) | Represents the amortization expense of cost basis adjustments on securities that we own in our portfolio that on a GAAP basis are eliminated. | |
| (4) | Represents the guaranty fees paid from consolidated trusts to the Single-Family and HCD segments. The adjustment to guaranty fee income in the Eliminations/Adjustments column represents the elimination of the amortization of deferred cash fees related to consolidated trusts that were re-established for segment reporting. | |
| (5) | Primarily represents the removal of realized gains and losses on sales of Fannie Mae MBS classified as available-for-sale securities that are issued by consolidated trusts and retained in the Capital Markets portfolio. The |
35
Table of Contents
| adjustment also includes the removal of securitization gains (losses) recognized in the Capital Markets segment relating to portfolio securitization transactions that do not qualify for sale accounting under GAAP. | ||
| (6) | Represents the removal of fair value adjustments on consolidated Fannie Mae MBS classified as trading that are retained in the Capital Markets portfolio. | |
| (7) | Represents the adjustment from equity accounting to consolidation accounting for partnership investments that are consolidated in our consolidated balance sheets. | |
| (8) | Represents the removal of amortization of deferred revenue on certain credit enhancements from the Single-Family and HCD segment balance sheets that are eliminated upon reconciliation to our condensed consolidated balance sheets. |
Single-Family
Business Results
Table 15 summarizes the financial results of the Single-Family
business for the first quarter of 2010 under the current segment
reporting presentation and for the first quarter of 2009 under
the prior segment reporting presentation. The primary sources of
revenue for our Single-Family business are guaranty fee income
and fee and other income. Expenses primarily include
credit-related expenses and administrative expenses.
Table
15: Single-Family Business Results
| For the Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Statement of operations
data:
(1)
|
||||||||
|
Guaranty fee
income
(2)
|
$ | 1,768 | $ | 1,966 | ||||
|
Credit-related
expenses
(3)
|
(11,926 | ) | (20,330 | ) | ||||
|
Other
expenses
(4)
|
(2,458 | ) | (339 | ) | ||||
|
Loss before federal income taxes
|
(12,616 | ) | (18,703 | ) | ||||
|
Benefit for federal income taxes
|
51 | 645 | ||||||
|
Net loss attributable to Fannie Mae
|
$ | (12,565 | ) | $ | (18,058 | ) | ||
|
Other key performance data:
|
||||||||
|
Single-family effective guaranty fee rate (in basis
points)
(1)(5)
|
24.4 | 27.9 | ||||||
|
Single-family average charged fee on new acquisitions (in basis
points)
(6)
|
26.9 | 21.0 | ||||||
|
Average single-family guaranty book of
business
(7)
|
$ | 2,893,988 | $ | 2,819,459 | ||||
|
Single-family Fannie Mae MBS
issues
(8)
|
$ | 124,358 | $ | 151,943 | ||||
| (1) | Segment statement of operations data reported under the current segment reporting basis is not comparable to the segment statement of operations data reported in prior periods. | |
| (2) | In 2010, guaranty fee income related to consolidated MBS trusts consists of contractual guaranty fees and the amortization of deferred cash fees using a static effective yield method. In 2009, guaranty fee income consisted of amortization of our guaranty-related assets and liabilities using a prospective yield method and fair value adjustments of buys-ups and certain guaranty assets. | |
| (3) | Consists of the provision for loan losses, provision for guaranty losses and foreclosed property income or expense. | |
| (4) | Consists of net interest income, investment gains and losses, fee and other income, other expenses, and administrative expenses. | |
| (5) | Presented in basis points based on annualized Single-Family segment guaranty fee income divided by the average single-family guaranty book of business. | |
| (6) | Presented in basis points. Represents the average contractual fee rate for our single-family guarantee arrangements plus the recognition of any upfront cash payments ratably over an estimated average life. | |
| (7) | Consists of single-family mortgage loans held in our mortgage portfolio, single-family mortgage loans held by consolidated trusts, single-family Fannie Mae MBS issued from unconsolidated trusts held by either third parties or within our retained portfolio, and other credit enhancements that we provide on single-family mortgage assets. Excludes non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a guaranty. | |
| (8) | Reflects unpaid principal balance of Fannie Mae MBS issued and guaranteed by the Single-Family segment. Includes $3.1 billion of HFA new issued bond program issuances in the first quarter of 2010. |
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Table of Contents
Guaranty
Fee Income
Guaranty fee income for the first quarter of 2010 was lower than
in the first quarter of 2009, primarily because: (1) we now
amortize our single-family deferred cash fees under the static
yield method, which resulted in lower amortization income
compared with the first quarter of 2009 when we amortized these
fees under the prospective level yield method; (2) guaranty
fee income in the first quarter of 2009 included the
amortization of certain non-cash deferred items, the balance of
which was eliminated upon adoption of the new accounting
standards and was not re-established on Single-Family’s
balance sheet at the transition date; and (3) guaranty fee
income in the first quarter of 2009 reflected an increase in the
fair value of
buy-ups
and
certain guaranty assets which are no longer marked to fair value
under the new segment reporting.
The average single-family guaranty book of business increased by
2.6% for the first quarter of 2010 compared with the first
quarter of 2009 due to an increase in our average outstanding
Fannie Mae MBS and other guarantees throughout 2009 and the
first quarter of 2010 as our market share of new single-family
mortgage securities issuances remained high and new MBS
issuances outpaced liquidations.
The average single-family charged guaranty fee on new
acquisitions increased in the first quarter of 2010 compared
with the first quarter of 2009 primarily due to an increase in
acquisitions of loans with characteristics that receive
risk-based pricing adjustments.
Credit-Related
Expenses
Single-Family credit-related expenses decreased in the first
quarter of 2010 compared with the first quarter of 2009
primarily due to a slowing in the growth relative to early 2009
of loans that are seriously delinquent resulting in a lower
provision for credit losses. Additionally, because we now
recognize loans underlying the substantial majority of our MBS
trusts in our condensed consolidated balance sheets, we no
longer recognize fair value losses upon acquiring
credit-impaired loans from these trusts. Although our
credit-related expenses declined in the first quarter of 2010,
our charge-offs were higher in the first quarter of 2010
compared with the first quarter of 2009 and our combined loss
reserves remained high.
Credit-related expenses in the Single-Family business represent
the substantial majority of our total consolidated losses. We
provide additional information on our credit-related expenses in
“Consolidated Results of Operations—Credit-Related
Expenses.”
Other
Expenses
Other expenses in the Single-Family segment consist of net
interest income, investments gains and losses, fee and other
income, administrative expenses and other expenses. In the first
quarter of 2010, other expenses increased primarily due to a
decrease in net interest income driven by an increase in forgone
interest on nonperforming loans, which increased to
$2.7 billion from $217 million in the first quarter of
2009. The increase in forgone interest on nonperforming loans
was due to the increase in nonperforming loans in our condensed
consolidated balance sheets as a result of our adoption of the
new accounting standards.
Benefit
for Federal Income Taxes
We recognized an income tax benefit in the first quarter of 2010
due to the reversal of a portion of the valuation allowance for
deferred tax assets primarily due to a settlement agreement
reached with the IRS in the first quarter of 2010 for our
unrecognized tax benefits for the tax years 1999 through 2004.
The tax benefit recognized for the first quarter of 2009 was
primarily due to the benefit of carrying back to prior years a
portion of our 2009 tax loss, net of the reversal of the use of
certain tax credits.
37
Table of Contents
HCD
Business Results
Table 16 summarizes the financial results for our HCD business
for the first quarter of 2010 under the current segment
reporting presentation and for the first quarter of 2009 under
the prior segment reporting presentation. The primary sources of
revenue for our HCD business are guaranty fee income and fee and
other income. Expenses primarily include credit-related
expenses, net operating losses associated with our partnership
investments, and administrative expenses.
Table
16: HCD Business Results
| For the Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Statement of operations
data:
(1)
|
||||||||
|
Guaranty fee
income
(2)
|
$ | 194 | $ | 158 | ||||
|
Fee and other income
|
35 | 27 | ||||||
|
Losses on partnership
investments
(3)
|
(58 | ) | (357 | ) | ||||
|
Credit-related income
(expenses)
(4)
|
42 | (542 | ) | |||||
|
Other
expenses
(5)
|
(101 | ) | (169 | ) | ||||
|
Income (loss) before federal income taxes
|
112 | (883 | ) | |||||
|
Provision for federal income taxes
|
(13 | ) | (168 | ) | ||||
|
Net income (loss)
|
99 | (1,051 | ) | |||||
|
Less: Net loss attributable to the noncontrolling
interests
(3)
|
— | 17 | ||||||
|
Net income (loss) attributable to Fannie Mae
|
$ | 99 | $ | (1,034 | ) | |||
|
Other key performance data:
|
||||||||
|
Multifamily effective guaranty fee rate (in basis
points)
(1)(6)
|
41.8 | 36.3 | ||||||
|
Credit loss performance ratio (in basis
points)
(7)
|
18.3 | 4.1 | ||||||
|
Average multifamily guaranty book of
business
(8)
|
$ | 185,703 | $ | 174,329 | ||||
|
Multifamily Fannie Mae MBS
issues
(9)
|
$ | 4,073 | $ | 2,377 | ||||
| (1) | Segment statement of operations data reported under the current segment reporting basis is not comparable to the segment statement of operations data reported in prior periods. | |
| (2) | In 2010, guaranty fee income related to consolidated MBS trusts consists of contractual guaranty fees. In 2009, guaranty fee income consisted of amortization of our guaranty-related assets and liabilities using a prospective yield method. | |
| (3) | In 2010, income or loss from partnership investments is reported using the equity method of accounting. As a result, net income or loss attributable to noncontrolling interests from partnership investments is not included in gains or losses for the HCD segment. In 2009, income or loss from partnership investments is reported using either the equity method or consolidation, in accordance with GAAP, with net income or losses attributable to noncontrolling interests included in partnership investments income or loss. | |
| (4) | Consists of the provision for loan losses, provision for guaranty losses and foreclosed property expense. | |
| (5) | Consists of net interest income, other expenses, and administrative expenses. | |
| (6) | Presented in basis points based on annualized HCD segment guaranty fee income divided by the average multifamily guaranty book of business. | |
| (7) | Basis points are based on the annualized amount for credit losses divided by the average multifamily guaranty book of business. | |
| (8) | Consists of multifamily mortgage loans held in our mortgage portfolio, multifamily mortgage loans held by consolidated trusts, multifamily Fannie Mae MBS issued from unconsolidated trusts held by either third parties or within our retained portfolio, and other credit enhancements that we provide on multifamily mortgage assets. Excludes non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a guaranty. | |
| (9) | Reflects unpaid principal balance of Fannie Mae MBS issued and guaranteed by the HCD segment. Includes $1.0 billion of HFA new issued bond program issuances for the three months ended March 31, 2010. |
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Table of Contents
Guaranty
Fee Income
HCD guaranty fee income increased in the first quarter of 2010
compared with the first quarter of 2009 primarily attributable
to growth in the average multifamily book of business and higher
fees on new acquisitions.
Losses
from Partnership Investments
In the fourth quarter of 2009, we reduced the carrying value of
our LIHTC investments to zero. As a result, we no longer
recognize net operating losses or
other-than-temporary
impairment on our LIHTC investments, which resulted in lower
losses in the first quarter of 2010 as compared with the first
quarter of 2009. Losses from partnership investments recognized
in the first quarter of 2010 were due to
other-than-temporary
impairment on our other affordable housing investments.
Credit-related
Income (Expenses)
The shift from credit-related expenses in the first quarter of
2009 to credit-related income in the first quarter of 2010 was
driven by a decrease in our multifamily combined loss reserves
in the first quarter of 2010 as compared with an increase in
this reserve in the first quarter of 2009. We saw a significant
increase in our combined multifamily loss reserves in 2009 due
to the economic downturn and lack of liquidity in the market,
which adversely affected multifamily property values, vacancy
rates and rent levels, the cash flows generated from these
investments, and refinancing options. These conditions have
moderated to a certain degree in the first quarter of 2010
resulting in a slight decrease in our combined multifamily loss
reserves.
Although the pace of decline in the multifamily housing market
has moderated, our multifamily net charge-offs and foreclosed
property expense increased from $18 million in the first
quarter of 2009 to $85 million in the first quarter of
2010. The increase in net charge-offs and foreclosed property
expenses was driven by the overall economic downturn, including
the related adverse impact on multifamily fundamentals which led
to growth in our serious delinquency rate and increased defaults
over the past year.
Provision
for Federal Income Taxes
We recognized a provision for income taxes in the first quarter
of 2010 resulting from a settlement agreement reached with the
IRS with respect to our unrecognized tax benefits for tax years
1999 through 2004. The tax provision recognized for the first
quarter of 2009 was attributable to the reversal of previously
utilized tax credits because of our ability to carry back to
prior years net operating losses.
Capital
Markets Group Results
Table 17 summarizes the financial results for our Capital
Markets group for the first quarter of 2010 under the current
segment reporting presentation and for the first quarter of 2009
under the prior segment reporting presentation. Following the
table we discuss the Capital Markets group’s financial
results and describe the Capital Markets group’s mortgage
portfolio. For a discussion on the debt issued by the Capital
Markets group to fund its investment activities, see
“Liquidity and Capital Management.” For a discussion
on the derivative instruments that Capital Markets uses to
manage interest rate risk, see “Note 10, Derivative
Instruments.” The primary sources of revenue for our
Capital Markets group are net interest income and fee and other
income. Expenses and other items that impact income or loss
primarily include fair value gains and losses, investment gains
and losses,
other-than-temporary
impairment, and administrative expenses.
39
Table of Contents
Table
17: Capital Markets Group Results
| For the Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Statement of operations
data:
(1)
|
||||||||
|
Net interest
income
(2)
|
$ | 3,057 | $ | 3,295 | ||||
|
Investment gains,
net
(3)(4)
|
792 | 150 | ||||||
|
Net
other-than-temporary
impairments
(3)
|
(236 | ) | (5,653 | ) | ||||
|
Fair value losses,
net
(5)
|
(1,186 | ) | (1,460 | ) | ||||
|
Fee and other income
|
104 | 69 | ||||||
|
Other
expenses
(6)
|
(423 | ) | (623 | ) | ||||
|
Income (loss) before federal income taxes
|
2,108 | (4,222 | ) | |||||
|
Benefit for federal income taxes
|
29 | 146 | ||||||
|
Net income (loss) attributable to Fannie Mae
|
$ | 2,137 | $ | (4,076 | ) | |||
| (1) | Segment statement of operations data reported under the current segment reporting basis is not comparable to the segment statement of operations data reported in prior periods. | |
| (2) | In 2010, Capital Markets net interest income is reported based on the mortgage-related assets held in the segment’s portfolio and excludes interest income on mortgage-related assets held by consolidated MBS trusts that are owned by third parties and the interest expense on the corresponding debt of such trusts. In 2009, the Capital Markets group’s net interest income included interest income on mortgage-related assets underlying MBS trusts that we consolidated under the prior consolidation accounting standards and the interest expense on the corresponding debt of such trusts. | |
| (3) | Certain prior period amounts have been reclassified to conform to our current period presentation. | |
| (4) | In 2010, we include the securities that we own regardless of whether the trust has been consolidated in reporting of gains and losses on securitizations and sales of available-for-sale securities. In 2009, we excluded the securities of consolidated trusts that we own in reporting of gains and losses on securitizations and sales of available-for-sale securities. | |
| (5) | In 2010, fair value gains or losses on trading securities include the trading securities that we own, regardless of whether the trust has been consolidated. In 2009, MBS trusts that were consolidated were reported as loans and thus any securities we owned issued by these trusts did not have fair value adjustments. | |
| (6) | Includes allocated guaranty fee expense, debt extinguishment losses, net, administrative expenses, and other expenses. In 2010, gains or losses related to the extinguishment of debt issued by consolidated trusts are excluded from the Capital Markets group because purchases of securities are recognized as such. In 2009, gains or losses related to the extinguishment of debt issued by consolidated trusts were included in the Capital Markets group’s results as debt extinguishment gain or loss. |
Net
Interest Income
Capital Markets group’s interest income consists of
interest on the segment’s interest-earning assets, which
differs from interest-earning assets in our condensed
consolidated balance sheets. We exclude loans and securities
that underlie the consolidated trusts from our Capital Markets
group balance sheets. The net interest income reported by the
Capital Markets group excludes the interest income earned on
assets held by consolidated trusts. As a result, we report
interest income and amortization of cost basis adjustments only
on securities and loans that are held in our portfolio. For
mortgage loans held in our portfolio, after we stop recognizing
interest income in accordance with our nonaccrual accounting
policy, the Capital Markets group recognizes interest income for
reimbursement from Single-Family and HCD for the contractual
interest due under the terms of our intracompany guaranty
arrangement. Capital Markets group’s interest expense
consists of contractual interest on the Capital Markets
group’s interest-bearing liabilities, including the
accretion and amortization of any cost basis adjustments. It
excludes interest expense on debt issued by consolidated trusts.
Therefore, the interest expense recognized on the Capital
Markets group income statement is limited to our funding debt,
which is reported as “Debt of Fannie Mae” in our
condensed consolidated balance sheets. Net interest expense also
includes an allocated cost of capital charge between the three
business segments.
40
Table of Contents
The Capital Markets group’s net interest income in the
first quarter of 2010 was lower compared with the first quarter
of 2009 because the decline in mortgage rates and in average
interest-earning assets as portfolio sales and liquidations
outpaced purchases more than offset the decline in borrowing
rates as we replaced higher cost debt with lower cost debt. In
addition, Capital Markets net interest income and net interest
yield benefited from funds we received from Treasury under the
senior preferred stock purchase agreement as the cost of these
funds is included in dividends rather than interest expense.
However, the allocation of this benefit to our other segments
was higher in the first quarter of 2010 as compared with the
first quarter of 2009 reflecting the impact of the cumulative
funds received through the first quarter of 2010 and resulting
in a larger reduction to the Capital Market’s net interest
income.
We supplement our issuance of debt with interest rate-related
derivatives to manage the prepayment and duration risk inherent
in our mortgage investments. The effect of these derivatives, in
particular the periodic net interest expense accruals on
interest rate swaps, is not reflected in Capital Markets’
net interest income but is included in our results as a
component of “Fair value losses, net” and is shown in
“Table 6: Fair Value Gains (Losses), Net.” If we had
included the economic impact of adding the net contractual
interest accruals on our interest rate swaps in our Capital
Markets’ interest expense, Capital Markets’ net
interest income would have decreased by $835 million in the
first quarter of 2010 compared with a $940 million decrease
in the first quarter of 2009.
Investment
Gains, Net
The increase in investment gains for the first quarter of 2010
compared with the first quarter of 2009 was primarily
attributable to an increase in gains on sales of
available-for-sale
securities as well as from a significant decline in lower of
cost or fair value adjustments on
held-for-sale
loans as we reclassified almost all of these loans to
held-for-investment
upon adoption of the new accounting standards.
Fair
Value Losses, Net
The derivative gains and losses and foreign exchange gains and
losses that are reported for the Capital Markets group are
consistent with these same losses reported in our condensed
consolidated results of operations. We discuss details of these
components of fair value losses, net in “Consolidated
Results of Operations—Fair Value Losses, Net.”
The gains on our trading securities for the segment during the
first quarter of 2010 were attributable to narrowing of spreads
on CMBS and a decline in interest rates.
The gains on our trading securities during the first quarter of
2009 were attributable to the significant decline in mortgage
interest rates and the narrowing of spreads on agency MBS during
the quarter. These gains were partially offset by a decrease in
the fair value of our private-label mortgage-related securities
backed by Alt-A and subprime loans.
Net
Other-Than-Temporary-Impairment
The net
other-than-temporary
impairment recognized by the Capital Markets group is consistent
with the net-other-than-temporary impairment reported in our
condensed consolidated results of operations. We discuss details
on net-other-than-temporary impairment in “Consolidated
Results of Operations—Net
Other-Than-Temporary
Impairment.”
Benefit
for Federal Income Taxes
We recognized an income tax benefit in the first quarter of 2010
primarily due to the reversal of a portion of the valuation
allowance for deferred tax assets resulting from a settlement
agreement reached with the IRS in the first quarter of 2010 for
our unrecognized tax benefits for the tax years 1999 through
2004. The tax benefit recognized for the first quarter of 2009
was primarily due to the benefit of carrying back to prior years
a portion of our 2009 tax loss, net of the reversal of the use
of certain tax credits.
41
Table of Contents
The
Capital Markets Group’s Mortgage Portfolio
The Capital Markets group’s mortgage portfolio consists of
mortgage-related securities and mortgage loans that we own.
Mortgage-related securities held by Capital Markets include
Fannie Mae MBS and non-Fannie Mae mortgage-related securities.
The Fannie Mae MBS that we own are maintained as securities on
Capital Markets group’s balance sheets. Mortgage-related
assets held by consolidated MBS trusts are not included in the
Capital Markets group’s mortgage portfolio.
We are restricted by our senior preferred stock purchase
agreement with Treasury in the amount of mortgage assets that we
may own. Beginning on December 31, 2010 and each year
thereafter, we are required to reduce our Capital Markets
group’s mortgage portfolio to 90% of the maximum allowable
amount we were permitted to own as of December 31 of the
immediately preceding calendar year, until the amount of
mortgage assets we own reaches $250 billion. The maximum
allowable amount we may own prior to December 31, 2010 is
$900 billion and on December 31, 2010 is
$810 billion.
Table 18 summarizes our Capital Markets group’s mortgage
portfolio activity based on unpaid principal balance for the
quarter ended March 31, 2010.
Table
18: Capital Markets Group’s Mortgage Portfolio
Activity
|
For the Three Months
|
||||
| Ended March 31, 2010 | ||||
| (Dollars in millions) | ||||
|
Total Capital Markets mortgage portfolio, beginning balance
as of January 1, 2010
|
$ | 772,728 | ||
|
Mortgage loans:
|
||||
|
Beginning balance as of January 1, 2010
|
281,162 | |||
|
Purchases
|
70,561 | |||
|
Securitizations
(1)
|
(14,254 | ) | ||
|
Liquidations
(2)
|
(7,192 | ) | ||
|
Mortgage loans, ending balance as of March 31, 2010
|
330,277 | |||
|
Mortgage securities:
|
||||
|
Beginning balance as of January 1, 2010
|
$ | 491,566 | ||
|
Purchases
(3)
|
29,186 | |||
|
Securitizations
(1)
|
14,254 | |||
|
Sales
|
(79,784 | ) | ||
|
Liquidations
(2)
|
(20,690 | ) | ||
|
Mortgage securities, ending balance as of March 31, 2010
|
434,532 | |||
|
Total Capital Markets mortgage portfolio, ending balance as
of March 31, 2010
|
$ | 764,809 | ||
| (1) | Includes portfolio securitization transactions that do not qualify for sale treatment under the new accounting standards on the transfers of financial assets. | |
| (2) | Includes scheduled repayments, prepayments, foreclosures and lender repurchases. | |
| (3) | Includes purchases of Fannie Mae MBS issued by consolidated trusts. |
On February 10, 2010, we announced that we intend to
significantly increase our purchases of delinquent loans from
single-family MBS trusts. Under our single-family MBS trust
documents, we have the option to purchase from MBS trusts loans
that are delinquent as to four or more consecutive monthly
payments. In March 2010, we purchased approximately 216,000
delinquent loans with an unpaid principal balance of
approximately $40 billion from MBS trusts, which increased
our Capital Market’s mortgage portfolio. As of
March 31, 2010, the total unpaid principal balance of all
loans in single-family MBS trusts that were delinquent as to
four or more consecutive monthly payments was approximately
$94 billion. In April 2010, we purchased approximately
229,000 delinquent loans with an unpaid principal balance of
approximately
42
Table of Contents
$46 billion from our MBS trusts. We expect to continue to
purchase a significant portion of the remaining delinquent
population within a few months subject to market conditions,
servicer capacity, and other constraints including the limit on
the mortgage assets that we may own pursuant to the senior
preferred stock purchase agreement.
Table 19 shows the composition of the Capital Markets mortgage
portfolio based on unpaid principal balance as of March 31,
2010 and as of January 1, 2010, immediately after we
adopted the new accounting standards.
Table
19: Capital Markets Group’s Mortgage Portfolio
Composition
| As of | ||||||||
|
March 31,
|
January 1,
|
|||||||
| 2010 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Capital Markets Group’s mortgage loans:
|
||||||||
|
Single-family loans
|
||||||||
|
Government insured or guaranteed
|
$ | 51,679 | $ | 51,395 | ||||
|
Conventional:
|
||||||||
|
Long-term, fixed-rate
|
140,539 | 94,236 | ||||||
|
Intermediate-term, fixed-rate
|
8,273 | 8,418 | ||||||
|
Adjustable-rate
|
21,979 | 18,493 | ||||||
|
Total conventional single-family
|
170,791 | 121,147 | ||||||
|
Total single-family loans
|
222,470 | 172,542 | ||||||
|
Multifamily loans
|
||||||||
|
Government insured or guaranteed
|
501 | 521 | ||||||
|
Conventional:
|
||||||||
|
Long-term, fixed-rate
|
4,926 | 4,941 | ||||||
|
Intermediate-term, fixed-rate
|
80,964 | 81,610 | ||||||
|
Adjustable-rate
|
21,416 | 21,548 | ||||||
|
Total conventional multifamily
|
107,306 | 108,099 | ||||||
|
Total multifamily loans
|
107,807 | 108,620 | ||||||
|
Total Capital Markets Group’s mortgage loans
|
330,277 | 281,162 | ||||||
|
Capital Markets Group’s mortgage-related securities:
|
||||||||
|
Fannie Mae
|
317,395 | 358,495 | ||||||
|
Freddie Mac
|
27,488 | 41,390 | ||||||
|
Ginnie Mae
|
1,215 | 1,255 | ||||||
|
Alt-A private-label securities
|
24,459 | 25,133 | ||||||
|
Subprime private-label securities
|
19,443 | 20,001 | ||||||
|
CMBS
|
25,633 | 25,703 | ||||||
|
Mortgage revenue bonds
|
13,916 | 14,448 | ||||||
|
Other mortgage-related securities
|
4,983 | 5,141 | ||||||
|
Total Capital Markets Group’s mortgage-related securities
|
434,532 | 491,566 | ||||||
|
Total Capital Markets Group’s mortgage portfolio
|
$ | 764,809 | $ | 772,728 | ||||
43
Table of Contents
CONSOLIDATED
BALANCE SHEET ANALYSIS
As discussed in “Executive Summary,” effective
January 1, 2010, we prospectively adopted new accounting
standards which had a significant impact on the presentation of
our condensed consolidated financial statements due to the
consolidation of the substantial majority of our single-class
securitization trusts. In the table below, we summarize the
primary impacts of the new accounting standards to our condensed
consolidated balance sheet for the first quarter of 2010.
| Item | Consolidation Impact | ||
|
Restricted cash
|
We recognize unscheduled cash payments that have been either received by the servicer or that are held by consolidated trusts and have not yet been remitted to MBS certificateholders. | ||
| Investments in securities | Fannie Mae MBS that we own were consolidated resulting in a decrease in our investments in securities. | ||
|
Mortgage loans
Accrued interest receivable |
We now record the underlying assets of the majority of our MBS trusts in our condensed consolidated balance sheets which significantly increases mortgage loans and related accrued interest receivable. | ||
|
Allowance for loan losses
Reserve for guaranty losses |
The substantial majority of our combined loss reserves are now recognized in our allowance for loan losses to reflect the loss allowance against the consolidated mortgage loans. We use a different methodology to estimate incurred losses for our allowance for loan losses as compared with our reserve for guaranty losses. | ||
|
Guaranty assets
Guaranty obligations |
We eliminated our guaranty accounting for the newly consolidated trusts, which resulted in derecognizing previously recorded guaranty-related assets and liabilities associated with the newly consolidated trusts from our condensed consolidated balance sheets. We continue to have guaranty assets and obligations on unconsolidated trusts and other credit enhancements arrangements, such as our long-term standby commitments. | ||
|
Debt
Accrued interest payable |
We recognize the MBS certificates issued by the consolidated trusts and that are held by third-party certificateholders as debt, which significantly increases our debt outstanding and related accrued interest payable. | ||
We recognized a decrease of $3.3 billion in our
stockholders’ deficit to reflect the cumulative effect of
adopting the new accounting standards. See “Note 2,
Adoption of the New Accounting Standards on the Transfers of
Financial Assets and Consolidation of Variable Interest
Entities” for a further discussion of the impacts of the
new accounting standards on our condensed consolidated financial
statements.
Table 20 presents a summary of our condensed consolidated
balance sheets as of March 31, 2010 and December 31,
2009, as well as the impact of the transition to the new
accounting standards on January 1, 2010. Following the
table is a discussion of material changes in the major
components of our assets, liabilities and deficit from
January 1, 2010 through March 31, 2010.
44
Table of Contents
| Table 20: | Summary of Condensed Consolidated Balance Sheets |
| As of | Variance | |||||||||||||||||||
|
March 31,
|
January 1,
|
December 31,
|
January 1 to
|
December 31, 2009 to
|
||||||||||||||||
|
|
2010 | 2010 | 2009 | March 31, 2010 | January 1, 2010 | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash and cash equivalents and federal funds sold and securities
purchased under agreements to resell or similar arrangements
|
$ | 92,923 | $ | 60,161 | $ | 60,496 | $ | 32,762 | $ | (335 | ) | |||||||||
|
Restricted cash
|
45,479 | 48,653 | 3,070 | (3,174 | ) | 45,583 | ||||||||||||||
|
Investments in
securities
(1)
|
181,196 | 161,088 | 349,667 | 20,108 | (188,579 | ) | ||||||||||||||
|
Mortgage loans
|
2,990,307 | 2,985,445 | 404,486 | 4,862 | 2,580,959 | |||||||||||||||
|
Allowance for loan losses
|
(60,569 | ) | (53,501 | ) | (9,925 | ) | (7,068 | ) | (43,576 | ) | ||||||||||
|
Mortgage loans, net of allowance for loan losses
|
2,929,738 | 2,931,944 | 394,561 | (2,206 | ) | 2,537,383 | ||||||||||||||
|
Other
assets
(2)
|
44,419 | 44,389 | 61,347 | 30 | (16,958 | ) | ||||||||||||||
|
Total assets
|
$ | 3,293,755 | $ | 3,246,235 | $ | 869,141 | $ | 47,520 | $ | 2,377,094 | ||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Liabilities and equity (deficit)
|
||||||||||||||||||||
|
Debt
(3)
|
$ | 3,262,844 | $ | 3,223,054 | $ | 774,554 | $ | 39,790 | $ | 2,448,500 | ||||||||||
|
Other
liabilities
(4)
|
39,282 | 35,164 | 109,868 | 4,118 | (74,704 | ) | ||||||||||||||
|
Total liabilities
|
3,302,126 | 3,258,218 | 884,422 | 43,908 | 2,373,796 | |||||||||||||||
|
Senior preferred stock
|
76,200 | 60,900 | 60,900 | 15,300 | — | |||||||||||||||
|
Other equity
(deficit)
(5)
|
(84,571 | ) | (72,883 | ) | (76,181 | ) | (11,688 | ) | 3,298 | |||||||||||
|
Total stockholders’ equity (deficit)
|
(8,371 | ) | (11,983 | ) | (15,281 | ) | 3,612 | 3,298 | ||||||||||||
|
Total liabilities and stockholders’ deficit
|
$ | 3,293,755 | $ | 3,246,235 | $ | 869,141 | $ | 47,520 | $ | 2,377,094 | ||||||||||
| (1) | Includes $43.8 billion as of March 31, 2010 and $8.9 billion as of January 1, 2010 and December 31, 2009 of non-mortgage-related securities that are included in our other investments portfolio in “Table 21: Cash and Other Investments Portfolio.” | |
| (2) | Consists of: advances to lenders; accrued interest receivable, net; acquired property, net; derivative assets, at fair value; guaranty assets; deferred tax assets, net; partnership investments; servicer and MBS trust receivable and other assets. | |
| (3) | Consists of: federal funds purchased and securities sold under agreements to repurchase; short-term debt; and long-term debt | |
| (4) | Consists of: accrued interest payable; derivative liabilities; reserve for guaranty losses; guaranty obligations; partnership liabilities; servicer and MBS trust payable; and other liabilities. | |
| (5) | Consists of: preferred stock; common stock; additional paid-in capital; retained earnings (accumulated deficit); accumulated other comprehensive loss; treasury stock; and noncontrolling interest. |
Cash and
Other Investments Portfolio
Table 21 provides information on the composition of our cash and
other investments portfolio for the periods indicated.
45
Table of Contents
| Table 21: | Cash and Other Investments Portfolio |
| As of | ||||||||
|
March 31,
|
January 1,
|
|||||||
| 2010 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Cash and cash
equivalents
(1)
|
$ | 30,477 | $ | 6,793 | ||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
62,446 | 53,368 | ||||||
|
Non-mortgage-related securities:
|
||||||||
|
U.S. Treasury securities
|
35,650 | 3 | ||||||
|
Asset-backed securities
|
7,991 | 8,515 | ||||||
|
Corporate debt securities
|
176 | 364 | ||||||
|
Total non-mortgage-related securities
|
43,817 | 8,882 | ||||||
|
Total cash and other investments
|
$ | 136,740 | $ | 69,043 | ||||
| (1) | Includes $11.5 billion of U.S. Treasury securities with a maturity at the date of acquisition of three months or less. |
Our total cash and other investments portfolio consists of cash
and cash equivalents, federal funds sold and securities
purchased under agreements to resell or similar arrangements and
non-mortgage investment securities. Our cash and other
investments portfolio increased as of March 31, 2010
compared with January 1, 2010 primarily because of our
efforts to improve our liquidity position, including investing
in higher quality, more liquid investments, and because we
anticipate increased cash needs in 2010 to purchase delinquent
loans from MBS trusts. In addition, under direction from FHFA,
we diversified our cash and other investments portfolio in the
first quarter of 2010 to include U.S. Treasury securities.
Our policy mandates that U.S. Treasury securities comprise
a significant percentage of our cash and other investments
portfolio.
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 reported at fair value. See
“Note 6, 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 March 31, 2010.
Investments
in Agency Mortgage-Related Securities
Our investments in agency mortgage-related securities consist of
securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.
Investments in agency mortgage securities declined to
$68.0 billion as of March 31, 2010 compared with
$83.7 billion as of January 1, 2010. The decline was
due to settlement of sales commitments related to dollar roll
transactions.
Investments
in Private-Label Mortgage-Related Securities
We classify private-label securities as Alt-A, subprime,
multifamily or manufactured housing if the securities were
labeled as such when issued. We have also invested in
private-label subprime mortgage-related securities that we have
resecuritized to include our guaranty (“wraps”).
The continued negative impact of the current economic
environment, such as sustained weakness in the housing market
and high unemployment, has adversely affected the performance of
our Alt-A and subprime securities. The unpaid principal balance
of our investments in Alt-A and subprime securities, excluding
wraps, was $44.3 billion as of March 31, 2010, of
which $31.9 billion was rated below investment grade. Table
22 presents the fair value of our investments in Alt-A and
subprime private-label securities, excluding wraps, and an
analysis of the cumulative losses on these investments as of
March 31, 2010.
46
Table of Contents
| Table 22: | Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities (Excluding Wraps) (1) |
| As of March 31, 2010 | ||||||||||||||||||||
|
Unpaid
|
Total
|
|||||||||||||||||||
|
Principal
|
Fair
|
Cumulative
|
Noncredit
|
Credit
|
||||||||||||||||
|
|
Balance | Value | Losses (2) | Component (3) | Component (4) | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Trading securities:
|
||||||||||||||||||||
|
Alt-A private-label securities
|
$ | 3,336 | $ | 1,405 | $ | (1,877 | ) | $ | (719 | ) | $ | (1,158 | ) | |||||||
|
Subprime private-label securities
|
2,936 | 1,683 | (1,252 | ) | (382 | ) | (870 | ) | ||||||||||||
|
Total Alt-A and subprime private-label securities classified as
trading
|
$ | 6,272 | $ | 3,088 | $ | (3,129 | ) | $ | (1,101 | ) | $ | (2,028 | ) | |||||||
|
Available-for-sale securities:
|
||||||||||||||||||||
|
Alt-A private-label securities
|
$ | 21,123 | $ | 14,458 | $ | (6,647 | ) | $ | (3,301 | ) | $ | (3,346 | ) | |||||||
|
Subprime private-label securities
|
16,895 | 10,511 | (6,367 | ) | (2,007 | ) | (4,360 | ) | ||||||||||||
|
Total Alt-A and subprime private-label securities classified as
available-for-sale
|
$ | 38,018 | $ | 24,969 | $ | (13,014 | ) | $ | (5,308 | ) | $ | (7,706 | ) | |||||||
| (1) | Excludes resecuritizations, or wraps, of private-label securities backed by subprime loans that we have guaranteed and hold in our mortgage portfolio. These wraps totaled $5.9 billion as of March 31, 2010. | |
| (2) | Amounts reflect the difference between the amortized cost basis (unpaid principal balance net of unamortized premiums, discounts and other cost basis adjustments), excluding other-than-temporary impairment losses, net of accretion for available-for-sale securities, recorded in earnings, and the fair value. | |
| (3) | Represents the estimated portion of the total cumulative losses that is noncredit-related. We have calculated the credit component based on the difference between the amortized cost basis of the securities and the present value of expected future cash flows. The remaining difference between the fair value and the present value of expected future cash flows is classified as noncredit-related. | |
| (4) | For securities classified as trading, amounts reflect the estimated portion of the total cumulative losses that is credit-related. For securities classified as available-for-sale, amounts reflect the portion of other-than-temporary impairment losses net of accretion that are recognized in earnings in accordance with the accounting standards for other-than-temporary impairments. |
Table 23 presents the 60 days or more delinquency rates and
average loss severities for the loans underlying our Alt-A and
subprime private-label mortgage-related securities for the most
recent remittance period of the current reporting quarter. The
delinquency rates and average loss severities are based on
available data provided by Intex Solutions, Inc.
(“Intex”) and First American CoreLogic,
LoanPerformance (“First American CoreLogic”). We also
present the average credit enhancement and monoline financial
guaranteed amount for these securities as of March 31,
2010. Based on the stressed condition of some of our financial
guarantors, we do not believe some of these counterparties will
fully meet their obligation to us in the future. See “Risk
Management—Institutional Counterparty Credit Risk
Management—Financial Guarantors” for additional
information on our financial guarantor exposure and the
counterparty risk associated with our financial guarantors.
47
Table of Contents
| Table 23: | Credit Statistics of Loans Underlying Alt-A and Subprime Private-Label Mortgage-Related Securities (Including Wraps) |
| As of March 31, 2010 | ||||||||||||||||||||||||||||
| Unpaid Principal Balance |
Monoline
|
|||||||||||||||||||||||||||
|
Available-
|
Average
|
Average
|
Financial
|
|||||||||||||||||||||||||
|
for-
|
³
60 Days
|
Loss
|
Credit
|
Guaranteed
|
||||||||||||||||||||||||
|
|
Trading | Sale | Wraps (1) | Delinquent (2)(3) | Severity (3)(4) | Enhancement (3)(5) | Amount (6) | |||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
|
Private-label mortgage-related securities backed
by:
(7)
|
||||||||||||||||||||||||||||
|
Alt-A mortgage loans:
|
||||||||||||||||||||||||||||
|
Option ARM Alt-A mortgage loans:
|
||||||||||||||||||||||||||||
|
2004 and prior
|
$ | — | $ | 566 | $ | — | 32.4 | % | 51.0 | % | 21.4 | % | $ | — | ||||||||||||||
|
2005
|
— | 1,494 | — | 43.0 | 56.5 | 44.9 | 290 | |||||||||||||||||||||
|
2006
|
— | 1,584 | — | 48.5 | 62.0 | 42.2 | 258 | |||||||||||||||||||||
|
2007
|
2,313 | — | — | 46.2 | 61.7 | 62.6 | 841 | |||||||||||||||||||||
|
Other Alt-A mortgage
loans: |
||||||||||||||||||||||||||||
|
2004 and prior
|
— | 7,672 | — | 9.2 | 48.0 | 12.2 | 16 | |||||||||||||||||||||
|
2005
|
103 | 4,817 | 155 | 24.0 | 55.0 | 9.8 | — | |||||||||||||||||||||
|
2006
|
72 | 4,850 | — | 32.3 | 53.4 | 5.7 | — | |||||||||||||||||||||
|
2007
|
848 | — | 230 | 49.4 | 66.2 | 34.2 | 352 | |||||||||||||||||||||
|
2008
(8)
|
— | 140 | — | — | ||||||||||||||||||||||||
|
Total Alt-A mortgage loans:
|
3,336 | 21,123 | 385 | 1,757 | ||||||||||||||||||||||||
|
Subprime mortgage loans:
|
||||||||||||||||||||||||||||
|
2004 and
prior
(9)
|
— | 2,378 | 749 | 25.3 | 77.8 | 59.3 | 734 | |||||||||||||||||||||
|
2005
(8)
|
— | 247 | 1,751 | 47.3 | 75.6 | 58.3 | 233 | |||||||||||||||||||||
|
2006
|
— | 13,569 | — | 54.5 | 72.4 | 22.9 | 52 | |||||||||||||||||||||
|
2007
|
2,936 | 701 | 6,253 | 53.2 | 69.1 | 25.0 | 190 | |||||||||||||||||||||
|
Total subprime mortgage loans:
|
2,936 | 16,895 | 8,753 | 1,209 | ||||||||||||||||||||||||
|
Total Alt-A and subprime mortgage loans:
|
$ | 6,272 | $ | 38,018 | $ | 9,138 | $ | 2,966 | ||||||||||||||||||||
| (1) | Represents our exposure to private-label Alt-A and subprime mortgage-related securities that have been resecuritized (or wrapped) to include our guarantee. | |
| (2) | Delinquency data provided by Intex, where available, for loans backing Alt-A and subprime private-label mortgage-related securities that we own or guarantee. The reported Intex delinquency data reflects information from March 2010 remittances for February 2010 payments. For consistency purposes, we have adjusted the Intex delinquency data, where appropriate, to include all bankruptcies, foreclosures and REO in the delinquency rates. | |
| (3) | The average delinquency, severity and credit enhancement metrics are calculated for each loan pool associated with securities where Fannie Mae has exposure and are weighted based on the unpaid principal balance of those securities. | |
| (4) | Severity data obtained from First American CoreLogic, where available, for loans backing Alt-A and subprime private-label mortgage-related securities that we own or guarantee. The First American CoreLogic severity data reflects information from March 2010 remittances for February 2010 payments. For consistency purposes, we have adjusted the severity data, where appropriate. | |
| (5) | Average credit enhancement percentage reflects both subordination and financial guarantees. Reflects the ratio of the current amount of the securities that will incur losses in the securitization structure before any losses are allocated to securities that we own or guarantee. Percentage generally calculated based on the quotient of the total unpaid principal balance of all credit enhancement in the form of subordination or financial guarantee of the security divided by the |
48
Table of Contents
| total unpaid principal balance of all of the tranches of collateral pools from which credit support is drawn for the security that we own or guarantee. | ||
| (6) | Reflects amount of unpaid principal balance supported by financial guarantees from monoline financial guarantors. | |
| (7) | Vintages are based on series date and not loan origination date. | |
| (8) | The unpaid principal balance includes private-label REMIC securities that have been resecuritized totaling $140 million for the 2008 vintage of other Alt-A loans and $37 million for the 2005 vintage of subprime loans. These securities are excluded from the delinquency, severity and credit enhancement statistics reported in this table. | |
| (9) | Includes a wrap transaction that has been partially consolidated on our balance sheet, which effectively resulted in a portion of the underlying structure of the transaction being accounted for and reported as available-for-sale securities. Although the wrap transaction is supported by financial guarantees that cover all of our credit risk, we have not included the amount of these financial guarantees in the consolidated securities in this table. |
Mortgage
Loans
The mortgage loans reported in our condensed consolidated
balance sheets include loans of Fannie Mae and loans of
consolidated trusts and are classified as either held for sale
or held for investment. The increase in mortgage loans, net of
an allowance for loan losses, from January 1, 2010 to
March 31, 2010, was primarily driven by securitization
activity from our lender swap and portfolio securitization
programs, partially offset by scheduled principal paydowns and
prepayments.
For additional information on our mortgage loans, see
“Note 4, Mortgage Loans.” For additional
information on the mortgage loan purchase and sale activities
reported by our Capital Markets group, see “Business
Segment Results—Capital Markets Group Results.”
Debt
Instruments
The debt reported in our condensed consolidated balance sheets
consists of two categories of debt, which we refer to as
“debt of Fannie Mae” and “debt of consolidated
trusts.” Debt of Fannie Mae, which consists of short-term
debt and long-term debt and federal funds purchased and
securities sold under agreements to repurchase, is the primary
means of funding our mortgage investments and managing interest
rate risk exposure. Debt of consolidated trusts represents our
liability to third-party beneficial interest holders when we
have included the assets of a corresponding trust in our
condensed consolidated balance sheets. 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 as of
March 31, 2010 and December 31, 2009 in
“Liquidity and Capital Management—Liquidity
Management—Debt Funding.” Also see “Note 9,
Short-Term Borrowings and Long-Term Debt” for additional
information on our outstanding debt.
The increase in debt of consolidated trusts as of March 31,
2010 compared with January 1, 2010 was primarily driven by
an increase in sales of Fannie Mae MBS which are accounted for
as reissuances of debt of consolidated trusts in our condensed
consolidated balance sheets, since the MBS certificates are
transferred from our ownership to a third party.
Derivative
Instruments
We supplement our issuance of debt with interest rate-related
derivatives to manage the prepayment and duration risk inherent
in our mortgage investments. We aggregate, by derivative
counterparty, the net fair value gain or loss, less any cash
collateral paid or received, and report these amounts in our
condensed consolidated balance sheets as either assets or
liabilities.
Our derivative assets and liabilities consist of these risk
management derivatives and our mortgage commitments. We refer to
the difference between the derivative assets and derivative
liabilities recorded in our condensed consolidated balance
sheets as our net derivative asset or liability. We present, by
derivative instrument type, the estimated fair value of
derivatives recorded in our condensed consolidated balance
sheets
49
Table of Contents
and the related outstanding notional amount as of March 31,
2010 and December 31, 2009 in “Note 10,
Derivative Instruments.” Table 24 provides an analysis of
the factors driving the change from December 31, 2009 to
March 31, 2010 in the estimated fair value of our net
derivative liability related to our risk management derivatives
recorded in our condensed consolidated balance sheets.
| Table 24: | Changes in Risk Management Derivative Assets (Liabilities) at Fair Value, Net |
|
For the Three
|
||||
|
Months Ended
|
||||
| March 31, 2010 | ||||
| (Dollars in millions) | ||||
|
Net risk management derivative liability as of December 31,
2009
|
$ | (340 | ) | |
|
Effect of cash payments:
|
||||
|
Fair value at inception of contracts entered into during the
period
(1)
|
268 | |||
|
Fair value at date of termination of contracts settled during
the
period
(2)
|
347 | |||
|
Net collateral posted
|
1,375 | |||
|
Periodic net cash contractual interest
receipts
(3)
|
(151 | ) | ||
|
Total cash payments
|
1,839 | |||
|
Statement of operations impact of recognized amounts:
|
||||
|
Net contractual interest expense accruals on interest rate swaps
|
(835 | ) | ||
|
Net change in fair value during the period
|
(1,326 | ) | ||
|
Risk management derivatives fair value losses, net
|
(2,161 | ) | ||
|
Net risk management derivative liability as of March 31,
2010
|
$ | (662 | ) | |
| (1) | Cash payments made to purchase derivative option contracts (purchased option premiums) increase the derivative asset recorded in our condensed consolidated balance sheets. Primarily includes upfront premiums paid on option contracts. Also includes upfront cash paid (received) on other derivative contracts. | |
| (2) | Cash payments made to terminate derivative contracts reduce the derivative liability recorded in our condensed consolidated balance sheets. Primarily represents cash paid (received) upon termination of derivative contracts. | |
| (3) | Interest is accrued on interest rate swap contracts based on the contractual terms. Accrued interest income increases our derivative asset and accrued interest expense increases our derivative liability. The offsetting interest income and expense are included as components of derivatives fair value gains (losses), net in our condensed consolidated statements of operations. Net periodic interest receipts reduce the derivative asset and net periodic interest payments reduce the derivative liability. |
For additional information on our derivative instruments see
“Note 10, Derivative Instruments.”
Stockholders’
Deficit
Our net deficit decreased as of March 31, 2010 compared
with December 31, 2009. See Table 25 in “Supplemental
Non-GAAP Information—Fair Value Balance Sheets”
for details of the change in our net deficit.
SUPPLEMENTAL
NON-GAAP INFORMATION—FAIR VALUE BALANCE
SHEETS
As part of our disclosure requirements with FHFA, we disclose on
a quarterly basis supplemental non-GAAP consolidated fair value
balance sheets, which reflect our assets and liabilities at
estimated fair value. “Table 26: Supplemental
Non-GAAP Consolidated Fair Value Balance Sheets,”
which we provide at the end of this section, presents our
non-GAAP consolidated fair value balance sheets as of
March 31, 2010 and December 31, 2009, and the non-GAAP
estimated fair value of our net assets.
The fair value of our net assets is not a measure defined within
GAAP and may not be comparable to similarly titled measures
reported by other companies. It is not intended as a substitute
for Fannie Mae’s stockholders’ deficit
50
Table of Contents
or for the total deficit reported in our GAAP condensed
consolidated balance sheets, which represents the net worth
measure that is used to determine whether it is necessary to
request additional funds from Treasury under the senior
preferred stock purchase agreement. Instead, the fair value of
our net assets reflects a point in time estimate of the fair
value of our existing assets and liabilities. The estimated fair
value of our net assets, which is derived from our non-GAAP
consolidated fair value balance sheets, is calculated based on
the difference between the fair value of our assets and the fair
value of our liabilities, adjusted for noncontrolling interests.
The ultimate amount of realized credit losses and realized
values we receive from holding our assets and liabilities,
however, is likely to differ materially from the current
estimated fair values, which reflect significant liquidity and
risk premiums. Accordingly, the fair value of our net assets
attributable to common stockholders presented in our fair value
balance sheet does not represent an estimate of the value we
expect to realize from operating the company; what we expect to
draw from the Treasury under the terms of our senior preferred
stock purchase agreement; nor does it reflect a liquidation or
market value of the company as a whole.
Table 25 summarizes changes in our stockholders’ deficit
reported in our GAAP condensed consolidated balance sheets and
in the fair value of our net assets in our non-GAAP consolidated
fair value balance sheets as of March 31, 2010.
| Table 25: | Comparative Measures—GAAP Change in Stockholders’ Deficit and Non-GAAP Change in Fair Value of Net Assets (Net of Tax Effect) |
|
For the
|
||||
|
Three Months Ended
|
||||
| March 31, 2010 | ||||
| (Dollars in millions) | ||||
|
GAAP consolidated balance sheets:
|
||||
|
Fannie Mae stockholders’ deficit as of December 31,
2009
|
$ | (15,372 | ) | |
|
Impact of new accounting standards on Fannie Mae
stockholders’ deficit as of January 1,
2010
(1)
|
3,312 | |||
|
Fannie Mae stockholders’ deficit as of January 1,
2010
(2)
|
(12,060 | ) | ||
|
Net loss attributable to Fannie Mae
|
(11,530 | ) | ||
|
Changes in net unrealized losses on available-for-sale
securities, net of tax
|
1,318 | |||
|
Reclassification adjustment for other-than-temporary impairments
recognized in net loss, net of tax
|
155 | |||
|
Capital
transactions:
(3)
|
||||
|
Funds received from Treasury under the senior preferred stock
purchase agreement
|
15,300 | |||
|
Senior preferred stock dividends
|
(1,527 | ) | ||
|
Capital transactions, net
|
13,773 | |||
|
Other equity transactions
|
(107 | ) | ||
|
Fannie Mae stockholders’ deficit as of March 31,
2010
(2)
|
$ | (8,451 | ) | |
|
Non-GAAP consolidated fair value balance sheets:
|
||||
|
Estimated fair value of net assets as of December 31, 2009
|
$ | (98,792 | ) | |
|
Impact of new accounting standards on Fannie Mae estimated fair
value of net assets as of January 1,
2010
(1)
|
(52,302 | ) | ||
|
Estimated fair value of net assets as of January 1, 2010
|
(151,094 | ) | ||
|
Capital transactions, net
|
13,773 | |||
|
Change in estimated fair value of net
assets
(4)
|
(7,892 | ) | ||
|
Increase in estimated fair value of net assets, net
|
5,881 | |||
|
Estimated fair value of net assets as of March 31, 2010
|
$ | (145,213 | ) | |
| (1) | Reflects our adoption of the new accounting standards for transfers of financial assets and consolidation of variable interest entities. | |
| (2) | Our net worth, as defined under the senior preferred stock purchase agreement, is equivalent to the “Total deficit” amount reported in our condensed consolidated balance sheets. Our net worth, or total deficit, is comprised of “Total |
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Table of Contents
| Fannie Mae’s stockholders’ equity (deficit)” and “Noncontrolling interests” reported in our condensed consolidated balance sheets. | ||
| (3) | Represents capital transactions, which are reflected in our condensed consolidated statements of changes in equity (deficit). | |
| (4) | Excludes cumulative effect of our adoption of the new accounting standards and capital transactions. |
The fair value of our net assets, including the impact of
adopting the new accounting standards and capital transactions,
decreased by $46.4 billion from December 31, 2009,
which resulted in a fair value net deficit of
$145.2 billion as of March 31, 2010. Included in this
decrease was $52.3 billion primarily associated with
recording delinquent loans underlying consolidated MBS trusts
and eliminating our net guaranty obligations related to MBS
trusts that were consolidated on January 1, 2010 as a
result of adopting the new accounting standards. The fair value
of our guaranty obligations is a measure of the credit risk
related to mortgage loans underlying Fannie Mae MBS that we
assume through our guaranty. With consolidation of MBS trusts
and the elimination of our guaranty obligation, we no longer
valued our credit risk associated with delinquent loans in
consolidated MBS trusts using our guaranty obligation models and
began valuing those delinquent loans based on nonperforming loan
prices.
Since market participant assumptions inherent in the pricing for
nonperforming loans differ from assumptions we use in estimating
the fair value of our guaranty obligations, most significantly
expected returns and liquidity discounts, consolidation of MBS
trusts directly impacted the fair value of our net assets.
Market prices for nonperforming loans are reflective of highly
negotiated transactions in a
principal-to-principal
market that often involve loan-level due diligence prior to
completion of a transaction. Many of these transactions involve
sellers who acquired the loans in distressed transactions and
buyers who demand significant return opportunities. As a result,
we believe that valuations in the nonperforming loan market
understate the economic value of the nonperforming loans. We
intend to maximize the value of distressed loans over time,
utilizing loan modification, foreclosure, repurchases and other
preferable loss resolution techniques (for example, short sales)
that to date have resulted in per loan net recoveries materially
higher than those that would have been available had they been
sold in the distressed loan market.
Had we continued to value our credit risk associated with
delinquent loans in consolidated MBS trusts using our guaranty
obligation models rather than valuing those loans based on
nonperforming loan prices, the fair value of our net assets at
March 31, 2010 would have been a net deficit of
approximately $104 billion, a $5 billion increase to
our December 31, 2009 net deficit of $99 billion.
Credit risk is managed by our guaranty business and is computed
for intracompany allocation purposes. By computing this
intracompany allocation, we reflect the value associated with
credit risk, which is managed by our guaranty business versus
the interest rate risk, which is measured by our Capital Markets
group. As a result of our adoption of the new accounting
standards, we shifted from presenting the fair value of mortgage
loans separately from the fair value of net guaranty obligations
of MBS trusts as of December 31, 2009 to presenting
consolidated mortgage loans, net of the fair value of guaranty
assets and obligations as of March 31, 2010. We have not
changed our fair value methodologies or our methodology of
computing our credit risk for intracompany allocation purposes.
Below we provide additional information that we believe may be
useful in understanding our fair value balance sheets,
including: (1) an explanation of how fair value is defined
and measured; (2) the primary factors driving the decline
in the fair value of net assets, excluding capital transactions,
during the first quarter of 2010; and (3) the limitations
of our non-GAAP consolidated fair value balance sheets and
related measures.
Fair
Value Measurement
As discussed more fully in “Critical Accounting Policies
and Estimates—Fair Value Measurement,” we use various
valuation techniques to estimate fair value, some of which
incorporate internal assumptions that are subjective and involve
a high degree of management judgment. We describe the specific
valuation techniques
52
Table of Contents
used to determine fair value and disclose the carrying value and
fair value of our financial assets and liabilities in
“Note 16, Fair Value.”
Fair value represents the price that would be received to sell
an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
(also referred to as an exit price). Fair value is intended to
convey the current value of an asset or liability as of the
measurement date, not the potential value of the asset or
liability that may be realized from future cash flows associated
with the asset or liability. Fair value generally incorporates
the market’s current view of the future, which is reflected
in the current price of the asset or liability. Future market
conditions, however, may be significantly different than what
the market has currently estimated and priced into these fair
value measures. Moreover, the fair value balance sheets reflect
only the value of the assets and liabilities of the enterprise
as of a point in time (the balance sheet date) and do not
reflect the value of new assets or liabilities the company may
generate in the future. To the extent we intend to hold our
mortgage investments until maturity, the amounts we ultimately
realize from the maturity, settlement or disposition of these
assets may vary significantly from the estimated fair value of
these assets as of March 31, 2010.
Our GAAP condensed consolidated balance sheets include a
combination of amortized historical cost, fair value and the
lower of cost or fair value as the basis for accounting and
reporting our assets and liabilities. The principal items that
we carry at fair value in our GAAP condensed consolidated
balance sheets include our trading and available-for-sale
securities and derivative instruments. The substantial majority
of our mortgage loans and liabilities, however, are carried at
amortized historical cost. Another significant difference
between our GAAP condensed consolidated balance sheets and our
non-GAAP consolidated fair value balance sheets is the manner in
which credit losses are reflected.
Primary
Factors Driving Changes in the Non-GAAP Fair Value of Net
Assets Excluding the January 1, 2010 Impact of Adopting the
New Accounting Standards and Capital Transactions
The following reflects attribution of the primary factors
driving the $7.9 billion decrease in the fair value of our
net assets, excluding the cumulative effect of our
January 1, 2010 adoption of the new accounting standards
and capital transactions, during the first quarter of 2010.
| • | A decrease in the fair value of nonperforming loans primarily attributable to an increase in the average delinquency period of the nonperforming loan population. | |
| • | An increase in the fair value of the net portfolio attributable to an increase to the positive impact of changes in the spread between mortgage assets and associated debt and derivatives. |
Cautionary
Language Relating to Supplemental Non-GAAP Financial
Measures
In reviewing our non-GAAP consolidated fair value balance
sheets, there are a number of important factors and limitations
to consider. The estimated fair value of our net assets is
calculated as of a particular point in time based on our
existing assets and liabilities. It does not incorporate other
factors that may have a
53
Table of Contents
significant impact on our long-term fair value, including
revenues generated from future business activities in which we
expect to engage, the value from our foreclosure and loss
mitigation efforts or the impact that potential regulatory
actions may have on us. As a result, the estimated fair value of
our net assets presented in our non-GAAP consolidated fair value
balance sheets does not represent an estimate of our net
realizable value, liquidation value or our market value as a
whole; nor does it represent an estimate of the value we expect
to receive from operating the company or what we expect to draw
from the Treasury under the terms of our senior preferred stock
purchase agreement. Amounts we ultimately realize from the
disposition of assets or settlement of liabilities may vary
materially from the estimated fair values presented in our
non-GAAP consolidated fair value balance sheets.
Supplemental
Non-GAAP Consolidated Fair Value Balance Sheets
Report
We present our non-GAAP fair value balance sheets report in
Table 26.
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Table of Contents
| Table 26: | Supplemental Non-GAAP Consolidated Fair Value Balance Sheets |
| As of March 31, 2010 | As of December 31, 2009 (1) | |||||||||||||||||||||||
|
GAAP
|
GAAP
|
|||||||||||||||||||||||
|
Carrying
|
Fair Value
|
Estimated
|
Carrying
|
Fair Value
|
Estimated
|
|||||||||||||||||||
| Value | Adjustment (2) | Fair Value | Value | Adjustment (2) | Fair Value | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 75,956 | $ | — | $ | 75,956 | (3) | $ | 9,882 | $ | — | $ | 9,882 | (3) | ||||||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
62,446 | — | 62,446 | (3) | 53,684 | (28 | ) | 53,656 | (3) | |||||||||||||||
|
Trading securities
|
72,529 | — | 72,529 | (3) | 111,939 | — | 111,939 | (3) | ||||||||||||||||
|
Available-for-sale
securities
|
108,667 | — | 108,667 | (3) | 237,728 | — | 237,728 | (3) | ||||||||||||||||
|
Mortgage loans:
|
||||||||||||||||||||||||
|
Mortgage loans held for sale
|
980 | 2 | 982 | (3) | 18,462 | 153 | 18,615 | (3) | ||||||||||||||||
|
Mortgage loans held for investment, net of allowance for loan
losses:
|
||||||||||||||||||||||||
|
Of Fannie Mae
|
284,316 | (13,532 | ) | 270,784 | (3) | 246,509 | (5,209 | ) | 241,300 | (3) | ||||||||||||||
|
Of consolidated trusts
|
2,644,442 | (4,998 | ) (4) | 2,639,444 | (3) | 129,590 | (45 | ) | 129,545 | (3) | ||||||||||||||
|
Total mortgage loans
|
2,929,738 | (18,528 | ) | 2,911,210 | 394,561 | (5,101 | ) | 389,460 | ||||||||||||||||
|
Advances to lenders
|
4,151 | (279 | ) | 3,872 | (3) | 5,449 | (305 | ) | 5,144 | (3) | ||||||||||||||
|
Derivative assets at fair value
|
435 | — | 435 | (3) | 1,474 | — | 1,474 | (3) | ||||||||||||||||
|
Guaranty assets and
buy-ups,
net
|
473 | 337 | 810 | (3)(5) | 9,520 | 5,104 | 14,624 | (3)(5) | ||||||||||||||||
|
Total financial assets
|
3,254,395 | (18,470 | ) | 3,235,925 | (3) | 824,237 | (330 | ) | 823,907 | (3) | ||||||||||||||
|
Master servicing assets and credit enhancements
|
573 | 4,354 | 4,927 | (5)(6) | 651 | 5,917 | 6,568 | (5)(6) | ||||||||||||||||
|
Other assets
|
38,787 | (263 | ) | 38,524 | (6) | 44,253 | 373 | 44,626 | (6) | |||||||||||||||
|
Total assets
|
$ | 3,293,755 | $ | (14,379 | ) | $ | 3,279,376 | $ | 869,141 | $ | 5,960 | $ | 875,101 | |||||||||||
|
Liabilities:
|
||||||||||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
$ | 180 | $ | — | $ | 180 | (3) | $ | — | $ | — | $ | — | (3) | ||||||||||
|
Short-term debt:
|
||||||||||||||||||||||||
|
Of Fannie Mae
|
207,822 | 44 | 207,866 | (3) | 200,437 | 56 | 200,493 | (3) | ||||||||||||||||
|
Of consolidated trusts
|
6,343 | (1 | ) | 6,342 | (3) | — | — | — | (3) | |||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||
|
Of Fannie Mae
|
576,307 | (7) | 20,528 | 596,835 | (3) | 567,950 | (7) | 19,473 | 587,423 | (3) | ||||||||||||||
|
Of consolidated trusts
|
2,472,192 | (7) | 98,762 | (4) | 2,570,954 | (3) | 6,167 | (7) | 143 | 6,310 | (3) | |||||||||||||
|
Derivative liabilities at fair value
|
957 | — | 957 | (3) | 1,029 | — | 1,029 | (3) | ||||||||||||||||
|
Guaranty obligations
|
827 | 3,497 | 4,324 | (3) | 13,996 | 124,586 | 138,582 | (3) | ||||||||||||||||
|
Total financial liabilities
|
3,264,628 | 122,830 | 3,387,458 | (3) | 789,579 | 144,258 | 933,837 | (3) | ||||||||||||||||
|
Other liabilities
|
37,498 | (447 | ) | 37,051 | (8) | 94,843 | (54,878 | ) | 39,965 | (8) | ||||||||||||||
|
Total liabilities
|
3,302,126 | 122,383 | 3,424,509 | 884,422 | 89,380 | 973,802 | ||||||||||||||||||
|
Equity (deficit):
|
||||||||||||||||||||||||
|
Fannie Mae stockholders’ equity (deficit):
|
||||||||||||||||||||||||
|
Senior
preferred
(9)
|
76,200 | — | 76,200 | 60,900 | — | 60,900 | ||||||||||||||||||
|
Preferred
|
20,291 | (19,485 | ) | 806 | 20,348 | (19,629 | ) | 719 | ||||||||||||||||
|
Common
|
(104,942 | ) | (117,277 | ) | (222,219 | ) | (96,620 | ) | (63,791 | ) | (160,411 | ) | ||||||||||||
|
Total Fannie Mae stockholders’ deficit/non-GAAP fair
value of net assets
|
$ | (8,451 | ) | $ | (136,762 | ) | $ | (145,213 | ) | $ | (15,372 | ) | $ | (83,420 | ) | $ | (98,792 | ) | ||||||
|
Noncontrolling interests
|
80 | — | 80 | 91 | — | 91 | ||||||||||||||||||
|
Total deficit
|
(8,371 | ) | (136,762 | ) | (145,133 | ) | (15,281 | ) | (83,420 | ) | (98,701 | ) | ||||||||||||
|
Total liabilities and equity (deficit)
|
$ | 3,293,755 | $ | (14,379 | ) | $ | 3,279,376 | $ | 869,141 | $ | 5,960 | $ | 875,101 | |||||||||||
55
Table of Contents
Explanation
and Reconciliation of Non-GAAP Measures to
GAAP Measures
| (1) | Certain prior period amounts have been reclassified to conform to the current period presentation. | |
| (2) | Each of the amounts listed as a “fair value adjustment” represents the difference between the carrying value included in our GAAP condensed consolidated balance sheets and our best judgment of the estimated fair value of the listed item. | |
| (3) | We determined the estimated fair value of these financial instruments in accordance with the fair value accounting standard as described in “Note 16, Fair Value.” | |
| (4) | Fair value exceeds the carrying value of consolidated loans and debt of consolidated trusts due to the fact that the loans and debt were consolidated in our GAAP condensed consolidated balance sheet at unpaid principal balance. Also impacting the difference between fair value and carrying value of the consolidated loans is the credit component of the loan. This credit component is reflected in the net guarantee obligation, which is included in the consolidated loan fair value, but was presented as a separate line item in our fair value balance sheet in prior periods. | |
| (5) | In our GAAP condensed consolidated balance sheets, we report the guaranty assets as a separate line item. Other guaranty related assets are within the “Other assets” line items and they include buy-ups, master servicing assets and credit enhancements. On a GAAP basis, our guaranty assets totaled $473 million and $8.4 billion as of March 31, 2010 and December 31, 2009, respectively. The associated buy-ups totaled $0.6 million and $1.2 billion as of March 31, 2010 and December 31, 2009, respectively. | |
| (6) | The line items “Master servicing assets and credit enhancements” and “Other assets” together consist of the assets presented on the following six line items in our GAAP condensed consolidated balance sheets: (a) Total accrued interest receivable, net of allowance; (b) Acquired property, net; (c) Deferred tax assets, net; (d) Partnership investments; (e) Servicer and MBS trust receivable and (f) Other assets. The carrying value of these items in our GAAP condensed consolidated balance sheets together totaled $39.4 billion and $46.1 billion as of March 31, 2010 and December 31, 2009, respectively. We deduct the carrying value of the buy-ups associated with our guaranty obligation, which totaled $0.6 million and $1.2 billion as of March 31, 2010 and December 31, 2009, respectively, from “Other assets” reported in our GAAP condensed consolidated balance sheets because buy-ups are a financial instrument that we combine with guaranty assets in our disclosure in “Note 16, Fair Value.” We have estimated the fair value of master servicing assets and credit enhancements based on our fair value methodologies described in Note 16. | |
| (7) | Includes certain long-term debt instruments that we elected to report at fair value in our GAAP condensed consolidated balance sheets of $3.3 billion as of March 31, 2010 and December 31, 2009. | |
| (8) | The line item “Other liabilities” consists of the liabilities presented on the following six line items in our GAAP condensed consolidated balance sheets: (a) Accrued interest payable of Fannie Mae; (b) Accrued interest payable of consolidated trusts; (c) Reserve for guaranty losses; (d) Partnership liabilities; (e) Servicer and MBS trust payable; and (f) Other liabilities. The carrying value of these items in our GAAP condensed consolidated balance sheets together totaled $37.5 billion and $94.8 billion as of March 31, 2010 and December 31, 2009, respectively. The GAAP carrying values of these other liabilities generally approximate fair value. We assume that certain other liabilities, such as deferred revenues, have no fair value. Although we report the “Reserve for guaranty losses” as a separate line item in our condensed consolidated balance sheets, it is incorporated into and reported as part of the fair value of our guaranty obligations in our non-GAAP supplemental consolidated fair value balance sheets. | |
| (9) | The amount included in “estimated fair value” of the senior preferred stock is the liquidation preference, which is the same as the GAAP carrying value, and does not reflect fair value. |
LIQUIDITY
AND CAPITAL MANAGEMENT
Liquidity
Management
Our business activities require that we maintain adequate
liquidity to fund our operations. We have implemented a
liquidity policy which is designed to mitigate our liquidity
risk. Liquidity risk is the risk that we will not be able to
meet our funding obligations in a timely manner. Liquidity
management involves forecasting funding requirements and
maintaining sufficient capacity to meet these needs while
accommodating fluctuations in asset and liability levels due to
changes in our business operations or unanticipated events. Our
Treasury group is responsible for our liquidity and contingency
planning strategies. For additional information on our liquidity
management, including liquidity governance and contingency
planning, see “MD&A—Liquidity and Capital
Management” in our 2009
Form 10-K.
56
Table of Contents
Debt
Funding
Effective January 1, 2010, we adopted new accounting
standards that resulted in the consolidation of the substantial
majority of our MBS trusts and recognized the underlying assets
and debt of these trusts in our condensed consolidated balance
sheet. Debt from consolidations represents our liability to
third-party beneficial interest holders of MBS that we guarantee
when we have included the assets of a corresponding trust in our
condensed consolidated balance sheets. Despite the increase in
debt recognized in our condensed consolidated balance sheet due
to consolidations, the adoption of the new accounting standards
did not change our exposure to liquidity risk. We separately
present the debt from consolidations (“debt of consolidated
trusts”) and the debt issued by us (“debt of Fannie
Mae”) in our condensed consolidated balance sheets and in
the debt tables below. Our discussion regarding debt funding in
this section focuses on the debt of Fannie Mae.
On February 10, 2010, we announced that we intend to
significantly increase our purchases of delinquent loans from
single-family MBS trusts. Under our single-family MBS trust
documents, we have the option to purchase from our MBS trusts
loans that are delinquent as to four or more consecutive monthly
payments. We began purchasing these loans in March 2010. The
purchases did not have a material impact on our debt activity in
the first quarter of 2010. However, we expect our funding needs
to increase in the second quarter of 2010 because we expect to
purchase a significant portion of the current delinquent
population within a few months subject to market conditions,
servicer capacity, and other constraints including the limit on
the mortgage assets that we may own pursuant to the senior
preferred stock purchase agreement. As of March 31, 2010,
the total unpaid principal balance of all loans in single-family
MBS trusts that were delinquent as to four or more consecutive
monthly payments was approximately $94 billion.
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 roll-over risk
increases when our outstanding short-term debt increases as a
percentage of our total outstanding debt.
We have a diversified funding base of domestic and international
investors. Purchasers of our debt securities include fund
managers, commercial banks, pension funds, insurance companies,
foreign central banks, corporations, state and local
governments, and other municipal authorities. Purchasers of our
debt securities are also geographically diversified, with a
significant portion of our investors historically located in the
United States, Europe and Asia.
Fannie
Mae Debt Funding Activity
Table 27 summarizes the activity in the debt of Fannie Mae for
the periods indicated. This activity includes federal funds
purchased and securities sold under agreements to repurchase but
excludes the debt of consolidated trusts as well as intraday
loans. The reported amounts of debt issued and paid off during
the period represent the face amount of the debt at issuance and
redemption, respectively. Activity for short-term debt of Fannie
Mae relates to borrowings with an original contractual maturity
of one year or less while activity for long-term debt of Fannie
Mae relates to borrowings with an original contractual maturity
of greater than one year.
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| Table 27: | Activity in Debt of Fannie Mae |
| For the Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Issued during the period:
|
||||||||
|
Short-term:
(1)
|
||||||||
|
Amount
|
$ | 138,480 | $ | 301,820 | ||||
|
Weighted-average interest rate
|
0.26 | % | 0.28 | % | ||||
|
Long-term:
|
||||||||
|
Amount
|
$ | 101,964 | $ | 108,501 | ||||
|
Weighted-average interest rate
|
2.28 | % | 2.30 | % | ||||
|
Total issued:
|
||||||||
|
Amount
|
$ | 240,444 | $ | 410,321 | ||||
|
Weighted-average interest rate
|
1.11 | % | 0.80 | % | ||||
|
Paid off during the
period:
(2)
|
||||||||
|
Short-term:
(1)
|
||||||||
|
Amount
|
$ | 130,866 | $ | 358,890 | ||||
|
Weighted-average interest rate
|
0.23 | % | 0.99 | % | ||||
|
Long-term:
|
||||||||
|
Amount
|
$ | 95,163 | $ | 65,238 | ||||
|
Weighted-average interest rate
|
3.30 | % | 4.23 | % | ||||
|
Total paid off:
|
||||||||
|
Amount
|
$ | 226,029 | $ | 424,128 | ||||
|
Weighted-average interest rate
|
1.53 | % | 1.49 | % | ||||
| (1) | For the three months ended March 31, 2009, the amount of short-term debt issued and paid off included $160.5 billion of debt issued and repaid to Fannie Mae MBS trusts. Due to the adoption of the new accounting standards on the transition date, we no longer include debt issued and repaid to Fannie Mae MBS trusts in the activity in debt of Fannie Mae as the substantial majority of these trusts are consolidated. | |
| (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. |
Due to the adoption of the new accounting standards, we no
longer include debt issued and repaid to Fannie Mae MBS trusts
in our short-term debt activity, as the substantial majority of
our MBS trusts were consolidated and the underlying assets and
debt of these trusts were recognized in our condensed
consolidated balance sheets. For the first quarter of 2009,
short-term debt activity of Fannie Mae, excluding debt issued
and repaid to Fannie Mae MBS trusts, consisted of issuances of
$141.3 billion with a weighted-average interest rate of
0.46% and repayments of $198.4 billion with a
weighted-average interest rate of 1.69%.
Our ability to issue long-term debt has been strong in recent
quarters primarily due to actions taken by the federal
government to support us and the financial markets. Many of
these programs initiated by the federal government have expired
in the last four months. The Treasury credit facility and
Treasury MBS purchase program terminated on December 31,
2009 and the Federal Reserve’s agency debt and MBS purchase
programs expired on March 31, 2010. Despite the expiration
of these programs, demand for our long-term debt securities
continues to be strong as of the date of this filing.
We believe that continued federal government support of our
business and the financial markets, as well as our status as a
GSE, are essential to maintaining our access to debt funding.
Changes or perceived changes in the government’s support
could increase our roll-over risk and materially adversely
affect our ability to refinance our debt as it becomes due,
which could have a material adverse impact on our liquidity,
financial condition and results of operations. In addition,
future changes or disruptions in the financial markets could
significantly
58
Table of Contents
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. See “Risk Factors” for a
discussion of the risks to our business related to our ability
to obtain funds for our operations through the issuance of debt
securities, the relative cost at which we are able to obtain
these funds and our liquidity contingency plans.
Outstanding
Debt
Table 28 provides information as of March 31, 2010 and
December 31, 2009 on our outstanding short-term and
long-term debt based on its original contractual terms. Our
total outstanding debt of Fannie Mae, which consists of federal
funds purchased and securities sold under agreements to
repurchase and short-term and long-term debt, excluding debt of
consolidated trusts, increased to $784.3 billion as of
March 31, 2010, from $768.4 billion as of
December 31, 2009.
As of March 31, 2010, our outstanding short-term debt,
based on its original contractual maturity, increased as a
percentage of our total outstanding debt to 27% from 26% as of
December 31, 2009. For information on our outstanding debt
maturing within one year, including the current portion of our
long-term debt, as a percentage of our total debt, see
“Maturity Profile of Outstanding Debt of Fannie Mae.”
In addition, the weighted-average interest rate on our long-term
debt, excluding debt of consolidated trusts, based on its
original contractual maturity, decreased to 3.55% as of
March 31, 2010 from 3.71% as of December 31, 2009.
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 120% of the amount of mortgage assets we
are allowed to own. Through December 30, 2010, our debt cap
under the senior preferred stock purchase agreement is
$1,080 billion. Beginning on December 31, 2010, and
through December 30, 2011, and each year thereafter, our
debt cap will equal 120% of the amount of mortgage assets we are
allowed to own on December 31 of the immediately preceding
calendar year. As of March 31, 2010, our aggregate
indebtedness totaled $800.0 billion, which was
$280.0 billion below our debt limit. Our calculation of our
indebtedness for purposes of complying with our debt cap
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.
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Table of Contents
| Table 28: |
|
| As of | ||||||||||||||||||||||||
| March 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
|
Weighted-
|
Weighted-
|
|||||||||||||||||||||||
|
Average
|
Average
|
|||||||||||||||||||||||
|
Interest
|
Interest
|
|||||||||||||||||||||||
| Maturities | Outstanding | Rate | Maturities | Outstanding | Rate | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
— | $ | 180 | 0.01 | % | — | $ | — | — | % | ||||||||||||||
|
Short-term debt:
|
||||||||||||||||||||||||
|
Fixed-rate short-term debt:
|
||||||||||||||||||||||||
|
Discount notes
|
— | $ | 207,517 | 0.26 | % | — | $ | 199,987 | 0.27 | % | ||||||||||||||
|
Foreign exchange discount notes
|
— | 305 | 1.64 | — | 300 | 1.50 | ||||||||||||||||||
|
Other short-term debt
|
— | — | — | — | 100 | 0.53 | ||||||||||||||||||
|
Total fixed-rate short-term debt
|
207,822 | 0.26 | 200,387 | 0.27 | ||||||||||||||||||||
|
Floating-rate short-term
debt
(2)
|
— | — | — | — | 50 | 0.02 | ||||||||||||||||||
|
Total short-term debt of Fannie
Mae
(3)
|
207,822 | 0.26 | 200,437 | 0.27 | ||||||||||||||||||||
|
Debt of consolidated trusts
|
— | 6,343 | 0.11 | — | — | — | ||||||||||||||||||
|
Total short-term debt
|
$ | 214,165 | 0.25 | % | $ | 200,437 | 0.27 | % | ||||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||
|
Senior fixed-rate long-term debt:
|
||||||||||||||||||||||||
|
Benchmark notes and bonds
|
2010 - 2030 | $ | 276,322 | 3.88 | % | 2010 - 2030 | $ | 279,945 | 4.10 | % | ||||||||||||||
|
Medium-term notes
|
2010 - 2020 | 182,431 | 2.92 | 2010 - 2019 | 171,207 | 2.97 | ||||||||||||||||||
|
Foreign exchange notes and bonds
|
2017 - 2028 | 1,107 | 6.09 | 2010 - 2028 | 1,239 | 5.64 | ||||||||||||||||||
|
Other long-term
debt
(2)
|
2010 - 2040 | 60,397 | 5.83 | 2010 - 2039 | 62,783 | 5.80 | ||||||||||||||||||
|
Total senior fixed-rate debt
|
520,257 | 3.77 | 515,174 | 3.94 | ||||||||||||||||||||
|
Senior floating-rate long-term debt:
|
||||||||||||||||||||||||
|
Medium-term notes
|
2010 - 2015 | 45,219 | 0.23 | 2010 - 2014 | 41,911 | 0.26 | ||||||||||||||||||
|
Other long-term
debt
(2)
|
2020 - 2037 | 951 | 4.53 | 2020 - 2037 | 1,041 | 4.12 | ||||||||||||||||||
|
Total senior floating-rate debt
|
46,170 | 0.32 | 42,952 | 0.34 | ||||||||||||||||||||
|
Subordinated fixed-rate long-term debt:
|
||||||||||||||||||||||||
|
Qualifying
subordinated
(5)
|
2011 - 2014 | 7,392 | 5.47 | 2011 - 2014 | 7,391 | 5.47 | ||||||||||||||||||
|
Subordinated debentures
|
2019 | 2,488 | 9.90 | 2019 | 2,433 | 9.89 | ||||||||||||||||||
|
Total subordinated fixed-rate long-term debt
|
9,880 | 6.59 | 9,824 | 6.57 | ||||||||||||||||||||
|
Total long-term debt of Fannie
Mae
(4)
|
576,307 | 3.55 | 567,950 | 3.71 | ||||||||||||||||||||
|
Debt of consolidated trusts
|
2010 - 2050 | 2,472,192 | 5.10 | 2010 - 2039 | 6,167 | 5.63 | ||||||||||||||||||
|
Total long-term debt
|
$ | 3,048,499 | 4.81 | % | $ | 574,117 | 3.73 | % | ||||||||||||||||
|
Outstanding callable debt of Fannie
Mae
(6)
|
$ | 221,709 | 3.40 | % | $ | 210,181 | 3.48 | % | ||||||||||||||||
| (1) | Outstanding debt amounts and weighted-average interest rates reported in this table include the effect of unamortized discounts, premiums and other cost basis adjustments. Reported amounts include fair value gains and losses associated with debt that we elected to carry at fair value. The unpaid principal balance of outstanding debt, which excludes unamortized discounts, premiums and other cost basis adjustments and debt of consolidated trusts, totaled $798.2 billion and $784.0 billion as of March 31, 2010 and December 31, 2009, respectively. | |
| (2) | Includes a portion of structured debt instruments that is reported at fair value. | |
| (3) | 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. Reported amounts include a net discount and other cost basis adjustments of $184 million and $129 million as of March 31, 2010 and December 31, 2009, respectively. |
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| (4) | Long-term debt of Fannie Mae consists of borrowings with an original contractual maturity of greater than one year. Reported amounts include the current portion of long-term debt that is due within one year, which totaled $94.0 billion and $106.5 billion as of March 31, 2010 and December 31, 2009, respectively. Reported amounts also include a net discount and other cost basis adjustments of $13.8 billion and $15.6 billion as of March 31, 2010 and December 31, 2009, respectively. The unpaid principal balance of long-term debt of Fannie Mae, which excludes unamortized discounts, premiums and other cost basis adjustments and amounts related to debt of consolidated trusts, totaled $590.1 billion and $583.4 billion as of March 31, 2010 and December 31, 2009, respectively. | |
| (5) | Consists of subordinated debt with an interest deferral feature. | |
| (6) | Consists 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. Includes the unpaid principal balance, and excludes unamortized discounts, premiums and other cost basis adjustments. |
Maturity
Profile of Outstanding Debt of Fannie Mae
Table 29 presents the maturity profile, as of March 31,
2010, of our outstanding debt maturing within one year, by
month, including amounts we have announced that we are calling
for redemption. Our outstanding debt maturing within one year,
including the current portion of our long-term debt, decreased
as a percentage of our total outstanding debt, excluding debt of
consolidated trusts and federal funds purchased and securities
sold under agreements to repurchase, to 40% as of March 31,
2010, compared with 41% as of December 31, 2009. The
weighted-average maturity of our outstanding debt that is
maturing within one year was 132 days as of March 31,
2010, compared with 103 days as of December 31, 2009.
| Table 29: | Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year (1) |
| (1) | Includes unamortized discounts, premiums and other cost basis adjustments of $264 million as of March 31, 2010. Excludes debt of consolidated trusts of $10.2 billion and federal funds purchased and securities sold under agreements to repurchase of $180 million as of March 31, 2010. |
Table 30 presents the maturity profile, as of March 31,
2010, of the portion of our long-term debt that matures in more
than one year, on a quarterly basis for one year and on an
annual basis thereafter, excluding amounts we have announced
that we are calling for redemption within one year. The
weighted-average maturity of our outstanding debt maturing in
more than one year was approximately 70 months as of
March 31, 2010, compared with approximately 72 months
as of December 31, 2009.
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Table of Contents
| Table 30: | Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year (1) |
| (1) | Includes unamortized discounts, premiums and other cost basis adjustments of $13.8 billion as of March 31, 2010. Excludes debt of consolidated trusts of $2.5 trillion as of March 31, 2010. |
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 intend to use funds we
receive from Treasury under the senior preferred stock purchase
agreement to pay our debt obligations and to pay dividends on
the senior preferred stock.
Liquidity
Contingency Planning
Under direction from FHFA, we are required to maintain
sufficient cash and high quality, non-mortgage securities in the
cash and other investments portfolio to meet all obligations for
a minimum of 30 days without needing to access the debt
markets. Furthermore, we plan to maintain a balance in the cash
and other investments portfolio as well as a balance of
unencumbered agency MBS such that the sum of those balances will
allow us to meet our cash obligations for 365 days without
relying on the issuance of unsecured debt. While our liquidity
contingency planning attempts to address market conditions, our
status under conservatorship and Treasury arrangements, and the
more fundamental changes in the longer-term credit market
environment, it may be difficult for a company of our size in
our circumstances to use our unencumbered agency MBS to meet our
obligations as planned under then-current market conditions. For
a discussion of the composition and recent changes in our cash
and other investments portfolio see “Consolidated Balance
Sheet Analysis—Cash and Other Investments Portfolio.”
Credit
Ratings
Our ability to access the capital markets and other sources of
funding, as well as our cost of funds, are highly dependent on
our credit ratings from the major ratings organizations. In
addition, our credit ratings are important when we seek to
engage in certain long-term transactions, such as derivative
transactions. There have been no changes in our credit ratings
from December 31, 2009 to April 30, 2010. Table 31
presents the credit ratings issued by each of these rating
agencies as of April 30, 2010.
62
Table of Contents
| Table 31: | Fannie Mae Credit Ratings |
| As of April 30, 2010 | ||||||
| Standard & Poor’s | Moody’s | Fitch | ||||
|
Long-term senior debt
|
AAA | Aaa | AAA | |||
|
Short-term senior debt
|
A-1+ | P-1 | F1+ | |||
|
Subordinated debt
|
A | Aa2 | AA- | |||
|
Preferred stock
|
C | Ca | C/RR6 | |||
|
Bank financial strength rating
|
— | E+ | — | |||
|
Outlook
|
Stable
(for Long Term Senior Debt and Subordinated Debt) |
Stable
(for all ratings) |
Stable
(for AAA rated Long Term Issue Default Rating) |
|||
Cash
Flows
Three Months Ended March 31,
2010
.
Cash and cash equivalents of
$30.5 billion as of March 31, 2010 increased by
$23.7 billion from December 31, 2009. Net cash
generated from investing activities totaled $112.2 billion,
resulting primarily from proceeds received from repayments of
loans held for investment. These net cash inflows were partially
offset by net cash outflows used in operating activities of
$32.9 billion resulting primarily from purchases of trading
securities. The net cash used in financing activities of
$55.6 billion was primarily attributable to a significant
amount of short-term and long-term debt redemptions in excess of
proceeds received from the issuances of short-term and long-term
debt as well as proceeds received from Treasury under the senior
preferred stock purchase agreement.
Three Months Ended March 31,
2009
.
Cash and cash equivalents of
$23.2 billion as of March 31, 2009 increased by
$5.3 billion from December 31, 2008. Net cash
generated from investing activities totaled $38.3 billion,
which was primarily attributable to proceeds received from the
sale of
available-for-sale
securities and from repayments of loans held for investment.
These net cash inflows were partially offset by net cash
outflows used in operating activities of $30.3 billion,
largely attributable to the net loss we incurred during the
period and the purchase of
held-for-sale
loans, and net cash outflows used in financing activities of
$2.6 billion. The net cash used in financing activities was
attributable to the redemption of a significant amount of
short-term debt, which was partially offset by proceeds received
from Treasury under the senior preferred stock purchase
agreement.
Capital
Management
Regulatory
Capital
FHFA has announced that our existing statutory and FHFA-directed
regulatory capital requirements will not be binding during the
conservatorship, and that FHFA will not issue quarterly capital
classifications during the conservatorship. We continue to
submit capital reports to FHFA during the conservatorship and
FHFA continues to closely monitor our capital levels. We report
our minimum capital requirement, core capital and GAAP net worth
in our periodic reports on
Form 10-Q
and
Form 10-K,
and FHFA also reports them on its website. FHFA is not reporting
on our critical capital, risk-based capital or subordinated debt
levels during the conservatorship. For information on our
minimum capital requirements see “Note 14, Regulatory
Capital Requirements.”
Senior
Preferred Stock Purchase Agreement
As a result of the covenants under the senior preferred stock
purchase agreement and Treasury’s ownership of a warrant to
purchase up to 79.9% of the total shares of our common stock
outstanding, we no longer have access to equity funding except
through draws under the senior preferred stock purchase
agreement.
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Table of Contents
We have received a total of $75.2 billion from Treasury
pursuant to the senior preferred stock purchase agreement as of
March 31, 2010. These funds allowed us to eliminate our net
worth deficits as of the end of each of the five prior quarters.
In May 2010, the Acting Director of FHFA submitted a request for
$8.4 billion from Treasury under the senior preferred stock
purchase agreement to eliminate our net worth deficit as of
March 31, 2010, and requested receipt of those funds on or
prior to June 30, 2010. Upon receipt of the requested
funds, the aggregate liquidation preference of the senior
preferred stock, including the initial aggregate liquidation
preference of $1.0 billion, will equal $84.6 billion.
Due to current trends in the housing and financial markets, we
continue to expect to have a net worth deficit in future
periods, and therefore will be required to obtain additional
funding from Treasury pursuant to the senior preferred stock
purchase agreement. Treasury’s maximum funding commitment
to us prior to a December 2009 amendment of the senior preferred
stock purchase agreement was $200 billion. The amendment to
the agreement stipulates that the cap on Treasury’s funding
commitment to us under the senior preferred stock purchase
agreement will increase as necessary to accommodate any net
worth deficits for calendar quarters in 2010 through 2012. For
any net worth deficits after December 31, 2012,
Treasury’s remaining funding commitment will be
$124.8 billion ($200 billion less $75.2 billion
drawn to date based on our net worth deficit as of
December 31, 2009) less any positive net worth as of
December 31, 2012.
Dividends
Holders of the senior preferred stock are entitled to receive,
when, as and if declared by our Board of Directors, out of
legally available funds, cumulative quarterly cash dividends at
the annual rate of 10% per year on the then-current liquidation
preference of the senior preferred stock. As conservator and
under our charter, FHFA has authority to declare and approve
dividends on the senior preferred stock. If at any time we fail
to pay cash dividends on the senior preferred stock in a timely
manner, then immediately following such failure and for all
dividend periods thereafter until the dividend period following
the date on which we have paid in cash full cumulative dividends
(including any unpaid dividends added to the liquidation
preference), the dividend rate will be 12% per year. Dividends
on the senior preferred stock that are not paid in cash for any
dividend period will accrue and be added to the liquidation
preference of the senior preferred stock.
A dividend of $1.5 billion was declared by the conservator
and paid by us on March 31, 2010 for the period from
January 1, 2010 through and including March 31, 2010.
When Treasury provides the additional funds that FHFA requested
on our behalf in May 2010, the annualized dividend on the senior
preferred stock will be $8.5 billion based on the 10%
dividend rate. The level of dividends on the senior preferred
stock will increase in future periods if, as we expect, the
conservator requests additional funds on our behalf from
Treasury under the senior preferred stock purchase agreement.
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
consolidated balance sheets or may be recorded in amounts
different from the full contract or notional amount of the
transaction, depending on the nature or structure of, and
accounting required to be applied to, the arrangement. These
arrangements are commonly referred to as “off-balance sheet
arrangements” and expose us to potential losses in excess
of the amounts recorded in our condensed consolidated balance
sheets.
Our off-balance sheet arrangements result primarily from the
following:
| • | our guaranty of mortgage loan securitization and resecuritization transactions over which we do not have control; |
64
Table of Contents
| • | other guaranty transactions; | |
| • | liquidity support transactions; and | |
| • | partnership interests |
In 2009 and prior, most MBS trusts created as part of our
guaranteed securitizations were not consolidated by the company
for financial reporting purposes because the trusts were
considered to be qualifying special purpose entities
(“QSPEs”) under the accounting rules governing the
transfer and servicing of financial assets and the
extinguishment of liabilities. Effective January 1, 2010,
we prospectively adopted the new accounting standards, which
resulted in the majority of our single-class securitization
trusts being consolidated by us upon adoption.
Table 32 presents the amounts of both our on- and off-balance
sheet Fannie Mae MBS and other guaranty obligations as of
March 31, 2010 and December 31, 2009.
| Table 32: | On- and Off-Balance Sheet MBS and Other Guaranty Arrangements |
| As of | ||||||||
| March 31, 2010 | December 31, 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Fannie Mae MBS and other guarantees
outstanding
(1)
|
$ | 2,815,950 | $ | 2,828,513 | ||||
|
Less: Consolidated Fannie Mae MBS
|
(2,755,606 | ) | (147,855 | ) | ||||
|
Less: Fannie Mae MBS held in
portfolio
(2)
|
(9,096 | ) | (220,245 | ) | ||||
|
Unconsolidated Fannie Mae MBS and other guarantees
|
$ | 51,248 | $ | 2,460,413 | ||||
| (1) | Includes unpaid principal balance of other guarantees of $30.2 billion as of March 31, 2010 and $27.6 billion as of December 31, 2009. | |
| (2) | Amounts represent unpaid principal balance and are recorded in “Investments in Securities” in our consolidated balance sheets. |
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 $51.2 billion as of March 31, 2010 and $2.5
trillion as of December 31, 2009.
For information on the mortgage loans underlying both our on-
and off-balance sheet Fannie Mae MBS, as well as whole mortgage
loans that we own, see “Risk Management—Credit Risk
Management.”
Through assistance to state and local housing finance agencies
(“HFAs”) and pursuant to the temporary credit and
liquidity facilities program that we describe in “Related
Parties” in “Note 1, Summary of Significant
Accounting Policies,” Treasury has purchased participation
interests in temporary credit and liquidity facilities provided
by us and Freddie Mac to the HFAs. These facilities create a
credit and liquidity backstop for the HFAs. Our outstanding
commitments under the temporary credit and liquidity facilities
program totaled $4.1 billion as of March 31, 2010 and
$870 million as of December 31, 2009.
Our total outstanding liquidity commitments to advance funds for
securities backed by multifamily housing revenue bonds totaled
$18.3 billion as of March 31, 2010 and
$15.5 billion as of December 31, 2009. These
commitments require us to advance funds to third parties that
enable them to repurchase tendered bonds or securities that are
unable to be remarketed. Any repurchased securities are pledged
to us to secure funding until the securities are remarketed. We
hold cash and cash equivalents in our cash and other investments
portfolio in excess of these commitments to advance funds
(exclusive of $4.1 billion as of March 31, 2010 and
65
Table of Contents
$870 million as of December 31, 2009, of our
outstanding commitments under the HFA temporary credit and
liquidity facilities program, for which we are not required to
hold excess cash).
As of both March 31, 2010 and December 31, 2009, there
were no liquidity guarantee advances outstanding.
RISK
MANAGEMENT
Our business activities expose us to the following four, often
overlapping, major categories of risk: credit risk, market risk
(including interest rate and liquidity risk), operational risk
and model risk. We seek to manage these risks and mitigate our
losses by using an established risk management framework. Our
risk management framework is intended to provide the basis for
the principles that govern our risk management activities. We
are also subject to a number of other risks that could adversely
impact our business, financial condition, earnings and cash
flow, including legal and reputational risks that may arise due
to a failure to comply with laws, regulations or ethical
standards and codes of conduct applicable to our business
activities and functions. In this section we provide an update
on our management of our major risk categories. For a more
complete discussion of the risks we face and how we manage
credit risk, market risk, operational risk and model risk,
please see “Risk Factors” and
“MD&A—Risk Management” in our 2009
Form 10-K.
Credit
Risk Management
We are generally subject to two types of credit risk: mortgage
credit risk and institutional counterparty credit risk.
Continuing adverse market conditions have resulted in
significant exposure to mortgage and institutional counterparty
credit risk.
Mortgage
Credit Risk Management
Mortgage credit risk is the risk that a borrower will fail 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. 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 portfolio for which we do not provide a guaranty.
Mortgage
Credit Book of Business
Table 33 displays the composition of our entire mortgage credit
book of business as of the periods indicated. Our single-family
mortgage credit book of business accounted for approximately 93%
of our total mortgage credit book of business as of
March 31, 2010 and December 31, 2009. As a result of
our adoption of the new accounting standards, we reflect a
substantial majority of our Fannie Mae MBS as mortgage loans,
which are reported on an actual unpaid principal balance basis
and includes the recognition of unscheduled payments made by
borrowers in the month received. Previously, we recorded these
Fannie Mae MBS in our mortgage credit book of business on a
scheduled basis, which recognized these payments when we remit
payment to the MBS trusts one month after the unscheduled
payments were received. As a result of this timing difference,
we reduced our mortgage credit book of business upon adoption of
the new accounting standards.
The total mortgage credit book of business is not impacted by
our repurchase of delinquent loans as this activity is a
reclassification from loans of consolidated trusts to loans of
Fannie Mae.
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Table of Contents
| Table 33: | Composition of Mortgage Credit Book of Business (1) |
| As of March 31, 2010 | ||||||||||||||||||||||||
| Single-Family | Multifamily | Total | ||||||||||||||||||||||
| Conventional (2) | Government (3) | Conventional (2) | Government (3) | Conventional (2) | Government (3) | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Mortgage assets:
|
||||||||||||||||||||||||
|
Mortgage
loans
(4)
|
$ | 2,782,600 | $ | 52,579 | $ | 166,097 | $ | 560 | $ | 2,948,697 | $ | 53,139 | ||||||||||||
|
Fannie Mae
MBS
(5)
|
7,348 | 1,746 | — | 2 | 7,348 | 1,748 | ||||||||||||||||||
|
Agency mortgage-related
securities
(5)(6)
|
27,437 | 1,253 | — | 13 | 27,437 | 1,266 | ||||||||||||||||||
|
Mortgage revenue
bonds
(5)
|
2,549 | 1,837 | 7,665 | 1,865 | 10,214 | 3,702 | ||||||||||||||||||
|
Other mortgage-related
securities
(5)
|
47,493 | 1,762 | 25,633 | 18 | 73,126 | 1,780 | ||||||||||||||||||
|
Total mortgage assets
|
2,867,427 | 59,177 | 199,395 | 2,458 | 3,066,822 | 61,635 | ||||||||||||||||||
|
Unconsolidated Fannie Mae
MBS
(5)(7)
|
815 | 18,178 | 41 | 1,976 | 856 | 20,154 | ||||||||||||||||||
|
Other credit
guarantees
(8)
|
9,551 | 3,272 | 16,814 | 601 | 26,365 | 3,873 | ||||||||||||||||||
|
Mortgage credit book of business
|
$ | 2,877,793 | $ | 80,627 | $ | 216,250 | $ | 5,035 | $ | 3,094,043 | $ | 85,662 | ||||||||||||
|
Guaranty book of business
|
$ | 2,800,314 | $ | 75,775 | $ | 182,952 | $ | 3,139 | $ | 2,983,266 | $ | 78,914 | ||||||||||||
| As of December 31, 2009 | ||||||||||||||||||||||||
| Single-Family | Multifamily | Total | ||||||||||||||||||||||
| Conventional (2) | Government (3) | Conventional (2) | Government (3) | Conventional (2) | Government (3) | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Mortgage portfolio:
|
||||||||||||||||||||||||
|
Mortgage
loans
(4)
|
$ | 243,730 | $ | 52,399 | $ | 119,829 | $ | 585 | $ | 363,559 | $ | 52,984 | ||||||||||||
|
Fannie Mae
MBS
(5)
|
218,033 | 1,816 | 314 | 82 | 218,347 | 1,898 | ||||||||||||||||||
|
Agency mortgage-related
securities
(5)(6)
|
41,337 | 1,309 | — | 21 | 41,337 | 1,330 | ||||||||||||||||||
|
Mortgage revenue
bonds
(5)
|
2,709 | 2,056 | 7,734 | 1,954 | 10,443 | 4,010 | ||||||||||||||||||
|
Other mortgage-related
securities
(5)
|
47,825 | 1,796 | 25,703 | 20 | 73,528 | 1,816 | ||||||||||||||||||
|
Total mortgage portfolio
|
553,634 | 59,376 | 153,580 | 2,662 | 707,214 | 62,038 | ||||||||||||||||||
|
Fannie Mae MBS held by third
parties
(5)(7)
|
2,370,037 | 15,197 | 46,628 | 927 | 2,416,665 | 16,124 | ||||||||||||||||||
|
Other credit
guarantees
(8)
|
9,873 | 802 | 16,909 | 40 | 26,782 | 842 | ||||||||||||||||||
|
Mortgage credit book of business
|
$ | 2,933,544 | $ | 75,375 | $ | 217,117 | $ | 3,629 | $ | 3,150,661 | $ | 79,004 | ||||||||||||
|
Guaranty book of business
|
$ | 2,841,673 | $ | 70,214 | $ | 183,680 | $ | 1,634 | $ | 3,025,353 | $ | 71,848 | ||||||||||||
| (1) | Based on unpaid principal balance. | |
| (2) | Refers to mortgage loans and mortgage-related securities that are not guaranteed or insured by the U.S. government or any of its agencies. | |
| (3) | Refers to mortgage loans and mortgage-related securities guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies. | |
| (4) | Includes unscheduled borrower principal payments. | |
| (5) | Excludes unscheduled borrower principal payments. | |
| (6) | Consists of mortgage-related securities issued by Freddie Mac and Ginnie Mae. | |
| (7) | The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount. | |
| (8) | Includes single-family and multifamily credit enhancements that we have provided and that are not otherwise reflected in the table. |
67
Table of Contents
Single-Family
Mortgage Credit Risk Management
Our strategy in managing single-family mortgage credit risk
consists of four primary components: (1) our acquisition and
servicing policies and standards, including the use of credit
enhancements; (2) portfolio diversification and monitoring; (3)
management of problem loans; and (4) REO loss management. These
strategies, which we discuss in detail below, may increase our
expenses and may not be effective in reducing our credit-related
expenses or credit losses. We provide information on our
credit-related expenses and credit losses in “Consolidated
Results of Operations—Credit-Related Expenses.”
The credit statistics reported below, unless otherwise noted,
pertain generally to the portion of our single-family guaranty
book of business for which we have access to detailed loan-level
information, which constituted over 99% of our conventional
single-family guaranty book of business as of March 31,
2010 and 98% as of December 31, 2009. See “Risk
Factors” in our 2009
Form 10-K
for a discussion of the risk that one or more parties in a
mortgage transaction engages in fraud and our reliance on lender
representations regarding the accuracy of the characteristics of
loans in our guaranty book of business.
Because we believe we have limited credit exposure on our
government loans, the single-family credit statistics we focus
on and report in the sections below generally relate to our
conventional single-family guaranty book of business, which
represents the substantial majority of our total single-family
guaranty book of business.
We provide information on the performance of non-Fannie Mae
mortgage-related securities held in our portfolio, including the
impairment that we have recognized on these securities, in
“Consolidated Balance Sheet Analysis—Investments in
Mortgage-Related Securities—Investments in Private-Label
Mortgage-Related Securities.”
Single-Family
Acquisition and Servicing Policies and Underwriting
Standards
We monitor both housing and economic market conditions as well
as loan performance, to manage and evaluate our credit risks. We
recently announced several changes to our single-family
acquisition policies and underwriting standards that are
intended to improve the credit quality of mortgage loans
delivered to us, continue our corporate focus on sustainable
homeownership and further reduce our acquisition of higher risk
conventional loan categories including:
| • | Implementation of a Loan Quality Initiative (“LQI”) which is a longer term strategy that will help mortgage loans meet our credit, eligibility, and pricing standards by capturing critical loan data earlier in the loan delivery process. This initiative is intended to reduce lender repurchase requests in the future through improved data integrity and early feedback on some aspects of policy compliance, thereby reducing investor and lender risks. As part of the LQI, we plan to validate certain borrower and property information and collect additional property and appraisal data at the time of delivery of the mortgage loan; | |
| • | Updating our existing quality control standards to require that lenders follow our revised requirements for their quality control plans, reviews and processes, as well as updated requirements for the approval and management of third-party originators. We have also increased our enforcement and monitoring resources to increase lender compliance with these revised standards; | |
| • | Changes to interest-only mortgage loans, including minimum reserve and FICO credit score requirements, lower loan-to-value ratios, and the elimination of interest-only eligibility for certain products, including cash-out refinances, 2- to 4- unit properties and investment properties; |
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Table of Contents
| • | Adjustments to the qualifying interest rate requirements for adjustable-rate mortgage loans with an initial term of five years or less to help increase the probability that borrowers are able to absorb future payment increases; and | |
| • | Elimination of balloon mortgage loans as an eligible product under our standard business. | |
| • | Continuing to provide guidance to assist servicers in implementing the eligibility, underwriting and servicing requirements of HAMP. For example, we implemented changes to require full verification of borrower eligibility prior to offering a trial period plan and issued guidance around income verification options. |
For additional discussion of our acquisition policy,
underwriting standards and use of mortgage insurance as a form
of credit enhancement see “Risk
Management—Single-Family Mortgage Credit Risk
Management” in our 2009
Form 10-K.
For a discussion of our aggregate mortgage insurance coverage as
of March 31, 2010 and December 31, 2009 and the
increase in mortgage insurance rescissions, see “Risk
Management—Institutional Counterparty Credit
Risk—Mortgage Insurers.”
Single-Family
Portfolio Diversification and Monitoring
Our single-family mortgage credit book of business is
diversified based on several factors that influence credit
quality, such as product type, loan characteristics and
geography. We monitor various loan attributes, in conjunction
with housing market and economic conditions, to determine if our
pricing and our 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.
Table 34 presents our conventional single-family business
volumes and our conventional single-family guaranty book of
business for the periods indicated, based on certain key risk
characteristics that we use to evaluate the risk profile and
credit quality of our single-family loans.
| Table 34: | Risk Characteristics of Conventional Single-Family Business Volume and Guaranty Book of Business (1) |
|
Percent of Conventional
|
Percent of Conventional
|
|||||||||||||||
|
Single-Family
|
Single-Family
|
|||||||||||||||
| Business Volume (2) |
Book of
Business
(3)(4)
|
|||||||||||||||
|
For the
|
As of | |||||||||||||||
| Three Months Ended March 31, |
March 31,
|
December 31,
|
||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Original LTV
ratio:
(5)
|
||||||||||||||||
|
<= 60%
|
30 | % | 30 | % | 24 | % | 24 | % | ||||||||
|
60.01% to 70%
|
16 | 18 | 16 | 16 | ||||||||||||
|
70.01% to 80%
|
37 | 42 | 42 | 42 | ||||||||||||
|
80.01% to
90%
(6)
|
9 | 7 | 9 | 9 | ||||||||||||
|
90.01% to
100%
(6)
|
6 | 3 | 9 | 9 | ||||||||||||
|
Greater than
100%
(6)
|
2 | — | * | * | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Weighted average
|
69 | % | 67 | % | 71 | % | 71 | % | ||||||||
|
Average loan amount
|
$ | 224,719 | $ | 218,185 | $ | 153,780 | $ | 153,302 | ||||||||
|
Estimated
mark-to-market
LTV
ratio:
(7)
|
||||||||||||||||
|
<= 60%
|
29 | % | 31 | % | ||||||||||||
|
60.01% to 70%
|
13 | 13 | ||||||||||||||
69
Table of Contents
|
Percent of Conventional
|
Percent of Conventional
|
|||||||||||||||
|
Single-Family
|
Single-Family
|
|||||||||||||||
| Business Volume (2) |
Book of
Business
(3)(4)
|
|||||||||||||||
|
For the
|
As of | |||||||||||||||
| Three Months Ended March 31, |
March 31,
|
December 31,
|
||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
70.01% to 80%
|
18 | 19 | ||||||||||||||
|
80.01% to 90%
|
15 | 14 | ||||||||||||||
|
90.01% to 100%
|
9 | 9 | ||||||||||||||
|
Greater than 100%
|
16 | 14 | ||||||||||||||
|
Total
|
100 | % | 100 | % | ||||||||||||
|
Weighted average
|
76 | % | 75 | % | ||||||||||||
|
Product type:
|
||||||||||||||||
|
Fixed-rate:
(8)
|
||||||||||||||||
|
Long-term
|
72 | % | 86 | % | 76 | % | 75 | % | ||||||||
|
Intermediate-term
|
20 | 13 | 13 | 13 | ||||||||||||
|
Interest-only
|
* | — | 2 | 3 | ||||||||||||
|
Total fixed-rate
|
92 | 99 | 91 | 91 | ||||||||||||
|
Adjustable-rate:
|
||||||||||||||||
|
Interest-only
|
2 | — | 4 | 4 | ||||||||||||
|
Negative-amortizing
|
— | — | 1 | 1 | ||||||||||||
|
Other ARMs
|
6 | 1 | 4 | 4 | ||||||||||||
|
Total adjustable-rate
|
8 | 1 | 9 | 9 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Number of property units:
|
||||||||||||||||
|
1 unit
|
98 | % | 99 | % | 96 | % | 96 | % | ||||||||
|
2-4 units
|
2 | 1 | 4 | 4 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Property type:
|
||||||||||||||||
|
Single-family homes
|
90 | % | 93 | % | 91 | % | 91 | % | ||||||||
|
Condo/Co-op
|
10 | 7 | 9 | 9 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Occupancy type:
|
||||||||||||||||
|
Primary residence
|
90 | % | 94 | % | 90 | % | 90 | % | ||||||||
|
Second/vacation home
|
5 | 4 | 5 | 4 | ||||||||||||
|
Investor
|
5 | 2 | 5 | 6 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
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Table of Contents
|
Percent of Conventional
|
Percent of Conventional
|
|||||||||||||||
|
Single-Family
|
Single-Family
|
|||||||||||||||
| Business Volume (2) |
Book of
Business
(3)(4)
|
|||||||||||||||
|
For the
|
As of | |||||||||||||||
| Three Months Ended March 31, |
March 31,
|
December 31,
|
||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
FICO credit score:
|
||||||||||||||||
|
< 620
|
1 | % | * | % | 4 | % | 4 | % | ||||||||
|
620 to < 660
|
2 | 2 | 8 | 8 | ||||||||||||
|
660 to < 700
|
8 | 7 | 16 | 16 | ||||||||||||
|
700 to < 740
|
18 | 17 | 22 | 22 | ||||||||||||
|
>= 740
|
71 | 74 | 50 | 50 | ||||||||||||
|
Not available
|
* | — | * | * | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Weighted average
|
758 | 761 | 731 | 730 | ||||||||||||
|
Loan purpose:
|
||||||||||||||||
|
Purchase
|
22 | % | 16 | % | 35 | % | 36 | % | ||||||||
|
Cash-out refinance
|
20 | 31 | 31 | 31 | ||||||||||||
|
Other refinance
|
58 | 53 | 34 | 33 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Geographic
concentration:
(9)
|
||||||||||||||||
|
Midwest
|
15 | % | 19 | % | 16 | % | 16 | % | ||||||||
|
Northeast
|
21 | 17 | 19 | 19 | ||||||||||||
|
Southeast
|
18 | 21 | 24 | 24 | ||||||||||||
|
Southwest
|
14 | 16 | 15 | 15 | ||||||||||||
|
West
|
32 | 27 | 26 | 26 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Origination year:
|
||||||||||||||||
|
<= 2000
|
2 | % | 2 | % | ||||||||||||
|
2001
|
1 | 1 | ||||||||||||||
|
2002
|
4 | 4 | ||||||||||||||
|
2003
|
14 | 14 | ||||||||||||||
|
2004
|
7 | 7 | ||||||||||||||
|
2005
|
10 | 10 | ||||||||||||||
|
2006
|
10 | 11 | ||||||||||||||
|
2007
|
14 | 15 | ||||||||||||||
|
2008
|
12 | 13 | ||||||||||||||
|
2009
|
24 | 23 | ||||||||||||||
|
2010
|
2 | — | ||||||||||||||
|
Total
|
100 | % | 100 | % | ||||||||||||
| * | Represents less than 0.5% of conventional single-family business volume or book of business. | |
| (1) | We reflect second lien loans in the original LTV ratio calculation only when we own both the first and second mortgage liens or we own only the second mortgage lien. Second lien mortgage loans represented less than 0.5% of our conventional single-family guaranty book of business as of March 31, 2010 and December 31, 2009. Second lien loans held by third parties are not reflected in the original LTV or mark-to-market LTV ratios in this table. |
71
Table of Contents
| (2) | Percentages calculated based on unpaid principal balance of loans at time of acquisition. Single-family business volume refers to both single-family mortgage loans we purchase for our mortgage portfolio and single-family mortgage loans we securitize into Fannie Mae MBS. | |
| (3) | Percentages calculated based on unpaid principal balance of loans as of the end of each period. | |
| (4) | Our conventional single-family guaranty book of business includes jumbo-conforming and high-balance loans that represented approximately 2.8% of our conventional single-family guaranty book of business as of March 31, 2010 and 2.4% as of December 31, 2009. See “Business—Our Charter and Regulation of Our Activities—Charter Act—Loan Standards” of our 2009 Form 10-K for additional information on our loan limits. | |
| (5) | The original LTV ratio generally is based on the original unpaid principal balance of the loan divided by the appraised property value reported to us at the time of acquisition of the loan. Excludes loans for which this information is not readily available. | |
| (6) | We purchase loans with original LTV ratios above 80% to fulfill our mission to serve the primary mortgage market and provide liquidity to the housing system. Except as permitted under HARP, our charter generally requires primary mortgage insurance or other credit enhancement for loans that we acquire that have a LTV ratio over 80%. | |
| (7) | The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of each reported period divided by the estimated current value of the property, which we calculate using an internal valuation model that estimates periodic changes in home value. Excludes loans for which this information is not readily available. | |
| (8) | Long-term fixed-rate consists of mortgage loans with maturities greater than 15 years, while intermediate-term fixed-rate has maturities equal to or less than 15 years. Loans with interest-only terms are included in the interest-only category regardless of their maturities. | |
| (9) | Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD and WI. Northeast includes CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI, VT and VI. Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA and WV. Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX and UT. West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY. |
Credit
Profile Summary
During 2008 and early 2009 we made changes in our pricing and
eligibility standards that were intended to promote sustainable
homeownership and stability in the housing market, and that have
resulted in the loans we have acquired since their
implementation having, on average, a strong risk profile. The
single-family loans we purchased or guaranteed in the first
quarter of 2010 had an average original LTV ratio of 69%, an
average FICO credit score of 758, and a product mix with a
significant percentage of fully amortizing fixed-rate mortgage
loans. We expect that these loans may have relatively slow
prepayment speeds, and therefore remain in our book of business
for an extended time, due to historically low interest rates
during the first quarter of 2010, which resulted in our first
quarter 2010 acquisitions having a weighted average interest
rate of 4.9%. Our acquisition of investor loans increased
steadily during 2009 and through the first quarter of 2010 as
investors have returned to markets where lower home prices
present good opportunities. Whether our acquisitions for all of
2010 exhibit the same credit profile as our recent acquisitions
will depend on many factors, including our future pricing and
eligibility standards, our future objectives, mortgage
insurers’ eligibility standards, our future volume of Refi
Plus acquisitions, which typically include higher LTV ratios and
lower FICO credit scores, and future activity by our
competitors, including FHA and Freddie Mac. Improvements in the
credit profile of our acquisitions since January 1, 2009
reflect changes we made in our pricing and eligibility
standards, as well as changes in the eligibility standards of
mortgage insurers. In addition, FHA’s role as the
lower-cost option, or in some cases the only option, for loans
with higher LTV ratios further reduced our acquisition of these
types of loans. We expect the ultimate performance of all our
loans will be affected by macroeconomic trends, including
unemployment, the economy, and home prices.
The credit profile of our first quarter 2010 acquisitions was
further enhanced by a significant percentage of our acquisitions
representing refinanced loans, which generally have a stronger
credit profile because refinancing indicates the borrower’s
ability to make their mortgage payment and desire to maintain
homeownership. Refinancings represented 78% of our first quarter
2010 acquisitions. We also saw increases in our acquisition of
adjustable-rate mortgage loans with initial terms of five years
or greater and intermediate-term fixed-rate
72
Table of Contents
mortgage loans that was primarily driven by borrowers
refinancing into a lower monthly payment or shorter term
mortgage option. While refinanced loans have historically tended
to perform better than loans used for initial home purchase,
HARP loans may not ultimately perform as strongly as traditional
refinanced loans because these loans, which relate to
non-delinquent Fannie Mae mortgages that were refinanced, may
have original LTV ratios of up to 125% and lower FICO credit
scores than traditional refinanced loans. Our regulator granted
our request for an extension of these flexibilities for loans
originated through June 2011.
The prolonged and severe decline in home prices has contributed
to an increase in the overall estimated weighted average
mark-to-market
LTV ratio of our conventional single-family guaranty book of
business to 76% as of March 31, 2010, from 75% as of
December 31, 2009. The portion of our conventional
single-family guaranty book of business with an estimated
mark-to-market
LTV ratio greater than 100% increased to 16% as of
March 31, 2010, from 14% as of December 31, 2009. If
home prices decline, more loans will have
mark-to-market
LTV ratios greater than 100%, which increases the risk of
delinquency and default.
Our exposure, as discussed in this paragraph, to Alt-A and
subprime loans included in our single-family guaranty book of
business does not include (1) our investments in
private-label mortgage-related securities backed by Alt-A and
subprime loans or (2) resecuritizations, or wraps, of
private-label mortgage-related securities backed by Alt-A
mortgage loans that we have guaranteed. As a result of our
decision to discontinue the purchase of newly originated Alt-A
loans effective January 1, 2009, we expect our acquisitions
of Alt-A mortgage loans to continue to be minimal in future
periods and the percentage of the book of business attributable
to Alt-A to decrease over time. While we are not currently
acquiring newly originated loans classified as Alt-A or subprime
loans, we have classified loans as Alt-A if the lender that
delivered the mortgage loan to us classified the loan as Alt-A
based on documentation or other features or as subprime if the
mortgage loan was originated by a lender specializing in
subprime business or by subprime divisions of large lenders. We
apply these classification criteria in order to determine our
Alt-A and subprime loan exposures; however, we have other loans
with some features that are similar to Alt-A and subprime loans
that we have not classified as Alt-A or subprime because they do
not meet our classification criteria. The unpaid principal
balance of Alt-A and subprime loans included in our
single-family guaranty book of business of $245.5 billion
as of March 31, 2010, represented approximately 9% of our
conventional single-family guaranty book of business.
The outstanding unpaid principal balance of reverse mortgages
included in our mortgage portfolio was $50.5 billion as of
March 31, 2010 and $50.2 billion as of
December 31, 2009. The majority of these loans are home
equity conversion mortgages insured by the federal government
through the FHA. Our market share of new reverse mortgage
acquisitions was approximately 5% in the first quarter of 2010
and 90% in the first quarter of 2009. The decrease in our market
share was a result of changes in our pricing strategy and market
conditions. Because home equity conversion mortgages are insured
by the federal government, we believe that we have limited
exposure to losses on these loans, although home price declines
and a weak housing market have also affected the performance of
these loans.
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 reduce the severity of the
losses we incur. We believe that reducing delays and
implementing solutions that can be executed in a timely manner
increase the likelihood that our problem loan management
strategies will be successful in avoiding a default or
minimizing severity. Our home retention solutions are intended
to help borrowers stay in their homes and include loan
modifications, repayment plans, HomeSaver Advance Loans and
forbearances. Because we believe our home retention solutions
can be most effective in preventing defaults when completed at
an early stage in delinquency, it is important to work with
borrowers to complete these solutions as early in their
delinquency as feasible. If we are unable to provide a viable
home retention solution for a problem loan, we seek to offer
foreclosure alternatives, primarily preforeclosure sales and
deeds-in-lieu
of foreclosure. These alternatives
73
Table of Contents
reduce the severity of our loss resulting from a borrower’s
default while benefitting the borrower by permitting them to
avoid going through a foreclosure.
In the following section, we present statistics on our problem
loans, describe specific efforts undertaken to manage these
loans and prevent foreclosures and provide metrics regarding the
performance of our loan workout activities. We generally define
single-family problem loans as loans that have been identified
as being at imminent risk of payment default; early stage
delinquent loans that are either 30 days or 60 days
past due; and seriously delinquent loans, which are loans that
are three or more monthly payments past due or in the
foreclosure process. Unless otherwise noted, single-family
delinquency data is calculated based on number of loans. We
include conventional single-family loans that we own and that
back Fannie Mae MBS in the calculation of the single-family
delinquency rate. Percentage of book 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
The following table displays the delinquency status of loans in
our conventional single-family guaranty book of business (based
on number of loans) as of the periods indicated.
| Table 35: | Delinquency Status of Conventional Single-Family Loans |
| As of | ||||||||||||
|
March 31,
|
December 31,
|
March 31,
|
||||||||||
| 2010 | 2009 | 2009 | ||||||||||
|
Delinquency status:
|
||||||||||||
|
30 to 59 days delinquent
|
2.09 | % | 2.46 | % | 2.19 | % | ||||||
|
60 to 89 days delinquent
|
0.90 | 1.07 | 0.94 | |||||||||
|
Seriously delinquent
|
5.47 | 5.38 | 3.15 | |||||||||
|
Percentage of seriously delinquent loans that have been
delinquent for more than 180 days
|
62.44 | % | 57.22 | % | 46.03 | % | ||||||
As of March 31, 2010, while the number of early stage
delinquencies, loans that are less than three monthly payments
past due, continues to fluctuate between the 30 and 60 day
categories, their total decreased from December 31, 2009.
As a result, the potential number of loans at risk of becoming
seriously delinquent has diminished. During the first quarter of
2010, the percentage of our conventional single-family loans
which were seriously delinquent increased slightly, as compared
with December 31, 2009. As we work with our servicers to
reduce delays in determining and executing the appropriate
workout solution, including more modifications and foreclosure
alternatives, we have seen a moderation in the growth of the
percentage of loans which are seriously delinquent. Further, we
historically have observed seasonal trends in delinquency
patterns in the first quarter of the year. The period of time
that loans are remaining seriously delinquent continues to
remain extended as the factors present during 2009 were
relatively unchanged during the first quarter of 2010.
Table 36 provides a comparison, by geographic region and by
loans with and without credit enhancement, of the serious
delinquency rates as of the periods indicated for conventional
single-family loans in our single-family guaranty book of
business.
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Table of Contents
| Table 36: | Serious Delinquency Rates |
| March 31, 2010 | December 31, 2009 | March 31, 2009 | ||||||||||||||||||||||
|
Percentage of
|
Serious
|
Percentage of
|
Serious
|
Percentage of
|
Serious
|
|||||||||||||||||||
|
Book
|
Delinquency
|
Book
|
Delinquency
|
Book
|
Delinquency
|
|||||||||||||||||||
| Outstanding | Rate | Outstanding | Rate | Outstanding | Rate | |||||||||||||||||||
|
Conventional single-family delinquency rates by geographic
region:
(1)
|
||||||||||||||||||||||||
|
Midwest
|
16 | % | 4.96 | % | 16 | % | 4.97 | % | 16 | % | 3.02 | % | ||||||||||||
|
Northeast
|
19 | 4.74 | 19 | 4.53 | 18 | 2.53 | ||||||||||||||||||
|
Southeast
|
24 | 7.22 | 24 | 7.06 | 25 | 4.24 | ||||||||||||||||||
|
Southwest
|
15 | 4.17 | 15 | 4.19 | 16 | 2.45 | ||||||||||||||||||
|
West
|
26 | 5.55 | 26 | 5.45 | 25 | 3.06 | ||||||||||||||||||
|
Total conventional single- family loans
|
100 | % | 5.47 | % | 100 | % | 5.38 | % | 100 | % | 3.15 | % | ||||||||||||
|
Conventional single-family
|
||||||||||||||||||||||||
|
Credit enhanced
|
17 | % | 13.29 | % | 18 | % | 13.51 | % | 20 | % | 8.17 | % | ||||||||||||
|
Non-credit enhanced
|
83 | 3.90 | 82 | 3.67 | 80 | 1.91 | ||||||||||||||||||
|
Total conventional single-family loans
|
100 | % | 5.47 | % | 100 | % | 5.38 | % | 100 | % | 3.15 | % | ||||||||||||
| (1) | See footnote 9 to “Table 34: Risk Characteristics of Conventional Single - Family Business Volume and Guaranty Book of Business” for states included in each geographic region. |
The continued negative trends in the current economic
environment, such as the sustained weakness in the housing
market and high unemployment, have adversely affected the
serious delinquency rates across our conventional single-family
guaranty book of business. In addition, certain states, certain
higher risk loan categories, such as Alt-A loans, subprime
loans, loans with higher
mark-to-market
LTVs, and our 2006 and 2007 loan vintages continue to exhibit
higher than average delinquency rates and account for a
disproportionate share of our credit losses. States in the
Midwest have experienced prolonged economic weakness and
California, Florida, Arizona and Nevada have experienced the
most significant declines in home prices coupled with
unemployment rates that remain elevated.
Table 37 presents the conventional serious delinquency rates and
other financial information for our single-family loans with
some of these higher risk characteristics as of the periods
indicated. The reported categories are not mutually exclusive.
See “Consolidated Results of Operations—Credit-Related
Expenses—Credit Loss Performance Metrics” for
information on the portion of our credit losses attributable to
Alt-A loans and certain other higher risk loan categories.
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Table of Contents
| Table 37: | Conventional Single-Family Serious Delinquency Rate Concentration Analysis |
| As of | ||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2010 | December 31, 2009 | March 31, 2009 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Estimated
|
Estimated
|
Estimated
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Mark-to-
|
Mark-to-
|
Mark-to-
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Unpaid
|
Percentage
|
Serious
|
Market
|
Unpaid
|
Percentage
|
Serious
|
Market
|
Unpaid
|
Percentage
|
Serious
|
Market
|
|||||||||||||||||||||||||||||||||||||
|
Principal
|
of Book
|
Delinquency
|
LTV
|
Principal
|
of Book
|
Delinquency
|
LTV
|
Principal
|
of Book
|
Delinquency
|
LTV
|
|||||||||||||||||||||||||||||||||||||
| Balance | Outstanding | Rate | Ratio (1) | Balance | Outstanding | Rate | Ratio (1) | Balance | Outstanding | Rate | Ratio (1) | |||||||||||||||||||||||||||||||||||||
|
States:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Arizona
|
$ | 74,831 | 3 | % | 8.76 | % | 103 | % | $ | 76,073 | 3 | % | 8.80 | % | 100 | % | $ | 77,194 | 3 | % | 5.00 | % | 96 | % | ||||||||||||||||||||||||
|
California
|
492,294 | 17 | 5.72 | 77 | 484,923 | 17 | 5.73 | 77 | 441,470 | 16 | 3.33 | 75 | ||||||||||||||||||||||||||||||||||||
|
Florida
|
192,724 | 7 | 13.27 | 103 | 195,309 | 7 | 12.82 | 100 | 198,728 | 7 | 8.07 | 95 | ||||||||||||||||||||||||||||||||||||
|
Nevada
|
34,166 | 1 | 13.95 | 130 | 34,657 | 1 | 13.00 | 123 | 35,586 | 1 | 7.05 | 107 | ||||||||||||||||||||||||||||||||||||
|
Select Midwest
States
(2)
|
302,017 | 11 | 5.65 | 80 | 304,147 | 11 | 5.62 | 77 | 306,856 | 11 | 3.36 | 76 | ||||||||||||||||||||||||||||||||||||
|
All other states
|
1,701,543 | 61 | 4.19 | 70 | 1,701,379 | 61 | 4.11 | 69 | 1,650,796 | 62 | 2.34 | 68 | ||||||||||||||||||||||||||||||||||||
|
Product type:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Alt-A
|
238,325 | 9 | 16.22 | 94 | 248,311 | 9 | 15.63 | 92 | 280,371 | 10 | 9.54 | 86 | ||||||||||||||||||||||||||||||||||||
|
Subprime
|
7,179 | * | 31.47 | 100 | 7,364 | * | 30.68 | 97 | 8,172 | * | 17.95 | 91 | ||||||||||||||||||||||||||||||||||||
|
Vintages:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
2006
|
277,752 | 10 | 13.42 | 100 | 292,184 | 11 | 12.87 | 97 | 348,243 | 13 | 6.97 | 91 | ||||||||||||||||||||||||||||||||||||
|
2007
|
401,782 | 14 | 14.85 | 99 | 422,956 | 15 | 14.06 | 96 | 502,444 | 19 | 6.77 | 91 | ||||||||||||||||||||||||||||||||||||
|
All other vintages
|
2,118,041 | 76 | 3.12 | 68 | 2,081,348 | 74 | 3.08 | 67 | 1,859,943 | 68 | 1.87 | 65 | ||||||||||||||||||||||||||||||||||||
|
Estimated
mark-to-market
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
LTV ratio:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Greater than 100%
|
439,327 | 16 | 21.79 | 129 | 403,443 | 14 | 22.09 | 128 | 384,624 | 14 | 13.46 | 122 | ||||||||||||||||||||||||||||||||||||
|
Select combined risk characteristics Original LTV ratio >
90% and FICO score < 620
|
23,395 | 1 | 26.94 | 106 | 23,966 | 1 | 27.96 | 104 | 26,304 | 1 | 17.84 | 101 | ||||||||||||||||||||||||||||||||||||
| * | Percentage is less than 0.5%. | |
| (1) | Second lien loans held by third parties are not included in the calculation of the estimated mark-to-market LTV ratios. | |
| (2) | Consists of Illinois, Indiana, Michigan and Ohio. |
Management
of Problem Loans and Loan Workout Metrics
If a borrower does not make required payments, we work with the
servicers of our loans to offer workout solutions to minimize
the likelihood of foreclosure as well as the severity of loss.
We refer to actions taken by servicers with borrowers to resolve
the problem of existing or potential delinquent loan payments as
“workouts.” Our loan workouts reflect our various
types of home retention strategies. During 2009 and continuing
through the first quarter of 2010, the prolonged economic stress
and high levels of unemployment hindered the efforts of many
delinquent borrowers to bring their loans current. If the
servicer cannot provide a viable home retention solution, the
servicer will continue to work with the borrower to avoid
foreclosure. We require that our servicers evaluate all problem
loans under HAMP first before considering other workout
alternatives. If it is determined that a borrower is not
eligible for a modification under HAMP, our servicers are
required to exhaust all other workout alternatives before
proceeding to foreclosure. We require our single-family
servicers to pursue various resolutions of problem loans as an
alternative to foreclosure, and we continue to work with our
servicers to implement our foreclosure prevention initiatives
effectively and to find ways to enhance our workout protocols
and their workflow processes. However, the existence of a second
lien
76
Table of Contents
may limit our ability to provide borrowers with loan workout
options, including those as part of our foreclosure prevention
efforts. When appropriate, we seek to move to foreclosure as
expeditiously as possible.
Borrowers have become increasingly in need of a workout solution
prior to the resolution of the hardships that are causing their
mortgage delinquency. In response, we completed more loan
modifications during the first quarter of 2010 that are
concentrated on lowering or deferring the borrowers’
monthly mortgage payments for a predetermined period of time to
allow borrowers to work through their hardships. Table 38
provides statistics on our single-family loan workouts, by type,
for periods indicated. These statistics include loan
modifications completed under HAMP but do not include trial
modifications under HAMP or repayment and forbearance plans that
have been initiated but not completed.
| Table 38: | Statistics on Single-Family Loan Workouts |
|
For the
|
For The
|
For the
|
||||||||||||||||||||||
|
Three Months Ended
|
Year Ended
|
Three Months Ended
|
||||||||||||||||||||||
| March 31, 2010 | December 31, 2009 | March 31, 2009 | ||||||||||||||||||||||
|
Unpaid
|
Unpaid
|
Unpaid
|
||||||||||||||||||||||
|
Principal
|
Number
|
Principal
|
Number
|
Principal
|
Number
|
|||||||||||||||||||
| Balance | of Loans | Balance | of Loans | Balance | of Loans | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Home retention strategies:
|
||||||||||||||||||||||||
|
Modifications
|
$ | 19,005 | 93,756 | $ | 18,702 | 98,575 | $ | 2,311 | 12,446 | |||||||||||||||
|
Repayment plans and forbearances completed
|
1,137 | 8,682 | 2,930 | 22,948 | 932 | 7,445 | ||||||||||||||||||
|
HomeSaver Advance first-lien loans
|
178 | 2,588 | 6,057 | 39,199 | 3,257 | 20,431 | ||||||||||||||||||
| $ | 20,320 | 105,026 | $ | 27,689 | 160,722 | $ | 6,500 | 40,322 | ||||||||||||||||
|
Foreclosure alternatives:
|
||||||||||||||||||||||||
|
Preforeclosure sales
|
$ | 3,817 | 16,457 | $ | 8,457 | 36,968 | $ | 1,244 | 5,457 | |||||||||||||||
|
Deeds-in-lieu
of foreclosure
|
158 | 869 | 491 | 2,649 | 100 | 514 | ||||||||||||||||||
| $ | 3,975 | 17,326 | $ | 8,948 | 39,617 | $ | 1,344 | 5,971 | ||||||||||||||||
|
Total loan workouts
|
$ | 24,295 | 122,352 | $ | 36,637 | 200,339 | $ | 7,844 | 46,293 | |||||||||||||||
|
Loan workouts as a percentage of single-family guaranty book of
business
(1)
|
3.38 | % | 2.68 | % | 1.26 | % | 1.10 | % | 1.11 | % | 1.02 | % | ||||||||||||
| (1) | Calculated based on annualized loan workouts during the period as a percentage of our single-family guaranty book of business as of the end of the period. |
We increased the level of workout volume in the first quarter of
2010 compared with the first quarter of 2009, through workouts
initiated through our home retention and foreclosure prevention
efforts. Loan modifications were over seven times larger in the
first quarter of 2010 from the volumes in the first quarter of
2009 and nearly equal the volumes for the full year 2009.
However, as the number of borrowers who were experiencing
financial difficulty increased and a significant number of trial
modifications were completed and become permanent HAMP
modifications. HomeSaver Advance workout volume continues to
decline in 2010 as a result of more borrowers facing permanent
hardships as well as our requirement that all potential loan
workouts first be evaluated under HAMP before being considered
for other alternatives. However, we have continued to use this
alternative in limited situations when it is strategically
favorable. We also agreed to an increasing number of
preforeclosure sales and accepted a higher number of
deeds-in-lieu
of foreclosure during the first quarter of 2010 as these are
favorable solutions for a growing number of borrowers who were
adversely affected by the weak economy.
Because we did not begin implementing HAMP until March 2009, the
workouts and loan modifications performed during the first
quarter of 2009 were not made under HAMP; during the first
quarter of 2010, slightly more than half of our loan
modifications were completed under HAMP. During the first
quarter of 2010, we initiated approximately 92,000 trial
modifications under HAMP, along with other types of loan
77
Table of Contents
modifications, repayment plans and forbearance. It is difficult
to predict how many of these trial modifications and initiated
plans will be completed. We expect to increase the number of
loan workouts during 2010, including modifications both under
HAMP and outside the program. We also expect to increase
foreclosure alternatives in those instances where borrowers are
unable to remain in their homes.
We remain focused on our goals to minimize our credit losses and
help borrowers stay in their homes and we expect to continue to
look for additional solutions to help borrowers stay in their
homes and avoid foreclosure. As such, we recently announced an
Alternative
Modification
tm
option for Fannie Mae borrowers who were eligible for and
accepted a HAMP trial modification plan, made their required
payments during their trial period, but were subsequently denied
a permanent modification because they were unable to demonstrate
compliance with the eligibility requirements for a permanent
modification under HAMP. In many cases, these borrowers
qualified for a HAMP trial modification based on verbal
information and, upon verification of their income, it was
discovered that their income was either too high or too low
relative to their monthly mortgage payment for them to meet the
program’s requirements. Alternative Modifications are
available only for borrowers who were in a HAMP trial
modification that was initiated by March 1, 2010.
Table 39 displays the types of loan modifications (HAMP and
non-HAMP) provided to borrowers during the first quarter of 2010
and during 2009.
| Table 39: | Loan Modification Profile |
|
For the
|
For the
|
|||||||
|
Three Months Ended
|
Year Ended
|
|||||||
| March 31, 2010 | December 31, 2009 | |||||||
|
Term extension, interest rate reduction, or combination of
both
(1)
|
90 | % | 93 | % | ||||
|
Initial reduction in monthly
payment
(2)
|
89 | 87 | ||||||
|
Estimated
mark-to-market
LTV ratio > 100%
|
54 | 47 | ||||||
|
Troubled debt restructurings
|
96 | 92 | ||||||
| (1) | Reported statistics for term extension, interest rate reduction or the combination include subprime adjustable-rate mortgage loans that have been modified to a fixed-rate loan. | |
| (2) | These modification statistics do not include subprime adjustable-rate mortgage loans that were modified to a fixed-rate loan and were current at the time of the modification. |
The vast majority of our loan modifications during 2009 and the
first quarter of 2010 were designed to help distressed borrowers
by reducing the borrower’s monthly principal and interest
payment through an extension of the loan term, a reduction in
the interest rate, or a combination of both.
A significant portion of our modifications pertain to loans with
a
mark-to-market
LTV ratio greater than 100% because these borrowers are
typically unable to sell their homes as their mortgage
obligation is greater than the value of their homes. As of
March 31, 2010, the serious delinquency rate for loans with
a
mark-to-market
LTV ratio greater than 100% was 22%, compared with our overall
average single-family serious delinquency rate of 5.47%.
Approximately 47% of loans modified during the first nine months
of 2009 were current or had paid off as of six months following
the loan modification date. In comparison, 37% of loans modified
during the first nine months of 2008 were current or had paid
off as of six months following the loan modification date. As we
have focused our efforts on distressed borrowers who are
experiencing current economic hardship, the short term
performance of our workouts may not be indicative of long term
performance. We believe the performance of our workouts will be
highly dependent on economic factors, such as unemployment rates
and home prices.
There is significant uncertainty regarding the ultimate long
term success of our current modification efforts because of the
pressures on borrowers and household wealth and high
unemployment. Modifications, even
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those with reduced monthly payments, may also not be sufficient
to help borrowers with second liens and other significant
non-mortgage debt obligations. If a borrower defaults on a loan
modification, we require our servicer to work again with the
borrower to cure the modified loan, or if that is not feasible,
evaluate the borrower for any other available foreclosure
prevention alternatives prior to commencing foreclosure
proceedings. If a borrower defaults on a loan modification under
HAMP, they are not eligible for another HAMP modification. FHFA,
other agencies of the U.S. government or Congress may ask
us to undertake new initiatives to support the housing and
mortgage markets should our current modification efforts
ultimately not perform in a manner that results in the
stabilization of these markets.
REO
Management
Foreclosure and REO activity affect the level of credit losses.
Table 40 compares our foreclosure activity, by region, for the
periods indicated. Regional REO acquisition and charge-off
trends generally follow a pattern that is similar to, but lags,
that of regional delinquency trends.
Table
40: Single-Family Foreclosed Properties
| For the Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Single-family foreclosed properties (number of properties):
|
||||||||
|
Beginning of period inventory of single-family foreclosed
properties
(REO)
(1)
|
86,155 | 63,538 | ||||||
|
Acquisitions by geographic
area:
(2)
|
||||||||
|
Midwest
|
15,095 | 5,974 | ||||||
|
Northeast
|
3,590 | 1,393 | ||||||
|
Southeast
|
17,748 | 6,436 | ||||||
|
Southwest
|
12,882 | 5,764 | ||||||
|
West
|
12,614 | 5,807 | ||||||
|
Total properties acquired through foreclosure
|
61,929 | 25,374 | ||||||
|
Dispositions of REO
|
(38,095 | ) | (26,541 | ) | ||||
|
End of period inventory of single-family foreclosed properties
(REO)
(1)
|
109,989 | 62,371 | ||||||
|
Carrying value of single-family foreclosed properties (dollars
in
millions)
(3)
|
$ | 11,423 | $ | 6,215 | ||||
|
Single-family foreclosure
rate
(4)
|
1.36 | % | 0.55 | % | ||||
| (1) | Includes acquisitions through deeds-in-lieu of foreclosure. | |
| (2) | See footnote 9 to “Table 34: Risk Characteristics of Conventional Single-Family Business Volume and Guaranty Book of Business” for states included in each geographic region. | |
| (3) | Excludes foreclosed property claims receivables, which are reported in our consolidated balance sheets as a component of “Acquired property, net.” | |
| (4) | Estimated based on annualized total number of properties acquired through foreclosure as a percentage of the total number of loans in our conventional single-family guaranty book of business as of the end of each respective period. |
Despite the increase in our foreclosure rate during the first
quarter of 2010, foreclosure levels were lower than what they
otherwise would have been due to our directive to servicers to
delay foreclosure sales until the loan servicer verifies that
the borrower is ineligible for a HAMP modification and that all
other foreclosure prevention alternatives have been exhausted.
Additionally, foreclosure levels during the first half of 2009
were affected because of the foreclosure moratoria. The
continued weak economy and high unemployment rates, as well as
the prolonged decline in home prices on a national basis,
continue to result in an increase in the percentage of our
mortgage loans that transition from delinquent to foreclosure
status and significantly reduced the values of our foreclosed
single-family properties. Further, we have seen an increase in
the percentage of our properties that we are unable to market
for sale in the first quarter of 2010 compared with the first
quarter of 2009. The most common reasons for our inability to
market properties for sale are:
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(1) properties are within the period during which state law
allows the original owner to redeem the property by paying the
past due balance; (2) properties are still occupied and the
eviction process is not yet complete; or (3) properties are
being repaired. As we are unable to market a higher portion of
our inventory, it slows the pace at which we can dispose of our
properties.
As shown in Table 41 we have experienced a disproportionate
share of defaults, particularly within certain states that have
had significant home price depreciation and Alt-A loans.
Table
41: Single-Family Acquired Property Concentration
Analysis
| For the Three Months Ended | ||||||||||||||||
| As of | March 31, 2010 | March 31, 2009 | ||||||||||||||
| March 31, 2010 | December 31, 2009 |
Percentage of
|
Percentage of
|
|||||||||||||
|
Percentage of
|
Percentage of
|
Properties
|
Properties
|
|||||||||||||
|
Book
|
Book
|
Acquired
|
Acquired
|
|||||||||||||
| Outstanding (1) | Outstanding (1) | by Foreclosure (2) | by Foreclosure (2) | |||||||||||||
|
States:
|
||||||||||||||||
|
Arizona, California, Florida and Nevada
|
28 | % | 28 | % | 36 | % | 36 | % | ||||||||
|
Illinois, Indiana, Michigan and Ohio
|
11 | 11 | 19 | 18 | ||||||||||||
| (1) | Percentage calculated based on unpaid principal balance as of the end of each period. | |
| (2) | Calculated based on the number of properties acquired through foreclosure during the period divided by the total number of properties acquired through foreclosure. |
Although we have expanded our loan workout initiatives to keep
borrowers in their homes, we expect our foreclosures to increase
during 2010 as a result of the adverse impact that the weak
economy and high unemployment have had and are expected to have
on the financial condition of borrowers.
Multifamily
Mortgage Credit Risk Management
The credit risk profile of our multifamily mortgage credit book
of business is influenced by: the structure of the financing;
the type and location of the property; the condition and value
of the property; the financial strength of the borrower and
lender; market and
sub-market
trends and growth; and the current and anticipated cash flows
from the property. These and other factors affect both the
amount of expected credit loss on a given loan and the
sensitivity of that loss to changes in the economic environment.
We provide information on our credit-related expenses and credit
losses in “Consolidated Results of
Operations—Credit-Related Expenses.”
While our multifamily mortgage credit book of business includes
all of our multifamily mortgage-related assets, both on-and
off-balance sheet, our guaranty book of business excludes
non-Fannie Mae multifamily mortgage-related securities held in
our portfolio for which we do not provide a guaranty. Our
multifamily guaranty book of business consists of: multifamily
mortgage loans held in our mortgage portfolio; Fannie Mae MBS
held in our portfolio or by third parties; and other credit
enhancements that we provide on mortgage assets. The following
credit risk management discussion pertains to our multifamily
guaranty book of business.
The credit statistics reported below, unless otherwise noted,
pertain only to a specific portion of our multifamily guaranty
book of business for which we have access to detailed loan-level
information, which constituted over 99% and 98% of our total
multifamily guaranty book as of March 31, 2010 and
December 31, 2009.
See “Risk Factors” in our 2009
Form 10-K
for a discussion of the risk due to our reliance on lender
representations regarding the accuracy of the characteristics of
loans in our guaranty book of business.
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Multifamily
Acquisition Policy and Underwriting Standards
Our HCD business, in conjunction with our Enterprise Risk
Management division, is responsible for pricing and managing the
credit risk on multifamily mortgage loans we purchase and on
Fannie Mae MBS backed by multifamily loans (whether held in our
portfolio or held by third parties). Our primary multifamily
delivery channel is the Delegated Underwriting and Servicing, or
DUS
®
,
program, which is comprised of multiple lenders that span the
spectrum from large sophisticated banks to smaller independent
multifamily lenders. Multifamily loans that we purchase or that
back Fannie Mae MBS are either underwritten by a Fannie
Mae-approved lender or subject to our underwriting review prior
to closing. Loans delivered to us by DUS lenders and their
affiliates represented approximately 83% of our multifamily
guaranty book of business as of March 31, 2010 compared
with 81% as of December 31, 2009.
We use various types of credit enhancement arrangements for our
multifamily loans, including lender risk sharing, lender
repurchase agreements, pool insurance, subordinated
participations in mortgage loans or structured pools, cash and
letter of credit collateral agreements, and
cross-collateralization/cross-default provisions. The most
prevalent form of credit enhancement on multifamily loans is
lender risk sharing. Lenders in the DUS program typically share
in loan-level risk in the following ways: (1) they bear
losses up to the first 5% of unpaid principal balance of the
loan and share in remaining losses up to a prescribed limit; or
(2) they agree to share with us up to one-third of the
credit losses on an equal basis. Other lenders typically share
or absorb credit losses up to a negotiated percentage of the
loan or the pool balance. As a result, our credit-enhanced loans
typically account for a smaller proportion of our multifamily
credit losses compared with their share of our seriously
delinquent loans.
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 credit
enhancement arrangements is an important factor that influences
credit quality and performance and helps reduce our credit risk.
The weighted average original LTV ratio for our multifamily
guaranty book of business was 67% as of both March 31, 2010
and December 31, 2009. The percentage of our multifamily
guaranty book of business with an original LTV ratio greater
than 80% was 5% as of March 31, 2010 and December 31,
2009. We present the current risk profile of our multifamily
guaranty book of business in “Note 7, Financial
Guarantees.”
We monitor the performance and risk concentrations of our
multifamily loans and the underlying properties on an ongoing
basis throughout the life of the investment at the loan,
property and portfolio level. We closely track the physical
condition of the property, the relevant local market and
economic conditions that may signal changing risk or return
profiles and other risk factors. For example, we closely monitor
the rental payment trends and vacancy levels in local markets to
identify loans that merit closer attention or loss mitigation
actions. For our investments in multifamily loans, the primary
asset management responsibilities are performed by our DUS and
other multifamily lenders. We periodically evaluate the
performance of our third-party service providers for compliance
with our asset management criteria.
Problem
Loan Management and Foreclosure Prevention
Elevated vacancy rates and declining property values and rental
income that resulted from weak economic conditions have caused
increases in our multifamily serious delinquency rate and the
level of foreclosures. In response to market conditions, we have
further tightened our underwriting standards and implemented
more proactive portfolio management and monitoring to keep
credit losses to a low level relative to our multifamily
guaranty book of business.
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Problem
Loan Statistics
Table 42 provides a comparison of our multifamily serious
delinquency rates for loans with and without credit enhancement.
We classify multifamily loans as seriously delinquent when
payment is 60 days or more past due. We calculate
multifamily serious delinquency rates based on the unpaid
principal balance of loans for each category divided by the
unpaid principal balance of our total multifamily guaranty book
of business. We include the unpaid principal balance of all
multifamily loans that we own or that back Fannie Mae MBS and
any housing bonds for which we provide credit enhancement in the
calculation of the multifamily serious delinquency rate.
Table
42: Multifamily Serious Delinquency Rates
| March 31, 2010 | December 31, 2009 | March 31, 2009 | ||||||||||||||||||||||
|
Percentage of
|
Serious
|
Percentage of
|
Serious
|
Percentage of
|
Serious
|
|||||||||||||||||||
|
Book
|
Delinquency
|
Book
|
Delinquency
|
Book
|
Delinquency
|
|||||||||||||||||||
| Outstanding | Rate | Outstanding | Rate | Outstanding | Rate | |||||||||||||||||||
|
Multifamily loans:
|
||||||||||||||||||||||||
|
Credit enhanced
|
89 | % | 0.69 | % | 89 | % | 0.54 | % | 87 | % | 0.31 | % | ||||||||||||
|
Non-credit enhanced
|
11 | 1.56 | 11 | 1.33 | 13 | 0.56 | ||||||||||||||||||
|
Total multifamily loans
|
100 | % | 0.79 | % | 100 | % | 0.63 | % | 100 | % | 0.34 | % | ||||||||||||
As stated previously, the weak economic environment has
negatively affected serious delinquency rates across our
multifamily guaranty book of business, with all loan sizes
experiencing higher delinquencies. The credit enhanced book is
exhibiting a lower rate of average delinquencies relative to the
overall book and the non-credit enhanced loans are experiencing
a higher rate of delinquencies. Relative to our overall
multifamily guaranty book, the 2007 acquisitions continue to
exhibit higher than average delinquency rates accounting for 41%
of our multifamily serious delinquency rate while representing
approximately 24% of our multifamily guaranty book as of
March 31, 2010. Although our 2007 acquisitions were
underwritten to our then-current credit standards and required
borrower cash equity, they were acquired near the peak of
multifamily housing values.
REO
Management
Foreclosure and REO activity affects the level of credit losses.
Table 43 compares our multifamily REO balances for the periods
indicated.
Table
43: Multifamily Foreclosed Properties
| As of March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Number of multifamily foreclosed properties (REO)
|
107 | 38 | ||||||
|
Carrying value of multifamily foreclosed properties (dollars in
millions)
|
$ | 319 | $ | 176 | ||||
Unfavorable economic conditions continue to stress our
multifamily guaranty book of business and have resulted in
increased levels of multifamily foreclosed property inventory.
Institutional
Counterparty Credit Risk Management
We rely on our institutional counterparties to provide services
and credit enhancements, including primary and pool mortgage
insurance coverage, risk sharing agreements with lenders and
financial guaranty contracts, that are critical to our business.
Institutional counterparty risk is the risk that these
institutional counterparties may
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fail to fulfill their contractual obligations to us. Defaults by
a counterparty with significant obligations to us could result
in significant financial losses to us.
See “Risk Management—Credit Risk
Management—Institutional Counterparty Credit Risk
Management” in our 2009
Form 10-K
for additional information about our institutional
counterparties including counterparty risk we face from mortgage
originators and investors, from debt security and mortgage
dealers and from document custodians.
Mortgage
Servicers
Our business with our mortgage servicers is concentrated. Our
ten largest single-family mortgage servicers, including their
affiliates, serviced 80% of our single-family guaranty book of
business as of March 31, 2010 and December 31, 2009.
Our largest mortgage servicer is Bank of America Corporation,
which, together with its affiliates, serviced approximately 27%
of our single-family guaranty book of business as of
March 31, 2010 and December 31, 2009. In addition, we
had two other mortgage servicers, Wells Fargo &
Company and JP Morgan Chase & Co., that, with their
affiliates, each serviced over 10% of our single-family guaranty
book of business as of March 31, 2010. Wells
Fargo & Company and the PNC Financial Services Group,
with their affiliates, each serviced over 10% of our multifamily
guaranty book of business as of March 31, 2010. Because we
delegate the servicing of our mortgage loans to mortgage
servicers and do not have our own servicing function, the loss
of business from a significant mortgage servicer counterparty
could pose significant risks to our ability to conduct our
business effectively.
During the first quarter of 2010, our primary mortgage servicer
counterparties have generally continued to meet their
obligations to us. The growth in the number of delinquent loans
on their books of business may negatively affect the ability of
these counterparties to continue to meet their obligations to us
in the future.
Our mortgage servicers are obligated to repurchase loans or
foreclosed properties, or reimburse us for losses if the
foreclosed property has been sold, if it is determined that the
mortgage loan did not meet our underwriting or eligibility
requirements or if mortgage insurers rescind coverage. In 2009
and during the first quarter of 2010, the number of repurchase
and reimbursement requests remained high. Pursuant to our
servicers’ contractual obligations, during the first
quarter of 2010, the aggregate unpaid principal balance of loans
repurchased by our servicers was approximately $1.8 billion
compared with $1.1 billion during the first quarter of
2009. If a significant servicer counterparty, or a number of
servicer counterparties, fails to fulfill its repurchase and
reimbursement obligations to us, it could result in a
substantial increase in our credit losses and have a material
adverse effect on our results of operations and financial
condition. We expect the amount of our outstanding repurchase
and reimbursement requests to remain high throughout 2010.
We are exposed to the risk that a mortgage servicer or another
party involved in a mortgage loan transaction will engage in
mortgage fraud by misrepresenting the facts about the loan. We
have experienced financial losses in the past and may experience
significant financial losses and reputational damage in the
future as a result of mortgage fraud.
Mortgage
Insurers
We use several types of credit enhancement to manage our
single-family mortgage credit risk, including primary and pool
mortgage insurance coverage. Mortgage insurance “risk in
force” represents our maximum potential loss recovery under
the applicable mortgage insurance policies. We had total
mortgage insurance coverage risk in force of $103.2 billion
on the single-family mortgage loans in our guaranty book of
business as of March 31, 2010, which represented
approximately 4% of our single-family guaranty book of business
as of March 31, 2010. Primary mortgage insurance
represented $97.3 billion of this total, and pool mortgage
insurance was $5.9 billion. We had total mortgage insurance
coverage risk in force of $106.5 billion on the
single-family mortgage loans in our guaranty book of business as
of December 31, 2009, which represented
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approximately 4% of our single-family guaranty book of business
as of December 31, 2009. Primary mortgage insurance
represented $99.6 billion of this total, and pool mortgage
insurance was $6.9 billion.
Table 44 presents our maximum potential loss recovery for the
primary and pool mortgage insurance coverage on single-family
loans in our guaranty book of business by mortgage insurer for
our top eight mortgage insurer counterparties as of
March 31, 2010. These mortgage insurers provided over 99%
of our total mortgage insurance coverage on single-family loans
in our guaranty book of business as of March 31, 2010.
Table
44: Mortgage Insurance Coverage
| As of March 31, 2010 | ||||||||||||
| Maximum Coverage (2) | ||||||||||||
|
Counterparty:
(1)
|
Primary | Pool | Total | |||||||||
| (Dollars in millions) | ||||||||||||
|
Mortgage Guaranty Insurance Corporation
|
$ | 23,003 | $ | 2,150 | $ | 25,153 | ||||||
|
Radian Guaranty, Inc.
|
15,545 | 400 | 15,945 | |||||||||
|
Genworth Mortgage Insurance Corporation
|
15,235 | 133 | 15,368 | |||||||||
|
United Guaranty Residential Insurance Company
|
14,449 | 245 | 14,694 | |||||||||
|
PMI Mortgage Insurance Co.
|
12,996 | 644 | 13,640 | |||||||||
|
Republic Mortgage Insurance Company
|
10,551 | 1,247 | 11,798 | |||||||||
|
Triad Guaranty Insurance Corporation
|
3,406 | 1,026 | 4,432 | |||||||||
|
CMG Mortgage Insurance
Company
(3)
|
1,950 | — | 1,950 | |||||||||
| (1) | Insurance coverage amounts provided for each counterparty may include coverage provided by consolidated affiliates and subsidiaries of the counterparty. | |
| (2) | Maximum coverage refers to the aggregate dollar amount of insurance coverage ( i.e. , “risk in force”) on single-family loans in our guaranty book of business and represents our maximum potential loss recovery under the applicable mortgage insurance policies. | |
| (3) | CMG Mortgage Insurance Company is a joint venture owned by PMI Mortgage Insurance Co. and CUNA Mutual Investment Corporation. |
The current weakened financial condition of our mortgage insurer
counterparties creates an increased risk that these
counterparties will fail to fulfill their obligations to
reimburse us for claims under insurance policies. A number of
our mortgage insurers have received waivers from their
regulators regarding state-imposed
risk-to-capital
limits. Without these waivers, these mortgage insurers would not
be able to continue to write new business in accordance with
state regulatory requirements. In April 2010, two of our
mortgage insurer counterparties raised capital, which improved
their ability to meet state-imposed
risk-to-capital
limits and improved their ability to continue paying our claims
in full when due. It is uncertain as to how long our mortgage
insurer counterparties will remain below their state-imposed
risk-to-capital
limits. Several mortgage insurers continue to approach us with
various proposed corporate restructurings that would require our
approval of affiliated mortgage insurance writing entities. In
February 2010, we approved PMI Mortgage Assurance Co. (PMAC), a
wholly-owned subsidiary of PMI Mortgage Insurance Co., to
provide mortgage insurance in a limited number of states,
subject to certain conditions.
As of March 31, 2010, our allowance for loan losses of
$60.6 billion, allowance for accrued interest receivable of
$7.6 billion and reserve for guaranty losses of
$233 million incorporated an estimated recovery amount of
approximately $16.5 billion from mortgage insurance related
both to loans that are individually measured for impairment and
those that are measured collectively for impairment. This amount
is comprised of the contractual recovery of approximately
$19.5 billion as of March 31, 2010 and an adjustment
of approximately $3.0 billion which reduces the contractual
recovery for our assessment of our mortgage insurer
counterparties’ inability to fully pay those claims.
When an insured loan held in Fannie Mae’s mortgage
portfolio subsequently goes into foreclosure, Fannie Mae charges
off the loan, eliminating any previously-recorded loss reserves,
and records real-estate owned and
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a mortgage insurance receivable for the claim proceeds deemed
probable of recovery, as appropriate. We had outstanding
receivables from mortgage insurers of $3.1 billion as of
March 31, 2010 and $2.5 billion as of
December 31, 2009, related to amounts claimed on insured,
defaulted loans that we have not yet received. We assessed the
receivables for collectibility, and they are recorded net of a
valuation allowance of $82 million as of March 31,
2010 and $51 million as of December 31, 2009 in
“Other assets.” These mortgage insurance receivables
are short-term in nature, having a duration of approximately
three to six months, and the valuation allowance reduces our
claim receivable to the amount that we consider probable of
collection. We received proceeds under our primary and pool
mortgage insurance policies for single-family loans of
$1.5 billion for the three months ended March 31, 2010
and $3.6 billion for the year ended December 31, 2009.
During the first quarter of 2010, we negotiated the cancellation
and restructurings of some of our mortgage insurance coverage in
exchange for a fee. As a result, we recognized $562 million
as a reduction of “foreclosed property expense” in our
condensed consolidated statements of operations, of which
$124 million was collected subsequent to March 31,
2010. The cash fees received of $438 million for the three
months ended March 31, 2010 and $668 million for the
year ended December 31, 2009 are included in our total
insurance proceeds amount.
Our mortgage insurer counterparties have generally continued to
pay claims owed to us, except where alternative payment terms
have been negotiated. Our mortgage insurer counterparties have
significantly increased the number of mortgage loans for which
they have rescinded coverage. In those cases where the mortgage
insurance was obtained to meet our charter requirements or where
we independently agree with the materiality of the finding that
was the basis for the rescission, we generally require the
servicer to repurchase the loan or indemnify us against loss.
Besides evaluating their condition to assess whether we have
incurred probable losses in connection with our coverage, we
also evaluate these counterparties individually to determine
whether or under what conditions they will remain eligible to
insure new mortgages sold to us. Except for Triad, as of
May 7, 2010, our mortgage insurer counterparties remain
qualified to conduct business with us.
We generally are required pursuant to our charter to obtain
credit enhancement on conventional single-family mortgage loans
that we purchase or securitize with
loan-to-value
ratios over 80% at the time of purchase. In connection with
HARP, we are generally able to purchase an eligible loan if the
loan has mortgage insurance in an amount at least equal to the
amount of mortgage insurance that existed on the loan that was
refinanced. As a result, these refinanced loans with updated
loan-to-value
ratios above 80% and up to 125% may have no mortgage insurance
or less insurance than we would otherwise require for a loan not
originated under this program. In the current environment, many
mortgage insurers have stopped insuring new mortgages with
higher
loan-to-value
ratios or with lower borrower credit scores or on select
property types, which has contributed to the reduction in our
business volumes for high
loan-to-value
ratio loans. If our mortgage insurer counterparties further
restrict their eligibility requirements or new business volumes
for high
loan-to-value
ratio loans, or if we are no longer willing or able to obtain
mortgage insurance from these counterparties, and we are not
able to find suitable alternative methods of obtaining credit
enhancement for these loans, we may be further restricted in our
ability to purchase or securitize loans with
loan-to-value
ratios over 80% at the time of purchase. Approximately 10% of
our conventional single-family business volume for 2009
consisted of loans with a
loan-to-value
ratio higher than 80% at the time of purchase. For the first
quarter of 2010, these loans accounted for 17% of our
single-family business volume.
Financial
Guarantors
We were the beneficiary of financial guarantees totaling
$9.4 billion as of March 31, 2010 and
$9.6 billion as of December 31, 2009, on securities
held in our investment portfolio or on securities that have been
resecuritized to include a Fannie Mae guaranty and sold to third
parties. The securities covered by these guarantees consist
primarily of private-label mortgage-related securities and
mortgage revenue bonds. We are also the beneficiary of financial
guarantees included in securities issued by Freddie Mac, the
federal
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government and its agencies that totaled $36.8 billion as
of March 31, 2010 and $51.3 billion as of
December 31, 2009.
Nine financial guarantors provided bond insurance coverage to us
as of March 31, 2010. Only one of the financial guarantors
had an investment grade rating while the others were rated below
investment grade. Most of these financial guarantors experienced
material adverse changes to their financial condition during
2009 and the first quarter of 2010 because of significantly
higher claim losses that have impaired their claims paying
ability. Although none of our financial guarantor counterparties
has failed to repay us for claims under guaranty contracts,
based on the stressed financial condition of our financial
guarantor counterparties, we believe that one or more of our
financial guarantor counterparties may not be able to fully meet
their obligations to us in the future.
In March 2010, Ambac Assurance Corp (“Ambac”) and its
insurance regulator, the Wisconsin Office of the Commissioner of
Insurance, imposed a court-ordered moratorium on certain claim
payments to provide bond insurance coverage, including
$1.4 billion of our private label securities insured by
Ambac. The outcome of legal proceedings regarding the moratorium
and the proposed company rehabilitation each remain uncertain at
this time. In determining our
other-than-temporary
impairment on our private label securities insured by Ambac, we
have assumed that we will not receive any proceeds from Ambac.
See “Consolidated Balance Sheet Analysis—Investments
in Mortgage-Related Securities” for more information on our
investments in private-label mortgage-related securities.
Lenders
with Risk Sharing
We enter into risk sharing agreements with lenders pursuant to
which the lenders agree to bear all or some portion of the
credit losses on the covered loans. Our maximum potential loss
recovery from lenders under these risk sharing agreements on
single-family loans was $17.7 billion as of March 31,
2010 and $18.3 billion as of December 31, 2009. Our
maximum potential loss recovery from lenders under these risk
sharing agreements on multifamily loans was $29.1 billion
as of March 31, 2010 and $28.7 billion as of
December 31, 2009.
Unfavorable market conditions have adversely affected, and are
expected to continue to adversely affect, the liquidity and
financial condition of our lender counterparties. The percentage
of single-family recourse obligations to lenders with investment
grade credit ratings (based on the lower of Standard &
Poor’s, Moody’s and Fitch ratings) was 45% as of
March 31, 2010 and December 31, 2009. The percentage
of these recourse obligations to lender counterparties rated
below investment grade was 22% as of March 31, 2010 and
December 31, 2009. The remaining percentage of these
recourse obligations were to lender counterparties that were not
rated by rating agencies, which was 33% as of March 31,
2010 and December 31, 2009. Given the stressed financial
condition of many of our lenders, we expect in some cases we
will recover less, perhaps significantly less, than the amount
the lender is obligated to provide us under our risk sharing
arrangement with them. Depending on the financial strength of
the counterparty, we may require a lender to pledge collateral
to secure its recourse obligations.
As noted above in “Multifamily Credit Risk
Management,” our primary multifamily delivery channel is
our DUS program, which is comprised of multiple lenders that
span the spectrum from large sophisticated banks to smaller
independent multifamily lenders. Given the recourse nature of
the DUS program, these lenders are bound by higher eligibility
standards that dictate, among other items, minimum capital and
liquidity levels, and the posting of collateral with us to
support a portion of the lenders’ loss sharing obligations.
To help ensure the level of risk that is being taken with these
lenders remains appropriate, we actively monitor the financial
condition of these lenders.
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Custodial
Depository Institutions
A total of $51.4 billion in deposits for single-family
payments were received and held by 291 institutions in the month
of March 2010 and a total of $51.0 billion in deposits for
single-family payments were received and held by 284
institutions in the month of December 2009. Of these total
deposits, 96% as of March 31, 2010 and 95% as of
December 31, 2009 were held by institutions rated as
investment grade by Standard & Poor’s,
Moody’s and Fitch. Our ten largest custodial depository
institutions held 94% and 93% of these deposits as of
March 31, 2010 and December 31, 2009, respectively.
Issuers
of Securities Held in our Cash and Other Investments
Portfolio
Our cash and other investments portfolio consists of cash and
cash equivalents, federal funds sold and securities purchased
under agreements to resell or similar arrangements,
U.S. Treasury securities, asset-backed securities, and
corporate debt securities. See “Consolidated Balance Sheet
Analysis—Cash and Other Investments Portfolio” for
more detailed information on our cash and other investments
portfolio. Our counterparty risk is primarily with the issuers
of unsecured corporate debt and financial institutions with
short-term deposits.
Our cash and other investments portfolio which totaled
$136.7 billion as of March 31, 2010, included
$47.1 billion of U.S. Treasury securities and
$30.8 billion of unsecured positions with issuers of
corporate debt securities or short-term deposits with financial
institutions, of which approximately 99% were with issuers which
had a credit rating of AA (or its equivalent) or higher, based
on the lowest of Standard & Poor’s, Moody’s
and Fitch ratings. As of December 31, 2009, our cash and
other investments portfolio totaled $69.4 billion and
included $45.8 billion of unsecured positions with issuers
of corporate debt securities or short-term deposits with
financial institutions, of which approximately 92% were with
issuers which had a credit rating of AA (or its equivalent) or
higher, based on the lowest of Standard & Poor’s,
Moody’s and Fitch ratings.
During the first quarter of 2010, we evaluated the growing
uncertainty on the stability of various European economies and
financial institutions and as a result of this evaluation,
reduced the number of counterparties in our cash and other
investments portfolio in those markets.
Derivatives
Counterparties
Our derivative credit exposure relates principally to interest
rate and foreign currency derivatives contracts. 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 by counterparty where the right of legal
offset exists, such as master netting agreements, and by
transaction where the right of legal offset does not exist.
Derivatives in a gain position are reported in our condensed
consolidated balance sheets as “Derivative assets, at fair
value.”
We present our credit loss exposure for our outstanding risk
management derivative contracts, by counterparty credit rating,
as of March 31, 2010 and December 31, 2009 in
“Note 10, Derivative Instruments.” We expect our
credit exposure on derivative contracts to fluctuate with
changes in interest rates, implied volatility and the collateral
thresholds of the counterparties. Typically, we seek to manage
this exposure by contracting with experienced counterparties
that are rated A- (or its equivalent) or better. These
counterparties consist of large banks, broker-dealers and other
financial institutions that have a significant presence in the
derivatives market, most of which are based in the United States.
We also manage our exposure to derivatives counterparties by
requiring collateral in specified instances. We have a
collateral management policy with provisions for requiring
collateral on interest rate and foreign currency derivative
contracts in net gain positions based upon the
counterparty’s credit rating. The collateral includes cash,
U.S. Treasury securities, agency debt and agency
mortgage-related securities. Our net credit exposure on
derivatives contracts decreased to $99 million as of
March 31, 2010, from $238 million as of
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December 31, 2009. We had outstanding interest rate and
foreign currency derivative transactions with 16 counterparties
as of March 31, 2010 and December 31, 2009.
Derivatives transactions with nine of our counterparties
accounted for approximately 90% of our total outstanding
notional amount as of March 31, 2010, with each of these
counterparties accounting for between approximately 4% and 13%
of the total outstanding notional amount. In addition to the 16
counterparties with whom we had outstanding notional amounts as
of March 31, 2010, we had master netting agreements with
three counterparties with whom we may enter into interest rate
derivative or foreign currency derivative transactions in the
future.
Congress is currently considering financial regulatory reform
legislation, including additional regulation of the
over-the-counter
derivatives market. If enacted, this legislation would require
that major derivatives market participants submit derivatives
trades for clearing through a central counterparty. Currently,
we do not centrally clear our derivatives trades. If enacted
such legislation could directly and indirectly affect many
aspects of our business and that of our business partners.
See “Note 10, Derivative Instruments” for
information on the outstanding notional amount and additional
information on our risk management derivative contracts as of
March 31, 2010 and December 31, 2009. See “Risk
Factors” in our 2009
Form 10-K
for a discussion of the risks to our business posed by interest
rate risk and a discussion of the risks to our business as a
result of the increasing concentration of our derivatives
counterparties.
Market
Risk Management, Including Interest Rate Risk
Management
We are subject to market risk, which includes interest rate
risk, spread risk and liquidity risk. These risks arise from our
mortgage asset investments. Interest rate risk is the risk of
loss in value or expected future earnings that may result from
changes in interest rates. Spread risk is the resulting impact
of changes in the spread between our mortgage assets and our
debt and derivatives we use to hedge our position. Liquidity
risk is the risk that we will not be able to meet our funding
obligations in a timely manner. We describe our sources of
interest rate risk exposure and our strategy for managing
interest rate risk in “MD&A—Risk
Management—Market Risk Management, Including Interest Rate
Risk Management” in our 2009
Form 10-K.
Derivatives
Activity
Table 45 presents, by derivative instrument type, our risk
management derivative activity, excluding mortgage commitments,
for the three months ended March 31, 2010 along with the
stated maturities of derivatives outstanding as of
March 31, 2010.
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Table of Contents
Table
45: Activity and Maturity Data for Risk Management
Derivatives
(1)
|
Interest Rate
|
||||||||||||||||||||||||||||||||||||
| Interest Rate Swaps | Swaptions | |||||||||||||||||||||||||||||||||||
|
Pay-
|
Receive-
|
Foreign
|
Pay-
|
Receive-
|
Interest
|
|||||||||||||||||||||||||||||||
| Fixed | Fixed (2) | Basis (3) | Currency (4) | Fixed | Fixed | Rate Caps | Other (5) | Total | ||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||
|
Notional balance as of December 31, 2009
|
$ | 382,600 | $ | 275,417 | $ | 3,225 | $ | 1,537 | $ | 99,300 | $ | 75,380 | $ | 7,000 | $ | 748 | $ | 845,207 | ||||||||||||||||||
|
Additions
|
43,140 | 35,576 | 55 | 151 | 6,425 | 5,750 | — | — | 91,097 | |||||||||||||||||||||||||||
|
Terminations
(6)
|
(109,883 | ) | (81,700 | ) | (60 | ) | (279 | ) | (11,000 | ) | (7,700 | ) | — | — | (210,622 | ) | ||||||||||||||||||||
|
Notional balance as of March 31, 2010
|
$ | 315,857 | $ | 229,293 | $ | 3,220 | $ | 1,409 | $ | 94,725 | $ | 73,430 | $ | 7,000 | $ | 748 | $ | 725,682 | ||||||||||||||||||
|
Future maturities of notional
amounts:
(7)
|
||||||||||||||||||||||||||||||||||||
|
Less than 1 year
|
$ | 29,225 | $ | 35,485 | $ | 2,180 | $ | 306 | $ | 2,600 | $ | — | $ | — | $ | 59 | $ | 69,855 | ||||||||||||||||||
|
1 to less than 5 years
|
189,430 | 132,736 | 85 | — | 54,400 | 1,500 | 7,000 | 643 | 385,794 | |||||||||||||||||||||||||||
|
5 to less than 10 years
|
72,377 | 47,218 | — | 458 | 11,450 | 27,645 | — | 46 | 159,194 | |||||||||||||||||||||||||||
|
10 years and over
|
24,825 | 13,854 | 955 | 645 | 26,275 | 44,285 | — | — | 110,839 | |||||||||||||||||||||||||||
|
Total
|
$ | 315,857 | $ | 229,293 | $ | 3,220 | $ | 1,409 | $ | 94,725 | $ | 73,430 | $ | 7,000 | $ | 748 | $ | 725,682 | ||||||||||||||||||
|
Weighted-average interest rate as of March 31, 2010:
|
||||||||||||||||||||||||||||||||||||
|
Pay rate
|
3.41 | % | 0.25 | % | 0.03 | % | — | 5.53 | % | — | — | — | ||||||||||||||||||||||||
|
Receive rate
|
0.25 | % | 3.21 | % | 1.83 | % | — | — | 4.46 | % | 3.58 | % | — | |||||||||||||||||||||||
|
Weighted-average interest rate as of December 31, 2009:
|
||||||||||||||||||||||||||||||||||||
|
Pay rate
|
3.46 | % | 0.26 | % | 0.05 | % | — | 5.46 | % | — | — | — | ||||||||||||||||||||||||
|
Receive rate
|
0.26 | % | 3.47 | % | 1.59 | % | — | — | 4.45 | % | 3.58 | % | — | |||||||||||||||||||||||
| (1) | Dollars represent notional amounts that indicate only the amount on which payments are being calculated and do not represent the amount at risk of loss. | |
| (2) | Notional amounts include swaps callable by Fannie Mae of $406 million as of March 31, 2010 and December 31, 2009. The notional amount of swaps callable by derivatives counterparties was $393 million as of March 31, 2010. There were no swaps callable by derivatives counterparties as of December 31, 2009. | |
| (3) | Notional amounts include swaps callable by derivatives counterparties of $605 million and $610 million as of March 31, 2010 and December 31, 2009, respectively. | |
| (4) | Exchange rate adjustments to foreign currency swaps existing at both the beginning and the end of the period are included in terminations. Exchange rate adjustments to foreign currency swaps that are added or terminated during the period are reflected in the respective categories. | |
| (5) | Includes swap credit enhancements and mortgage insurance contracts. | |
| (6) | Includes matured, called, exercised, assigned and terminated amounts. | |
| (7) | Amounts reported are based on contractual maturities. Some of these amounts represent swaps that are callable by Fannie Mae or by a derivative counterparty, in which case the notional amount would cease to be outstanding prior to maturity if the call option were exercised. See notes (2) and (3) for information on notional amounts that are callable. |
The decline in our outstanding notional balance of our risk
management derivatives during the first quarter of 2010
primarily resulted from the termination of a significant portion
of offsetting pay-fixed and receive-fixed swap positions that we
determined are no longer providing an economic hedging benefit.
Measurement
of Interest Rate Risk
Below we present two quantitative metrics that provide estimates
of our interest rate exposure: (1) fair value sensitivity
of net portfolio to changes in interest rate levels and slope of
yield curve; and (2) duration gap. The metrics presented
are generated using internal models. On a continuous basis,
management makes judgments
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about the appropriateness of the risk assessments of the model
results and will make adjustments to the results shown below as
it sees fit to properly assess our interest rate exposure and
manage our interest rate risk.
Interest
Rate Sensitivity to Changes in Interest Rate Level and Slope of
Yield Curve
As part of our disclosure commitments 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 in the
1-year
and
30-year
rates of 16.7 basis points and 8.3 basis points,
respectively. We believe the aforementioned interest rate shocks
for our monthly disclosures represent moderate movements in
interest rates over a one-month period.
The daily average adverse impact from a 50 basis point
change in interest rates and from a 25 basis point change
in the slope of the yield curve was $(0.5) billion and
$(0.1) billion, respectively, for the month of March 2010,
compared with $(0.6) billion for a 50 basis point
change in interest rates and $(0.1) billion for a
25 basis point change in the slope of the yield curve for
the month of December 2009.
The sensitivity measures presented in Table 46, which we
disclose on a quarterly basis as part of our disclosure
commitments with FHFA, are an extension of our monthly
sensitivity measures. There are three primary differences
between our monthly sensitivity disclosure and the quarterly
sensitivity disclosure presented below: (1) the quarterly
disclosure is expanded to include the sensitivity results for
larger rate level shocks of plus or minus 100 basis points;
(2) the monthly disclosure reflects the estimated pre-tax
impact on the market value of our net portfolio calculated based
on a daily average, while the quarterly disclosure reflects the
estimated pre-tax impact calculated based on the estimated
financial position of our net portfolio and the market
environment as of the last business day of the quarter based on
values used for financial reporting; and (3) the monthly
disclosure shows the most adverse pre-tax impact on the market
value of our net portfolio from the hypothetical interest rate
shocks, while the quarterly disclosure includes the estimated
pre-tax impact of both up and down interest rate shocks.
Table
46: Interest Rate Sensitivity of Net Portfolio to
Changes in Interest Rate Level and Slope of Yield
Curve
(1)
| As of | ||||||||
| March 31, 2010 | December 31, 2009 | |||||||
| (Dollars in billions) | ||||||||
|
Rate level shock:
|
||||||||
|
-100 basis points
|
$ | (1.0 | ) | $ | (0.1 | ) | ||
|
-50 basis points
|
(0.4 | ) | 0.1 | |||||
|
+50 basis points
|
0.2 | (0.4 | ) | |||||
|
+100 basis points
|
0.4 | (0.9 | ) | |||||
|
Rate slope shock:
|
||||||||
|
-25 basis points (flattening)
|
(0.1 | ) | (0.2 | ) | ||||
|
+25 basis points (steepening)
|
0.1 | 0.1 | ||||||
| (1) | Computed based on changes in LIBOR swap rates. |
The change in the sensitivities from December 31, 2009 to
March 31, 2010 reflects the decline in interest rates
during the first quarter of 2010 that reduced the sensitivity of
prepayable mortgage assets.
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Duration
Gap
Duration measures the price sensitivity of our assets and
liabilities 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 the estimated cash flows of our liabilities. A
positive duration indicates that the duration of our assets
exceeds the duration of our liabilities.
Table 47 presents our monthly effective duration gap from
December 2009 to March 2010. We also present the historical
average daily duration for the
30-year
Fannie Mae MBS component of the Barclays Capital
U.S. Aggregate index for the same months. As a result of
our rebalancing actions in response to movements in interest
rates, our duration gap is both lower than and less volatile
than the duration of the mortgage index as calculated by
Barclays Capital. We use duration hedges, including longer term
debt and interest rate swaps, to reduce the duration of our net
portfolio, and we use option-based hedges, including callable
debt and interest rate swaptions, to reduce the convexity, or
the duration changes, of our net portfolio as interest rates
move. Our duration gap also differs from the duration of the
mortgage index as calculated by Barclay’s capital because
our mortgage portfolio includes mortgage assets that typically
have a duration shorter than 30 years, such as
adjustable-rate mortgage loans, as well as mortgage assets that
generally have a longer duration, such as multifamily loans and
CMBS. In addition, the models we use to estimate duration are
different from those used by Barclays Capital.
Table
47: Duration Gap
|
30-Year Fannie Mae
|
||||||||
|
Fannie Mae
|
Mortgage Index
|
|||||||
|
Effective
|
Option Adjusted
|
|||||||
|
Month
|
Duration Gap | Duration (1) | ||||||
| (In months) | ||||||||
|
December 2009
|
1 | 40 | ||||||
|
January 2010
|
1 | 43 | ||||||
|
February 2010
|
— | 44 | ||||||
|
March 2010
|
(1 | ) | 44 | |||||
|
April 2010
|
(1 | ) | 49 | |||||
| (1) | Reflects average daily option-adjusted duration, expressed in months, based on the 30-year Fannie Mae MBS component of the Barclays Capital U.S. Aggregate index obtained from Barclays Capital Live. |
Other
Interest Rate Risk Information
The interest rate risk measures discussed above exclude the
impact of changes in the fair value of our net guaranty assets
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 that result from changes
in interest rates.
In “Risk Management—Market Risk Management, Including
Interest Rate Risk Management—Measurement of Interest Rate
Risk—Other Interest Rate Risk Information” in our 2009
Form 10-K,
we provided additional interest rate sensitivities including
separate disclosure of the potential impact on the fair value of
our trading assets, our net guaranty assets and obligations, and
our other financial instruments. As of March 31, 2010,
these sensitivities were relatively unchanged as compared with
December 31, 2009. Although fewer of our financial
instruments are designated as trading instruments as of
March 31, 2010 compared with December 31, 2009 due to
adopting the new accounting standards, there was no significant
change in our overall portfolio composition or risk profile and
the decrease in trading securities resulted in a decrease in the
interest rate sensitivity of those instruments. The fair value
of our trading financial instruments and our other financial
instruments as of March 31, 2010 and December 31, 2009
can be found in “Note 16, Fair Value.”
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Table of Contents
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 (“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,” or
similar words.
Among the forward-looking statements in this report are
statements relating to:
| • | Our general belief that the housing and mortgage markets will continue to be weak throughout 2010, though they may be supported in the second quarter of 2010 by historically low mortgage rates and the temporary homebuyer tax credit; | |
| • | Our belief that home sales may start a longer term growth path by the end of 2010 if the labor market shows improvement; | |
| • | Our belief that the actions we have taken to stabilize the housing market and minimize our credit losses may continue to have, at least in the short term, a material adverse effect on our results of operations and financial condition, including our net worth; | |
| • | Our expectation that there may be fewer multifamily properties being offered for sale in 2010; | |
| • | Our expectation that our REO inventory will increase in 2010; | |
| • | Our expectation that during 2010: (1) default and severity rates will remain heightened; (2) home prices will decline slightly further on a national basis, more in some geographic areas than in others; and (3) the level of foreclosures will increase. | |
| • | Our expectation that the level of multifamily defaults and serious delinquencies will increase further during 2010; | |
| • | Our expectations that (1) residential mortgage debt outstanding will continue to decline through 2010, (2) there will be a shift of the market away from refinance activity in the coming months if interest rates increase, which will be somewhat offset by a seasonal increase in home sales, and (3) these trends, combined with an expected decline in total originations in 2010, will have an adverse impact on our business volumes during the remainder of 2010; | |
| • | Our expectation that home prices on a national basis will continue to decline slightly in 2010 before stabilizing, and that there will be significant geographic variation in the levels of decline and stabilization; | |
| • | Our expectation that our credit-related expenses will remain high in 2010; | |
| • | Our expectation that our single-family and multifamily credit losses will continue to increase during 2010 as a result of anticipated continued high unemployment and overall economic weakness, which will contribute to an expected increase in our charge-offs as we pursue foreclosure alternatives and foreclosures; | |
| • | Our belief that the level of our nonperforming loans will remain elevated for a period of time; | |
| • | Our expectation that, if current trends continue, our credit related expenses in 2010 could be lower than in 2009; |
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| • | Our expectation that, as 2010 progresses, the pace at which loans become delinquent will moderate which, coupled with an increase in the pace of foreclosures and problem loan workouts, will result in a slower rate of increase in, and possibly a leveling of, delinquencies; | |
| • | Our expectation that we will not earn profits in excess of our annual dividend obligation to Treasury for the indefinite future; | |
| • | Our expectation that we will not generate sufficient taxable income for the foreseeable future to realize our net deferred tax assets; | |
| • | Our expectation that uncertainty regarding the future of our business after the conservatorship is terminated will continue, including uncertainty about whether we will continue in our current form; | |
| • | Our expectation that our single-family loss reserve for individually impaired loans will continue to grow in conjunction with our loan modification efforts; | |
| • | Our intention to maximize the value of distressed loans over time, utilizing loan modification, foreclosure, repurchases and other preferable loss resolution techniques that to date have resulted in per loan net recoveries materially higher than those that would have been available had they been sold in the distressed loan market; | |
| • | Our intention to increase our purchases of delinquent loans from single-family MBS trusts and our expectation that we will have increased cash needs to complete such purchases; | |
| • | Our intention to repay our short-term and long-term debt obligations as they become due primarily through proceeds from the issuance of additional debt securities and through funds we receive from Treasury; | |
| • | Our expectation that we will continue to need funding from Treasury due to our continued net worth deficit; | |
| • | Our expectation that the level of dividends on the senior preferred stock will increase in future periods as the conservator requests additional funds on our behalf from Treasury; | |
| • | Our belief that our expenses may increase as a result of our single-family mortgage credit risk management strategies; | |
| • | Our expectation that our acquisitions of Alt-A mortgage loans will be minimal in future periods; | |
| • | The possibility that the financial difficulties that our institutional counterparties are experiencing may negatively affect their ability to meet their obligations to us; | |
| • | Our intention to maintain a balance in our cash and other investments portfolio, as well as a balance of unencumbered agency MBS, such that the sum of those balances will allow us to meet our cash obligations for 365 days without relying on the issuance of unsecured debt; | |
| • | Our intention to remediate the material weaknesses in the design of our controls over the change management process we apply to applications and models we use in accounting; | |
| • | Our belief that it is likely that we will not remediate the material weakness, related to the communication of information to management, in our disclosure controls and procedures while we are under conservatorship; |
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| • | Our expectation that we may be required to pay substantial judgments, settlements or other penalties and incur significant expenses in connection with investigations and lawsuits, which could have a material adverse effect on our business, results of operations, financial condition, liquidity and net worth; | |
| • | Our expectation that we may be unable to find sufficient alternative sources of liquidity in the event our access to the unsecured debt markets is impaired; | |
| • | Our belief that shortcoming or failures in our internal processes, people or systems could have a material adverse effect on our risk management, liquidity, financial statement reliability, financial condition and results of operations, disrupt our business, and result in legislative or regulatory intervention, liability to customers, and financial losses or damage to our reputation, including as a result of our inadvertent dissemination of confidential or inaccurate information; | |
| • | Our belief that certain laws and regulations that restrict our activities and operations may prohibit us from undertaking activities that we believe would benefit our business and limit our ability to diversify our business; | |
| • | Our intention that recently announced changes to our single-family acquisition policies and underwriting standards will improve the credit quality of mortgage loans delivered to us and further reduce our acquisition of higher risk conventional loan categories; | |
| • | Our intention, as part of our Loan Quality Initiative, to validate certain borrower and property information and collect additional property and appraisal data at the time of delivery of mortgage loans; and | |
| • | Our expectation that if our stock trades below one dollar per share, or our conservator determines that our securities should not continue to be listed on a national securities exchange, our common and preferred stock could be delisted from the NYSE, which would likely result in a significant decline in trading volume and liquidity, and possibly a decline in price, of our securities, and it could become more difficult for our shareholders to sell their shares at prices comparable to those in effect prior to delisting or at all. |
Forward-looking statements reflect our management’s
expectations 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: our
ability to maintain a positive net worth; adverse effects from
activities we undertake to support the mortgage market and help
borrowers; the conservatorship and its effect on our business;
the investment by Treasury and its effect on our business;
future accounting standards; changes in the structure and
regulation of the financial services industry, including
government efforts to bring about an economic recovery; our
ability to access the debt capital markets; further disruptions
in the housing, credit and stock markets; the level and
volatility of interest rates and credit spreads; the adequacy of
credit reserves; pending government investigations and
litigation; changes in management; the accuracy of subjective
estimates used in critical accounting policies; and those
factors described in this report and in our 2009
Form 10-K,
including those factors described under the heading “Risk
Factors.”
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 described under the
heading “Risk Factors” in our 2009
Form 10-K
or in this report. Our forward-looking statements speak 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.
94
Table of Contents
| Item 1. | Financial Statements |
FANNIE
MAE
(In conservatorship)
Condensed Consolidated Balance Sheets
(Dollars in millions, except share amounts)
(Unaudited)
(In conservatorship)
Condensed Consolidated Balance Sheets
(Dollars in millions, except share amounts)
(Unaudited)
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents (includes cash of consolidated trusts
of $446 and $2,092, respectively)
|
$ | 30,477 | $ | 6,812 | ||||
|
Restricted cash (includes restricted cash of consolidated trusts
of $42,731 and $-, respectively)
|
45,479 | 3,070 | ||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
62,446 | 53,684 | ||||||
|
Investments in securities:
|
||||||||
|
Trading, at fair value (includes securities of consolidated
trusts of $32 and $5,599, respectively)
|
72,529 | 111,939 | ||||||
|
Available-for-sale,
at fair value (includes securities of consolidated trusts of
$624 and $10,513, respectively, and securities pledged as
collateral that may be sold or repledged of $- and $1,148,
respectively)
|
108,667 | 237,728 | ||||||
|
Total investments in securities
|
181,196 | 349,667 | ||||||
|
Mortgage loans:
|
||||||||
|
Loans held for sale, at lower of cost or fair value
|
980 | 18,462 | ||||||
|
Loans held for investment, at amortized cost
|
||||||||
|
Of Fannie Mae
|
309,991 | 256,434 | ||||||
|
Of consolidated trusts (includes loans pledged as collateral
that may be sold or repledged of $2,895 and $1,947, respectively)
|
2,679,336 | 129,590 | ||||||
|
Total loans held for investment
|
2,989,327 | 386,024 | ||||||
|
Allowance for loan losses
|
(60,569 | ) | (9,925 | ) | ||||
|
Total loans held for investment, net of allowance
|
2,928,758 | 376,099 | ||||||
|
Total mortgage loans
|
2,929,738 | 394,561 | ||||||
|
Advances to lenders
|
4,151 | 5,449 | ||||||
|
Accrued interest receivable:
|
||||||||
|
Of Fannie Mae
|
4,333 | 3,774 | ||||||
|
Of consolidated trusts
|
13,939 | 519 | ||||||
|
Allowance for accrued interest receivable
|
(7,611 | ) | (536 | ) | ||||
|
Total accrued interest receivable, net of allowance
|
10,661 | 3,757 | ||||||
|
Acquired property, net
|
12,369 | 9,142 | ||||||
|
Derivative assets, at fair value
|
435 | 1,474 | ||||||
|
Guaranty assets
|
473 | 8,356 | ||||||
|
Deferred tax assets, net
|
1,906 | 909 | ||||||
|
Partnership investments
|
1,853 | 2,372 | ||||||
|
Servicer and MBS trust receivable
|
679 | 18,329 | ||||||
|
Other assets
|
11,892 | 11,559 | ||||||
|
Total assets
|
$ | 3,293,755 | $ | 869,141 | ||||
| LIABILITIES AND EQUITY (DEFICIT) | ||||||||
|
Liabilities:
|
||||||||
|
Accrued interest payable:
|
||||||||
|
Of Fannie Mae
|
$ | 5,006 | $ | 4,951 | ||||
|
Of consolidated trusts
|
10,558 | 29 | ||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
180 | — | ||||||
|
Short-term debt:
|
||||||||
|
Of Fannie Mae
|
207,822 | 200,437 | ||||||
|
Of consolidated trusts
|
6,343 | — | ||||||
|
Long-term debt:
|
||||||||
|
Of Fannie Mae (includes debt at fair value of $3,258 and $3,274,
respectively)
|
576,307 | 567,950 | ||||||
|
Of consolidated trusts (includes debt at fair value of $310 and
$-, respectively)
|
2,472,192 | 6,167 | ||||||
|
Derivative liabilities, at fair value
|
957 | 1,029 | ||||||
|
Reserve for guaranty losses (includes $33 and $4,772,
respectively, related to Fannie Mae MBS included in Investments
in securities)
|
233 | 54,430 | ||||||
|
Guaranty obligations
|
827 | 13,996 | ||||||
|
Partnership liabilities
|
2,020 | 2,541 | ||||||
|
Servicer and MBS trust payable
|
9,799 | 25,872 | ||||||
|
Other liabilities
|
9,882 | 7,020 | ||||||
|
Total liabilities
|
3,302,126 | 884,422 | ||||||
|
Commitments and contingencies (Note 17)
|
— | — | ||||||
|
Fannie Mae stockholders’ equity (deficit):
|
||||||||
|
Senior preferred stock, 1,000,000 shares issued and
outstanding
|
76,200 | 60,900 | ||||||
|
Preferred stock, 700,000,000 shares are
authorized—578,598,631 and 579,735,457 shares issued
and outstanding, respectively
|
20,291 | 20,348 | ||||||
|
Common stock, no par value, no maximum
authorization—1,267,426,377 and 1,265,674,761 shares
issued, respectively; 1,115,813,353 and
1,113,358,051 shares outstanding, respectively
|
665 | 664 | ||||||
|
Additional paid-in capital
|
604 | 2,083 | ||||||
|
Accumulated deficit
|
(95,061 | ) | (90,237 | ) | ||||
|
Accumulated other comprehensive loss
|
(3,754 | ) | (1,732 | ) | ||||
|
Treasury stock, at cost, 151,613,024 and
152,316,710 shares, respectively
|
(7,396 | ) | (7,398 | ) | ||||
|
Total Fannie Mae stockholders’ deficit
|
(8,451 | ) | (15,372 | ) | ||||
|
Noncontrolling interest
|
80 | 91 | ||||||
|
Total deficit
|
(8,371 | ) | (15,281 | ) | ||||
|
Total liabilities and equity (deficit)
|
$ | 3,293,755 | $ | 869,141 | ||||
See Notes to Condensed Consolidated Financial Statements
95
Table of Contents
(In conservatorship)
Condensed Consolidated Statements of Operations
(Dollars and shares in millions, except per share amounts)
(Unaudited)
|
For the Three
|
||||||||
|
Months Ended
|
||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Interest income:
|
||||||||
|
Trading securities
|
$ | 315 | $ | 990 | ||||
|
Available-for-sale
securities
|
1,473 | 3,721 | ||||||
|
Mortgage loans:
|
||||||||
|
Of Fannie Mae
|
3,298 | 4,707 | ||||||
|
Of consolidated trusts
|
34,321 | 891 | ||||||
|
Other
|
39 | 127 | ||||||
|
Total interest income
|
39,446 | 10,436 | ||||||
|
Interest expense:
|
||||||||
|
Short-term debt:
|
||||||||
|
Of Fannie Mae
|
116 | 1,107 | ||||||
|
Of consolidated trusts
|
2 | — | ||||||
|
Long-term debt:
|
||||||||
|
Of Fannie Mae
|
5,081 | 5,992 | ||||||
|
Of consolidated trusts
|
31,458 | 89 | ||||||
|
Total interest expense
|
36,657 | 7,188 | ||||||
|
Net interest income
|
2,789 | 3,248 | ||||||
|
Provision for loan losses
|
(11,939 | ) | (2,509 | ) | ||||
|
Net interest income (loss) after provision for loan losses
|
(9,150 | ) | 739 | |||||
|
Guaranty fee income (includes imputed interest of $29 and $150
for the three months ended March 31, 2010 and 2009,
respectively)
|
54 | 1,752 | ||||||
|
Investment gains, net
|
166 | 223 | ||||||
|
Other-than-temporary
impairments
|
(186 | ) | (5,653 | ) | ||||
|
Noncredit portion of
other-than-temporary
impairments recognized in other comprehensive loss
|
(50 | ) | — | |||||
|
Net
other-than-temporary
impairments
|
(236 | ) | (5,653 | ) | ||||
|
Fair value losses, net
|
(1,705 | ) | (1,460 | ) | ||||
|
Debt extinguishment losses, net (includes debt extinguishment
losses related to consolidated trusts of $69 for the three
months ended March 31, 2010)
|
(124 | ) | (79 | ) | ||||
|
Losses from partnership investments
|
(58 | ) | (357 | ) | ||||
|
Fee and other income
|
179 | 192 | ||||||
|
Non-interest loss
|
(1,724 | ) | (5,382 | ) | ||||
|
Administrative expenses:
|
||||||||
|
Salaries and employee benefits
|
324 | 293 | ||||||
|
Professional services
|
194 | 143 | ||||||
|
Occupancy expenses
|
41 | 48 | ||||||
|
Other administrative expenses
|
46 | 39 | ||||||
|
Total administrative expenses
|
605 | 523 | ||||||
|
Provision (benefit) for guaranty losses
|
(36 | ) | 17,825 | |||||
|
Foreclosed property expense (income)
|
(19 | ) | 538 | |||||
|
Other expenses
|
172 | 279 | ||||||
|
Total expenses
|
722 | 19,165 | ||||||
|
Loss before federal income taxes
|
(11,596 | ) | (23,808 | ) | ||||
|
Benefit for federal income taxes
|
(67 | ) | (623 | ) | ||||
|
Net loss
|
(11,529 | ) | (23,185 | ) | ||||
|
Less: Net (income) loss attributable to the noncontrolling
interest
|
(1 | ) | 17 | |||||
|
Net loss attributable to Fannie Mae
|
(11,530 | ) | (23,168 | ) | ||||
|
Preferred stock dividends
|
(1,527 | ) | (29 | ) | ||||
|
Net loss attributable to common stockholders
|
$ | (13,057 | ) | $ | (23,197 | ) | ||
|
Loss per share — Basic and Diluted
|
$ | (2.29 | ) | $ | (4.09 | ) | ||
|
Weighted-average common shares outstanding — Basic and
Diluted
|
5,692 | 5,666 | ||||||
See Notes to Condensed Consolidated Financial Statements
96
Table of Contents
(In conservatorship)
Condensed Consolidated Statements of Cash Flows
(Dollars in millions)
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Cash flows used in operating activities:
|
||||||||
|
Net loss
|
$ | (11,529 | ) | $ | (23,185 | ) | ||
|
Amortization of debt of Fannie Mae cost basis adjustments
|
364 | 1,326 | ||||||
|
Amortization of debt of consolidated trusts cost basis
adjustments
|
(68 | ) | (2 | ) | ||||
|
Provision for loan and guaranty losses
|
11,903 | 20,334 | ||||||
|
Valuation (gains) losses
|
(990 | ) | 5,403 | |||||
|
Current and deferred federal income taxes
|
(67 | ) | (1,713 | ) | ||||
|
Derivatives fair value adjustments
|
891 | (3 | ) | |||||
|
Purchases of loans held for sale
|
(17 | ) | (33,332 | ) | ||||
|
Proceeds from repayments of loans held for sale
|
9 | 295 | ||||||
|
Net change in trading securities, excluding non-cash transfers
|
(31,679 | ) | 1,949 | |||||
|
Other, net
|
(1,720 | ) | (1,417 | ) | ||||
|
Net cash used in operating activities
|
(32,903 | ) | (30,345 | ) | ||||
|
Cash flows provided by investing activities:
|
||||||||
|
Purchases of trading securities held for investment
|
(6,695 | ) | — | |||||
|
Proceeds from maturities of trading securities held for
investment
|
805 | 2,656 | ||||||
|
Proceeds from sales of trading securities held for investment
|
15,068 | 38 | ||||||
|
Purchases of
available-for-sale
securities
|
(107 | ) | (22,697 | ) | ||||
|
Proceeds from maturities of
available-for-sale
securities
|
4,120 | 9,731 | ||||||
|
Proceeds from sales of
available-for-sale
securities
|
6,154 | 53,972 | ||||||
|
Purchases of loans held for investment
|
(19,863 | ) | (9,859 | ) | ||||
|
Proceeds from repayments of loans held for investment of Fannie
Mae
|
3,250 | 10,974 | ||||||
|
Proceeds from repayments of loans held for investment of
consolidated trusts
|
130,226 | 3,020 | ||||||
|
Net change in restricted cash
|
3,174 | — | ||||||
|
Advances to lenders
|
(10,338 | ) | (22,877 | ) | ||||
|
Proceeds from disposition of acquired property
|
7,678 | 4,554 | ||||||
|
Reimbursements to servicers for loan advances
|
(11,748 | ) | (4,434 | ) | ||||
|
Net change in federal funds sold and securities purchased under
agreements to resell or similar arrangements
|
(9,135 | ) | 13,405 | |||||
|
Other, net
|
(382 | ) | (195 | ) | ||||
|
Net cash provided by investing activities
|
112,207 | 38,288 | ||||||
|
Cash flows used in financing activities:
|
||||||||
|
Proceeds from issuance of short-term debt of Fannie Mae
|
192,421 | 360,173 | ||||||
|
Proceeds from issuance of short-term debt of consolidated trusts
|
3,332 | — | ||||||
|
Payments to redeem short-term debt of Fannie Mae
|
(185,156 | ) | (417,553 | ) | ||||
|
Payments to redeem short-term debt of consolidated trusts
|
(9,513 | ) | — | |||||
|
Proceeds from issuance of long-term debt of Fannie Mae
|
100,604 | 105,057 | ||||||
|
Proceeds from issuance of long-term debt of consolidated trusts
|
83,692 | — | ||||||
|
Payments to redeem long-term debt of Fannie Mae
|
(92,355 | ) | (65,290 | ) | ||||
|
Payments to redeem long-term debt of consolidated trusts
|
(162,617 | ) | (127 | ) | ||||
|
Proceeds from senior preferred stock purchase agreement with
Treasury
|
15,300 | 15,200 | ||||||
|
Net change in federal funds purchased and securities sold under
agreements to repurchase
|
180 | (65 | ) | |||||
|
Other, net
|
(1,527 | ) | (25 | ) | ||||
|
Net cash used in financing activities
|
(55,639 | ) | (2,630 | ) | ||||
|
Net increase in cash and cash equivalents
|
23,665 | 5,313 | ||||||
|
Cash and cash equivalents at beginning of period
|
6,812 | 17,933 | ||||||
|
Cash and cash equivalents at end of period
|
$ | 30,477 | $ | 23,246 | ||||
|
Cash paid during the period for:
|
||||||||
|
Interest
|
$ | 40,660 | $ | 7,806 | ||||
|
Income taxes
|
— | 848 | ||||||
|
Non-cash activities
(excluding transition-related
impacts — see Note 2)
:
|
||||||||
|
Mortgage loans acquired by assuming debt
|
$ | 130,042 | $ | 13 | ||||
|
Net transfers from mortgage loans held for investment of
consolidated trusts to mortgage loans held for investment of
Fannie Mae
|
55,074 | — | ||||||
|
Transfers from advances to lenders to investments in securities
|
— | 13,131 | ||||||
|
Transfers from advances to lenders to loans held for investment
of consolidated trusts
|
11,012 | — | ||||||
|
Net transfers from mortgage loans to acquired property
|
2,233 | 916 | ||||||
See Notes to Condensed Consolidated Financial Statements
97
Table of Contents
(Dollars and shares in
millions, except per share amounts)
(Unaudited)
(Unaudited)
| Fannie Mae Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Retained
|
Accumulated
|
|||||||||||||||||||||||||||||||||||||||||||||||
| Shares Outstanding |
Additional
|
Earnings
|
Other
|
Non
|
Total
|
|||||||||||||||||||||||||||||||||||||||||||
|
Senior
|
Senior
|
Preferred
|
Common
|
Paid-In
|
(Accumulated
|
Comprehensive
|
Treasury
|
Controlling
|
Equity
|
|||||||||||||||||||||||||||||||||||||||
| Preferred | Preferred | Common | Preferred | Stock | Stock | Capital | Deficit) | Loss | Stock | Interest | (Deficit) | |||||||||||||||||||||||||||||||||||||
|
Balance as of December 31, 2008
|
1 | 597 | 1,085 | $ | 1,000 | $ | 21,222 | $ | 650 | $ | 3,621 | $ | (26,790 | ) | $ | (7,673 | ) | $ | (7,344 | ) | $ | 157 | $ | (15,157 | ) | |||||||||||||||||||||||
|
Change in investment in noncontrolling interest
|
— | — | — | — | — | — | — | — | — | — | (3 | ) | (3 | ) | ||||||||||||||||||||||||||||||||||
|
Comprehensive loss:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | — | — | (23,168 | ) | — | — | (17 | ) | (23,185 | ) | |||||||||||||||||||||||||||||||||
|
Other comprehensive loss, net of tax effect:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Changes in net unrealized losses on available-for sale
securities (net of tax of $271)
|
— | — | — | — | — | — | — | — | 505 | — | — | 505 | ||||||||||||||||||||||||||||||||||||
|
Reclassification adjustment for other-than-temporary impairments
recognized in net loss (net of tax of $1,979)
|
— | — | — | — | — | — | — | — | 3,674 | 3,674 | ||||||||||||||||||||||||||||||||||||||
|
Reclassification adjustment for gains included in net loss (net
of tax of $17)
|
— | — | — | — | — | — | — | — | 32 | — | — | 32 | ||||||||||||||||||||||||||||||||||||
|
Unrealized gains on guaranty assets and guaranty fee
buy-ups
|
— | — | — | — | — | — | — | — | 29 | — | — | 29 | ||||||||||||||||||||||||||||||||||||
|
Prior service cost and actuarial gains, net of amortization for
defined benefit plans
|
— | — | — | — | — | — | — | — | 15 | — | — | 15 | ||||||||||||||||||||||||||||||||||||
|
Total comprehensive loss
|
(18,930 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Senior preferred stock dividends
|
— | — | — | — | — | — | (25 | ) | — | — | — | — | (25 | ) | ||||||||||||||||||||||||||||||||||
|
Increase to senior preferred liquidation preference
|
— | — | — | 15,200 | — | — | — | — | — | — | — | 15,200 | ||||||||||||||||||||||||||||||||||||
|
Conversion of convertible preferred stock into common stock
|
— | (12 | ) | 19 | — | (593 | ) | 10 | 583 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
|
Other
|
— | — | 1 | — | — | — | 19 | 1 | — | (34 | ) | — | (14 | ) | ||||||||||||||||||||||||||||||||||
|
Balance as of March 31, 2009
|
1 | 585 | 1,105 | $ | 16,200 | $ | 20,629 | $ | 660 | $ | 4,198 | $ | (49,957 | ) | $ | (3,418 | ) | $ | (7,378 | ) | $ | 137 | $ | (18,929 | ) | |||||||||||||||||||||||
|
Balance as of December 31, 2009
|
1 | 580 | 1,113 | $ | 60,900 | $ | 20,348 | $ | 664 | $ | 2,083 | $ | (90,237 | ) | $ | (1,732 | ) | $ | (7,398 | ) | $ | 91 | $ | (15,281 | ) | |||||||||||||||||||||||
|
Cumulative effect from the adoption of the accounting standards
on transfers of financial assets and consolidation
|
— | — | — | — | — | — | — | 6,706 | (3,394 | ) | — | (14 | ) | 3,298 | ||||||||||||||||||||||||||||||||||
|
Balance as of January 1, 2010, adjusted
|
1 | 580 | 1,113 | 60,900 | 20,348 | 664 | 2,083 | (83,531 | ) | (5,126 | ) | (7,398 | ) | 77 | (11,983 | ) | ||||||||||||||||||||||||||||||||
|
Change in investment in noncontrolling interest
|
— | — | — | — | — | — | — | — | — | — | 2 | 2 | ||||||||||||||||||||||||||||||||||||
|
Comprehensive loss:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income (loss)
|
— | — | — | — | — | — | — | (11,530 | ) | — | — | 1 | (11,529 | ) | ||||||||||||||||||||||||||||||||||
|
Other comprehensive loss, net of tax effect:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Changes in net unrealized losses on
available-for-sale
securities, (net of tax of $710)
|
— | — | — | — | — | — | — | — | 1,318 | — | — | 1,318 | ||||||||||||||||||||||||||||||||||||
|
Reclassification adjustment for other-than-temporary impairments
recognized in net loss (net of tax of $81)
|
— | — | — | — | — | — | — | — | 155 | — | — | 155 | ||||||||||||||||||||||||||||||||||||
|
Reclassification adjustment for losses included in net loss (net
of tax of $56)
|
— | — | — | — | — | — | — | — | (103 | ) | — | — | (103 | ) | ||||||||||||||||||||||||||||||||||
|
Prior service cost and actuarial gains, net of amortization for
defined benefit plans
|
— | — | — | — | — | — | — | — | 2 | — | — | 2 | ||||||||||||||||||||||||||||||||||||
|
Total comprehensive loss
|
(10,157 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Senior preferred stock dividends
|
— | — | — | — | — | — | (1,527 | ) | — | — | — | — | (1,527 | ) | ||||||||||||||||||||||||||||||||||
|
Increase to senior preferred liquidation preference
|
— | — | — | 15,300 | — | — | — | — | — | — | — | 15,300 | ||||||||||||||||||||||||||||||||||||
|
Conversion of convertible preferred stock into common stock
|
— | (1 | ) | 2 | — | (57 | ) | 1 | 56 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
|
Other
|
— | — | 1 | — | — | — | (8 | ) | — | — | 2 | — | (6 | ) | ||||||||||||||||||||||||||||||||||
|
Balance as of March 31, 2010
|
1 | 579 | 1,116 | $ | 76,200 | $ | 20,291 | $ | 665 | $ | 604 | $ | (95,061 | ) | $ | (3,754 | ) | $ | (7,396 | ) | $ | 80 | $ | (8,371 | ) | |||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
98
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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”). Through July 29, 2008,
we were regulated by the Office of Federal Housing Enterprise
Oversight (“OFHEO”), which was replaced on
July 30, 2008 with FHFA upon the enactment of the Federal
Housing Finance Regulatory Reform Act of 2008 (“2008 Reform
Act”). 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; (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; and
(3) Treasury’s agreement to establish a temporary
secured lending credit facility that was available to us and the
other GSEs regulated by FHFA under identical terms until
December 31, 2009.
Under the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended by the 2008 Reform Act,
(together, the “GSE Act”), the conservator immediately
succeeded to 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 succeeded to the
title to the books, records and assets of any other legal
custodian of Fannie Mae. FHFA, in its role as conservator, has
overall management authority over our business. 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.
As of May 9, 2010, the conservator has advised us that it
has not disaffirmed or repudiated any contracts we entered into
prior to its appointment as conservator. The GSE Act requires
FHFA to exercise its right to disaffirm or repudiate most
contracts within a reasonable period of time after its
appointment as conservator.
The conservator has the power to transfer or sell any asset or
liability of Fannie Mae (subject to limitations and
post-transfer notice provisions for transfers of qualified
financial contracts) without any approval, assignment of rights
or consent of any party. The GSE Act, however, provides that
mortgage loans and mortgage-related assets that have been
transferred to a Fannie Mae MBS trust must be held by the
conservator for the beneficial owners of the Fannie Mae MBS and
cannot be used to satisfy the general creditors of the company.
As of May 9, 2010, FHFA has not exercised this power.
Neither the conservatorship nor the terms of our agreements with
Treasury changes our obligation to make required payments on our
debt securities or perform under our mortgage guaranty
obligations.
The conservatorship has no specified termination date and the
future structure of our business following termination of the
conservatorship is uncertain. We do not know when or how the
conservatorship will be
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terminated or what changes to our business structure will be
made during or following the termination of the conservatorship.
We do not know whether we will exist in the same or a similar
form or continue to conduct our business as we did before the
conservatorship, or whether the conservatorship will end in
receivership. 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
(that is, we have a net worth deficit) or if we have not been
paying our debts, in either case, for a period of 60 days.
In addition, the Director of FHFA may place us in receivership
at his discretion at any time for other reasons, including
conditions that FHFA has already asserted existed at the time
the Director of FHFA placed us into conservatorship. Placement
into receivership would have a material adverse effect on
holders of our common stock, preferred stock, debt securities
and Fannie Mae MBS. 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.
Impact
of U.S. Government Support
We are dependent upon the continued support of Treasury to
eliminate our net worth deficit, which avoids our being placed
into receivership. Based on consideration of all the relevant
conditions and events affecting our operations, including our
dependence on the U.S. Government, we continue to operate
as a going concern and in accordance with our delegation of
authority from FHFA.
Pursuant to the amended senior preferred stock purchase
agreement, Treasury has committed to provide us with funding as
needed to help us maintain a positive net worth thereby avoiding
the mandatory receivership trigger described above. We have
received a total of $75.2 billion to date under
Treasury’s funding commitment and the Acting Director of
FHFA has submitted a request for an additional $8.4 billion
from Treasury to eliminate our net worth deficit as of
March 31, 2010. The aggregate liquidation preference of the
senior preferred stock was $76.2 billion as of
March 31, 2010 and will increase to $84.6 billion as a
result of FHFA’s request on our behalf for funds to
eliminate our net worth deficit as of March 31, 2010.
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 roll-over risk
increases when our outstanding short-term debt increases as a
percentage of our total outstanding debt. Our ability to issue
long-term debt has been strong in recent quarters primarily due
to actions taken by the federal government, to support us and
the financial markets. Many of these programs initiated by the
federal government, however, have expired in the last five
months. The Treasury credit facility and Treasury MBS purchase
program terminated on December 31, 2009. The Federal
Reserve’s agency debt and MBS purchase programs expired on
March 31, 2010. Despite the expiration of these programs,
as of the date of this filing, demand for our long-term debt
securities continues to be strong.
We believe that continued federal government support of our
business and the financial markets, as well as our status as a
GSE, are essential to maintaining our access to debt funding.
Changes or perceived changes in the government’s support
could increase our roll-over risk and materially adversely
affect our ability to refinance our debt as it becomes due,
which could have a material adverse impact on our liquidity,
financial condition and results of operations. In addition,
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.
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In February 2010, the Obama Administration stated in its fiscal
year 2011 budget proposal that it was continuing to monitor the
situation of Fannie Mae, Freddie Mac and the Federal Home Loan
Bank System and would continue to provide updates on
considerations for longer-term reform of Fannie Mae and Freddie
Mac as appropriate. These considerations may have a material
impact on our ability to issue debt or refinance existing debt
as it becomes due and hinder our ability to continue as a going
concern. On April 14, 2010, the Obama Administration
released seven broad questions for public comment on the future
of the housing finance system, including Fannie Mae and Freddie
Mac, and announced that it would hold a series of public forums
across the country on housing finance reform.
Basis
of Presentation
The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“GAAP”) for interim financial information and
with the SEC’s instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and note
disclosures required by GAAP for complete consolidated financial
statements. In the opinion of management, all adjustments of a
normal recurring nature considered necessary for a fair
presentation have been included. Results for the three months
ended March 31, 2010 may not necessarily be indicative
of the results for the year ending December 31, 2010. The
unaudited interim condensed consolidated financial statements as
of March 31, 2010 and our consolidated financial statements
as of December 31, 2009 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, 2009 (“2009
Form 10-K”),
filed with the SEC on February 26, 2010.
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 the
Treasury are deemed related parties. As of March 31, 2010,
Treasury held an investment in our senior preferred stock with a
liquidation preference of $76.2 billion. During 2009,
Treasury engaged us to serve as program administrator for the
Home Affordable Modification Program.
In addition, in 2009, we entered into a memorandum of
understanding with Treasury, FHFA and Freddie Mac in which we
agreed to provide assistance to state and local housing finance
agencies (“HFAs”) through three separate assistance
programs: a temporary credit and liquidity facilities
(“TCLF”) program, a new issue bond (“NIB”)
program and a multifamily credit enhancement program.
Under the TCLF program, we have $4.1 billion and
$870 million outstanding, which includes principal and
interest, of three-year standby credit and liquidity support as
of March 31, 2010 and December 31, 2009, respectively.
Treasury has purchased participating interests in these
temporary credit and liquidity facilities. Under the NIB
program, we have $7.6 billion and $3.5 billion
outstanding of partially guaranteed pass-through securities
backed by single-family and multifamily housing bonds issued by
HFAs as of March 31, 2010 and December 31, 2009,
respectively. Treasury bears the initial loss of principal under
the TCLF program and the NIB program up to 35% of the total
principal on a combined program-wide basis. We are not
participating in the multifamily credit enhancement program.
FHFA’s control of both us and Freddie Mac has caused us and
Freddie Mac to be related parties. No transactions outside of
normal business activities have occurred between us and Freddie
Mac. As of March 31,
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2010 and December 31, 2009, we held Freddie Mac
mortgage-related securities with a fair value of
$28.4 billion and $42.6 billion, respectively, and
accrued interest receivable of $151 million and
$230 million, respectively. We recognized interest income
on Freddie Mac mortgage-related securities held by us of
$335 million and $407 million for the three months
ended March 31, 2010 and 2009, respectively.
Use of
Estimates
Preparing condensed consolidated financial statements in
accordance with GAAP requires management to make estimates and
assumptions that affect our reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities
as of the dates of our condensed consolidated financial
statements, as well as our reported amounts of revenues and
expenses during the reporting periods. Management has made
significant estimates in a variety of areas including, but not
limited to, valuation of certain financial instruments and other
assets and liabilities, the allowance for loan losses and
reserve for guaranty losses, and
other-than-temporary
impairment of investment securities. Actual results could be
different from these estimates.
Principles
of Consolidation
Our condensed consolidated financial statements include our
accounts as well as the accounts of other entities in which we
have a controlling financial interest. All significant
intercompany balances and transactions have been eliminated.
The typical condition for a controlling financial interest is
ownership of a majority of the voting interests of an entity. A
controlling financial interest may also exist in entities
through arrangements that do not involve voting interests, such
as a variable interest entity (“VIE”).
VIE Assessment
A VIE is an entity (1) that has total equity at risk that
is not sufficient to finance its activities without additional
subordinated financial support from other entities,
(2) where the group of equity holders does not have the
power to direct the activities of the entity that most
significantly impact the entity’s economic performance, or
the obligation to absorb the entity’s expected losses or
the right to receive the entity’s expected residual
returns, or both, or (3) where the voting rights of some
investors are not proportional to their obligations to absorb
the expected losses of the entity, their rights to receive the
expected residual returns of the entity, or both, and
substantially all of the entity’s activities either involve
or are conducted on behalf of an investor that has
disproportionately few voting rights.
In order to determine if an entity is considered a VIE, we first
perform a qualitative analysis, which requires certain
subjective decisions regarding our assessments, including, but
not limited to, the design of the entity, the variability that
the entity was designed to create and pass along to its interest
holders, the rights of the parties, and the purpose of the
arrangement. If we cannot conclude after a qualitative analysis
whether an entity is a VIE, we perform a quantitative analysis.
We have interests in various entities that are considered VIEs.
The primary types of entities are securitization trusts
guaranteed by us via lender swap and portfolio securitization
transactions, limited partnership investments in low-income
housing tax credit (“LIHTC”) and other housing
partnerships, as well as mortgage and asset-backed trusts that
were not created by us.
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In June 2009, the FASB revised the accounting standard on the
consolidation of VIEs (the “new accounting standard”),
which was effective for consolidated financial statements issued
for reporting periods beginning after November 15, 2009. We
adopted the new accounting standard prospectively for all
existing VIEs effective January 1, 2010.
Prior to the adoption of the new accounting standard on
January 1, 2010, we were exempt from evaluating certain
securitization entities for consolidation if the entities met
the criteria of a qualifying special purpose entity
(“QSPE”), and if we did not have the unilateral
ability to cause the entity to liquidate or change the
entity’s QSPE status. The QSPE requirements significantly
limited the activities in which a QSPE could engage and the
types of assets and liabilities it could hold. To the extent any
entity failed to meet those criteria, we were required to
consolidate its assets and liabilities if we were determined to
be the primary beneficiary of the entity. The new accounting
standard removed the concept of a QSPE and replaced the previous
primarily quantitative consolidation model with a qualitative
model for determining the primary beneficiary of a VIE.
Primary Beneficiary Determination
Upon the adoption of the new accounting standard on
January 1, 2010, if an entity is a VIE, we consider whether
our variable interest causes us to be the primary beneficiary.
Under the new accounting standard, an enterprise is deemed to be
the primary beneficiary of a VIE when the enterprise has both
(1) the power to direct the activities of the VIE that most
significantly impact the entity’s economic performance, and
(2) exposure to benefits
and/or
losses that could potentially be significant to the entity. The
primary beneficiary of the VIE is required to consolidate and
account for the assets, liabilities, and noncontrolling
interests of the VIE in its consolidated financial statements.
The assessment of the party that has the power to direct the
activities of the VIE may require significant management
judgment when (1) more than one party has power or
(2) more than one party is involved in the design of the
VIE but no party has the power to direct the ongoing activities
that could be significant.
We are required to continually assess whether we are the primary
beneficiary and therefore may consolidate a VIE through the
duration of our involvement. Examples of certain events that may
change whether or not we consolidate the VIE include a change in
the design of the entity or a change in our ownership such that
we no longer hold substantially all of the certificates issued
by a multi-class resecuritization trust.
Prior to January 1, 2010, we determined whether our
variable interest caused us to be considered the primary
beneficiary through a combination of qualitative and
quantitative analyses. The qualitative analysis considered the
design of the entity, the risks that cause variability, the
purpose for which the entity was created, and the variability
that the entity was designed to pass along to its variable
interest holders. When the primary beneficiary could not be
identified through a qualitative analysis, we used internal cash
flow models, which in certain cases included Monte Carlo
simulations, to compute and allocate expected losses or expected
residual returns to each variable interest holder based upon the
relative contractual rights and preferences of each interest
holder in the VIE’s capital structure. We were the primary
beneficiary and were required to consolidate the entity if we
absorbed the majority of expected losses or expected residual
returns, or both.
Measurement of Consolidated Assets and Liabilities
In accordance with the new accounting standard, on the
transition date, January 1, 2010, we initially measured the
assets and liabilities of the newly consolidated securitization
trusts at their unpaid principal balances and
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established a corresponding valuation allowance and accrued
interest as it was not practicable to determine the carrying
amount of such assets and liabilities. The securitization assets
and liabilities that did not qualify for the use of this
practical expedient were initially measured at fair value. As
such, we recognized in our condensed consolidated balance sheet
the mortgage loans underlying our consolidated trusts as
“Mortgage loans held for investment of consolidated
trusts.” We also recognized securities issued by these
trusts that are held by third parties in our condensed
consolidated balance sheet as either “Short-term debt of
consolidated trusts” or “Long-term debt of
consolidated trusts.”
Except for securitization trusts consolidated on the transition
date, when we transfer assets into a VIE that we consolidate at
the time of transfer, we recognize the assets and liabilities of
the VIE at the amounts that they would have been recognized if
they had not been transferred, and no gain or loss is recognized
on the transfer. For all other VIEs that we consolidate, we
recognize the assets and liabilities of the VIE in our condensed
consolidated financial statements at fair value, and we
recognize a gain or loss for the difference between (1) the
fair value of the consideration paid, fair value of
noncontrolling interests and the reported amount of any
previously held interests, and (2) the net amount of the
fair value of the assets and liabilities consolidated. However,
for the securitization trusts established under our lender swap
program, no gain or loss is recognized if the trust is
consolidated at formation as there is no difference in the
respective fair value of (1) and (2) above.
If we cease to be deemed the primary beneficiary of a VIE then
we deconsolidate the VIE. We use fair value to measure the
initial cost basis for the retained interests that are recorded
upon the deconsolidation of a VIE. Any difference between the
fair value and the previous carrying amount of our investment in
the VIE is recorded as “Investment gains, net” in our
condensed consolidated statements of operations. We also record
gains or losses that are associated with the consolidation of a
VIE as “Investment gains, net” in our condensed
consolidated statements of operations.
Purchase/Sale of Fannie Mae Securities
We actively purchase and may subsequently sell guaranteed MBS
that have been issued through our lender swap and portfolio
securitization transaction programs. The accounting for the
purchase and sale of our guaranteed MBS issued by the trusts
differs based on the characteristics of the securitization
trusts and whether the trusts are consolidated.
Single-Class Securitization
Trusts
Our single-class securitization trusts are trusts we create to
issue single-class Fannie Mae MBS that evidence an
undivided interest in the mortgage loans held in the trust. With
single-class Fannie Mae MBS, the investors receive
principal and interest payments in proportion to their
percentage ownership of the MBS issuance. We guarantee to each
single-class securitization trust that we will supplement
amounts received by the single-class securitization trust as
required to permit timely payments of principal and interest on
the related Fannie Mae MBS. This guaranty exposes us to credit
losses on the loans underlying Fannie Mae MBS.
We create single-class securitization trusts through our lender
swap and portfolio securitization transaction programs. A lender
swap transaction occurs when a mortgage lender delivers a pool
of single-family mortgage loans to us, which we immediately
deposit into an MBS trust. The MBS securities are then issued to
the seller in exchange for the mortgage loans. A portfolio
securitization transaction occurs when we purchase mortgage
loans from third-party sellers for cash and later deposit these
loans into an MBS trust. The securities issued
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through a portfolio securitization are then sold to investors
for cash. We consolidate most of the single-class securitization
trusts that are issued under these programs because our role as
guarantor and master servicer provides us with the power to
direct matters that impact the credit risk to which we are
exposed.
The purchase of an MBS security from a third party that was
issued from a consolidated trust is accounted for as the
extinguishment of debt in our condensed consolidated financial
statements. A gain or loss on the extinguishment of such debt is
recorded to the extent that the purchase price of the MBS does
not equal the carrying value of the related consolidated debt
reported in our condensed consolidated balance sheet (including
unamortized premiums, discounts or the other cost basis
adjustments), at the time of purchase. The sale of an MBS
security from Fannie Mae’s portfolio to a third party that
was issued from a consolidated trust is accounted for as the
issuance of debt in our condensed consolidated financial
statements. Related premiums, discounts and other cost basis
adjustments are amortized into income over time.
If a single-class securitization trust is not consolidated, we
account for the purchase and subsequent sale of such securities
as the transfer of an investment security in accordance with the
new accounting standard for the transfers of financial assets.
Single-Class Resecuritization
Trusts
Single-class resecuritization trusts are created by depositing
Fannie Mae MBS into a new securitization trust for the purpose
of aggregating multiple MBS into a single larger security. The
cash flows from the new security represent an aggregation of the
cash flows from the underlying MBS. We guarantee to each
single-class resecuritization trust that we will supplement
amounts received by the trust as required to permit timely
payments of principal and interest on the related Fannie Mae
securities. However, there is no additional credit risk assumed
by us because the underlying assets are MBS for which we have
already provided a guaranty. Additionally, our involvement with
these trusts does not provide any incremental rights or power
that would enable Fannie Mae to direct any activities of the
trusts. As a result, we are not the primary beneficiaries of,
and therefore do not consolidate our single-class
resecuritization trusts.
As our single-class resecuritization securities pass through all
of the cash flows of the underlying MBS directly to the holders
of the securities, they are deemed to be substantially the same
as the underlying MBS. Therefore, we account for purchases of
our single-class resecuritization securities as an
extinguishment of the underlying MBS debt and the sale of these
securities as an issuance of the underlying MBS debt.
Multi-Class Resecuritization
Trusts
Multi-class resecuritization trusts are trusts we create to
issue multi-class Fannie Mae securities, including Real
Estate Mortgage Investment Conduits (“REMICs”) and
strip securities, in which the cash flows of the underlying
mortgage assets are divided, creating several classes of
securities, each of which represents a beneficial ownership
interest in a separate portion of cash flows. We guarantee to
each multi-class resecuritization trust that we will supplement
amounts received by the trusts as required to permit timely
payments of principal and interest, as applicable, on the
related Fannie Mae securities. However, there is no credit risk
assumed by us because the underlying assets are Fannie Mae MBS
for which we have already provided a guaranty. Although we may
be exposed to prepayment risk via our ownership of the
securities issued by these trusts, we do not have the ability
via our involvement with a multi-class resecuritization trust to
impact the economic risk to which we are exposed. Therefore, we
do not consolidate such a multi-class
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resecuritization trust until we hold a substantial portion of
the outstanding beneficial interests that have been issued by
the trust and are therefore considered the primary beneficiary
of the trust.
We account for the purchase of the securities issued by
consolidated multi-class resecuritization trusts as an
extinguishment of the debt issued by these trusts and the
subsequent sale of such securities as the issuance of
multi-class debt. If a multi-class resecuritization trust is not
consolidated, we account for the purchase and subsequent sale of
such securities as the transfer of an investment security rather
than the issuance or extinguishment of debt in accordance with
the new accounting standard for the transfers of financial
assets. Additionally, the cash flows from the underlying
mortgage assets have been divided between the debt securities
issued by the multi-class resecuritization trust; therefore, the
debt issued by a multi-class resecuritization trust is not
substantially the same as the consolidated MBS debt.
When we do not consolidate a multi-class resecuritization trust,
we recognize both our investment in the trust and the mortgage
loans of the Fannie Mae MBS trusts that we consolidate that
underlie the multi-class resecuritization trust. Additionally,
we recognize the unsecured corporate debt issued to third
parties to fund the purchase of our investments in the
multi-class resecuritization trusts as well as the debt issued
to third parties of the MBS trusts we consolidate that underlie
the multi-class resecuritization trusts.
This results in the recognition of interest income from
investments in multi-class resecuritization trusts and interest
expense from the unsecured debt issued to third parties to fund
the purchase of the investments in multi-class resecuritization
trusts, as well as interest income from the mortgage loans and
interest expense from the debt issued to third parties from the
MBS trusts we consolidate that underlie the multi-class
resecuritization trusts.
See “Note 2
,
Adoption of the New Accounting
Standards on the Transfers of Financial Assets and Consolidation
of Variable Interest Entities” for additional information
regarding the impact upon adoption.
Portfolio
Securitizations
We evaluate a transfer of financial assets from a portfolio
securitization transaction to an entity that is not consolidated
to determine whether the transfer qualifies as a sale. Transfers
of financial assets for which we surrender control of the
transferred assets are recorded as sales.
When a transfer that qualifies as a sale is completed, we
derecognize all assets transferred and recognize all assets
obtained and liabilities incurred at fair value. Prior to the
adoption of the new accounting standard on the transfers of
financial assets, we allocated the previous carrying amount of
the transferred assets between the assets sold and the retained
interests, if any, in proportion to their relative fair values
at the date of transfer. We record a gain or loss as a component
of “Investment gains, net” in our condensed
consolidated statements of operations, which now represents the
difference between the carrying basis of the assets transferred
and the fair value of the proceeds from the sale. Prior to the
adoption of the new accounting standard on the transfers of
financial assets, the gain or loss represented the difference
between the allocated carrying amount of the assets sold and the
proceeds from the sale, net of any transaction costs and
liabilities incurred, which may have included a recourse
obligation for our financial guaranty. Retained interests are
primarily in the form of Fannie Mae MBS, REMIC certificates,
guaranty assets and master servicing assets (“MSAs”).
If a portfolio securitization does not meet the criteria for
sale treatment, the transferred assets remain in our condensed
consolidated balance sheets and we record a liability to the
extent of any proceeds received in connection with such a
transfer.
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MAE
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Cash
and Cash Equivalents and Statements of Cash Flows
Short-term investments that have a maturity at the date of
acquisition of three months or less and are readily convertible
to known amounts of cash are generally considered cash
equivalents. We may pledge as collateral certain short-term
investments classified as cash equivalents.
In the presentation of our condensed consolidated statements of
cash flows, we present cash flows from mortgage loans held for
sale as operating activities. We present cash flows from federal
funds sold and securities purchased under agreements to resell
or similar arrangements as investing activities and cash flows
from federal funds purchased and securities sold under
agreements to repurchase as financing activities. We classify
cash flows related to dollar roll transactions that do not meet
the requirements to be accounted for as secured borrowings as
purchases and sales of securities in investing activities. We
classify cash flows from trading securities based on their
nature and purpose. We classify cash flows from trading
securities that we intend to hold for investment (the majority
of our mortgage-related trading securities) as investing
activities and cash flows from trading securities that we do not
intend to hold for investment (primarily our
non-mortgage-related securities) as operating activities.
Prior to the adoption of the new accounting standards on the
transfers of financial assets and the consolidation of VIEs, we
reflected the creation of Fannie Mae MBS through either the
securitization of loans held for sale or advances to lenders as
a non-cash activity in our condensed consolidated statements of
cash flows in the line items “Securitization-related
transfers from mortgage loans held for sale to investments in
securities” or “Transfers from advances to lenders to
investments in securities,” respectively. Cash inflows from
the sale of a Fannie Mae MBS created through the securitization
of loans held for sale were reflected in the condensed
consolidated statements of cash flows based on the balance sheet
classification of the associated Fannie Mae MBS as either
“Net decrease in trading securities, excluding non-cash
transfers,” or “Proceeds from sales of
available-for-sale
securities.” Subsequent to the adoption of these new
accounting standards, we continue to apply this presentation to
unconsolidated trusts. For consolidated trusts, we classify cash
flows related to mortgage loans held by our consolidated trusts
as either investing activities (for principal repayments) or
operating activities (for interest received from borrowers
included as a component of our net loss). Cash flows related to
debt securities issued by consolidated trusts are classified as
either financing activities (for repayments of principal to
certificateholders) or operating activities (for interest
payments to certificateholders included as a component of our
net loss). We distinguish between the payments and proceeds
related to the debt of Fannie Mae and the debt of consolidated
trusts, as applicable.
Restricted
Cash
We and our servicers advance payments on delinquent loans to
consolidated Fannie Mae MBS trusts. We recognize the cash
advanced as “Restricted cash” in our condensed
consolidated balance sheets to the extent such amounts are due
to, but have not yet been remitted to, the MBS
certificateholders. In addition, when we or our servicers
collect and hold cash that is due to certain Fannie Mae MBS
trusts in advance of our requirement to remit these amounts to
the trusts, we recognize the collected cash amounts as
“Restricted cash.”
We also recognize “Restricted cash” as a result of
restrictions related to certain consolidated partnership funds
as well as for certain collateral arrangements.
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MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Mortgage
Loans
Loans
Held for Investment
When we acquire mortgage loans that we have the ability and the
intent to hold for the foreseeable future or until maturity, we
classify the loans as held for investment (“HFI”).
When we consolidate a trust, we recognize the loans underlying
the trust in our condensed consolidated balance sheet. The
trusts do not have the ability to sell mortgage loans and the
use of such loans is limited exclusively to the settlement of
obligations of the trusts. Therefore, mortgages acquired when we
have the intent to securitize via trusts that are consolidated
will generally be classified as HFI in our condensed
consolidated balance sheets both prior to and subsequent to
their securitization. This is consistent with our intent and
ability to hold the loans for the foreseeable future or until
maturity.
We report HFI loans at their outstanding unpaid principal
balance adjusted for any deferred and unamortized cost basis
adjustments, including purchase premiums, discounts and other
cost basis adjustments. We recognize interest income on HFI
loans on an accrual basis using the interest method, unless we
determine that the ultimate collection of contractual principal
or interest payments in full is not reasonably assured. When the
collection of principal or interest payments in full is not
reasonably assured, we discontinue the accrual of interest
income.
Historically, mortgage loans held both by us and by consolidated
trusts were reported collectively as “Mortgage loans held
for investment.” We now report loans held by consolidated
trusts as “Mortgage loans held for investment of
consolidated trusts” and those held directly by us as
“Mortgage loans held for investment of Fannie Mae” in
our condensed consolidated balance sheets.
Loans
Held for Sale
When we acquire mortgage loans that we intend to sell or
securitize via trusts that are not consolidated, we classify the
loans as held for sale (“HFS”). Prior to the adoption
of the new accounting standards, we initially classified loans
as HFS if they were product types that we actively securitized
from our portfolio because we had the intent, at acquisition, to
securitize the loans (either during the month in which the
acquisition occurred or during the following month) via a trust
that we did not consolidate and for which we sold all or a
portion of the resulting securities. At month-end, we
reclassified the loans acquired during the month from HFS to
HFI, if we had not securitized or were not in the process of
securitizing them because we had the intent to hold the loans
for the foreseeable future or until maturity.
We report HFS loans at the lower of cost or fair value
(“LOCOM”). Any excess of an HFS loan’s cost over
its fair value is recognized as a valuation allowance, with
changes in the valuation allowance recognized as
“Investment gains, net” in our condensed consolidated
statements of operations. We recognize interest income on HFS
loans on an accrual basis, unless we determine that the ultimate
collection of contractual principal or interest payments in full
is not reasonably assured. When the collection of principal or
interest payments in full is not reasonably assured, we
discontinue the accrual of interest income. Purchase premiums,
discounts and other cost basis adjustments on HFS loans are
deferred upon loan acquisition, included in the cost basis of
the loan, and not amortized. We determine any LOCOM adjustment
on HFS loans on a pool basis by aggregating those loans based on
similar risks and characteristics, such as product types and
interest rates.
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MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
In the event that we reclassify HFS loans to HFI, we record the
loans at LOCOM on the date of reclassification. We recognize any
LOCOM adjustment recognized upon reclassification as a basis
adjustment to the HFI loan.
Nonaccrual
Loans
We discontinue accruing interest on single-family and
multifamily loans when we believe collectibility of principal or
interest is not reasonably assured, unless the loan is well
secured and in the process of collection based upon an
individual loan assessment. When a loan is placed on nonaccrual
status, interest previously accrued but not collected becomes
part of our recorded investment in the loan and is collectively
reviewed for impairment. If cash is received while a loan is on
nonaccrual status, it is applied first towards the recovery of
accrued interest and related scheduled principal repayments.
Once these amounts are recovered, we recognize interest income
on a cash basis. If we have doubt regarding the ultimate
collectibility of the remaining recorded investment in a
nonaccrual loan, we apply any payment received to reduce
principal to the extent necessary to eliminate such doubt. We
return a loan to accrual status when we determine that the
collectibility of principal and interest is reasonably assured.
Restructured
Loans
A modification to the contractual terms of a loan that results
in granting a concession to a borrower experiencing financial
difficulties is considered a troubled debt restructuring
(“TDR”). A concession has been granted to a borrower
when we determine that the effective yield based on the
restructured loan term is less than the effective yield prior to
the modification. We measure impairment of a loan restructured
in a TDR individually based on the excess of the recorded
investment in the loan over the present value of the expected
future cash inflows discounted at the loan’s original
effective interest rate. Costs incurred that affect a TDR are
expensed as incurred.
A loan modification for reasons other than a borrower
experiencing financial difficulties or that results in terms at
least as favorable to us as the terms for comparable loans to
other customers with similar credit risks who are not
refinancing or restructuring a loan is not considered a TDR. We
further evaluate such a loan modification to determine whether
the modification is considered “more than minor.” If
the modification is considered more than minor and the modified
loan is not subject to the accounting requirements for acquired
credit-impaired loans, we treat the modification as an
extinguishment of the previously recorded loan and the
recognition of a new loan. We recognize any unamortized basis
adjustments on the previously recorded loan immediately in
“Interest income” in our condensed consolidated
statements of operations. We account for a minor modification as
a continuation of the previously recorded loan.
Loans
Purchased or Eligible to be Purchased from Trusts
For our single-class securitization trusts that include a Fannie
Mae guaranty, we have the option to purchase a loan from the
trust after four or more consecutive monthly payments due under
the loan are delinquent in whole, or in part. With respect to
single-family mortgage loans in trusts with issue dates on or
after January 1, 2009, we also have the option to purchase
a loan from the trust after the loan has been delinquent for at
least one monthly payment, if the delinquency has not been fully
cured on or before the next payment date (that is, 30 days
delinquent), and it is determined that it is appropriate to
execute loss mitigation activity that is not permissible while
the loan is held in a trust. Fannie Mae, as guarantor or as
issuer, may also purchase mortgage loans when other pre-defined
contingencies have been met, such as when there is a material
breach
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MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
of a seller’s representation and warranty. Under long-term
standby commitments, we purchase loans from lenders when the
loans subject to these commitments meet certain delinquency
criteria. Our acquisition cost for these loans is the unpaid
principal balance of the loans plus accrued interest.
Effective January 1, 2010, when we purchase mortgage loans
from consolidated trusts, we reclassify the loans from
“Mortgage loans held for investment of consolidated
trusts” to “Mortgage loans held for investment by
Fannie Mae” and, upon settlement, we record an
extinguishment of the corresponding portion of the debt of the
consolidated trusts.
For unconsolidated trusts, loans that are credit impaired at the
time of acquisition are recorded at the lower of their
acquisition cost or fair value. A loan is considered credit
impaired at acquisition when there is evidence of credit
deterioration subsequent to the loan’s origination and it
is probable, at acquisition, that we will be unable to collect
all contractually required payments receivable (ignoring
insignificant delays in contractual payments). We record each
acquired loan that does not meet these criteria at its
acquisition cost.
For unconsolidated trusts where we are considered the
transferor, we recognize the loan in our condensed consolidated
balance sheets at fair value and record a corresponding
liability to the unconsolidated trust when the contingency on
our option to purchase the loan from the trust has been met and
we regain effective control over the transferred loan.
We base our estimate of the fair value of delinquent loans
purchased from unconsolidated trusts upon an assessment of what
a market participant would pay for the loan at the date of
acquisition. We utilize indicative market prices from large,
experienced dealers to estimate the initial fair value of
delinquent loans purchased from unconsolidated trusts. We
consider acquired credit-impaired loans to be individually
impaired at acquisition. However, no valuation allowance is
established or carried over at acquisition. We record the excess
of the loan’s acquisition cost over its fair value as a
charge-off against our “Reserve for guaranty losses”
at acquisition. We recognize any subsequent decreases in
estimated future cash flows to be collected subsequent to
acquisition as impairment losses through our “Allowance for
loan losses.”
We place credit-impaired loans that we acquire from
unconsolidated trusts on nonaccrual status at acquisition in
accordance with our nonaccrual policy. If we subsequently
determine that the collectibility of principal and interest is
reasonably assured, we return the loan to accrual status. We
determine the initial accrual status of acquired loans that are
not credit impaired in accordance with our nonaccrual policy.
Accordingly, we place loans purchased from trusts under other
contingent call options on accrual status at acquisition if they
are current or if there has been only an insignificant delay in
payment and there are no other facts and circumstances that
would lead us to conclude that the collection of principal and
interest is not reasonably assured.
When an acquired loan is returned to accrual status, the portion
of the expected cash flows, which incorporates changes in the
timing and amount that are associated with credit and prepayment
events, that exceeds the recorded investment in the loan is
accreted into interest income over the expected remaining life
of the loan. We prospectively recognize increases in future cash
flows expected to be collected as interest income over the
remaining expected life of the loan through a yield adjustment.
If we subsequently refinance or restructure an acquired
credit-impaired loan, other than through a TDR, the loan is not
accounted for as a new loan but continues to be accounted for
under the accounting standard for credit-impaired loans.
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MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Allowance
for Loan Losses and Reserve for Guaranty Losses
The allowance for loan losses is a valuation allowance that
reflects an estimate of incurred credit losses related to our
recorded investment in HFI loans. This population includes both
HFI loans held by Fannie Mae and by consolidated Fannie Mae MBS
trusts. The reserve for guaranty losses is a liability account
in our condensed consolidated balance sheets that reflects an
estimate of incurred credit losses related to our guaranty to
each unconsolidated Fannie Mae MBS trust that we will supplement
amounts received by the Fannie Mae MBS trust as required to
permit timely payments of principal and interest on the related
Fannie Mae MBS. As a result, the guaranty reserve considers not
only the principal and interest due on the loan at the current
balance sheet date, but also any additional interest payments
due to the trust from the current balance sheet date until the
point of loan acquisition or foreclosure. We recognize incurred
losses by recording a charge to the “Provision for loan
losses” or the “Provision (benefit) for guaranty
losses” in our condensed consolidated statements of
operations.
Credit losses related to groups of similar single-family and
multifamily HFI loans that are not individually impaired are
recognized when (1) available information as of each
balance sheet date indicates that it is probable a loss has
occurred and (2) the amount of the loss can be reasonably
estimated in accordance with the accounting standard for
contingencies. Single-family and multifamily loans that we
evaluate for individual impairment are measured in accordance
with the accounting standard on measuring individual impairment
of a loan. When making an assessment as to whether a loan is
individually impaired, we also consider whether a delay in
payment is insignificant. Determination of whether a delay in
payment or shortfall in amount is insignificant requires
management’s judgment as to the facts and circumstances
surrounding the loan. We record charge-offs as a reduction to
the allowance for loan losses or reserve for guaranty losses
when losses are confirmed through the receipt of assets, such as
cash in a preforeclosure sale or the underlying collateral in
full satisfaction of the mortgage loan upon foreclosure.
Single-Family
Loans
We aggregate single-family loans (except for those that are
deemed to be individually impaired), based on similar risk
characteristics for purposes of estimating incurred credit
losses and establish a collective single-family loss reserve
using an econometric model that derives an overall loss reserve
estimate given multiple factors which include but are not
limited to: origination year; loan product type;
mark-to-market
loan-to-value
(“LTV”) ratio; and delinquency status. Once loans are
aggregated, there typically is not a single, distinct event that
would result in an individual loan or pool of loans being
impaired. Accordingly, to determine an estimate of incurred
credit losses, we base our allowance and reserve methodology on
historical events and trends, such as loss severity, default
rates, and recoveries from mortgage insurance contracts and
other credit enhancements that are either contractually attached
to a loan or that were entered into contemporaneous with and in
contemplation of a guaranty or loan purchase transaction. 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.
The excess of a loan’s unpaid principal balance, accrued
interest, and any applicable cost basis adjustments (“our
total exposure”) over the fair value of the assets received
in full satisfaction of the loan is treated as a charge-off loss
that is deducted from the allowance for loan losses or reserve
for guaranty losses. Any excess
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MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
of the fair value of the assets received in full satisfaction
over our total exposure at charge-off is applied first to
recover any forgone, yet contractually past due interest (for
mortgage loans recognized in our condensed consolidated balance
sheets), and then to “Foreclosed property expense” in
our condensed consolidated statements of operations. We also
apply estimated proceeds from primary mortgage insurance or
other credit enhancements that are either contractually attached
to a loan or that were entered into contemporaneous with and in
contemplation of a guaranty or loan purchase transaction as a
recovery of our total exposure, up to the amount of loss
recognized as a charge-off. We record proceeds from credit
enhancements in excess of our total exposure in “Foreclosed
property expense” in our condensed consolidated statements
of operations when received.
Individually
Impaired Single-Family 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 making our assessment as to
whether a loan is impaired, we also take into account more than
insignificant delays in payment. Determination of whether a
delay in payment or shortfall in amount is insignificant
requires management’s judgment as to the facts and
circumstances surrounding the loan.
Individually impaired single-family loans currently include
those restructured in a TDR and acquired credit-impaired loans.
Our measurement of impairment on an individually impaired loan
follows the method that is most consistent with our expectations
of recovery of our recorded investment in the loan. When a loan
has been restructured, we measure impairment using a cash flow
analysis discounted at the loan’s original effective
interest rate, as our expectation is that the loan will continue
to perform under the restructured terms. If we determine that
the only source to recover our recorded investment in an
individually impaired loan is through probable foreclosure of
the underlying collateral, we measure impairment based on the
fair value of the collateral, reduced by estimated disposal
costs on a discounted basis and adjusted for estimated proceeds
from mortgage, flood, or hazard insurance or similar sources.
Impairment recognized on individually impaired loans is part of
our allowance for loan losses.
We use internal models to project cash flows used to assess
impairment of individually impaired loans, including acquired
credit-impaired loans. We generally update the market and loan
characteristic inputs we use in these models monthly, using
month-end data. Market inputs include information such as
interest rates, volatility and spreads, while loan
characteristic inputs include information such as
mark-to-market
LTV ratios and delinquency status. The loan characteristic
inputs are key factors that affect the predicted rate of default
for loans evaluated for impairment through our internal cash
flow models. We evaluate the reasonableness of our models by
comparing the results with actual performance and our assessment
of current market conditions. In addition, we review our models
at least annually for reasonableness and predictive ability in
accordance with our corporate model review policy. Accordingly,
we believe the projected cash flows generated by our models that
we use to assess impairment appropriately reflect the expected
future performance of the loans.
Multifamily
Loans
We identify multifamily loans for evaluation for impairment
through a credit risk classification process and individually
assign them a risk rating. Based on this evaluation, we
determine whether or not a loan is individually impaired. If we
deem a multifamily loan to be individually impaired, we measure
impairment on that loan based on the fair value of the
underlying collateral less estimated costs to sell the property
on a discounted basis, as we consider such loans to be
collateral dependent. If we determine that an individual loan
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MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
that was specifically evaluated for impairment is not
individually impaired, we include the loan as part of a pool of
loans with similar characteristics that are evaluated
collectively for incurred losses.
We stratify multifamily loans into different risk rating
categories based on the credit risk inherent in each individual
loan. We categorize credit risk based on relevant observable
data about a borrower’s ability to pay, including reviews
of current borrower financial information, operating statements
on the underlying collateral, historical payment experience,
collateral values when appropriate, and other related credit
documentation. Multifamily loans that are categorized into pools
based on their relative credit risk ratings are assigned certain
default and severity factors representative of the credit risk
inherent in each risk category. We apply these factors against
our recorded investment in the loans, including recorded accrued
interest associated with such loans, to determine an appropriate
allowance. As part of our allowance process for multifamily
loans, we also consider other factors based on observable data
such as historical charge-off experience, loan size and trends
in delinquency. In addition, we consider any loss sharing
arrangements with our lenders.
Amortization
of Cost Basis Adjustments
We amortize cost basis adjustments, including premiums and
discounts on mortgage loans and securities, as a yield
adjustment using the interest method over the contractual or
estimated life of the loan or security. We amortize these cost
basis adjustments into interest income for mortgage securities
and loans we classify as HFI. We do not amortize cost basis
adjustments for loans that we classify as HFS but include them
in the calculation of the gain or loss on the sale of those
loans.
We have elected to use the contractual payment terms to
determine the amortization of cost basis adjustments on mortgage
loans and mortgage securities initially recognized on or after
January 1, 2010 in our condensed consolidated balance
sheets.
For substantially all mortgage loans and mortgage securities
initially recorded on or before December 31, 2009, we use
prepayment estimates in determining the periodic amortization of
cost basis adjustments under the interest method using a
constant effective yield. For those mortgage loans and mortgage
securities for which we did not estimate prepayments, we used
the contractual payment terms of the loan or security to apply
the interest method. When we anticipate prepayments for the
application of the interest method to mortgage loans initially
recognized before January 1, 2010, we aggregate individual
mortgage loans based upon coupon rate, product type and
origination year and consider Fannie Mae MBS to be aggregations
of similar loans for the purpose of estimating prepayments. We
also recalculate the constant effective yield each reporting
period to reflect the actual payments and prepayments we have
received to date and our new estimate of future prepayments. We
then adjust our net investment in the mortgage loans and
mortgage securities to the amount the investment would have been
had we applied the recalculated constant effective yield since
their acquisition, with a corresponding charge or credit to
interest income.
We cease amortization of cost basis adjustments during periods
in which we are not recognizing interest income on a loan
because the collection of the principal and interest payments is
not reasonably assured (that is, when the loan is placed on
nonaccrual status).
Collateral
We enter into various transactions where we pledge and accept
collateral, the most common of which are our derivative
transactions. Required collateral levels vary depending on the
credit rating and type of counterparty.
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MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
We also pledge and receive collateral under our repurchase and
reverse repurchase agreements. In order to reduce potential
exposure to repurchase counterparties, a third-party custodian
typically maintains the collateral and any margin. We monitor
the fair value of the collateral received from our
counterparties, and we may require additional collateral from
those counterparties, as we deem appropriate. Collateral
received under early funding agreements with lenders, whereby we
advance funds to lenders prior to the settlement of a security
commitment, must meet our standard underwriting guidelines for
the purchase or guarantee of mortgage loans.
Cash
Collateral
We pledged $6.0 billion and $5.4 billion in cash
collateral as of March 31, 2010 and December 31, 2009,
respectively, related to our derivative activities. For
derivative positions with the same counterparty under master
netting arrangements where we pledge cash collateral, we remove
it from “Cash and cash equivalents” and net the right
to receive it against “Derivative liabilities at fair
value” in our condensed consolidated balance sheets as a
part of our counterparty netting calculation. Additionally, we
pledged $5.7 billion and $5.4 billion in cash
collateral as of March 31, 2010 and December 31, 2009,
respectively, related to operating activities and recorded this
amount as “Other assets” or “Federal funds sold
and securities purchased under agreements to resell or similar
arrangements” in our condensed consolidated balance sheets.
We record cash collateral accepted from a counterparty that we
have the right to use as “Cash and cash equivalents”
and cash collateral accepted from a counterparty that we do not
have the right to use as “Restricted cash” in our
condensed consolidated balance sheets. We net our obligation to
return cash collateral pledged to us against “Derivative
assets at fair value” in our condensed consolidated balance
sheets as part of our counterparty netting calculation. We
accepted cash collateral of $2.9 billion and
$4.1 billion as of March 31, 2010 and
December 31, 2009, respectively, of which $2.7 billion
and $3.0 billion, respectively, was restricted.
Non-Cash
Collateral
We classify securities pledged to counterparties as either
“Investments in securities” or “Cash and cash
equivalents” in our condensed consolidated balance sheets.
Securities pledged to counterparties that have been consolidated
with the underlying assets recognized as loans are included as
“Mortgage loans” in our condensed consolidated balance
sheets. We pledged $1.1 billion of
available-for-sale
(“AFS”) securities that the counterparty had the right
to resell or repledge as of December 31, 2009. We did not
pledge any AFS securities as of March 31, 2010. We pledged
$2.9 billion and $1.9 billion in HFI loans that the
counterparty had the right to sell or repledge as of
March 31, 2010 and December 31, 2009, respectively.
The fair value of non-cash collateral accepted that we were
permitted to sell or repledge was $5.3 billion and
$67 million as of March 31, 2010 and December 31,
2009, respectively, none of which was sold or repledged. The
fair value of non-cash collateral accepted that we were not
permitted to sell or repledge was $47.1 billion and
$6.3 billion as of March 31, 2010 and
December 31, 2009, respectively.
We provide early funding to lenders on a collateralized basis
and account for the advances as secured lending arrangements. We
recognize the amounts funded to lenders in “Advances to
lenders” in our condensed consolidated balance sheets.
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MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Our liability to third-party holders of Fannie Mae MBS that
arises as the result of a consolidation of a securitization
trust is collateralized by the underlying loans
and/or
mortgage-related securities.
When securities sold under agreements to repurchase meet all of
the conditions of a secured financing, we report the collateral
of the transferred securities at fair value, excluding accrued
interest. The fair value of these securities is classified in
“Investments in securities” in our condensed
consolidated balance sheets. We had no such repurchase
agreements outstanding as of March 31, 2010 or
December 31, 2009.
Debt
Our condensed consolidated balance sheets contain debt of Fannie
Mae as well as debt of consolidated trusts. We classify our
outstanding debt as either short-term or long-term based on the
initial contractual maturity. Prior to January 1, 2010, we
reported debt issued both by us and by consolidated trusts
collectively as either “Short-term debt” or
“Long-term debt” in our condensed consolidated balance
sheets. Effective January 1, 2010, the debt of consolidated
trusts is reported as either “Short-term debt of
consolidated trusts” or “Long-term debt of
consolidated trusts,” and represents the amount of Fannie
Mae MBS issued from such trusts and held by third-party
certificateholders. Debt issued by us is reported as either
“Short-term debt of Fannie Mae” or “Long-term
debt of Fannie Mae,” and represents debt that we issue to
third parties to fund our general business activities. The debt
of consolidated trusts is prepayable without penalty at any
time. We report deferred items, including premiums, discounts
and other cost basis adjustments, as adjustments to the related
debt balances in our condensed consolidated balance sheets. We
remeasure the carrying amount, accrued interest and basis
adjustments of debt denominated in a foreign currency into
U.S. dollars using foreign exchange spot rates as of the
balance sheet dates and report any associated gains or losses as
a component of “Fair value losses, net” in our
condensed consolidated statements of operations.
We classify interest expense as either short-term or long-term
based on the contractual maturity of the related debt. We
recognize the amortization of premiums, discounts and other cost
basis adjustments through interest expense using the effective
interest method usually over the contractual term of the debt.
Amortization of premiums, discounts and other cost basis
adjustments begins at the time of debt issuance. We remeasure
interest expense for debt denominated in a foreign currency into
U.S. dollars using the monthly weighted-average spot rate
since the interest expense is incurred over the reporting
period. The difference in rates arising from the month-end spot
exchange rate used to calculate the interest accruals and the
weighted-average exchange rate used to record the interest
expense is a foreign currency transaction gain or loss for the
period and is recognized as either “Short-term debt
interest expense” or “Long-term debt interest
expense” in our condensed consolidated statements of
operations.
When we purchase a Fannie Mae MBS issued from a consolidated
single-class securitization trust, we extinguish the related
debt of the consolidated trust as the MBS debt is no longer owed
to a third party. We record debt extinguishment gains or losses
related to debt of consolidated trusts to the extent that the
purchase price of the MBS does not equal the carrying value of
the related consolidated MBS debt reported on our balance sheets
(including unamortized premiums, discounts and other cost basis
adjustments) at the time of purchase.
Servicer
and MBS Trust Receivable and Payable
When a servicer advances payments to a consolidated MBS trust
for delinquent loans, we record restricted cash and a
corresponding liability to reimburse the servicer. When a
delinquency advance is made to an
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
unconsolidated trust, we record a receivable from the MBS trust,
net of a valuation allowance, and a corresponding liability to
reimburse the servicer. Servicers are reimbursed for amounts
that they do not collect from the borrower at the earlier of the
exercise of our default call option or foreclosure.
For unconsolidated MBS trusts where we are considered the
transferor, when the contingency on our option to purchase loans
from the trust has been met and we regain effective control over
the transferred loan, we recognize the loan in our condensed
consolidated balance sheets at fair value and record a
corresponding liability to the unconsolidated MBS trust.
Fair
Value Losses, Net
Fair value losses, net, consists of fair value gains and losses
on derivatives, trading securities, debt carried at fair value
and foreign currency debt. The following table displays the
composition of “Fair value losses, net” for the three
months ended March 31, 2010 and 2009.
|
For the Three Months Ended
|
||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Derivatives fair value losses, net
|
$ | (2,762 | ) | $ | (1,706 | ) | ||
|
Trading securities gains, net
|
1,058 | 167 | ||||||
|
Debt foreign exchange gains, net
|
23 | 55 | ||||||
|
Debt fair value gains (losses), net
|
(24 | ) | 24 | |||||
|
Fair value losses, net
|
$ | (1,705 | ) | $ | (1,460 | ) | ||
Reclassifications
To conform to our current period presentation, we have
reclassified amounts reported in our condensed consolidated
financial statements. In our condensed consolidated balance
sheet as of December 31, 2009, we reclassified
$536 million from “Allowance for loan losses” to
“Allowance for accrued interest receivable.” In our
condensed consolidated statement of operations for the three
months ended March 31, 2009, we reclassified
$17.8 billion and $2.5 billion from “Provision
for credit losses,” which is no longer presented, to
“Provision for guaranty losses” and “Provision
for loan losses,” respectively, and $5.7 billion from
“Investment gains, net” to “Net
other-than-temporary
impairments.” In our condensed consolidated statement of
changes in equity (deficit) for the three months ended
March 31, 2009, we reclassified $3.7 billion, net of
tax of $2.0 billion, from “Changes in net unrealized
losses on
available-for-sale
securities” to “Reclassification adjustment for
other-than-temporary
impairments recognized in net loss.”
| 2. | Adoption of the New Accounting Standards on the Transfers of Financial Assets and Consolidation of Variable Interest Entities |
Effective January 1, 2010, we prospectively adopted the new
accounting standards on the transfer of financial assets and the
consolidation of VIEs (“the new accounting standards”)
for all VIEs existing as of January 1, 2010
(“transition date”). The new accounting standards
removed the scope exception for QSPEs and replaced the previous
consolidation model with a qualitative model for determining the
primary beneficiary of a VIE. Upon adoption of the new
accounting standards, we consolidated the substantial majority
of our single-class
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
securitization trusts, which had significant impacts on our
condensed consolidated financial statements. The key financial
statement impacts are summarized below.
The mortgage loans and debt reported in our condensed
consolidated balance sheet increased significantly at the
transition date because we recognized the underlying assets and
liabilities of the newly consolidated trusts. We recorded the
trusts’ mortgage loans and the debt held by third parties
at their unpaid principal balance at the transition date.
Prospectively, we recognized the interest income on the
trusts’ mortgage loans and interest expense on the
trusts’ debt, resulting in an increase in the interest
income and interest expense reported in our condensed
consolidated statements of operations compared to prior periods.
Another significant impact was the elimination of our guaranty
accounting for the newly consolidated trusts. We derecognized
the previously recorded guaranty-related assets and liabilities
associated with the newly consolidated trusts from our condensed
consolidated balance sheets. We also eliminated our reserve for
guaranty losses and recognized an allowance for loan losses for
such trusts. In our condensed consolidated statements of
operations, we no longer recognize guaranty fee income for the
newly consolidated trusts, as the revenue is now recorded as a
component of loan interest income.
When we recognized the newly consolidated trusts’ assets
and liabilities at the transition date, we also derecognized our
investments in these trusts, resulting in a decrease in our
investments in MBS that are classified as trading and AFS
securities. Instead of being recorded as an asset, our
investments in Fannie Mae MBS reduce the debt reported in our
condensed consolidated balance sheets. Accordingly, the purchase
and subsequent sale of MBS issued by consolidated trusts are
accounted for in our condensed consolidated financial statements
as the extinguishment and issuance of the debt of consolidated
trusts, respectively. Furthermore, under the new accounting
standards, a transfer of mortgage loans from our portfolio to a
trust will generally not qualify for sale treatment.
The new accounting standards do not change the economic risk to
our business, specifically our exposure to liquidity, credit,
and interest rate risks. We continue to securitize mortgage
loans originated by lenders in the primary mortgage market into
Fannie Mae MBS.
Refer to the “Principles of Consolidation” section in
“Note 1, Summary of Significant Accounting
Policies” for additional information.
Summary
of Transition Adjustments
The cumulative impact of our adoption of the new accounting
standards was a decrease to our total deficit of
$3.3 billion at the transition date. This amount includes:
| • | A net decrease in our accumulated deficit of $6.7 billion, primarily driven by the reversal of the guaranty assets and guaranty obligations related to the newly consolidated trusts; and | |
| • | A net increase in our accumulated other comprehensive loss of $3.4 billion primarily driven by the reversal of net unrealized gains related to our investments in Fannie Mae MBS classified as AFS. |
117
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Our transition adjustment is a result of the following changes
to our accounting:
| • | Net recognition of assets and liabilities of newly consolidated entities. At the transition date, trust assets and liabilities required to be consolidated were recognized in our condensed consolidated balance sheet at their unpaid principal balance plus any accrued interest. An allowance for loan losses was established for the newly consolidated mortgage loans. The reserve for guaranty losses previously established for such loans was eliminated. Our investments in Fannie Mae MBS issued by the newly consolidated trusts were eliminated along with the related accrued interest receivable and unrealized gains or losses at the transition date. | |
| • | Accounting for portfolio securitizations. At the transition date, we reclassified the majority of our HFS loans to HFI. Under the new accounting standards, the transfer of mortgage loans to a trust and the sale of the related securities in a portfolio securitization transaction will generally not qualify for sale treatment. As such, mortgage loans acquired with the intent to securitize will generally be classified as held for investment in our condensed consolidated balance sheets both prior to and subsequent to their securitization. | |
| • | Elimination of accounting for guarantees. At the transition date, a significant portion of our guaranty-related assets and liabilities were derecognized from our condensed consolidated balance sheet. Upon consolidation of a trust, our guaranty activities represent intercompany activities that must be eliminated for purposes of our condensed consolidated financial statements. |
We also describe in this note the ongoing impacts of the new
accounting standards on our condensed consolidated statements of
operations, as well as the changes we have made to our segment
reporting as a result of our adoption of the new accounting
standards. The substantial majority of the transition impact
related to non-cash activity, which has not been included in our
condensed consolidated statement of cash flows.
Balance
Sheet Impact
In accordance with the new accounting standards, effective on
the transition date, we report the assets and liabilities of
consolidated trusts separately from the assets and liabilities
of Fannie Mae in our condensed consolidated balance sheets. As
such, we have reclassified prior period amounts to conform to
our current
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
period presentation. The following table presents the impact to
our condensed consolidated balance sheet at the transition date.
|
As of
|
As of
|
|||||||||||
|
December 31,
|
Transition
|
January 1,
|
||||||||||
| 2009 | Impact | 2010 | ||||||||||
| (Dollars in millions) | ||||||||||||
|
ASSETS
|
||||||||||||
|
Cash and cash equivalents
|
$ | 6,812 | $ | (19 | ) | $ | 6,793 | |||||
|
Restricted cash
|
3,070 | 45,583 | 48,653 | |||||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
53,684 | (316 | ) | 53,368 | ||||||||
|
Investments in securities:
|
||||||||||||
|
Trading, at fair value
|
111,939 | (66,251 | ) | 45,688 | ||||||||
|
Available-for-sale,
at fair value
|
237,728 | (122,328 | ) | 115,400 | ||||||||
|
Total investments in securities
|
349,667 | (188,579 | ) | 161,088 | ||||||||
|
Mortgage loans:
|
||||||||||||
|
Loans held for sale, at lower of cost or fair value
|
18,462 | (18,115 | ) | 347 | ||||||||
|
Loans held for investment, at amortized cost:
|
||||||||||||
|
Of Fannie Mae
|
256,434 | 3,753 | 260,187 | |||||||||
|
Of consolidated trusts
|
129,590 | 2,595,321 | 2,724,911 | |||||||||
|
Total loans held for investment
|
386,024 | 2,599,074 | 2,985,098 | |||||||||
|
Allowance for loan losses
|
(9,925 | ) | (43,576 | ) | (53,501 | ) | ||||||
|
Total loans held for investment, net of allowance
|
376,099 | 2,555,498 | 2,931,597 | |||||||||
|
Total mortgage loans
|
394,561 | 2,537,383 | 2,931,944 | |||||||||
|
Advances to lenders
|
5,449 | — | 5,449 | |||||||||
|
Accrued interest receivable:
|
||||||||||||
|
Of Fannie Mae
|
3,774 | (659 | ) | 3,115 | ||||||||
|
Of consolidated trusts
|
519 | 16,329 | 16,848 | |||||||||
|
Allowance for accrued interest receivable
|
(536 | ) | (6,989 | ) | (7,525 | ) | ||||||
|
Total accrued interest receivable, net of allowance
|
3,757 | 8,681 | 12,438 | |||||||||
|
Acquired property, net
|
9,142 | — | 9,142 | |||||||||
|
Derivative assets, at fair value
|
1,474 | — | 1,474 | |||||||||
|
Guaranty assets
|
8,356 | (8,014 | ) | 342 | ||||||||
|
Deferred tax assets, net
|
909 | 1,731 | 2,640 | |||||||||
|
Partnership investments
|
2,372 | (456 | ) | 1,916 | ||||||||
|
Servicer and MBS trust receivable
|
18,329 | (17,143 | ) | 1,186 | ||||||||
|
Other assets
|
11,559 | (1,757 | ) | 9,802 | ||||||||
|
Total assets
|
$ | 869,141 | $ | 2,377,094 | $ | 3,246,235 | ||||||
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
|
As of
|
As of
|
|||||||||||
|
December 31,
|
Transition
|
January 1,
|
||||||||||
| 2009 | Impact | 2010 | ||||||||||
| (Dollars in millions) | ||||||||||||
|
LIABILITIES AND EQUITY (DEFICIT)
|
||||||||||||
|
Liabilities:
|
||||||||||||
|
Accrued interest payable:
|
||||||||||||
|
Of Fannie Mae
|
$ | 4,951 | $ | 8 | $ | 4,959 | ||||||
|
Of consolidated trusts
|
29 | 10,564 | 10,593 | |||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
— | — | — | |||||||||
|
Short-term debt:
|
||||||||||||
|
Of Fannie Mae
|
200,437 | — | 200,437 | |||||||||
|
Of consolidated trusts
|
— | 6,425 | 6,425 | |||||||||
|
Long-term debt:
|
||||||||||||
|
Of Fannie Mae
|
567,950 | (205 | ) | 567,745 | ||||||||
|
Of consolidated trusts
|
6,167 | 2,442,280 | 2,448,447 | |||||||||
|
Derivative liabilities, at fair value
|
1,029 | — | 1,029 | |||||||||
|
Reserve for guaranty losses
|
54,430 | (54,103 | ) | 327 | ||||||||
|
Guaranty obligations
|
13,996 | (13,321 | ) | 675 | ||||||||
|
Partnership liabilities
|
2,541 | (456 | ) | 2,085 | ||||||||
|
Servicer and MBS trust payable
|
25,872 | (16,600 | ) | 9,272 | ||||||||
|
Other liabilities
|
7,020 | (796 | ) | 6,224 | ||||||||
|
Total liabilities
|
884,422 | 2,373,796 | 3,258,218 | |||||||||
|
Fannie Mae’s stockholders’ equity (deficit):
|
||||||||||||
|
Senior preferred stock
|
60,900 | — | 60,900 | |||||||||
|
Preferred stock
|
20,348 | — | 20,348 | |||||||||
|
Common stock
|
664 | — | 664 | |||||||||
|
Additional paid-in capital
|
2,083 | — | 2,083 | |||||||||
|
Accumulated deficit
|
(90,237 | ) | 6,706 | (83,531 | ) | |||||||
|
Accumulated other comprehensive loss
|
(1,732 | ) | (3,394 | ) | (5,126 | ) | ||||||
|
Treasury stock
|
(7,398 | ) | — | (7,398 | ) | |||||||
|
Total Fannie Mae stockholders’ deficit
|
(15,372 | ) | 3,312 | (12,060 | ) | |||||||
|
Noncontrolling interest
|
91 | (14 | ) | 77 | ||||||||
|
Total equity (deficit)
|
(15,281 | ) | 3,298 | (11,983 | ) | |||||||
|
Total liabilities and equity (deficit)
|
$ | 869,141 | $ | 2,377,094 | $ | 3,246,235 | ||||||
In the following sections, we describe the impacts to our
condensed consolidated balance sheet at the transition date in
the context of the three categories of transition adjustments
noted above.
Net
Recognition of the Assets and Liabilities of Newly Consolidated
Entities
At the transition date, the majority of the net increase to both
total assets and total liabilities resulted from the recognition
of the assets and liabilities of newly consolidated trusts. This
includes the impact of derecognizing
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
our investments in Fannie Mae MBS issued from newly consolidated
trusts. We describe the impacts to our condensed consolidated
balance sheet resulting from the recognition of the assets and
liabilities of newly consolidated trusts below.
Investments
in Securities
At the transition date, we derecognized $66.3 billion and
$122.3 billion in investments in securities classified as
trading and AFS, respectively. The net transition impact to our
investments in securities was driven both by the derecognition
of investments in Fannie Mae MBS issued by the newly
consolidated trusts and the recognition of mortgage-related
securities held by the newly consolidated trusts. We
derecognized from our condensed consolidated balance sheet
investments in the Fannie Mae MBS issued by the newly
consolidated trusts as these investments represent debt
securities that are both debt of the consolidated trusts and
investments in our portfolio and therefore represent
intercompany activity. Such investments act to reduce the debt
held by third parties in our condensed consolidated balance
sheets. We also derecognized the accrued interest receivable and
net unrealized gains related to securities that we derecognized
at transition.
Additionally, we recognized mortgage-related securities at
transition in situations where trusts that were previously
consolidated in our condensed consolidated balance sheets
deconsolidated under the new accounting standards. Upon
deconsolidation of these trusts, we derecognized the collateral
of the trusts (that is, mortgage loans) and recognized our
investment in securities issued from the trusts in our condensed
consolidated balance sheet.
The table below presents the impact at the transition date to
our investments in securities.
|
As of
|
As of
|
|||||||||||
| December 31, 2009 | Transition Impact | January 1, 2010 | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Mortgage-related securities:
|
||||||||||||
|
Fannie Mae
|
$ | 229,169 | $ | (189,360 | ) | $ | 39,809 | |||||
|
Freddie Mac
|
42,551 | — | 42,551 | |||||||||
|
Ginnie Mae
|
1,354 | (21 | ) | 1,333 | ||||||||
|
Alt-A private-label securities
|
15,505 | 533 | 16,038 | |||||||||
|
Subprime private-label securities
|
12,526 | (118 | ) | 12,408 | ||||||||
|
CMBS
|
22,528 | — | 22,528 | |||||||||
|
Mortgage revenue bonds
|
13,446 | 21 | 13,467 | |||||||||
|
Other mortgage-related securities
|
3,706 | 366 | 4,072 | |||||||||
|
Total mortgage-related securities
|
340,785 | (188,579 | ) | 152,206 | ||||||||
|
Total non-mortgage-related securities
|
8,882 | — | 8,882 | |||||||||
|
Total investments in securities
|
$ | 349,667 | $ | (188,579 | ) | $ | 161,088 | |||||
Mortgage
Loans
At the transition date, the recognition of loans held by the
newly consolidated trusts resulted in an increase in
“Mortgage loans held for investment of consolidated
trusts.” Loans held by consolidated trusts are generally
classified as HFI in our condensed consolidated balance sheets.
Prior to the transition date, we reported mortgage loans held
both by us in our mortgage portfolio and those held by
consolidated trusts collectively as
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
“Mortgage loans held for investment” in our condensed
consolidated balance sheets. Effective at the transition date,
we report loans held by us as “Mortgage loans held for
investment of Fannie Mae” and loans held by consolidated
trusts as “Mortgage loans held for investment of
consolidated trusts.” Prior period amounts have been
reclassified to conform to our current period presentation.
The recognition of the mortgage loans held by newly consolidated
trusts also resulted in an increase in “Accrued interest
receivable of consolidated trusts.” This increase was
offset in part by an increase to “Allowance for accrued
interest receivable,” which represents estimated incurred
losses on our accrued interest. Prior to the transition date,
incurred losses on interest of unconsolidated trusts were
reported as a portion of our “Reserve for guaranty
losses.” Prior to the transition date, we reported the
accrued interest receivable relating to loans held by
consolidated trusts as a component of “Accrued interest
receivable.” Prior period amounts have been reclassified to
conform to our current period presentation.
The table below presents the impact to the unpaid principal
balance of our mortgage loans at the transition date.
| As of December 31, 2009 | Transition Impact | As of January 1, 2010 | ||||||||||||||||||||||
|
Of Fannie
|
Of Consolidated
|
Of Fannie
|
Of Consolidated
|
Of Fannie
|
Of Consolidated
|
|||||||||||||||||||
| Mae | Trusts | Mae | Trusts | Mae | Trusts | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Single-family:
|
||||||||||||||||||||||||
|
Government insured or guaranteed
|
$ | 51,454 | $ | 945 | $ | — | $ | 1 | $ | 51,454 | $ | 946 | ||||||||||||
|
Conventional:
|
||||||||||||||||||||||||
|
Long-term fixed-rate
|
90,245 | 89,409 | (5,272 | ) | 2,029,932 | 84,973 | 2,119,341 | |||||||||||||||||
|
Intermediate-term fixed-rate
|
8,069 | 21,405 | (178 | ) | 318,329 | 7,891 | 339,734 | |||||||||||||||||
|
Adjustable-rate
|
16,889 | 17,713 | (2 | ) | 190,706 | 16,887 | 208,419 | |||||||||||||||||
|
Total conventional single-family
|
115,203 | 128,527 | (5,452 | ) | 2,538,967 | 109,751 | 2,667,494 | |||||||||||||||||
|
Total single-family
|
$ | 166,657 | $ | 129,472 | $ | (5,452 | ) | $ | 2,538,968 | $ | 161,205 | $ | 2,668,440 | |||||||||||
|
Multifamily:
|
||||||||||||||||||||||||
|
Government insured or guaranteed
|
$ | 585 | $ | — | $ | — | $ | — | $ | 585 | $ | — | ||||||||||||
|
Conventional:
|
||||||||||||||||||||||||
|
Long-term fixed-rate
|
4,937 | 790 | — | 3,752 | 4,937 | 4,542 | ||||||||||||||||||
|
Intermediate-term fixed-rate
|
81,456 | 10,304 | — | 35,672 | 81,456 | 45,976 | ||||||||||||||||||
|
Adjustable-rate
|
21,535 | 807 | — | 5,603 | 21,535 | 6,410 | ||||||||||||||||||
|
Total conventional multifamily
|
107,928 | 11,901 | — | 45,027 | 107,928 | 56,928 | ||||||||||||||||||
|
Total multifamily
|
$ | 108,513 | $ | 11,901 | $ | — | $ | 45,027 | $ | 108,513 | $ | 56,928 | ||||||||||||
Allowance
for Loan Losses and Reserve for Guaranty Losses
We maintain an allowance for loan losses related to HFI loans
reported in our condensed consolidated balance sheets and a
reserve for guaranty losses related to loans held by
unconsolidated trusts. Upon recognition of the mortgage loans
held by newly consolidated trusts at the transition date, we
increased our “Allowance for loan losses” and
decreased our “Reserve for guaranty losses.” The
overall decrease in the combined reserves represents a
difference in the methodology used to estimate incurred losses
for our allowance for loan losses
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
versus our reserve for guaranty losses. Our guaranty reserve
considers all contractually past due interest income including
payments expected to be missed between the balance sheet date
and the point of loan acquisition or foreclosure, however, for
our loan loss allowance, we consider only our net recorded
investment in the loan at the balance sheet date, which only
includes interest income accrued while the loan was on accrual
status. We recognize the portion of the allowance related to
principal as our “Allowance for loan losses” and the
portion of the allowance related to accrued interest as our
“Allowance for accrued interest receivable.” We
continue to record a reserve for guaranty losses related to
loans in unconsolidated trusts and loans that we have guaranteed
under long-term standby commitments, which require us to
purchase loans from lenders if the loans meet certain
delinquency criteria. See “Note 5, Allowance for Loan
Losses and Reserve for Guaranty Losses” for additional
information.
Short-Term
Debt and Long-Term Debt
At the transition date, we recognized an increase of
$6.4 billion in “Short-term debt of consolidated
trusts” and $2.4 trillion in “Long-term debt of
consolidated trusts.” The debt of consolidated trusts
represents the amount of Fannie Mae debt securities issued by
such trusts and held by third-party certificateholders. We
recognized an increase of $10.6 billion in “Accrued
interest payable of consolidated trusts,” which represents
the interest expense accrued as of the transition date on the
long-term debt of the newly consolidated trusts.
Prior to the transition date, we reported debt issued both by us
and by consolidated trusts collectively as either
“Short-term debt” or “Long-term debt.”
Effective at the transition date, we report debt issued by us as
either “Short-term debt of Fannie Mae” or
“Long-term debt of Fannie Mae.” We report the debt of
consolidated trusts as either “Short-term debt of
consolidated trusts” or “Long-term debt of
consolidated trusts.” Prior period amounts have been
reclassified to conform to our current period presentation.
Servicer
and MBS Trust Receivable and Payable
At the transition date we recognized a net decrease of
$17.1 billion in “Servicer and MBS trust
receivable.” Prior to our adoption of the new accounting
standards, we recorded a receivable from unconsolidated trusts,
net of a valuation allowance, when a delinquency advance was
made to the trust. This receivable now represents intercompany
activity that we eliminate for the purpose of our condensed
consolidated financial statements.
We also recognized a decrease of $16.6 billion in
“Servicer and MBS trust payable,” which consisted of
two components. First, we have the option to purchase loans and
foreclosed properties from the trust when certain contingencies
have been met. At December 31, 2009, we recorded a payable
to the trust for loans and foreclosed properties that had been
purchased during the month of December. Second, prior to the
consolidation of certain out of portfolio trusts, we recognized
a loan in our condensed consolidated balance sheets at fair
value and recorded a corresponding liability to the
unconsolidated trust when the contingency on our option to
purchase loans from the trust had been met. These payables now
represent intercompany activity that we eliminate for the
purpose of our condensed consolidated financial statements.
Restricted
Cash
At the transition date, “Restricted cash” increased by
$45.6 billion to record cash payments received by the
servicer or consolidated trusts due to be remitted to the MBS
certificateholders that have been determined to be restricted
for use.
123
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Federal
Funds Sold and Securities Purchased Under Agreements to Resell
or Similar Arrangements
At the transition date, we recognized a decrease of
$316 million in “Federal funds sold and securities
purchased under agreements to resell or similar
arrangements” relating to dollar roll transactions that
utilized Fannie Mae MBS. As a result of the dollar roll
transactions, we held investments in Fannie Mae MBS in our
condensed consolidated balance sheet as of December 31,
2009 that were issued from trusts that subsequently consolidated
at the transition date. Similar to our treatment of Fannie Mae
MBS classified as trading or AFS, we eliminated our secured
financing receivable related to these dollar roll transactions
and recharacterized the transfer of the Fannie Mae MBS as debt
extinguishment in our condensed consolidated financial
statements.
Accounting
for Portfolio Securitizations
At the transition date, we reclassified the majority of our HFS
mortgage loans to HFI due to the change in our accounting for
portfolio securitizations. Prior to our adoption of the new
accounting standards, we classified mortgage loans acquired with
the intent to securitize as HFS in our condensed consolidated
balance sheets as the majority of the transfers of mortgage
loans under portfolio securitization transactions qualified as
sales under the previous accounting standards. Under the new
accounting standards, the transfer of mortgage loans through
portfolio securitization transactions will generally not result
in the derecognition of mortgage loans, thus we have classified
the loans as HFI.
Certain mortgage loans continue to be classified as HFS in our
condensed consolidated balance sheets, consistent with our
intent to securitize and transfer the mortgage loans to an MBS
trust that we will not consolidate.
Elimination
of Accounting for Guarantees
At the transition date, we made adjustments relating to our
accounting for guarantees and master servicing. We describe the
impact of the new accounting standards on our accounting for
guarantees and master servicing below.
Guaranty
Accounting
We continue to guarantee to our MBS trusts that we will
supplement amounts received by the trust as required to permit
timely payments of principal and interest on the related Fannie
Mae MBS, regardless of their consolidation status. However, for
consolidated trusts, our guarantee to the trust represents an
intercompany activity that must be eliminated for purposes of
our condensed consolidated financial statements. Thus, upon
consolidation of the trusts, we eliminated the related guaranty
asset, guaranty obligation,
buy-up,
buy-down and risk-based price adjustments from our condensed
consolidated balance sheet. We continue to record guaranty
assets and guaranty obligations in our condensed consolidated
balance sheets relating to unconsolidated trusts.
Master
Servicing
The transition adjustment to our “Other assets” and
“Other liabilities” includes the derecognition of the
portion of our master servicing asset and master servicing
liability relating to newly consolidated trusts, which
represents intercompany activity.
124
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Impact
on Statements of Operations
Our adoption of the new accounting standards affects how certain
income and expense items are reported in our condensed
consolidated statements of operations on an ongoing basis. We
explain the key impacts below.
Interest
Income on Mortgage Loans
The interest income earned on mortgage loans held by the newly
consolidated trusts is recorded in our condensed consolidated
statements of operations as loan interest income. This interest
income was not recorded in our condensed consolidated statements
of operations prior to the transition date as the trusts were
not consolidated.
Prior to our adoption of the new accounting standards, we
reported interest income on mortgage loans held both by us and
by consolidated trusts collectively as “Interest income on
mortgage loans.” Effective at the transition date, we
report interest income on loans held by us as “Interest
income on mortgage loans of Fannie Mae” and interest income
on loans held by consolidated trusts as “Interest income on
mortgage loans of consolidated trusts.” Prior period
amounts have been reclassified to conform to our current period
presentation. “Interest income on mortgage loans of Fannie
Mae” is not impacted by our adoption of the new accounting
standards.
Interest
Expense on Short-Term and Long-Term Debt
The interest expense incurred on debt of newly consolidated
trusts is recorded in our condensed consolidated statements of
operations as interest expense on short-term and long-term debt.
This interest expense was not recorded in our condensed
consolidated statements of operations prior to the transition
date as the trusts were not consolidated.
Prior to our adoption of the new accounting standards, we
reported interest expense on debt issued both by us and by
consolidated trusts as either “Interest expense on
short-term debt” or “Interest expense on long-term
debt.” Effective at the transition date, we report interest
expense as either “Interest expense on debt of Fannie
Mae” or “Interest expense on debt of consolidated
trusts.” Prior period amounts have been reclassified to
conform to our current period presentation. “Interest
expense on debt of Fannie Mae” is not impacted by our
adoption of the new accounting standards.
Provision
for Loan Losses and Provision for Guaranty Losses
Since the majority of our MBS trusts were consolidated at the
transition date, the provision for loan losses recorded in
periods after the transition date reflects the increase in the
mortgage loans reported in our condensed consolidated balance
sheets. The provision for guaranty losses recorded in periods
after the transition date reflects the subsequent decrease in
unconsolidated trusts. The portion of the reserve for guaranty
losses relating to loans in previously unconsolidated MBS trusts
that were consolidated at the transition date was derecognized
and we recognized an allowance for loan losses as the loans are
now reflected in our condensed consolidated balance sheet.
125
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Guaranty
Fee Income
We do not recognize the guaranty fee income earned from
consolidated trusts. Guaranty fees from consolidated trusts are
reported as a component of interest income on mortgage loans. As
our guaranty-related assets and liabilities pertaining to
consolidated trusts were also eliminated, we no longer record
amortization income or fair value adjustments related to these
trusts. The guaranty fee income that continues to be recognized
in our condensed consolidated statements of operations relates
to guarantees to unconsolidated trusts and other credit
enhancements that we have provided.
Debt
Extinguishment Gains (Losses)
Upon purchase of Fannie Mae MBS debt securities issued from a
consolidated trust for our mortgage portfolio, we extinguish the
related debt issued by the consolidated trust as we now own the
debt securities instead of a third party. We record debt
extinguishment gains or losses related to debt of consolidated
trusts to the extent that the purchase price of the debt
security does not equal the carrying value of the related
consolidated debt reported in our condensed consolidated balance
sheet at the time of purchase.
Trust Management
Income
As master servicer, issuer, and trustee for Fannie Mae MBS, we
earn a fee that reflects interest earned on cash flows from the
date of remittance of mortgage and other payments to us by the
servicers until the date of distribution of these payments to
the MBS certificateholders. Previously, we reported this
compensation as “Trust management income” in our
condensed consolidated statements of operations. Upon adoption
of the new accounting standards, we report the trust management
income earned by consolidated trusts as a component of net
interest income in our condensed consolidated statements of
operations. Trust management income earned by us relating to
unconsolidated trusts is now reported as a component of
“Fee and other income.” Prior period amounts have been
reclassified to conform to our current period presentation.
Impact
on Segment Reporting
As a result of our adoption of the new accounting standards, we
changed the presentation of segment financial information that
is currently evaluated by management. With this change, the sum
of the results for our three segments does not equal our
condensed consolidated results of operations as we separate the
activity related to our consolidated trusts from the results
generated by our three segments.
Our three reportable segments continue to be: Single-Family,
HCD, and Capital Markets. We use these three segments to
generate revenue and manage business risk, and each segment is
measured based on the type of business activities it performs.
We have not restated prior period results nor have we presented
current year results under the old presentation as we determined
that it was impracticable to do so; therefore, our segment
results reported in the current period are not comparable with
prior periods.
We present our segment results in “Note 13, Segment
Reporting.”
126
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| 3. | 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
guaranteed by us via lender swap and portfolio securitization
transactions, mortgage and asset-backed trusts that were not
created by us, as well as housing partnerships that are
established to finance the acquisition, construction,
development or rehabilitation of affordable multifamily and
single-family housing. These interests also include investments
in securities issued by VIEs, such as Fannie Mae MBS created
pursuant to our securitization transactions and our guaranty to
the entity. Our adoption of the new accounting standards on the
transfers of financial assets and consolidation of VIEs resulted
in the majority of our single-class securitization trusts being
consolidated by us.
Consolidated
VIEs
The following table displays the assets and liabilities of
consolidated VIEs in our condensed consolidated balance sheets
as of March 31, 2010 and December 31, 2009. The
difference between total assets of consolidated VIEs and total
liabilities of consolidated VIEs is primarily due to our
investment in the debt securities of consolidated VIEs. In
general, the investors in the obligations of consolidated VIEs
have recourse only to the assets of those VIEs and do not have
recourse to us, except where we provide a guaranty to the VIE.
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2010 (1) | 2009 (1) | |||||||
| (Dollars in millions) | ||||||||
|
Assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 446 | $ | 2,092 | ||||
|
Restricted cash
|
42,731 | — | ||||||
|
Trading securities
|
32 | 5,599 | ||||||
|
Available-for-sale
securities
|
624 | 10,513 | ||||||
|
Loans held for sale
|
799 | 11,646 | ||||||
|
Loans held for investment
|
2,679,336 | 129,590 | ||||||
|
Accrued interest receivable
|
13,939 | 519 | ||||||
|
Servicer and MBS trust receivable
|
512 | 466 | ||||||
|
Other
assets
(2)
|
38 | 451 | ||||||
|
Total assets of consolidated VIEs
|
$ | 2,738,457 | $ | 160,876 | ||||
|
Liabilities:
|
||||||||
|
Accrued interest payable
|
$ | 10,558 | $ | 29 | ||||
|
Short-term debt
|
6,343 | — | ||||||
|
Long-term debt
|
2,472,192 | 6,167 | ||||||
|
Servicer and MBS trust payable
|
6,657 | 850 | ||||||
|
Other
liabilities
(3)
|
46 | 385 | ||||||
|
Total liabilities of consolidated VIEs
|
$ | 2,495,796 | $ | 7,431 | ||||
| (1) | Includes VIEs created through lender swaps, private label wraps and portfolio securitization transactions. | |
| (2) | Includes partnership investments of $430 million and cash, cash equivalents and restricted cash of $21 million in limited partnerships as of December 31, 2009. | |
| (3) | Includes partnership liabilities of $385 million as of December 31, 2009. |
127
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
The adoption of the new accounting standards resulted in
significant changes in the consolidation status of VIEs. Refer
to “Note 2, Adoption of the New Accounting Standards
on the Transfers of Financial Assets and Consolidation of
Variable Interest Entities” for additional information
regarding the impact of transition.
In addition to the VIEs consolidated as a result of adopting the
new accounting standards, we consolidated VIEs as of
March 31, 2010 that were not consolidated as of
December 31, 2009. These VIEs are Fannie Mae multi-class
resecuritization trusts and were consolidated because we now
hold in our portfolio a substantial portion of the certificates.
As a result of consolidating these multi-class resecuritization
trusts, which have combined total assets of $80 million, we
derecognized our investment in these trusts and recognized the
assets and liabilities of the consolidated trusts at their fair
value.
As of December 31, 2009, we consolidated VIEs that were no
longer consolidated as of March 31, 2010, excluding the
impact of adopting the new accounting standards. These VIEs were
Fannie Mae multi-class resecuritization trusts and were
deconsolidated because we no longer hold in our portfolio a
substantial portion of the certificates. As a result of
deconsolidating these multi-class resecuritization trusts, which
had combined total assets of $1.1 billion, we derecognized
the assets and liabilities of the trusts and recognized at fair
value our retained interests as securities in our condensed
consolidated balance sheets.
For the three months ended March 31, 2010, we recognized a
loss of $18 million upon deconsolidation of VIEs. The
portion of this net loss related to the remeasurement of our
retained investments in the VIEs to their fair value was a gain
of $89 million for the three months ended March 31,
2010.
Unconsolidated
VIEs
We also have investments in VIEs that we do not consolidate
because we are not deemed to be the primary beneficiary. These
unconsolidated VIEs include securitization trusts, as well as
other equity investments. The following table displays the total
assets as of March 31, 2010 and December 31, 2009 of
unconsolidated VIEs with which we are involved.
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Mortgage-backed trusts
|
$ | 930,824 | $ | 3,044,516 | ||||
|
Asset-backed trusts
|
454,640 | 484,703 | ||||||
|
Limited partnership investments
|
14,290 | 13,085 | ||||||
|
Mortgage revenue bonds and other credit-enhanced bonds
|
8,039 | 8,061 | ||||||
|
Total assets of unconsolidated VIEs
|
$ | 1,407,793 | $ | 3,550,365 | ||||
128
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
The following table displays the carrying amount and
classification of the assets and liabilities as of
March 31, 2010 and December 31, 2009 and the maximum
exposure to loss as of March 31, 2010 related to our
variable interests in unconsolidated VIEs with which we are
involved.
| As of | ||||||||||||
| March 31, 2010 | December 31, 2009 | |||||||||||
|
Maximum
|
Carrying
|
|||||||||||
| Carrying Amount | Exposure to Loss | Amount (1) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Assets:
|
||||||||||||
|
Available-for-sale
securities
(2)
|
$ | 96,790 | $ | 88,714 | $ | 190,135 | ||||||
|
Trading
securities
(2)
|
36,571 | 35,973 | 91,222 | |||||||||
|
Guaranty assets
|
294 | — | 8,195 | |||||||||
|
Partnership investments
|
151 | 338 | 144 | |||||||||
|
Servicer and MBS trust receivable
|
10 | 10 | 15,903 | |||||||||
|
Other assets
|
— | — | 1,320 | |||||||||
|
Total assets related to our interests in unconsolidated VIEs
|
$ | 133,816 | $ | 125,035 | $ | 306,919 | ||||||
|
Liabilities:
|
||||||||||||
|
Reserve for guaranty losses
|
$ | 191 | $ | 191 | $ | 52,703 | ||||||
|
Guaranty obligations
|
542 | 30,131 | 13,504 | |||||||||
|
Partnership liabilities
|
327 | — | 325 | |||||||||
|
Servicer and MBS trust payable
|
380 | 380 | 20,371 | |||||||||
|
Other liabilities
|
17 | — | 818 | |||||||||
|
Total liabilities related to our interest in unconsolidated VIEs
|
$ | 1,457 | $ | 30,702 | $ | 87,721 | ||||||
| (1) | Includes VIEs created through lender swaps and portfolio securitization transactions. Our total maximum exposure to loss relating to unconsolidated VIEs was $2.6 trillion as of December 31, 2009. | |
| (2) | Contains securities exposed through consolidation which may also represent an interest in other unconsolidated VIEs. |
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.
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 portfolio in a portfolio
securitization transaction. For the three months ended
March 31, 2010 and 2009, the unpaid principal balance of
portfolio securitizations was $17.8 billion and
$22.9 billion, respectively.
Upon adoption of the new accounting standards, the majority of
our portfolio securitization transactions do not qualify for
sale treatment. As a result, our continuing involvement in the
form of guaranty assets and guaranty liabilities with assets
that were transferred into unconsolidated trusts has been
greatly reduced and are no
129
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
longer material. We report the assets and liabilities of
consolidated trusts created via portfolio securitization
transactions that do not qualify as sales in our condensed
consolidated balance sheets and in the consolidated VIEs table
above.
The following table displays some key characteristics of the
securities retained in portfolio securitizations accounted for
as sales.
|
Fannie Mae
|
||||||||
|
Single-class
|
||||||||
|
MBS & Fannie
|
REMICS &
|
|||||||
| Mae Megas | SMBS | |||||||
| (Dollars in millions) | ||||||||
|
As of March 31, 2010
|
||||||||
|
Unpaid principal balance
|
$ | 73 | $ | 19,282 | ||||
|
Fair value
|
77 | 20,205 | ||||||
|
Impact on value from a 10% adverse change
|
(8 | ) | (2,021 | ) | ||||
|
Impact on value from a 20% adverse change
|
(15 | ) | (4,041 | ) | ||||
|
Weighted-average coupon
|
6.57 | % | 6.67 | % | ||||
|
Weighted-average loan age
|
3.3 years | 4.7 years | ||||||
|
Weighted-average maturity
|
26.5 years | 25.0 years | ||||||
|
As of December 31, 2009
|
||||||||
|
Unpaid principal balance
|
$ | 34,260 | $ | 19,472 | ||||
|
Fair value
|
35,455 | 20,224 | ||||||
|
Impact on value from a 10% adverse change
|
(3,546 | ) | (2,022 | ) | ||||
|
Impact on value from a 20% adverse change
|
(7,091 | ) | (4,045 | ) | ||||
|
Weighted-average coupon
|
5.62 | % | 6.82 | % | ||||
|
Weighted-average loan age
|
2.9 years | 4.6 years | ||||||
|
Weighted-average maturity
|
24.2 years | 26.1 years | ||||||
The gain or loss on a portfolio securitization transaction that
qualifies as a sale depends, in part, on the carrying amount of
the financial assets sold. Prior to January 1, 2010, we
allocated the carrying amount of the financial assets sold
between the assets sold and the interests retained, if any,
based on their relative fair value at the date of sale. Further,
we recognized our recourse obligations at their full fair value
at the date of sale, which serves as a reduction of sale
proceeds in the gain or loss calculation. Beginning
January 1, 2010, we recognize all assets obtained and all
liabilities incurred at fair value. We recorded a net gain on
portfolio securitizations of $80 million and
$320 million for the three months ended March 31, 2010
and 2009, respectively. We recognize these amounts as a
component of “Investment gains, net” in our condensed
consolidated statements of operations.
130
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
The following table displays cash flows from our securitization
trusts related to portfolio securitizations accounted for as
sales for the three months ended March 31, 2010 and 2009.
|
For the
|
||||||||
|
Three Months
|
||||||||
| Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Proceeds from the initial sale of securities (new
securitizations)
|
$ | 1,556 | $ | 22,063 | ||||
|
Principal and interest received on retained interests
|
836 | 2,293 | ||||||
We define “managed loans” as on-balance sheet mortgage
loans as well as mortgage loans that we have securitized in
portfolio securitizations that have qualified as sales pursuant
to the accounting standards for transfers of financial assets.
As noted above, our adoption of the new accounting standards
resulted in a significant increase in mortgage loans held for
investment and a decrease in loans held for sale in our
condensed consolidated balance sheets, as well as a decrease in
the amount of loans securitized in portfolio securitizations
that qualify as sales. The following table displays the unpaid
principal balances of managed loans, including those managed
loans that are delinquent as of March 31, 2010 and
December 31, 2009.
|
Unpaid
|
Principal Amount of
|
|||||||
| Principal Balance | Delinquent Loans (1) | |||||||
| (Dollars in millions) | ||||||||
|
As of March 31, 2010
|
||||||||
|
Loans held for investment
|
$ | 3,000,831 | $ | 218,693 | ||||
|
Loans held for sale
|
1,005 | 42 | ||||||
|
Securitized loans
|
2,015 | 60 | ||||||
|
Total loans managed
|
$ | 3,003,851 | $ | 218,795 | ||||
|
As of December 31, 2009
|
||||||||
|
Loans held for investment
|
$ | 395,551 | $ | 51,051 | ||||
|
Loans held for sale
|
20,992 | 140 | ||||||
|
Securitized loans
|
187,922 | 5,161 | ||||||
|
Total loans managed
|
$ | 604,465 | $ | 56,352 | ||||
| (1) | Represents the unpaid principal balance of loans held for investment and loans held for sale for which we are no longer accruing interest. We discontinue accruing interest when payment of principal and interest in full is not reasonably assured. |
131
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| 4. | Mortgage Loans |
The following table displays loans in our mortgage portfolio as
of March 31, 2010 and December 31, 2009 and reflects
the adoption of the new accounting standards.
| As of | ||||||||||||||||||||||||
| March 31, 2010 | December 31, 2009 (1) | |||||||||||||||||||||||
|
Of
|
Of
|
Of
|
Of
|
|||||||||||||||||||||
|
Fannie
|
Consolidated
|
Fannie
|
Consolidated
|
|||||||||||||||||||||
| Mae | Trusts | Total | Mae | Trusts | Total | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Single-family
(2)
|
$ | 215,191 | $ | 2,619,988 | $ | 2,835,179 | $ | 166,657 | $ | 129,472 | $ | 296,129 | ||||||||||||
|
Multifamily
|
107,725 | 58,932 | 166,657 | 108,513 | 11,901 | 120,414 | ||||||||||||||||||
|
Total unpaid principal balance of mortgage loans
|
322,916 | 2,678,920 | 3,001,836 | 275,170 | 141,373 | 416,543 | ||||||||||||||||||
|
Unamortized premiums (discounts) and other cost basis
adjustments, net
|
(12,727 | ) | 1,215 | (11,512 | ) | (11,196 | ) | 28 | (11,168 | ) | ||||||||||||||
|
Lower of cost or fair value adjustments on loans held for sale
|
(17 | ) | — | (17 | ) | (729 | ) | (160 | ) | (889 | ) | |||||||||||||
|
Allowance for loan losses for loans held for investment
|
(25,675 | ) | (34,894 | ) | (60,569 | ) | (8,078 | ) | (1,847 | ) | (9,925 | ) | ||||||||||||
|
Total mortgage loans
|
$ | 284,497 | $ | 2,645,241 | $ | 2,929,738 | $ | 255,167 | $ | 139,394 | $ | 394,561 | ||||||||||||
| (1) | Certain prior period amounts have been reclassified to conform to the current period presentation. | |
| (2) | As of March 31, 2010, our single-family of Fannie Mae amount of $215.2 billion includes unpaid principal balance of $40.1 billion related to credit-impaired loans that were acquired from MBS trusts in March 2010. Fannie Mae paid this amount, along with accrued interest of $2.5 billion, in April 2010. We acquired credit impaired loans from MBS trusts with an unpaid principal balance totaling $46.4 billion in April 2010. This amount will be paid, along with accrued interest of approximately $2.7 billion, in May 2010. |
Impaired
Loans
Impaired loans include performing and nonperforming
single-family and multifamily TDRs, acquired credit-impaired
loans, and other multifamily loans. The following table displays
the recorded investment and corresponding specific loss
allowance as of March 31, 2010 and December 31, 2009
for all impaired loans.
| As of March 31, 2010 | As of December 31, 2009 | |||||||||||||||||||||||
|
Recorded
|
Net
|
Recorded
|
Net
|
|||||||||||||||||||||
| Investment | Allowance | Investment | Investment | Allowance | Investment | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Impaired
loans:
(1)
|
||||||||||||||||||||||||
|
With valuation allowance
|
$ | 122,080 | $ | 30,554 | $ | 91,526 | $ | 27,050 | $ | 5,995 | $ | 21,055 | ||||||||||||
|
Without valuation
allowance
(2)
|
8,989 | — | 8,989 | 8,420 | — | 8,420 | ||||||||||||||||||
|
Total
|
$ | 131,069 | $ | 30,554 | $ | 100,515 | $ | 35,470 | $ | 5,995 | $ | 29,475 | ||||||||||||
| (1) | Includes single-family loans individually impaired and restructured in a TDR with a recorded investment of $120.2 billion and $23.9 billion as of March 31, 2010 and December 31, 2009, respectively. Includes multifamily loans individually impaired and restructured (1) in a TDR with a recorded investment of $51 million as of March 31, 2010 and December 31, 2009. | |
| (2) | The discounted cash flows, collateral value or fair value equals or exceeds the carrying value of the loan, and as such, no valuation allowance is required. |
132
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
The average recorded investment in impaired loans was
$115.4 billion and $13.2 billion for the three months
ended March 31, 2010 and 2009, respectively. Interest
income recognized on impaired loans was $978 million and
$212 million for the three months ended March 31, 2010
and 2009, respectively.
Loans
Acquired in a Transfer
We acquired delinquent unconsolidated loans with an unpaid
principal balance plus accrued interest of $85 million and
$2.6 billion for the three months ended March 31, 2010
and 2009, respectively. The following table displays the
outstanding balance and carrying amount of acquired
credit-impaired loans as of March 31, 2010 and
December 31, 2009, excluding loans that were modified as
TDRs subsequent to their acquisition from MBS trusts.
| As of | ||||||||
| March 31, 2010 | December 31, 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Outstanding contractual balance
|
$ | 17,291 | $ | 24,106 | ||||
|
Carrying amount:
|
||||||||
|
Loans on accrual status
|
2,304 | 2,560 | ||||||
|
Loans on nonaccrual status
|
5,758 | 8,952 | ||||||
|
Total carrying amount of loans
|
$ | 8,062 | $ | 11,512 | ||||
The following table displays details on activity for acquired
credit-impaired loans at their acquisition dates for the three
months ended March 31, 2010 and 2009, excluding loans that
were modified as TDRs subsequent to their acquisition from MBS
trusts.
|
For the
|
||||||||
|
Three Months Ended
|
||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Contractually required principal and interest payments at
acquisition
(1)
|
$ | 88 | $ | 2,860 | ||||
|
Nonaccretable difference
|
32 | 681 | ||||||
|
Cash flows expected to be collected at
acquisition
(1)
|
56 | 2,179 | ||||||
|
Accretable yield
|
29 | 953 | ||||||
|
Initial investment in acquired credit-impaired loans at
acquisition
|
$ | 27 | $ | 1,226 | ||||
| (1) | Contractually required principal and interest payments at acquisition and cash flows expected to be collected at acquisition are adjusted for the estimated timing and amount of prepayments. |
133
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
The following table displays activity for the accretable yield
of all outstanding acquired credit-impaired loans for the three
months ended March 31, 2010 and 2009. Accreted effective
interest is shown for only those loans that we were still
accounting for as acquired credit-impaired loans for the
respective periods.
|
For the
|
||||||||
|
Three Months Ended
|
||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Beginning balance, January 1
|
$ | 10,117 | $ | 1,559 | ||||
|
Additions
|
29 | 953 | ||||||
|
Accretion
|
(76 | ) | (56 | ) | ||||
|
Reductions
(1)
|
(2,743 | ) | (1,023 | ) | ||||
|
Changes in estimated cash
flows
(2)
|
(340 | ) | 307 | |||||
|
Reclassifications (to) from nonaccretable
difference
(3)
|
(152 | ) | 59 | |||||
|
Ending balance, March 31
|
$ | 6,835 | $ | 1,799 | ||||
| (1) | Reductions are the result of liquidations and loan modifications due to TDRs. | |
| (2) | Represents changes in expected cash flows due to changes in prepayment and other assumptions. | |
| (3) | Represents changes in expected cash flows due to changes in credit quality or credit assumptions. |
The following table displays interest income recognized and the
increase in the “Provision for loan losses” related to
loans that are still being accounted for as acquired
credit-impaired loans, as well as loans that have been
subsequently modified as a TDR, for the three months ended
March 31, 2010 and 2009. The accretion of fair value losses
reported in the table below relates primarily to credit-impaired
loans that were acquired prior to the transition date.
Subsequent to the transition date, our condensed consolidated
statements of operations no longer reflect the recognition of
fair value losses on the majority of acquisitions of
credit-impaired loans because the loans are already recorded in
our condensed consolidated balance sheets at the time of
purchase.
|
For the
|
||||||||
|
Three Months Ended
|
||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Accretion of fair value
discount
(1)
|
$ | 266 | $ | 65 | ||||
|
Interest income on loans returned to accrual status or
subsequently modified as TDRs
|
321 | 88 | ||||||
|
Total interest income recognized on acquired credit-impaired
loans
|
$ | 587 | $ | 153 | ||||
|
Increase in “Provision for loan losses” subsequent to
the acquisition of credit-impaired loans
|
$ | 564 | $ | 63 | ||||
| (1) | Represents accretion of the fair value discount that was recorded on acquired credit-impaired loans. |
| 5. | Allowance for Loan Losses and Reserve for Guaranty Losses |
We maintain an allowance for loan losses for loans held for
investment in our mortgage portfolio and loans backing Fannie
Mae MBS issued from consolidated trusts and a reserve for
guaranty losses related to loans backing Fannie Mae MBS issued
from unconsolidated trusts and loans that we have guaranteed
under long-term standby commitments. We refer to our allowance
for loan losses and reserve for guaranty losses
134
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
collectively as our combined loss reserves. When calculating our
guaranty reserve, we consider all contractually past due
interest income including payments expected to be missed between
the balance sheet date and the point of loan acquisition or
foreclosure. When calculating our loan loss allowance, we
consider only our net recorded investment in the loan at the
balance sheet date, which includes interest income only while
the loan was on accrual status. Determining the adequacy of our
allowance for loan losses and reserve for guaranty losses is
complex and requires judgment about the effect of matters that
are inherently uncertain.
Upon recognition of the mortgage loans held by newly
consolidated trusts at the transition date, we increased our
allowance for loan losses and decreased our reserve for guaranty
losses. The decrease in our combined loss reserves of
$10.5 billion reflects the difference in the methodology
used to estimate incurred losses under our allowance for loan
losses versus our reserve for guaranty losses and recording the
portion of the reserve related to accrued interest to
“Allowance for accrued interest receivable” in our
condensed consolidated balance sheets. See “Note 2,
Adoption of the New Accounting Standards on the Transfers of
Financial Assets and Consolidation of Variable Interest
Entities” for additional information.
Although our loss models include extensive historical loan
performance data, our loss reserve process is subject to risks
and uncertainties particularly in the rapidly changing credit
environment.
|
For the Three Months Ended
|
||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Allowance for loan losses:
|
||||||||
|
Beginning
balance
(1)(2)
|
$ | 9,925 | $ | 2,772 | ||||
|
Adoption of new accounting standards
|
43,576 | — | ||||||
|
Provision for loan losses
|
11,939 | 2,509 | ||||||
|
Charge-offs
(3)
|
(5,160 | ) | (637 | ) | ||||
|
Recoveries
|
374 | 35 | ||||||
|
Net reclassification of portion of allowance related to
interest
(1)(4)
|
(85 | ) | (49 | ) | ||||
|
Ending
balance
(1)(5)(8)
|
$ | 60,569 | $ | 4,630 | ||||
|
Reserve for guaranty losses:
|
||||||||
|
Beginning balance
|
$ | 54,430 | $ | 21,830 | ||||
|
Adoption of new accounting standards
|
(54,103 | ) | — | |||||
|
Provision (benefit) for guaranty losses
|
(36 | ) | 17,825 | |||||
|
Charge-offs
(6)(7)
|
(61 | ) | (2,944 | ) | ||||
|
Recoveries
|
3 | 165 | ||||||
|
Ending balance
|
$ | 233 | $ | 36,876 | ||||
| (1) | Prior period amounts have been reclassified to conform to current year presentation. | |
| (2) | Includes $1.8 billion related to loans of consolidated trusts as of December 31, 2009. | |
| (3) | Includes accrued interest of $579 million and $247 million for the three months ended March 31, 2010 and 2009, respectively. | |
| (4) | Represents reclassification of amounts recorded in provision for loan losses and charge-offs that relate to allowance for accrued interest receivable. | |
| (5) | Includes $903 million and $197 million as of March 31, 2010 and 2009, respectively, for acquired credit-impaired loans. |
135
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| (6) | Includes charges $115 million for the three months ended March 31, 2009 related to unsecured HomeSaver Advance loans. There were no charges related to unsecured HomeSaver Advance loans for the three months ended March 31, 2010. | |
| (7) | Includes charges recorded at the date of acquisition of $58 million and $1.4 billion for the three months ended March 31, 2010 and 2009, respectively, for acquired credit-impaired loans where the acquisition cost exceeded the fair value of the acquired loan. | |
| (8) | Includes $34.9 billion related to loans of consolidated trusts as of March 31, 2010. |
| 6. | 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. The following table displays our investments in
trading securities and the cumulative amount of net losses
recognized from holding these securities as of March 31,
2010 and December 31, 2009.
| As of | ||||||||
| March 31, 2010 | December 31, 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Mortgage-related securities:
|
||||||||
|
Fannie Mae
|
$ | 8,239 | $ | 74,750 | ||||
|
Freddie Mac
|
6,502 | 15,082 | ||||||
|
Ginnie Mae
|
16 | 1 | ||||||
|
Alt-A private-label securities
|
1,405 | 1,355 | ||||||
|
Subprime private-label securities
|
1,683 | 1,780 | ||||||
|
CMBS
|
10,098 | 9,335 | ||||||
|
Mortgage revenue bonds
|
611 | 600 | ||||||
|
Other mortgage-related securities
|
158 | 154 | ||||||
|
Total
|
28,712 | 103,057 | ||||||
|
Non-mortgage-related securities:
|
||||||||
|
U.S. Treasury
securities
(1)
|
35,650 | 3 | ||||||
|
Asset-backed securities
|
7,991 | 8,515 | ||||||
|
Corporate debt securities
|
176 | 364 | ||||||
|
Total
|
43,817 | 8,882 | ||||||
|
Total trading securities
|
$ | 72,529 | $ | 111,939 | ||||
|
Losses in trading securities held in our portfolio, net
|
$ | 3,783 | $ | 2,685 | ||||
| (1) | Certain prior year amounts have been reclassified to conform to our current period presentation. |
As of March 31, 2010, we held U.S. Treasury securities with
fair value of $11.5 billion, which we elected to classify
as “cash and cash equivalents” in our condensed
consolidated balance sheets.
136
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
The following table displays information about our net trading
gains and losses for the three months ended March 31, 2010
and 2009.
| For the Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Net trading gains (losses):
|
||||||||
|
Mortgage-related securities
|
$ | 1,006 | $ | (121 | ) | |||
|
Non-mortgage-related securities
|
52 | 288 | ||||||
|
Total
|
$ | 1,058 | $ | 167 | ||||
|
Net trading gains (losses) recorded in the period related to
securities still held at period end:
|
||||||||
|
Mortgage-related securities
|
$ | 900 | $ | (122 | ) | |||
|
Non-mortgage-related securities
|
48 | 424 | ||||||
|
Total
|
$ | 948 | $ | 302 | ||||
Available-for-Sale
Securities
We measure AFS securities at fair value with unrealized gains
and losses recorded as a component of AOCI, net of tax, in our
condensed consolidated balance sheets. We record realized gains
and losses from the sale of AFS securities in “Investment
gains, net” in our condensed consolidated statements of
operations.
The following table displays the gross realized gains, losses
and proceeds on sales of AFS securities for the three months
ended March 31, 2010 and 2009.
| For the Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Gross realized gains
|
$ | 265 | $ | 799 | ||||
|
Gross realized losses
|
120 | 663 | ||||||
|
Total
proceeds
(1)
|
4,598 | 31,910 | ||||||
| (1) | Excludes proceeds from the initial sale of securities from new portfolio securitizations included in “Note 3, Consolidations and Transfers of Financial Assets.” |
137
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
The following tables display the amortized cost, gross
unrealized gains and losses and fair value by major security
type for AFS securities we held as of March 31, 2010 and
December 31, 2009.
| As of March 31, 2010 | ||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||
|
Total
|
Gross
|
Unrealized
|
Unrealized
|
Total
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Losses -
|
Losses -
|
Fair
|
||||||||||||||||
| Cost (1) | Gains | OTTI (2) | Other (3) | Value | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Fannie Mae
|
$ | 28,499 | $ | 1,556 | $ | (22 | ) | $ | (18 | ) | $ | 30,015 | ||||||||
|
Freddie Mac
|
20,869 | 1,069 | — | (3 | ) | 21,935 | ||||||||||||||
|
Ginnie Mae
|
1,178 | 110 | — | (1 | ) | 1,287 | ||||||||||||||
|
Alt-A private-label securities
|
17,761 | 53 | (2,527 | ) | (829 | ) | 14,458 | |||||||||||||
|
Subprime private-label securities
|
12,518 | 29 | (1,407 | ) | (629 | ) | 10,511 | |||||||||||||
|
CMBS
|
15,705 | — | — | (1,712 | ) | 13,993 | ||||||||||||||
|
Mortgage revenue bonds
|
13,177 | 79 | (50 | ) | (628 | ) | 12,578 | |||||||||||||
|
Other mortgage-related securities
|
4,457 | 58 | (169 | ) | (456 | ) | 3,890 | |||||||||||||
|
Total
|
$ | 114,164 | $ | 2,954 | $ | (4,175 | ) | $ | (4,276 | ) | $ | 108,667 | ||||||||
| As of December 31, 2009 | ||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||
|
Total
|
Gross
|
Unrealized
|
Unrealized
|
Total
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Losses -
|
Losses -
|
Fair
|
||||||||||||||||
| Cost (1) | Gains | OTTI (2) | Other (3) | Value | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Fannie Mae
|
$ | 148,074 | $ | 6,413 | $ | (23 | ) | $ | (45 | ) | $ | 154,419 | ||||||||
|
Freddie Mac
|
26,281 | 1,192 | — | (4 | ) | 27,469 | ||||||||||||||
|
Ginnie Mae
|
1,253 | 102 | — | (2 | ) | 1,353 | ||||||||||||||
|
Alt-A private-label securities
|
17,836 | 41 | (2,738 | ) | (989 | ) | 14,150 | |||||||||||||
|
Subprime private-label securities
|
13,232 | 33 | (1,774 | ) | (745 | ) | 10,746 | |||||||||||||
|
CMBS
|
15,797 | — | — | (2,604 | ) | 13,193 | ||||||||||||||
|
Mortgage revenue bonds
|
13,679 | 71 | (44 | ) | (860 | ) | 12,846 | |||||||||||||
|
Other mortgage-related securities
|
4,225 | 29 | (235 | ) | (467 | ) | 3,552 | |||||||||||||
|
Total
|
$ | 240,377 | $ | 7,881 | $ | (4,814 | ) | $ | (5,716 | ) | $ | 237,728 | ||||||||
| (1) | Amortized cost includes unamortized premiums, discounts and other cost basis adjustments as well as the credit component of other-than-temporary impairments recognized in our condensed consolidated statements of operations. | |
| (2) | Represents the noncredit component of other-than-temporary impairment losses recorded in other comprehensive loss as well as cumulative changes in fair value for securities for which we previously recognized the credit component of an other-than-temporary impairment. | |
| (3) | Represents the gross unrealized losses on securities for which we have not recognized an other-than-temporary impairment. |
138
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
The following tables display additional information regarding
gross unrealized losses and fair value by major security type
for AFS securities in an unrealized loss position that we held
as of March 31, 2010 and December 31, 2009.
| As of March 31, 2010 | ||||||||||||||||
|
Less Than 12
|
12 Consecutive
|
|||||||||||||||
| Consecutive Months | Months or Longer | |||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
|||||||||||||
| Losses | Value | Losses | Value | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Fannie Mae
|
$ | (29 | ) | $ | 873 | $ | (11 | ) | $ | 269 | ||||||
|
Freddie Mac
|
(2 | ) | 106 | (1 | ) | 13 | ||||||||||
|
Ginnie Mae
|
— | — | (1 | ) | 136 | |||||||||||
|
Alt-A private-label securities
|
(29 | ) | 459 | (3,327 | ) | 13,611 | ||||||||||
|
Subprime private-label securities
|
(30 | ) | 271 | (2,006 | ) | 9,479 | ||||||||||
|
CMBS
|
— | — | (1,712 | ) | 13,993 | |||||||||||
|
Mortgage revenue bonds
|
(16 | ) | 1,310 | (662 | ) | 5,592 | ||||||||||
|
Other mortgage-related securities
|
(7 | ) | 71 | (618 | ) | 3,138 | ||||||||||
|
Total
|
$ | (113 | ) | $ | 3,090 | $ | (8,338 | ) | $ | 46,231 | ||||||
| As of December 31, 2009 | ||||||||||||||||
|
Less Than 12
|
12 Consecutive
|
|||||||||||||||
| Consecutive Months | Months or Longer | |||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
|||||||||||||
| Losses | Value | Losses | Value | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Fannie Mae
|
$ | (36 | ) | $ | 1,461 | $ | (32 | ) | $ | 544 | ||||||
|
Freddie Mac
|
(2 | ) | 85 | (2 | ) | 164 | ||||||||||
|
Ginnie Mae
|
(2 | ) | 139 | — | 26 | |||||||||||
|
Alt-A private-label securities
|
(2,439 | ) | 7,018 | (1,288 | ) | 6,929 | ||||||||||
|
Subprime private-label securities
|
(998 | ) | 4,595 | (1,521 | ) | 5,860 | ||||||||||
|
CMBS
|
— | — | (2,604 | ) | 13,193 | |||||||||||
|
Mortgage revenue bonds
|
(54 | ) | 2,392 | (850 | ) | 5,664 | ||||||||||
|
Other mortgage-related securities
|
(96 | ) | 536 | (606 | ) | 2,739 | ||||||||||
|
Total
|
$ | (3,627 | ) | $ | 16,226 | $ | (6,903 | ) | $ | 35,119 | ||||||
Other-Than-Temporary
Impairments
We recognize the credit component of
other-than-temporary
impairments of our debt securities in our condensed consolidated
statements of operations and the noncredit component in
“Other comprehensive loss” for those securities that
we do not intend to sell and for which it is not more likely
than not that we will be required to sell before recovery.
The fair value of our securities varies from period to period
due to changes in interest rates, in the performance of the
underlying collateral and in the credit performance of the
underlying issuer, among other factors. $8.3 billion of the
$8.5 billion of gross unrealized losses on AFS securities
as of March 31, 2010 have
139
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
existed for a period of 12 consecutive months or longer. Gross
unrealized losses on AFS securities as of March 31, 2010
include unrealized losses on securities with
other-than-temporary
impairment in which a portion of the impairment remains in AOCI.
The securities with unrealized losses for 12 consecutive months
or longer, on average, had a market value as of March 31,
2010 that was 85% of their amortized cost basis. Based on our
review for impairments of AFS securities, which includes an
evaluation of the collectibility of cash flows and any intent or
requirement to sell the securities, we have concluded that we do
not have an intent to sell and we believe it is not more likely
than not that we will be required to sell the securities.
Additionally, our projections of cash flows indicate that we
will recover these unrealized losses over the lives of the
securities.
The following table displays our net
other-than-temporary
impairments by major security type recognized in our condensed
consolidated statements of operations for the three months ended
March 31, 2010 and 2009.
| For the Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Fannie Mae
|
$ | — | $ | 38 | ||||
|
Freddie Mac
|
— | 1 | ||||||
|
Alt-A private-label securities
|
37 | 2,928 | ||||||
|
Subprime private-label securities
|
184 | 2,606 | ||||||
|
Mortgage revenue bonds
|
— | 17 | ||||||
|
Other
|
15 | 63 | ||||||
|
Net
other-than-temporary
impairments
|
$ | 236 | $ | 5,653 | ||||
For the quarter ended March 31, 2010, we recorded net
other-than-temporary
impairment of $236 million. This
other-than-temporary
impairment reflects current market conditions and was primarily
driven by a decrease in the present value of our cash flow
projections on Alt-A and subprime securities due to:
| • | net projected home price impact; and | |
| • | actual performance versus previous projections |
Of the factors that caused a decline in the present value of
projected cash flows, the net projected home price impact for
the quarter was estimated to account for approximately 66% of
the decrease. Actual home-price growth in geographies where we
have private-label securities exposure was worse than had been
previously modeled. The actual performance of private-label
securities, when compared to what had been previously modeled,
was estimated to account for the remaining 34% of the decrease
in net projected cash flows. We update loan information for
securities on a monthly basis for our Alt-A and subprime
securities. In rolling forward the valuation dates of the models
based on these actual performance updates, the resulting
projected present value of cash flows declined from prior
expectations. Lower expectations for interest rates offset a
portion of the decrease in projected present value of cash flows
in certain securities. Our projections for interest rates are
generally based on the implied forward curve for interest rates
in the market as of the last day of each respective reporting
period. We would consider lower interest rates to be favorable
in the context of estimated credit losses on subprime securities
because the subprime securities held by us are typically
floating rate instruments. In lower interest rate environments,
the cash flows provided by the underlying
140
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
subprime mortgage loans are typically greater than the floating
rate liabilities of the bonds and therefore more cash flow is
available to protect against credit losses than in a higher rate
interest environment where the difference between the rate on
the subprime mortgage loans and the coupon on the bonds is
smaller.
The following table displays activity for the three months ended
March 31, 2010 related to the credit component recognized
in earnings on debt securities held by us for which we
recognized a portion of
other-than-temporary
impairment in AOCI.
|
For the
|
||||
|
Three Months Ended
|
||||
| March 31, 2010 | ||||
| (Dollars in millions) | ||||
|
Balance, January 1
|
$ | 8,191 | ||
|
Additions for the credit component on debt securities for which
OTTI was not previously recognized
|
6 | |||
|
Additions for credit losses on debt securities for which OTTI
was previously recognized
|
230 | |||
|
Reductions for securities no longer in portfolio at period
end
(1)
|
(51 | ) | ||
|
Reductions for increases in cash flows expected to be collected
over the remaining life of the security
|
(167 | ) | ||
|
Balance, March 31
|
$ | 8,209 | ||
| (1) | Includes securities sold, matured, called and consolidated to loans. |
As of March 31, 2010, those debt securities with
other-than-temporary
impairment in which we recognized in our condensed consolidated
statement of operations only the amount of loss related to
credit consisted predominantly of Alt-A and subprime securities.
For these residential mortgage-backed securities, we estimate
the portion of loss attributable to credit using discounted cash
flow models. We create the models based on the performance of
first-lien loans in a loan performance asset-backed securities
database, which reflect the average performance of all
private-label mortgage-related securities. We employ separate
models to project regional home prices, interest rates,
prepayment speeds, conditional default rates, severity,
delinquency rates and early payment defaults on a loan-level
basis by product type. We first aggregate loan-level performance
projections by pool. We then input the prepayment, default,
severity and delinquency vectors for these pools in cash flow
modeling software which projects our bond cash flows, including
projections of bond principal losses and interest shortfalls.
The software contains detailed information on security-level
subordination levels and cash flow priority of payments. We
model all securities without assuming the benefit of any
external financial guarantees; we then perform a separate
assessment to assess whether we can rely upon the guaranty. We
have recorded
other-than-temporary
impairments for the three months ended March 31, 2010 based
on this analysis, with amounts related to credit loss recognized
in our condensed consolidated statement of operations. For
securities we determined were not
other-than-temporarily
impaired, we concluded that either the bond did not project any
credit loss or if we projected a loss, that the present value of
expected cash flows was greater than the security’s cost
basis.
We analyze Commercial mortgage-backed securities
(“CMBS”) using a third party loan level model that
incorporates such factors as debt service coverage,
loan-to-value
ratio, geographic location, property type, and amortization type
to determine the level of projected losses. We then compare the
projected loss to the amount of subordination in the bonds that
we hold to determine whether we expect any loss on those bonds.
As of March 31, 2010, we have no
other-than-temporary
impairments in our holdings of CMBS as we project the remaining
subordination to be more than sufficient to absorb the level of
projected losses. We believe the
141
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
decline in fair value for these securities results from the
lower level of liquidity in the marketplace and the resultant
higher investor required returns, and not from an expectation of
credit loss. While downgrades have occurred in this sector in
recent months, all of our holdings remain investment grade.
For mortgage revenue bonds, where we cannot utilize
credit-sensitized cash flows, we perform a qualitative and
quantitative analysis to assess whether a bond is
other-than-temporarily
impaired. If a bond is deemed to be
other-than-temporarily
impaired, the projected contractual cash flows of the security
are reduced by a default loss amount based on the
security’s lowest credit rating as provided by the major
nationally recognized statistical rating organizations. The
lower the security’s credit rating, the larger the amount
by which the contractual cash flows are reduced. These adjusted
cash flows are then used in the present value calculation to
determine the credit portion of the
other-than-temporary
impairment. While we have recognized
other-than-temporary
impairment on these bonds, we expect to realize no credit losses
on the vast majority of our holdings due to the inherent
financial strength of the issuers, or in some cases, the amount
of external credit support from mortgage collateral or financial
guarantees. The fair values of these bonds are likewise impacted
by the low levels of market liquidity and high required returns,
which has led to unrealized losses in the portfolio that we deem
to be temporary.
Other mortgage-related securities include manufactured housing
securities, which have been
other-than-temporarily
impaired in 2009. For manufactured housing securities, we
utilize models that incorporate recent historical performance
information and other relevant public data to run cash flows and
assess for
other-than-temporary
impairment. Given the significant seasoning of these securities
we expect that the future performance will be in line with how
the securities are currently performing. We model all of these
securities assuming no benefit of any external financial
guarantees and then separately assess whether we can rely on the
guaranty. If we determined that securities were not
other-than-temporarily
impaired, we concluded that either the bond did not project any
credit loss or, if a loss was projected, that present value of
expected cash flows was greater than the security’s cost
basis.
The following table displays the modeled attributes for
securities that were
other-than-temporarily
impaired as of March 31, 2010.
| Prepayment Rates | Default Rates | Loss Severity | ||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
| Average | Range | Average | Range | Average | Range | |||||||||||||||||||
|
Alt-A private-label securities
|
||||||||||||||||||||||||
|
2004 and prior
|
8.5 | % | 7.2 - 9.6 | % | 48.1 | % | 36.2 - 55.9 | % | 52.5 | % | 48.3 -55.3 | % | ||||||||||||
|
2005
|
5.7 | 4.6 - 7.5 | 38.7 | 16.0 - 73.6 | 63.7 | 53.3 - 68.7 | ||||||||||||||||||
|
2006
|
7.8 | 5.0 - 10.0 | 36.8 | 19.4 - 63.7 | 54.7 | 40.0 - 74.4 | ||||||||||||||||||
|
Subprime private-label securities
|
||||||||||||||||||||||||
|
2004 and prior
|
5.6 | 5.6 | 31.4 | 31.4 | 72.9 | 72.9 | ||||||||||||||||||
|
2005
|
2.0 | 1.9 - 2.2 | 80.7 | 79.0 - 81.9 | 76.6 | 75.2 - 78.8 | ||||||||||||||||||
|
2006
|
2.0 | 1.5 - 2.6 | 80.7 | 69.7 - 87.4 | 77.5 | 73.9 - 85.0 | ||||||||||||||||||
|
2007
|
2.9 | 2.4 - 3.2 | 74.1 | 71.1 - 80.1 | 73.8 | 72.5 - 76.5 | ||||||||||||||||||
|
Manufactured housing
|
||||||||||||||||||||||||
|
2004 and prior
|
2.2 | 1.5 - 4.9 | 35.0 | 2.2 - 50.4 | 83.7 | 77.1 - 100.0 | ||||||||||||||||||
142
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Maturity
Information
The following table displays the amortized cost and fair value
of our AFS securities by major security type and remaining
maturity, assuming no principal prepayments, as of
March 31, 2010. Contractual maturity of mortgage-backed
securities is not a reliable indicator of their expected life
because borrowers generally have the right to prepay their
obligations at any time.
| As of March 31, 2010 | ||||||||||||||||||||||||||||||||||||||||
|
After One Year
|
After Five Years
|
|||||||||||||||||||||||||||||||||||||||
|
Total
|
Total
|
One Year or Less | Through Five Years | Through Ten Years | After Ten Years | |||||||||||||||||||||||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$ | 28,499 | $ | 30,015 | $ | — | $ | — | $ | 3 | $ | 3 | $ | 4,641 | $ | 4,903 | $ | 23,855 | $ | 25,109 | ||||||||||||||||||||
|
Freddie Mac
|
20,869 | 21,935 | 22 | 22 | 55 | 57 | 1,690 | 1,791 | 19,102 | 20,065 | ||||||||||||||||||||||||||||||
|
Ginnie Mae
|
1,178 | 1,287 | — | — | — | — | 5 | 6 | 1,173 | 1,281 | ||||||||||||||||||||||||||||||
|
Alt-A private-label securities
|
17,761 | 14,458 | — | — | 1 | 1 | 342 | 332 | 17,418 | 14,125 | ||||||||||||||||||||||||||||||
|
Subprime private-label securities
|
12,518 | 10,511 | — | — | — | — | — | — | 12,518 | 10,511 | ||||||||||||||||||||||||||||||
|
CMBS
|
15,705 | 13,993 | 310 | 309 | 63 | 60 | 14,974 | 13,375 | 358 | 249 | ||||||||||||||||||||||||||||||
|
Mortgage revenue bonds
|
13,177 | 12,578 | 40 | 41 | 366 | 377 | 833 | 839 | 11,938 | 11,321 | ||||||||||||||||||||||||||||||
|
Other mortgage-related securities
|
4,457 | 3,890 | — | — | — | — | — | 18 | 4,457 | 3,872 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 114,164 | $ | 108,667 | $ | 372 | $ | 372 | $ | 488 | $ | 498 | $ | 22,485 | $ | 21,264 | $ | 90,819 | $ | 86,533 | ||||||||||||||||||||
Accumulated
Other Comprehensive Loss
The following table displays our accumulated other comprehensive
loss by major categories as of March 31, 2010 and
December 31, 2009.
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2010 (1) | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Net unrealized gains (losses) on
available-for-sale
securities for which we have not recorded
other-than-temporary
impairment
|
$ | (917 | ) | $ | 1,337 | |||
|
Net unrealized losses on
available-for-sale
securities for which we have recorded
other-than-temporary
impairment
|
(2,653 | ) | (3,059 | ) | ||||
|
Other
|
(184 | ) | (10 | ) | ||||
|
Accumulated other comprehensive loss
|
$ | (3,754 | ) | $ | (1,732 | ) | ||
| (1) | Includes a net increase of $3.4 billion from the adoption of the new accounting standards. |
| 7. | Financial Guarantees |
As a result of adopting the new accounting standards, we
derecognized the previously recognized guaranty assets, guaranty
obligations, master servicing assets, and master servicing
liabilities associated with the newly consolidated trusts from
our condensed consolidated balance sheets.
143
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
For our guarantees to unconsolidated trusts and other guaranty
arrangements, we recognize a guaranty obligation for our
obligation to stand ready to perform on these guarantees. For
those guarantees recognized in our condensed consolidated
balance sheets, our maximum potential exposure under these
guarantees is primarily comprised of the unpaid principal
balance of the underlying mortgage loans, which totaled
$48.4 billion as of March 31, 2010. The maximum amount
we could recover through available credit enhancements and
recourse with third parties on guarantees recognized in our
condensed consolidated balance sheets was $13.7 billion as
of March 31, 2010. In addition, we had exposure of
$10.8 billion for other guarantees not recognized in our
condensed consolidated balance sheets as of March 31, 2010,
which primarily represents the unpaid principal balance of loans
underlying guarantees issued prior to the effective date of the
current accounting standards on guaranty accounting. The maximum
amount we could recover through available credit enhancements
and recourse with third parties on guarantees not recognized in
our condensed consolidated balance sheets was $4.1 billion
as of March 31, 2010. 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.
As of December 31, 2009, our maximum potential exposure for
guarantees recognized in our condensed consolidated balance
sheets was primarily comprised of the unpaid principal balance
of the underlying mortgage loans, which totaled $2.5 trillion.
The maximum amount we could recover through available credit
enhancements and recourse with third parties for these
guarantees was $113.4 billion. In addition, we had exposure
of $135.7 billion for other guarantees not recognized in
our condensed consolidated balance sheets as of
December 31, 2009. The maximum amount we could recover
through available credit enhancements and recourse with third
parties on guarantees not recognized in our condensed
consolidated balance sheets was $13.6 billion as of
December 31, 2009.
Risk
Characteristics of our Book of Business
We gauge our performance risk under our guaranty based on the
delinquency status of the mortgage loans we hold in portfolio,
or in the case of mortgage-backed securities, the underlying
mortgage loans of the related securities. Management also
monitors the serious delinquency rate, which is the percentage
of single-family loans three or more months past due and the
percentage of multifamily loans two or more months past due, of
loans with certain risk characteristics, such as
mark-to-market
loan-to-value
and operating debt service coverage ratios. We use this
information, in conjunction with housing market and economic
conditions, to structure our pricing and our eligibility and
underwriting criteria to accurately reflect the current risk of
loans with these high-risk characteristics, and in some cases we
decide to significantly reduce our participation in riskier loan
product categories. Management also uses this data together with
other credit risk measures to identify key trends that guide the
development of our loss mitigation strategies.
The following tables display the current delinquency status and
certain risk characteristics of our conventional single-family
and total multifamily guaranty book of business as of
March 31, 2010 and December 31, 2009.
| As of March 31, 2010 (1) | As of December 31, 2009 (1) | |||||||||||||||||||||||
|
30 Days
|
60 Days
|
Seriously
|
30 Days
|
60 Days
|
Seriously
|
|||||||||||||||||||
| Delinquent | Delinquent | Delinquent (2) | Delinquent | Delinquent | Delinquent (2) | |||||||||||||||||||
|
Percentage of conventional single-family guaranty book of
business
(3)
|
2.04 | % | 0.99 | % | 6.84 | % | 2.38 | % | 1.15 | % | 6.68 | % | ||||||||||||
|
Percentage of conventional single-family
loans
(4)
|
2.09 | 0.90 | 5.47 | 2.46 | 1.07 | 5.38 | ||||||||||||||||||
144
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| As of March 31, 2010 (1) | As of December 31, 2009 (1) | |||||||||||||||
|
Percentage of
|
Percentage of
|
|||||||||||||||
|
Single-Family
|
Percentage
|
Single-Family
|
Percentage
|
|||||||||||||
|
Guaranty Book
|
Seriously
|
Guaranty Book
|
Seriously
|
|||||||||||||
| of Business | Delinquent (2)(4) | of Business | Delinquent (2)(4) | |||||||||||||
|
Estimated
mark-to-market
loan-to-value
ratio:
|
||||||||||||||||
|
100.01% to 110%
|
5 | % | 14.48 | % | 5 | % | 14.79 | % | ||||||||
|
110.01% to 120%
|
3 | 18.30 | 3 | 18.55 | ||||||||||||
|
120.01% to 125%
|
1 | 20.87 | 1 | 21.39 | ||||||||||||
|
Greater than 125%
|
7 | 30.50 | 5 | 31.05 | ||||||||||||
|
Geographical distribution:
|
||||||||||||||||
|
Arizona
|
3 | 8.76 | 3 | 8.80 | ||||||||||||
|
California
|
17 | 5.72 | 17 | 5.73 | ||||||||||||
|
Florida
|
7 | 13.27 | 7 | 12.82 | ||||||||||||
|
Nevada
|
1 | 13.95 | 1 | 13.00 | ||||||||||||
|
Select Midwest
states
(5)
|
11 | 5.65 | 11 | 5.62 | ||||||||||||
|
All other states
|
61 | 4.19 | 61 | 4.11 | ||||||||||||
|
Product distribution (not mutually exclusive):
(6)
|
||||||||||||||||
|
Alt-A
|
9 | 16.22 | 9 | 15.63 | ||||||||||||
|
Subprime
|
* | 31.47 | * | 30.68 | ||||||||||||
|
Negatively amortizing adjustable rate
|
1 | 10.09 | 1 | 10.29 | ||||||||||||
|
Interest only
|
6 | 20.82 | 7 | 20.17 | ||||||||||||
|
Investor property
|
5 | 5.53 | 6 | 5.54 | ||||||||||||
|
Condo/Coop
|
9 | 6.14 | 9 | 5.99 | ||||||||||||
|
Original
loan-to-value
ratio
>90%
(7)
|
9 | 12.93 | 9 | 13.05 | ||||||||||||
|
FICO credit score
<620
(7)
|
4 | 17.86 | 4 | 18.20 | ||||||||||||
|
Original
loan-to-value
ratio >90% and FICO credit score
<620
(7)
|
1 | 26.94 | 1 | 27.96 | ||||||||||||
|
Vintages:
|
||||||||||||||||
|
2005
|
10 | 7.58 | 10 | 7.27 | ||||||||||||
|
2006
|
10 | 13.42 | 11 | 12.87 | ||||||||||||
|
2007
|
14 | 14.85 | 15 | 14.06 | ||||||||||||
|
2008
|
12 | 4.51 | 13 | 3.98 | ||||||||||||
|
All other vintages
|
54 | 2.16 | 51 | 2.19 | ||||||||||||
| * | Represents less than 0.5% of the single-family conventional guaranty book of business. | |
| (1) | Consists of the portion of our conventional single-family guaranty book of business for which we have detailed loan level information, which constituted over 99% and 98% of our total conventional single-family guaranty book of business as of March 31, 2010 and December 31, 2009, respectively. | |
| (2) | Includes conventional single-family loans that were three months or more past due or in foreclosure as of March 31, 2010 and December 31, 2009. | |
| (3) | Calculated based on the aggregate unpaid principal balance of delinquent conventional single-family loans divided by the aggregate unpaid principal balance of loans in our conventional single-family guaranty book of business. | |
| (4) | Calculated based on the number of conventional single-family loans that were delinquent divided by the total number of loans in our conventional single-family guaranty book of business. |
145
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| (5) | Consists of Illinois, Indiana, Michigan, and Ohio. | |
| (6) | Categories are not mutually exclusive. Loans with multiple product features are included in all applicable categories. | |
| (7) | Includes housing goals-oriented products such as MyCommunityMortgage ® and Expanded Approval ® . |
| As of March 31, 2010 (1)(2) | As of December 31, 2009 (1)(2) | |||||||||||||||
|
30 Days
|
Seriously
|
30 Days
|
Seriously
|
|||||||||||||
| Delinquent | Delinquent (3) | Delinquent | Delinquent (3) | |||||||||||||
|
Percentage of multifamily guaranty book of business
|
0.22 | % | 0.79 | % | 0.28 | % | 0.63 | % | ||||||||
| As of March 31, 2010 (1) | As of December 31, 2009 (1) | |||||||||||||||||||
|
Percentage of
|
Percentage of
|
|||||||||||||||||||
|
Multifamily
|
Percentage
|
Multifamily
|
Percentage
|
|||||||||||||||||
|
Guaranty
|
Seriously
|
Guaranty
|
Seriously
|
|||||||||||||||||
| Book of Business | Delinquent | Book of Business | Delinquent | |||||||||||||||||
|
Originating
loan-to-value
ratio:
|
||||||||||||||||||||
|
Greater than 80%
|
5 | % | 0.91 | % | 5 | % | 0.50 | % | ||||||||||||
|
Less than or equal to 80%
|
95 | 0.78 | 95 | 0.63 | ||||||||||||||||
|
Originating debt service coverage ratio:
|
||||||||||||||||||||
|
Less than or equal to 1.10
|
10 | 0.46 | 10 | 0.17 | ||||||||||||||||
|
Greater than 1.10
|
90 | 0.82 | 90 | 0.68 | ||||||||||||||||
|
Acquisition loan size distribution:
|
||||||||||||||||||||
|
Less than or equal to $750,000
|
3 | 1.46 | 3 | 1.27 | ||||||||||||||||
|
Greater than $750,000 and less than or equal to $3 million
|
13 | 1.22 | 13 | 1.01 | ||||||||||||||||
|
Greater than $3 million and less than or equal to
$5 million
|
9 | 1.14 | 9 | 1.08 | ||||||||||||||||
|
Greater than $5 million and less than or equal to
$25 million
|
41 | 0.87 | 41 | 0.60 | ||||||||||||||||
|
Greater than $25 million
|
34 | 0.39 | 34 | 0.34 | ||||||||||||||||
|
Maturing dates:
|
||||||||||||||||||||
|
Maturing in 2010
|
2 | 2.50 | 2 | 1.55 | ||||||||||||||||
|
Maturing in 2011
|
5 | 1.32 | 5 | 0.64 | ||||||||||||||||
|
Maturing in 2012
|
8 | 1.43 | 10 | 1.13 | ||||||||||||||||
|
Maturing in 2013
|
11 | 0.53 | 12 | 0.22 | ||||||||||||||||
|
Maturing in 2014
|
9 | 0.70 | 9 | 0.62 | ||||||||||||||||
| (1) | Consists of the portion of our multifamily guaranty book of business for which we have detailed loan level information, which constituted over 99% and 98% of our total multifamily guaranty book of business as of March 31, 2010 and December 31, 2009, respectively. | |
| (2) | Calculated based on the aggregate unpaid principal balance of delinquent multifamily loans divided by the aggregate unpaid principal balance of loans in our multifamily guaranty book of business. | |
| (3) | Includes multifamily loans that were two months or more past due as of March 31, 2010 and December 31, 2009. |
146
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Guaranty
Obligations
The following table displays changes in our “Guaranty
obligations” recognized in our condensed consolidated
balance sheets for the three months ended March 31, 2010
and 2009. We derecognized the majority of our guaranty
obligations and deferred profit from our condensed consolidated
balance sheet upon adoption of the new accounting standards.
| For the Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Beginning balance, January 1
|
$ | 13,996 | $ | 12,147 | ||||
|
Adoption of new accounting standards
|
(13,320 | ) | — | |||||
|
Additions to guaranty
obligations
(1)
|
183 | 1,335 | ||||||
|
Amortization of guaranty obligations into guaranty fee income
|
(32 | ) | (1,763 | ) | ||||
|
Impact of consolidation
activity
(2)
|
— | (46 | ) | |||||
|
Ending balance, March 31
|
$ | 827 | $ | 11,673 | ||||
|
Deferred profit amortization
|
$ | 1 | $ | 283 | ||||
| (1) | Represents the fair value of our contractual obligation at issuance of new guarantees. | |
| (2) | Represents the derecognition of guaranty obligations during the period due to consolidations excluding the impact of adopting the new accounting standards. |
The fair value of our guaranty obligations associated with the
Fannie Mae MBS included in “Investments in securities”
was $2.4 billion and $4.8 billion as of March 31,
2010 and December 31, 2009, respectively.
| 8. | Acquired Property, Net |
Acquired property, net consists of
held-for-sale
foreclosed property received in full satisfaction of a loan net
of a valuation allowance for declines in the fair value of
foreclosed properties after initial acquisition. We classify as
held for sale those properties that we intend to sell and are
actively marketed for sale. The following table displays the
activity in acquired property and the related valuation
allowance for the three months ended March 31, 2010 and
2009.
|
For the Three Months Ended
|
For the Three Months Ended
|
|||||||||||||||||||||||
| March 31, 2009 | March 31, 2010 | |||||||||||||||||||||||
|
Acquired
|
Valuation
|
Acquired
|
Acquired
|
Valuation
|
Acquired
|
|||||||||||||||||||
| Property | Allowance (1) | Property, Net | Property | Allowance (1) | Property, Net | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Beginning balance, January 1
|
$ | 9,716 | $ | (574 | ) | $ | 9,142 | $ | 8,040 | $ | (1,122 | ) | $ | 6,918 | ||||||||||
|
Additions
|
6,762 | (52 | ) | 6,710 | 2,542 | (16 | ) | 2,526 | ||||||||||||||||
|
Disposals
|
(3,425 | ) | 206 | (3,219 | ) | (2,823 | ) | 373 | (2,450 | ) | ||||||||||||||
|
Write-downs, net of recoveries
|
— | (264 | ) | (264 | ) | — | (364 | ) | (364 | ) | ||||||||||||||
|
Ending balance, March 31
|
$ | 13,053 | $ | (684 | ) | $ | 12,369 | $ | 7,759 | $ | (1,129 | ) | $ | 6,630 | ||||||||||
| (1) | Reflects activities in the valuation allowance for acquired properties held primarily by our single-family segment. |
147
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| 9. | Short-Term Borrowings and Long-Term Debt |
Our short-term borrowings and long-term debt increased
significantly due to our adoption of the new accounting
standards on the transfers of financial assets and the
consolidation of VIEs.
Short-Term
Borrowings
Our short-term borrowings (borrowings with an original
contractual maturity of one year or less) consist of both
“Federal funds purchased and securities sold under
agreements to repurchase” and “Short-term debt”
in our condensed consolidated balance sheets. The following
table displays our outstanding short-term borrowings and
weighted-average interest rates as of March 31, 2010 and
December 31, 2009.
| As of | ||||||||||||||||
| March 31, 2010 | December 31, 2009 | |||||||||||||||
|
Weighted-
|
Weighted-
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Interest
|
Interest
|
|||||||||||||||
| Outstanding | Rate (1) | Outstanding | Rate (1) | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
$ | 180 | 0.01 | % | $ | — | — | % | ||||||||
|
Fixed-rate short-term debt:
|
||||||||||||||||
|
Discount notes
|
$ | 207,517 | 0.26 | % | $ | 199,987 | 0.27 | % | ||||||||
|
Foreign exchange discount notes
|
305 | 1.64 | 300 | 1.50 | ||||||||||||
|
Other short-term debt
|
— | — | 100 | 0.53 | ||||||||||||
|
Total fixed-rate short-term debt
|
207,822 | 0.26 | 200,387 | 0.27 | ||||||||||||
|
Floating-rate short-term
debt
(2)
|
— | — | 50 | 0.02 | ||||||||||||
|
Total short-term debt of Fannie Mae
|
207,822 | 0.26 | % | 200,437 | 0.27 | % | ||||||||||
|
Debt of consolidated trusts
|
6,343 | 0.11 | — | — | ||||||||||||
|
Total short-term debt
|
$ | 214,165 | 0.25 | % | $ | 200,437 | 0.27 | % | ||||||||
| (1) | Includes the effects of discounts, premiums, and other cost basis adjustments. | |
| (2) | Includes a portion of structured debt instruments that is reported at fair value. |
Our federal funds purchased and securities sold under agreements
to repurchase represent agreements to repurchase securities from
banks with excess reserves on a particular day for a specified
price, with repayment generally occurring on the following day.
Our short-term debt includes discount notes and foreign exchange
discount notes, as well as other short-term debt. Our discount
notes are unsecured general obligations and have maturities
ranging from overnight to 360 days from the date of
issuance.
Additionally, we issue foreign exchange discount notes in the
Euro money market enabling investors to hold short-term
investments in different currencies. We have the ability to
issue foreign exchange discount notes in maturities ranging from
5 to 360 days.
148
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Long-Term
Debt
Long-term debt represents borrowings with an original
contractual maturity of greater than one year. The following
table displays our outstanding long-term debt as of
March 31, 2010 and December 31, 2009.
| As of | ||||||||||||||||||||||||
| March 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
|
Weighted-
|
Weighted-
|
|||||||||||||||||||||||
|
Average
|
Average
|
|||||||||||||||||||||||
|
Interest
|
Interest
|
|||||||||||||||||||||||
| Maturities | Outstanding | Rate (1) | Maturities | Outstanding | Rate (1) | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Senior fixed:
|
||||||||||||||||||||||||
|
Benchmark notes and bonds
|
2010-2030 | $ | 276,322 | 3.88 | % | 2010-2030 | $ | 279,945 | 4.10 | % | ||||||||||||||
|
Medium-term notes
|
2010-2020 | 182,431 | 2.92 | 2010-2019 | 171,207 | 2.97 | ||||||||||||||||||
|
Foreign exchange notes and bonds
|
2017-2028 | 1,107 | 6.09 | 2010-2028 | 1,239 | 5.64 | ||||||||||||||||||
|
Other long-term
debt
(2)
|
2010-2040 | 60,397 | 5.83 | 2010-2039 | 62,783 | 5.80 | ||||||||||||||||||
|
Total senior fixed
|
520,257 | 3.77 | 515,174 | 3.94 | ||||||||||||||||||||
|
Senior floating:
|
||||||||||||||||||||||||
|
Medium-term notes
|
2010-2015 | 45,219 | 0.23 | 2010-2014 | 41,911 | 0.26 | ||||||||||||||||||
|
Other long-term
debt
(2)
|
2020-2037 | 951 | 4.53 | 2020-2037 | 1,041 | 4.12 | ||||||||||||||||||
|
Total senior floating
|
46,170 | 0.32 | 42,952 | 0.34 | ||||||||||||||||||||
|
Subordinated fixed:
|
||||||||||||||||||||||||
|
Qualifying
subordinated
(3)
|
2011-2014 | 7,392 | 5.47 | 2011-2014 | 7,391 | 5.47 | ||||||||||||||||||
|
Subordinated debentures
|
2019 | 2,488 | 9.90 | 2019 | 2,433 | 9.89 | ||||||||||||||||||
|
Total subordinated fixed
|
9,880 | 6.59 | 9,824 | 6.57 | ||||||||||||||||||||
|
Total long-term debt of Fannie
Mae
(4)
|
576,307 | 3.55 | 567,950 | 3.71 | ||||||||||||||||||||
|
Debt of consolidated trusts
|
2010-2050 | 2,472,192 | 5.10 | 2010-2039 | 6,167 | 5.63 | ||||||||||||||||||
|
Total long-term debt
|
$ | 3,048,499 | 4.81 | % | $ | 574,117 | 3.73 | % | ||||||||||||||||
| (1) | Includes the effects of discounts, premiums and other cost basis adjustments. | |
| (2) | Includes a portion of structured debt instruments that is reported at fair value. | |
| (3) | Consists of subordinated debt issued with an interest deferral feature. | |
| (4) | Reported amounts include a net discount and other cost basis adjustments of $13.8 billion and $15.6 billion as of March 31, 2010 and December 31, 2009, respectively. |
Intraday
Lines of Credit
We periodically use secured and unsecured intraday funding lines
of credit provided by several large financial institutions. We
post collateral which, in some circumstances, the secured party
has the right to repledge to third parties. As these lines of
credit are uncommitted intraday loan facilities, we may be
unable to draw on them if and when needed. We had secured
uncommitted lines of credit of $25.0 billion and unsecured
uncommitted lines of credit of $500 million as of both
March 31, 2010 and December 31, 2009. We had no
borrowings outstanding from these lines of credit as of
March 31, 2010.
149
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| 10. | Derivative Instruments |
Derivative instruments are an integral part of our strategy in
managing interest rate risk. Derivative instruments may be
privately negotiated contracts, which are often referred to as
over-the-counter
(“OTC”) derivatives, or they may be listed and traded
on an exchange. When deciding whether to use derivatives, we
consider a number of factors, such as cost, efficiency, the
effect on our liquidity, results of operations, and our overall
interest rate risk management strategy. We choose to use
derivatives when we believe they will provide greater relative
value or more efficient execution of our strategy than debt
securities. 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 OTC contracts that fall
into three broad categories:
| • | Interest rate swap contracts. An interest rate swap is a transaction between two parties in which each party agrees to exchange payments tied to different interest rates or indices for a specified period of time, generally based on a notional amount of principal. The types of interest rate swaps we use include pay-fixed swaps, receive-fixed swaps and basis swaps. |
| • | Interest rate option contracts. These contracts primarily include pay-fixed swaptions, receive-fixed swaptions, cancelable swaps and interest rate caps. A swaption is an option contract that allows us to enter into a pay-fixed or receive-fixed swap at some point in the future. |
| • | Foreign currency swaps. These swaps convert debt that we issue in foreign-denominated currencies into U.S. dollars. We enter into foreign currency swaps only to the extent that we issue foreign currency debt. |
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 account for our derivatives pursuant to the accounting
standards on derivative instruments, and 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 at the counterparty
level and are inclusive of cash collateral posted or received,
are recorded in “Derivative assets, at fair value” or
“Derivative liabilities, at fair value” in our
condensed consolidated balance sheets. We record all derivative
gains and losses, including accrued interest, in “Fair
value losses, net” in our condensed consolidated statements
of operations.
150
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
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 on
a gross basis, before the application of master netting
agreements, as of March 31, 2010 and December 31, 2009.
| As of March 31, 2010 | As of December 31, 2009 | |||||||||||||||||||||||||||||||
| Asset Derivatives | Liability Derivatives | Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||||||
|
Notional
|
Estimated
|
Notional
|
Estimated
|
Notional
|
Estimated
|
Notional
|
Estimated
|
|||||||||||||||||||||||||
| Amount | Fair Value | Amount | Fair Value | Amount | Fair Value | Amount | Fair Value | |||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||
|
Risk management derivatives:
|
||||||||||||||||||||||||||||||||
|
Swaps:
|
||||||||||||||||||||||||||||||||
|
Pay-fixed
|
$ | 34,109 | $ | 568 | $ | 281,748 | $ | (16,867 | ) | $ | 68,099 | $ | 1,422 | $ | 314,501 | $ | (17,758 | ) | ||||||||||||||
|
Receive-fixed
|
169,390 | 6,759 | 59,903 | (1,016 | ) | 160,384 | 8,250 | 115,033 | (2,832 | ) | ||||||||||||||||||||||
|
Basis
|
3,170 | 51 | 50 | (1 | ) | 2,715 | 61 | 510 | (4 | ) | ||||||||||||||||||||||
|
Foreign currency
|
1,063 | 61 | 346 | (58 | ) | 727 | 107 | 810 | (49 | ) | ||||||||||||||||||||||
|
Swaptions:
|
||||||||||||||||||||||||||||||||
|
Pay-fixed
|
90,350 | 1,045 | 4,375 | (10 | ) | 97,100 | 2,012 | 2,200 | (1 | ) | ||||||||||||||||||||||
|
Receive-fixed
|
71,430 | 4,065 | 2,000 | (5 | ) | 75,380 | 4,043 | — | — | |||||||||||||||||||||||
|
Interest rate caps
|
7,000 | 72 | — | — | 7,000 | 128 | — | — | ||||||||||||||||||||||||
|
Other
(1)
|
740 | 87 | 8 | — | 740 | 84 | 8 | — | ||||||||||||||||||||||||
|
Total gross risk management derivatives
|
377,252 | 12,708 | 348,430 | (17,957 | ) | 412,145 | 16,107 | 433,062 | (20,644 | ) | ||||||||||||||||||||||
|
Collateral receivable
(payable)
(2)
|
— | 5,973 | — | (181 | ) | — | 5,437 | — | (1,023 | ) | ||||||||||||||||||||||
|
Accrued interest receivable (payable)
|
— | 1,735 | — | (2,940 | ) | — | 2,596 | — | (2,813 | ) | ||||||||||||||||||||||
|
Total net risk management derivatives
|
$ | 377,252 | $ | 20,416 | $ | 348,430 | $ | (21,078 | ) | $ | 412,145 | $ | 24,140 | $ | 433,062 | $ | (24,480 | ) | ||||||||||||||
|
Mortgage commitment derivatives:
|
||||||||||||||||||||||||||||||||
|
Mortgage commitments to purchase whole loans
|
$ | 793 | $ | 1 | $ | 2,870 | $ | (15 | ) | $ | 273 | $ | — | $ | 4,453 | $ | (66 | ) | ||||||||||||||
|
Forward contracts to purchase mortgage-related
|
||||||||||||||||||||||||||||||||
|
securities
|
7,275 | 26 | 19,616 | (61 | ) | 3,403 | 7 | 23,287 | (283 | ) | ||||||||||||||||||||||
|
Forward contracts to sell mortgage-related securities
|
44,652 | 224 | 12,064 | (35 | ) | 83,299 | 1,141 | 7,232 | (14 | ) | ||||||||||||||||||||||
|
Total mortgage commitment derivatives
|
$ | 52,720 | $ | 251 | $ | 34,550 | $ | (111 | ) | $ | 86,975 | $ | 1,148 | $ | 34,972 | $ | (363 | ) | ||||||||||||||
|
Derivatives at fair value
|
$ | 429,972 | $ | 20,667 | $ | 382,980 | $ | (21,189 | ) | $ | 499,120 | $ | 25,288 | $ | 468,034 | $ | (24,843 | ) | ||||||||||||||
| (1) | Includes swap credit enhancements and mortgage insurance contracts that we account for as derivatives. The mortgage insurance contracts have payment provisions that are not based on a notional amount. | |
| (2) | Collateral receivable represents cash collateral posted by us for derivatives in a loss position. Collateral payable represents cash collateral posted by counterparties to reduce our exposure for derivatives in a gain position. |
151
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
A majority of our derivative instruments contain provisions that
require our senior unsecured debt to maintain a minimum credit
rating from each of the major credit rating agencies. If our
senior unsecured debt were to fall below established thresholds
in our governing agreements, which range from A- to BBB+, we
would be in violation of these provisions, and the
counterparties to the derivative instruments could request
immediate payment or demand immediate collateralization on
derivative instruments in net liability positions. The aggregate
fair value of all derivatives with credit-risk-related
contingent features that were in a net liability position as of
March 31, 2010 was $6.8 billion for which we posted
collateral of $6.0 billion in the normal course of
business. If the credit-risk-related contingency features
underlying these agreements were triggered as of March 31,
2010, we would be required to post an additional
$846 million of collateral to our counterparties.
The following table displays, by type of derivative instrument,
the fair value gains and losses, net on our derivatives for the
three months ended March 31, 2010 and 2009.
|
For the Three Months
|
||||||||
| Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Risk management derivatives:
|
||||||||
|
Swaps:
|
||||||||
|
Pay-fixed
|
$ | (5,879 | ) | $ | 3,314 | |||
|
Receive-fixed
|
4,669 | (1,362 | ) | |||||
|
Basis
|
9 | (23 | ) | |||||
|
Foreign currency
|
(3 | ) | (73 | ) | ||||
|
Swaptions:
|
||||||||
|
Pay-fixed
|
(934 | ) | (15 | ) | ||||
|
Receive-fixed
|
27 | (3,238 | ) | |||||
|
Interest rate caps
|
(56 | ) | — | |||||
|
Other
|
6 | 29 | ||||||
|
Total risk management derivatives fair value losses, net
|
(2,161 | ) | (1,368 | ) | ||||
|
Mortgage commitment derivatives fair value losses, net
|
(601 | ) | (338 | ) | ||||
|
Total derivatives fair value losses, net
|
$ | (2,762 | ) | $ | (1,706 | ) | ||
152
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Volume
and Activity of our Derivatives
Risk
Management Derivatives
The following table displays, by derivative instrument type, our
risk management derivative activity for the three months ended
March 31, 2010 and 2009.
| For the Three Months Ended March 31, 2010 | ||||||||||||||||||||||||||||||||||||
| Interest Rate Swaps | Interest Rate Swaptions | |||||||||||||||||||||||||||||||||||
|
Pay-
|
Receive-
|
Foreign
|
Pay-
|
Receive-
|
Interest
|
|||||||||||||||||||||||||||||||
| Fixed | Fixed | Basis | Currency (1) | Fixed | Fixed | Rate Caps | Other (2) | Total | ||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||
|
Beginning notional balance
|
$ | 382,600 | $ | 275,417 | $ | 3,225 | $ | 1,537 | $ | 99,300 | $ | 75,380 | $ | 7,000 | $ | 748 | $ | 845,207 | ||||||||||||||||||
|
Additions
|
43,140 | 35,576 | 55 | 151 | 6,425 | 5,750 | — | — | 91,097 | |||||||||||||||||||||||||||
|
Terminations
(3)
|
(109,883 | ) | (81,700 | ) | (60 | ) | (279 | ) | (11,000 | ) | (7,700 | ) | — | — | (210,622 | ) | ||||||||||||||||||||
|
Ending notional balance
|
$ | 315,857 | $ | 229,293 | $ | 3,220 | $ | 1,409 | $ | 94,725 | $ | 73,430 | $ | 7,000 | $ | 748 | $ | 725,682 | ||||||||||||||||||
| For the Three Months Ended March 31, 2009 | ||||||||||||||||||||||||||||||||||||
| Interest Rate Swaps | Interest Rate Swaptions | |||||||||||||||||||||||||||||||||||
|
Pay-
|
Receive-
|
Foreign
|
Pay-
|
Receive-
|
Interest
|
|||||||||||||||||||||||||||||||
| Fixed | Fixed | Basis | Currency (1) | Fixed | Fixed | Rate Caps | Other (2) | Total | ||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||
|
Beginning notional balance
|
$ | 546,916 | $ | 451,081 | $ | 24,560 | $ | 1,652 | $ | 79,500 | $ | 93,560 | $ | 500 | $ | 827 | $ | 1,198,596 | ||||||||||||||||||
|
Additions
|
98,935 | 127,958 | 180 | 198 | 5,650 | 2,200 | — | 13 | 235,134 | |||||||||||||||||||||||||||
|
Terminations
(3)
|
(25,001 | ) | (29,216 | ) | (4,925 | ) | (628 | ) | — | (6,130 | ) | — | (92 | ) | (65,992 | ) | ||||||||||||||||||||
|
Ending notional balance
|
$ | 620,850 | $ | 549,823 | $ | 19,815 | $ | 1,222 | $ | 85,150 | $ | 89,630 | $ | 500 | $ | 748 | $ | 1,367,738 | ||||||||||||||||||
| (1) | Exchange rate adjustments to foreign currency swaps existing at both the beginning and the end of the period are included in terminations. Exchange rate adjustments to foreign currency swaps that are added or terminated during the period are reflected in the respective categories. | |
| (2) | Includes swap credit enhancements and mortgage insurance contracts. | |
| (3) | Includes matured, called, exercised, assigned and terminated amounts. |
153
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Mortgage
Commitment Derivatives
The following table displays, by commitment type, our mortgage
commitment derivative activity for the three months ended
March 31, 2010 and 2009.
| For the Three Months Ended March 31, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
|
Purchase
|
Sale
|
Purchase
|
Sale
|
|||||||||||||
| Commitments | Commitments | Commitments | Commitments | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Beginning of period notional
balance
(1)
|
$ | 31,416 | $ | 90,531 | $ | 35,004 | $ | 36,232 | ||||||||
|
Mortgage related securities:
|
||||||||||||||||
|
Open
commitments
(2)
|
156,149 | 234,668 | 124,434 | 165,585 | ||||||||||||
|
Settled
commitments
(3)
|
(155,948 | ) | (268,483 | ) | (108,008 | ) | (129,833 | ) | ||||||||
|
Loans:
|
||||||||||||||||
|
Open
commitments
(2)
|
11,871 | — | 40,766 | — | ||||||||||||
|
Settled
commitments
(3)
|
(12,934 | ) | — | (36,274 | ) | — | ||||||||||
|
End of period notional
balance
(1)
|
$ | 30,554 | $ | 56,716 | $ | 55,922 | $ | 71,984 | ||||||||
| (1) | Represents the balance of open mortgage commitment derivatives. | |
| (2) | Represents open mortgage commitment derivatives traded during the three months ended March 31, 2010 and 2009. | |
| (3) | Represents mortgage commitment derivatives settled during the three months ended March 31, 2010 and 2009. |
Derivative
Counterparty Credit Exposure
Our derivative counterparty credit exposure relates principally
to interest rate and foreign currency derivative contracts. We
are exposed to the risk that a counterparty in a derivative
transaction will default on payments due to us. If there is a
default, we may need to acquire a replacement derivative from a
different counterparty at a higher cost or may be unable to find
a suitable replacement. Typically, we seek to manage credit
exposure by contracting with experienced counterparties that are
rated A- (or its equivalent) or better. We also manage our
exposure by requiring counterparties to post collateral. The
collateral includes cash, U.S. Treasury securities, agency
debt and agency mortgage-related securities.
The table below displays our credit exposure on outstanding risk
management derivative instruments in a gain position by
counterparty credit ratings, as well as the notional amount
outstanding and the number of counterparties for all risk
management derivatives as of March 31, 2010 and
December 31, 2009.
| As of March 31, 2010 | ||||||||||||||||||||||||
| Credit Rating (1) | ||||||||||||||||||||||||
| AAA | AA+/AA/AA- | A+/A/A- | Subtotal | Other (2) | Total | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Credit loss
exposure
(3)
|
$ | — | $ | 203 | $ | 75 | $ | 278 | $ | 87 | $ | 365 | ||||||||||||
|
Less: Collateral
held
(4)
|
— | 198 | 68 | 266 | — | 266 | ||||||||||||||||||
|
Exposure net of collateral
|
$ | — | $ | 5 | $ | 7 | $ | 12 | $ | 87 | $ | 99 | ||||||||||||
|
Additional information:
|
||||||||||||||||||||||||
|
Notional
amount
(5)
|
$ | — | $ | 211,610 | $ | 513,324 | $ | 724,934 | $ | 748 | $ | 725,682 | ||||||||||||
|
Number of
counterparties
(5)
|
— | 7 | 9 | 16 | ||||||||||||||||||||
154
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| As of December 31, 2009 | ||||||||||||||||||||||||
| Credit Rating (1) | ||||||||||||||||||||||||
| AAA | AA+/AA/AA- | A+/A/A- | Subtotal | Other (2) | Total | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Credit loss
exposure
(3)
|
$ | — | $ | 658 | $ | 583 | $ | 1,241 | $ | 84 | $ | 1,325 | ||||||||||||
|
Less: Collateral
held
(4)
|
— | 580 | 507 | 1,087 | — | 1,087 | ||||||||||||||||||
|
Exposure net of collateral
|
$ | — | $ | 78 | $ | 76 | $ | 154 | $ | 84 | $ | 238 | ||||||||||||
|
Additional information:
|
||||||||||||||||||||||||
|
Notional
amount
(5)
|
$ | — | $ | 220,791 | $ | 623,668 | $ | 844,459 | $ | 748 | $ | 845,207 | ||||||||||||
|
Number of
counterparties
(5)
|
— | 7 | 9 | 16 | ||||||||||||||||||||
| (1) | We manage collateral requirements based on the lower credit rating of the legal entity, as issued by Standard & Poor’s and Moody’s. The credit rating reflects the equivalent Standard & Poor’s rating for any ratings based on Moody’s scale. | |
| (2) | Includes defined benefit mortgage insurance contracts and swap credit enhancements accounted for as derivatives where the right of legal offset does not exist. | |
| (3) | Represents the exposure to credit loss on derivative instruments, which we estimate using the fair value of all outstanding derivative contracts in a gain position. We net derivative gains and losses with the same counterparty where a legal right of offset exists under an enforceable master netting agreement. This table excludes mortgage commitments accounted for as derivatives. | |
| (4) | Represents both cash and non-cash collateral posted by our counterparties to us. We reduce the value of non-cash collateral in accordance with the counterparty agreements to help ensure recovery of any loss through the disposition of the collateral. We posted cash collateral of $6.0 billion and $5.4 billion related to our counterparties’ credit exposure to us as of March 31, 2010 and December 31, 2009, respectively. | |
| (5) | We had exposure to 2 and 6 interest rate and foreign currency derivative counterparties in a net gain position as of March 31, 2010 and December 31, 2009, respectively. Those interest rate and foreign currency derivatives had notional balances of $84.5 billion and $310.0 billion as of March 31, 2010 and December 31, 2009, respectively. |
| 11. | Income Taxes |
As of March 31, 2010, there has been no change to our
conclusion that it is more likely than not that we will not
generate sufficient taxable income in the foreseeable future to
realize our net deferred tax assets. For the three months ended
March 31, 2010 and 2009, we recognized a tax benefit of
$67 million and $623 million, which represented an
effective tax rate of 1% and 3%, respectively. Our effective tax
rates were different from the statutory rate of 35% primarily
due to the recognition of an increase in our valuation allowance
for our net deferred tax assets. The differences in rates were
also due to the reversal of a portion of the valuation allowance
for deferred tax assets resulting from a settlement agreement
reached with the IRS in the first quarter of 2010 for our
unrecognized tax benefits for the tax years 1999 through 2004,
and to our ability in the first quarter of 2009 to carryback our
net operating loss to prior years. In 2010, our tax benefit does
not include a carryback of our net operating loss to prior years
as we are now in a net operating loss carryforward position.
155
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| 12. | Employee Retirement Benefits |
The following table displays the components of our net periodic
benefit cost for our pension plans and other postretirement
benefit plan for the three months ended March 31, 2010 and
2009. The net periodic benefit cost for each period is
calculated based on assumptions at the end of the prior year.
| For the Three Months Ended March 31, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
|
Other Post-
|
Other Post-
|
|||||||||||||||
|
Pension
|
Retirement
|
Pension
|
Retirement
|
|||||||||||||
| Plans | Plan | Plans | Plan | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Service cost
|
$ | 9 | $ | 1 | $ | 10 | $ | 1 | ||||||||
|
Interest cost
|
16 | 3 | 15 | 2 | ||||||||||||
|
Other
|
(12 | ) | (1 | ) | (3 | ) | — | |||||||||
|
Net periodic benefit cost
|
$ | 13 | $ | 3 | $ | 22 | $ | 3 | ||||||||
|
Contributions during period
|
$ | 12 | $ | 2 | $ | 2 | $ | 2 | ||||||||
During the remaining period of 2010, we anticipate contributing
$37 million to our pension plans and $7 million to our
other postretirement benefit plan.
| 13. | Segment Reporting |
Our three reportable segments are: Single-Family, HCD, and
Capital Markets. We use these three segments to generate revenue
and manage business risk, and each segment is based on the type
of business activities it performs.
Segment
Reporting for 2010
Our prospective adoption of the new accounting standards had a
significant impact on the presentation and comparability of our
condensed consolidated financial statements due to the
consolidation of the substantial majority of our single-class
securitization trusts and the elimination of previously recorded
deferred revenue from our guaranty arrangements. We continue to
manage Fannie Mae based on the same three business segments.
However, effective in 2010, we changed the presentation of
segment financial information that is currently evaluated by
management.
Under the current segment reporting, the sum of the results for
our three business segments does not equal our condensed
consolidated statements of operations, as we separate the
activity related to our consolidated trusts from the results
generated by our three segments. In addition, we include an
eliminations/adjustments category to reconcile our business
segment results and the activity related to our consolidated
trusts to our condensed consolidated statements of operations.
While some line items in our segment results were not impacted
by either the change from the new accounting standards or
changes to our segment presentation, others were impacted
materially, which reduces the comparability of our segment
results with prior periods. We have neither restated prior
period results nor presented current year results under the old
presentation as we determined that it was impracticable to do
so; therefore, our segment results reported in the current
period are not comparable with prior periods.
156
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
The section below provides a discussion of the three business
segments and how each segment’s financial information
reconciles to our condensed consolidated financial statements
for those line items that were impacted significantly as a
result of changes to our segment presentation.
Single-Family
Revenue drivers for Single-Family did not change under our
current method of segment reporting. Revenue for our
Single-Family business is from the guaranty fees the segment
receives as compensation for assuming the credit risk on the
mortgage loans underlying single-family Fannie Mae MBS, most of
which are held within consolidated trusts
,
and on the
single-family mortgage loans held in our mortgage portfolio. The
primary source of profit for the Single-Family segment is the
difference between the guaranty fees earned and the costs of
providing the guaranty, including credit-related losses.
Our current segment reporting presentation differs from our
condensed consolidated balance sheets and statements of
operations in order to reflect the activities and results of the
Single-Family segment. The significant differences from the
condensed consolidated statements of operations are as follows:
| • | Guaranty fee income —Guaranty fee income reflects (1) the cash guaranty fees paid by MBS trusts to Single-Family, (2) the amortization of deferred cash fees (both the previously recorded deferred cash fees that were eliminated from our condensed consolidated balance sheets at transition and deferred guaranty fees received subsequent to transition that are currently recognized in our condensed consolidated financial statements through interest income), such as buy-ups, buy-downs, and risk-based pricing adjustments, and (3) the guaranty fees from the Capital Markets group on single-family loans in our mortgage portfolio. To reconcile to our condensed consolidated statements of operations, we eliminate guaranty fees and the amortization of deferred cash fees related to consolidated trusts as they are now reflected as a component of interest income. However, such accounting continues to be reflected for the segment reporting presentation. | |
| • | Net interest income (expense) —Net interest expense within the Single-Family segment reflects interest expense to reimburse Capital Markets and consolidated trusts for contractual interest not received on mortgage loans, after we stop recognizing interest income in accordance with our nonaccrual accounting policy in our condensed consolidated statements of operations. Net interest income (expense), also includes an allocated cost of capital charge between the three segments that is not included in net interest income in the condensed consolidated statement of operations. |
Housing
and Community Development
Revenue drivers for HCD did not change under our current method
of segment reporting. The primary sources of revenue for our HCD
business are (1) guaranty fees the segment receives as
compensation for assuming the credit risk on the mortgage loans
underlying multifamily Fannie Mae MBS, most of which are held
within consolidated trusts, (2) guaranty fees on the
multifamily mortgage loans held in our mortgage portfolio,
(3) transaction fees associated with the multifamily
business and (4) bond credit enhancement fees. Investments
in rental and for-sale housing generate revenue and losses from
operations and the eventual sale of the assets. In the fourth
quarter of 2009, we reduced the carrying value of our LIHTC
investments to zero. As a result, we no longer recognize net
operating losses or
other-than-temporary
impairment on our LIHTC investments. While the HCD guaranty
business is similar to our Single-Family business, neither the
economic return nor the nature of the credit risk is similar to
that of Single-Family.
157
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Our current segment reporting presentation differs from our
condensed consolidated balance sheets and statements of
operations in order to reflect the activities and results of the
HCD segment. The significant differences from the condensed
consolidated statements of operations are as follows:
| • | Guaranty fee income —Guaranty fee income reflects the cash guaranty fees paid by MBS trusts to HCD and the guaranty fees from the Capital Markets group on multifamily loans in Fannie Mae’s portfolio. To reconcile to our condensed consolidated statements of operations, we eliminate guaranty fees related to consolidated trusts. | |
| • | Losses from partnership investments —Losses from partnership investments primarily reflect losses on investments in affordable rental and for-sale housing partnerships measured under the equity method of accounting. To reconcile to our condensed consolidated statements of operations, we adjust the losses to reflect the consolidation of certain partnership investments. |
Capital
Markets Group
Revenue drivers for Capital Markets did not change under our
current method of segment reporting. Our Capital Markets group
generates most of its revenue from the difference, or spread,
between the interest we earn on our mortgage assets and the
interest we pay on the debt we issue to fund these assets. We
refer to this spread as our net interest yield. Changes in the
fair value of the derivative instruments and trading securities
we hold impact the net income or loss reported by the Capital
Markets group. The net income or loss reported by our Capital
Markets group is also affected by the impairment of AFS
securities.
Our current segment reporting presentation differs from our
condensed consolidated balance sheets and statements of
operations in order to reflect the activities and results of the
Capital Markets group. The significant differences from the
condensed consolidated statements of operations are as follows:
| • | Net interest income —Net interest income reflects the interest income on mortgage loans and securities owned by Fannie Mae and interest expense on funding debt issued by Fannie Mae, including accretion and amortization of any cost basis adjustments. To reconcile to our condensed consolidated statements of operations, we adjust for the impact of consolidated trusts and intercompany eliminations as follows: |
| • | Interest income: Interest income consists of interest on the segment’s interest-earning assets, which differs from interest-earning assets in our condensed consolidated balance sheets. We exclude loans and securities that underlie the consolidated trusts from our Capital Markets group balance sheets. The net interest income reported by the Capital Markets group excludes the interest income earned on assets held by consolidated trusts. As a result, we report interest income and amortization of cost basis adjustments only on securities and loans that are held in our portfolio. For mortgage loans held in our portfolio, after we stop recognizing interest income in accordance with our nonaccrual accounting policy, the Capital Markets group recognizes interest income for reimbursement from Single-Family and HCD for the contractual interest due under the terms of our intracompany guaranty arrangement. | |
| • | Interest expense: Interest expense consists of contractual interest on the Capital Markets group’s interest-bearing liabilities, including the accretion and amortization of any cost basis adjustments. It excludes interest expense on debt issued by consolidated trusts. Therefore, the interest expense recognized on the Capital Markets group income statement is limited to our funding debt, which is reported as “Debt of Fannie Mae” in our condensed consolidated balance sheets. Net interest expense |
158
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| also includes an allocated cost of capital charge between the three business segments that is not included in net interest income in our condensed consolidated statements of operations. |
| • | Investment gains or losses, net —Investment gains or losses, net reflects the gains and losses on securitizations and sales of available-for-sale securities from our portfolio. To reconcile to our condensed consolidated statements of operations, we eliminate gains and losses on securities that have been consolidated to loans. | |
| • | Fair value losses, net —Fair value losses, net for the Capital Markets group includes derivative gains and losses, foreign exchange gains and losses, and the fair value gains and losses on certain debt securities in our portfolio. To reconcile to our condensed consolidated statements of operations, we eliminate fair value gains or losses on Fannie Mae MBS that have been consolidated to loans. | |
| • | Other expenses, net —Debt extinguishment gains (losses) recorded on the segment statements of operations relate exclusively to our funding debt, which is reported as “Debt of Fannie Mae” on our consolidated balance sheets. To reconcile to our condensed consolidated statements of operations, we include debt extinguishment gains (losses) related to consolidated trusts to arrive at our total recognized debt extinguishment gains (losses). |
Segment
Allocations and Results
Our segment financial results include directly attributable
revenues and expenses. Additionally, we allocate to each of our
segments: (1) capital using FHFA minimum capital
requirements adjusted for over- or under-capitalization;
(2) indirect administrative costs; and (3) a provision
or benefit for federal income taxes. In addition, we allocate
intercompany guaranty fee income as a charge from the
Single-Family and HCD segments to Capital Markets for managing
the credit risk on mortgage loans held by the Capital Markets
group.
With the adoption of the new accounting standards, we have
prospectively revised the presentation of our results for these
segments to better reflect how we operate and oversee these
businesses.
159
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
The following table displays our segment results under our
current segment reporting presentation for the three months
ended March 31, 2010.
| For the Three Months Ended March 31, 2010 | ||||||||||||||||||||||||
| Business Segments | Other Activity/Reconciling Items | |||||||||||||||||||||||
|
Capital
|
Consolidated
|
Eliminations/
|
Total
|
|||||||||||||||||||||
| Single-Family | HCD | Markets | Trusts (1) | Adjustments (2) | Results | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Net interest income
(expense)
(3)
|
$ | (1,945 | ) | $ | 4 | $ | 3,057 | $ | 1,239 | $ | 434 | $ | 2,789 | |||||||||||
|
Benefit (provision) for loan losses
|
(11,945 | ) | 6 | — | — | — | (11,939 | ) | ||||||||||||||||
|
Net interest income (expense) after provision
|
||||||||||||||||||||||||
|
for loan losses
|
(13,890 | ) | 10 | 3,057 | 1,239 | 434 | (9,150 | ) | ||||||||||||||||
|
Guaranty fee income
(expense)
(4)
|
1,768 | 194 | (279 | ) | (1,197 | ) | (432 | ) | 54 | |||||||||||||||
|
Investment gains (losses), net
|
2 | — | 792 | (155 | ) | (473 | ) | 166 | ||||||||||||||||
|
Net
other-than-temporary
impairments
|
— | — | (236 | ) | — | — | (236 | ) | ||||||||||||||||
|
Fair value losses, net
|
— | — | (1,186 | ) | (35 | ) | (484 | ) | (1,705 | ) | ||||||||||||||
|
Debt extinguishment losses, net
|
— | — | (55 | ) | (69 | ) | — | (124 | ) | |||||||||||||||
|
Losses from partnership investments
|
— | (58 | ) | — | — | — | (58 | ) | ||||||||||||||||
|
Fee and other income
(expense)
(5)
|
47 | 35 | 104 | (7 | ) | — | 179 | |||||||||||||||||
|
Administrative expenses
|
(390 | ) | (99 | ) | (116 | ) | — | — | (605 | ) | ||||||||||||||
|
Benefit (provision) for guaranty losses
|
(11 | ) | 47 | — | — | — | 36 | |||||||||||||||||
|
Foreclosed property income (expense)
|
30 | (11 | ) | — | — | — | 19 | |||||||||||||||||
|
Other income (expenses)
|
(172 | ) | (6 | ) | 27 | — | (21 | ) | (172 | ) | ||||||||||||||
|
Income (loss) before federal income taxes
|
(12,616 | ) | 112 | 2,108 | (224 | ) | (976 | ) | (11,596 | ) | ||||||||||||||
|
Provision (benefit) for federal income taxes
|
(51 | ) | 13 | (29 | ) | — | — | (67 | ) | |||||||||||||||
|
Net income (loss)
|
(12,565 | ) | 99 | 2,137 | (224 | ) | (976 | ) | (11,529 | ) | ||||||||||||||
|
Less: Net income attributable to noncontrolling interests
|
— | — | — | — | (1 | ) | (1 | ) | ||||||||||||||||
|
Net income (loss) attributable to Fannie Mae
|
$ | (12,565 | ) | $ | 99 | $ | 2,137 | $ | (224 | ) | $ | (977 | ) | $ | (11,530 | ) | ||||||||
| (1) | Column represents activity of consolidated trusts and it also includes the issuances and extinguishment of debt due to sales and purchases of our MBS. | |
| (2) | Column represents adjustments during the period used to reconcile segment results to consolidated results which include the elimination of intersegment transactions occurring between the three operating segments and our consolidated trusts. | |
| (3) | Includes cost of capital charge among our three business segments. | |
| (4) | The charge to Capital Markets represents an intercompany guaranty fee expense allocated to Capital Markets from Single-Family and HCD for absorbing the credit risk on mortgage loans held in our portfolio. | |
| (5) | Fee and other income for Single-Family and HCD segments include trust management income. |
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
The following table displays our segment results under our
previous segment reporting presentation for the three months
ended March 31, 2009.
| For the Three Months Ended March 31, 2009 | ||||||||||||||||
|
Capital
|
||||||||||||||||
| Single-Family | HCD | Markets | Total | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Net interest income (expense)
(1)
|
$ | 15 | $ | (62 | ) | $ | 3,295 | $ | 3,248 | |||||||
|
Guaranty fee income
(expense)
(2)
|
1,966 | 158 | (372 | ) | 1,752 | |||||||||||
|
Trust management income
|
11 | — | — | 11 | ||||||||||||
|
Investment gains, net
|
73 | — | (5,503 | ) | (5,430 | ) | ||||||||||
|
Fair value losses, net
|
— | — | (1,460 | ) | (1,460 | ) | ||||||||||
|
Debt extinguishment losses, net
|
— | — | (79 | ) | (79 | ) | ||||||||||
|
Losses from partnership investments
|
— | (357 | ) | — | (357 | ) | ||||||||||
|
Fee and other income
|
85 | 27 | 69 | 181 | ||||||||||||
|
Administrative expenses
|
(320 | ) | (91 | ) | (112 | ) | (523 | ) | ||||||||
|
Provision for credit losses
|
(19,791 | ) | (543 | ) | — | (20,334 | ) | |||||||||
|
Other expenses
|
(742 | ) | (15 | ) | (60 | ) | (817 | ) | ||||||||
|
Loss before federal income taxes
|
(18,703 | ) | (883 | ) | (4,222 | ) | (23,808 | ) | ||||||||
|
Provision (benefit) for federal income taxes
|
(645 | ) | 168 | (146 | ) | (623 | ) | |||||||||
|
Net loss
|
(18,058 | ) | (1,051 | ) | (4,076 | ) | (23,185 | ) | ||||||||
|
Less: Net loss attributable to the noncontrolling interests
|
— | 17 | — | 17 | ||||||||||||
|
Net loss attributable to Fannie Mae
|
$ | (18,058 | ) | $ | (1,034 | ) | $ | (4,076 | ) | $ | (23,168 | ) | ||||
| (1) | Includes cost of capital charge. | |
| (2) | The charge to Capital Markets represents an intercompany guaranty fee expense allocated to Capital Markets from Single-Family and HCD for absorbing the credit risk on mortgage loans held in our portfolio and consolidated loans. |
| 14. | Regulatory Capital Requirements |
In 2008, FHFA announced that our existing statutory and
FHFA-directed regulatory capital requirements will not be
binding during the conservatorship, and that FHFA will not issue
quarterly capital classifications during the conservatorship. We
continue to submit capital reports to FHFA during the
conservatorship and FHFA continues to closely monitor our
capital levels. FHFA has stated that it does not intend to
report our critical capital, risk-based capital or subordinated
debt levels during the conservatorship. As of March 31,
2010 and December 31, 2009, we had a minimum capital
deficiency of $115.3 billion and $107.6 billion,
respectively. Our minimum capital deficiency as of
March 31, 2010 was determined based on guidance from FHFA,
in which FHFA (1) directed us, for loans backing Fannie Mae
MBS held by third parties, to continue reporting our minimum
capital requirements based on 0.45% of the unpaid principal
balance and critical capital based on 0.25% of the unpaid
principal balance, notwithstanding our transition date adoption
of the new accounting standards, and (2) issued a
regulatory interpretation stating that our minimum capital
requirements are not automatically affected by the new
accounting standards. Additionally, our minimum capital
deficiency excludes the funds provided to us by Treasury
pursuant to the senior preferred stock purchase agreement, as
the senior preferred stock does not qualify as core capital due
to its cumulative dividend provisions.
Pursuant to the GSE Act, if our total assets are less than our
total obligations (a net worth deficit) for a period of
60 days, FHFA is mandated by law to appoint a receiver for
Fannie Mae. Treasury’s funding commitment under the senior
preferred stock purchase agreement is intended to ensure that we
avoid a net worth deficit, in order to
161
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
avoid this mandatory trigger of receivership. In order to avoid
a net worth deficit, our conservator may request funds on our
behalf from Treasury under the senior preferred stock purchase
agreement.
FHFA has directed us, during the time we are under
conservatorship, to focus on managing to a positive net worth.
As of March 31, 2010 and December 31, 2009, we had a
net worth deficit of $8.4 billion and $15.3 billion,
respectively.
The following table displays our regulatory capital
classification measures as of March 31, 2010 and
December 31, 2009.
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2010 (1) | 2009 (1) | |||||||
| (Dollars in millions) | ||||||||
|
Core
capital
(2)
|
$ | (80,898 | ) | $ | (74,540 | ) | ||
|
Statutory minimum capital
requirement
(3)
|
34,426 | 33,057 | ||||||
|
Deficit of core capital over statutory minimum capital
requirement
|
$ | (115,323 | ) | $ | (107,597 | ) | ||
|
Deficit of core capital percentage over statutory minimum
capital requirement
|
(335.0 | )% | (325.5 | )% | ||||
| (1) | Amounts as of March 31, 2010 and December 31, 2009 represent estimates that have been submitted to FHFA. As noted above, FHFA is not issuing capital classifications during conservatorship. | |
| (2) | The sum of (a) the stated value of our outstanding common stock (common stock less treasury stock); (b) the stated value of our outstanding non-cumulative perpetual preferred stock; (c) our paid-in capital; and (d) our retained earnings (accumulated deficit). Core capital does not include: (a) accumulated other comprehensive income (loss) or (b) senior preferred stock. | |
| (3) | Generally, the sum of (a) 2.50% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third parties; (b) 0.45% of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and (c) up to 0.45% of other off-balance sheet obligations, which may be adjusted by the Director of FHFA under certain circumstances (See 12 CFR 1750.4 for existing adjustments made by the Director). |
| 15. | Concentration of Credit Risk |
Mortgage 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 business with mortgage servicers is concentrated.
Our ten largest single-family mortgage servicers, including
their affiliates, serviced 80% of our single-family guaranty
book of business as of March 31, 2010 and December 31,
2009. Our ten largest multifamily mortgage servicers including
their affiliates serviced 75% of our multifamily guaranty book
of business as of both March 31, 2010 and December 31,
2009.
If one of our principal mortgage servicers fails to meet its
obligations to us, it could increase our credit-related expenses
and credit losses, result in financial losses to us and have a
material adverse effect on our earnings, liquidity, financial
condition and net worth.
Mortgage Insurers.
Mortgage insurance
“risk in force” represents our maximum potential loss
recovery under the applicable mortgage insurance policies. We
had total mortgage insurance coverage risk in force of
$103.2 billion on the single-family mortgage loans in our
guaranty book of business as of March 31, 2010, which
represented approximately 4% of our single-family guaranty book
of business. Our primary and pool mortgage insurance coverage
risk in force on single-family mortgage loans in our guaranty
book of business of $97.3 billion and $5.9 billion,
respectively, as of March 31, 2010, compared with
$99.6 billion and
162
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
$6.9 billion, respectively, as of December 31, 2009.
Eight mortgage insurance companies provided over 99% of our
mortgage insurance as of March 31, 2010 and
December 31, 2009.
Increases in mortgage insurance claims due to higher defaults
and credit losses in recent periods have adversely affected the
financial results and financial condition of many mortgage
insurers. The current weakened financial condition of our
mortgage insurer counterparties creates an increased risk that
these counterparties will fail to fulfill their obligations to
reimburse us for 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 these mortgage insurer
counterparties, it could result in an increase in our loss
reserves, which could adversely affect our earnings, liquidity,
financial condition and net worth.
As of March 31, 2010, our allowance for loan losses of
$60.6 billion, allowance for accrued interest receivable of
$7.6 billion and reserve for guaranty losses of
$233 million incorporated an estimated recovery amount of
approximately $16.5 billion from mortgage insurance related
both to loans that are individually measured for impairment and
those that are measured collectively for impairment. This amount
is comprised of the contractual recovery of approximately
$19.5 billion as of March 31, 2010 and an adjustment
of approximately $3.0 billion which reduces the contractual
recovery for our assessment of our mortgage insurer
counterparties’ inability to fully pay those claims.
We had outstanding receivables from mortgage insurers of
$3.1 billion in “Other assets” in our condensed
consolidated balance sheet as of March 31, 2010 and
$2.5 billion as of December 31, 2009, related to
amounts claimed on insured, defaulted loans that we have not yet
received. We assessed the receivables for collectibility, and
they are recorded net of a valuation allowance of
$82 million as of March 31, 2010 and $51 million
as of December 31, 2009 in “Other assets.” These
mortgage insurance receivables are short-term in nature, having
a duration of approximately three to six months, and the
valuation allowance reduces our claim receivable to the amount
which is considered probable of collection as of March 31,
2010 and December 31, 2009. We received proceeds under our
primary and pool mortgage insurance policies for single-family
loans of $1.5 billion for the three months ended
March 31, 2010 and $3.6 billion for the year ended
December 31, 2009. During the three months ended
March 31, 2010, we negotiated the cancellation and
restructurings of some of our mortgage insurance coverage in
exchange for a fee. As a result, we recognized $562 million
as a reduction of “foreclosed property expense” in our
condensed consolidated statements of operations, of which
$124 million was collected subsequent to March 31,
2010. The cash fees received of $438 million for the three
months ended March 31, 2010 and $668 million for the
year ended December 31, 2009 are included in our total
insurance proceeds amount.
Financial Guarantors.
We were the beneficiary
of financial guarantees totaling $9.4 billion and
$9.6 billion as of March 31, 2010 and
December 31, 2009, respectively, on securities held in our
investment portfolio or on securities that have been
resecuritized to include a Fannie Mae guaranty and sold to third
parties. The securities covered by these guarantees consist
primarily of private-label mortgage-related securities and
mortgage revenue bonds. We obtained these guarantees from nine
financial guaranty insurance companies. In addition, we are the
beneficiary of financial guarantees totaling $36.8 billion
and $51.3 billion as of March 31, 2010 and
December 31, 2009, respectively, obtained from Freddie Mac,
the federal government, and its agencies. These financial
guaranty contracts assure the collectibility of timely interest
and ultimate principal payments on the guaranteed securities if
the cash flows generated by the underlying collateral are not
sufficient to fully support these payments.
If a financial guarantor fails to meet its obligations to us
with respect to the securities for which we have obtained
financial guarantees, it could reduce the fair value of our
mortgage-related securities and result in financial losses to
us, which could have a material adverse effect on our earnings,
liquidity, financial condition and net worth. Nine financial
guarantors provided bond insurance coverage to us as of
March 31, 2010, of
163
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
which only one of the financial guarantors had an investment
grade rating. We considered the financial strength of our
financial guarantors in assessing our securities for
other-than-temporary
impairment.
Derivatives Counterparties.
For information on
credit risk associated with our derivatives transactions refer
to “Note 10, Derivative Instruments.”
| 16. | Fair Value |
We use fair value measurements for the initial recording of
certain assets and liabilities and periodic remeasurement of
certain assets and liabilities on a recurring or nonrecurring
basis.
Fair
Value Measurement
Fair value measurement guidance defines fair value, establishes
a framework for measuring fair value and expands disclosures
around fair value measurements. This guidance applies whenever
other accounting standards require or permit 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 and lowest
priority, Level 3, to measurements based on unobservable
inputs and classifies assets and liabilities with limited
observable inputs or observable inputs for similar assets or
liabilities as Level 2 measurements. For the period ending
March 31, 2010, we adopted the new accounting standard that
requires enhanced disclosures about fair value measurements.
Recurring
Changes in Fair Value
The following tables display our assets and liabilities measured
in our condensed consolidated balance sheets at fair value on a
recurring basis subsequent to initial recognition, including
instruments for which we have elected the fair value option as
of March 31, 2010 and December 31, 2009. Specifically,
total assets measured at fair value on a recurring basis and
classified as Level 3 were $42.7 billion, or 1% of
“Total assets,” and $47.7 billion, or 5% of
“Total assets,” in our condensed consolidated balance
sheets as of March 31, 2010 and December 31, 2009,
respectively.
164
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| Fair Value Measurements as of March 31, 2010 | ||||||||||||||||||||
|
Quoted
|
||||||||||||||||||||
|
Prices in
|
||||||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
Netting
|
Estimated
|
||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Adjustment (1) | Fair Value | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Cash equivalents (Treasury bills)
|
$ | 11,498 | $ | — | $ | — | $ | — | $ | 11,498 | ||||||||||
|
Trading securities:
|
||||||||||||||||||||
|
Mortgage-related securities:
|
||||||||||||||||||||
|
Fannie Mae
|
— | 4,163 | 4,076 | — | 8,239 | |||||||||||||||
|
Freddie Mac
|
— | 6,502 | — | — | 6,502 | |||||||||||||||
|
Ginnie Mae
|
— | 16 | — | — | 16 | |||||||||||||||
|
Alt-A private-label securities
|
— | 1,252 | 153 | — | 1,405 | |||||||||||||||
|
Subprime private-label securities
|
— | — | 1,683 | — | 1,683 | |||||||||||||||
|
CMBS
|
— | 10,098 | — | — | 10,098 | |||||||||||||||
|
Mortgage revenue bonds
|
— | — | 611 | — | 611 | |||||||||||||||
|
Other
|
— | — | 158 | — | 158 | |||||||||||||||
|
Non-mortgage-related securities:
|
||||||||||||||||||||
|
Asset-backed securities
|
— | 7,948 | 43 | — | 7,991 | |||||||||||||||
|
Corporate debt securities
|
— | 176 | — | — | 176 | |||||||||||||||
|
U.S. Treasury securities
|
35,650 | — | — | — | 35,650 | |||||||||||||||
|
Total trading securities
|
35,650 | 30,155 | 6,724 | — | 72,529 | |||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||
|
Mortgage-related securities:
|
||||||||||||||||||||
|
Fannie Mae
|
— | 29,798 | 217 | — | 30,015 | |||||||||||||||
|
Freddie Mac
|
— | 21,905 | 30 | — | 21,935 | |||||||||||||||
|
Ginnie Mae
|
— | 1,164 | 123 | — | 1,287 | |||||||||||||||
|
Alt-A private-label securities
|
— | 5,941 | 8,517 | — | 14,458 | |||||||||||||||
|
Subprime private-label securities
|
— | — | 10,511 | — | 10,511 | |||||||||||||||
|
CMBS
|
— | 13,993 | — | — | 13,993 | |||||||||||||||
|
Mortgage revenue bonds
|
— | 19 | 12,559 | — | 12,578 | |||||||||||||||
|
Other
|
— | 17 | 3,873 | — | 3,890 | |||||||||||||||
|
Total
available-for-sale
securities
|
— | 72,837 | 35,830 | — | 108,667 | |||||||||||||||
|
Derivative assets:
|
||||||||||||||||||||
|
Risk management derivatives:
|
||||||||||||||||||||
|
Swaps
|
— | 9,122 | 52 | — | 9,174 | |||||||||||||||
|
Swaptions
|
— | 5,110 | — | — | 5,110 | |||||||||||||||
|
Interest rate caps
|
— | 72 | — | — | 72 | |||||||||||||||
|
Other
|
— | — | 87 | — | 87 | |||||||||||||||
|
Netting adjustment
|
— | — | — | (14,259 | ) | (14,259 | ) | |||||||||||||
|
Mortgage commitment derivatives
|
— | 244 | 7 | — | 251 | |||||||||||||||
|
Total derivative assets
|
— | 14,548 | 146 | (14,259 | ) | 435 | ||||||||||||||
|
Guaranty assets and
buy-ups
|
— | — | 11 | — | 11 | |||||||||||||||
|
Total assets at fair value
|
$ | 47,148 | $ | 117,540 | $ | 42,711 | $ | (14,259 | ) | $ | 193,140 | |||||||||
165
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| Fair Value Measurements as of March 31, 2010 | ||||||||||||||||||||
|
Quoted
|
||||||||||||||||||||
|
Prices in
|
||||||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
Netting
|
Estimated
|
||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Adjustment (1) | Fair Value | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Long-term debt
|
||||||||||||||||||||
|
Of Fannie Mae
|
||||||||||||||||||||
|
Senior fixed
|
$ | — | $ | 492 | $ | — | $ | — | $ | 492 | ||||||||||
|
Senior floating
|
— | 2,184 | 582 | — | 2,766 | |||||||||||||||
|
Total Fannie Mae
|
— | 2,676 | 582 | — | 3,258 | |||||||||||||||
|
Of consolidated trusts
|
— | 239 | 71 | — | 310 | |||||||||||||||
|
Total long-term debt
|
— | 2,915 | 653 | — | 3,568 | |||||||||||||||
|
Derivative liabilities:
|
||||||||||||||||||||
|
Risk management derivatives:
|
||||||||||||||||||||
|
Swaps
|
— | 20,878 | 4 | — | 20,882 | |||||||||||||||
|
Swaptions
|
— | 15 | — | — | 15 | |||||||||||||||
|
Netting adjustment
|
— | — | — | (20,051 | ) | (20,051 | ) | |||||||||||||
|
Mortgage commitment derivatives
|
— | 109 | 2 | — | 111 | |||||||||||||||
|
Total derivative liabilities
|
— | 21,002 | 6 | (20,051 | ) | 957 | ||||||||||||||
|
Other liabilities
|
— | 147 | — | — | 147 | |||||||||||||||
|
Total liabilities at fair value
|
$ | — | $ | 24,064 | $ | 659 | $ | (20,051 | ) | $ | 4,672 | |||||||||
166
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| Fair Value Measurements as of December 31, 2009 | ||||||||||||||||||||
|
Quoted
|
||||||||||||||||||||
|
Prices in
|
||||||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
Netting
|
Estimated
|
||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Adjustment (1) | Fair Value | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Trading securities:
|
||||||||||||||||||||
|
Mortgage-related securities:
|
||||||||||||||||||||
|
Fannie Mae
|
$ | — | $ | 69,094 | $ | 5,656 | $ | — | $ | 74,750 | ||||||||||
|
Freddie Mac
|
— | 15,082 | — | — | 15,082 | |||||||||||||||
|
Ginnie Mae
|
— | 1 | — | — | 1 | |||||||||||||||
|
Alt-A
|
— | 791 | 564 | — | 1,355 | |||||||||||||||
|
Subprime
|
— | — | 1,780 | — | 1,780 | |||||||||||||||
|
CMBS
|
— | 9,335 | — | — | 9,335 | |||||||||||||||
|
Mortgage revenue bonds
|
— | — | 600 | — | 600 | |||||||||||||||
|
Other
|
— | — | 154 | — | 154 | |||||||||||||||
|
Non-mortgage-related securities:
|
||||||||||||||||||||
|
Asset-backed securities
|
— | 8,408 | 107 | — | 8,515 | |||||||||||||||
|
Corporate debt securities
|
— | 364 | — | — | 364 | |||||||||||||||
|
U.S. Treasury securities
|
3 | — | — | — | 3 | |||||||||||||||
|
Total trading securities
|
3 | 103,075 | 8,861 | — | 111,939 | |||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||
|
Mortgage-related securities:
|
||||||||||||||||||||
|
Fannie Mae
|
— | 153,823 | 596 | — | 154,419 | |||||||||||||||
|
Freddie Mac
|
— | 27,442 | 27 | — | 27,469 | |||||||||||||||
|
Ginnie Mae
|
— | 1,230 | 123 | — | 1,353 | |||||||||||||||
|
Alt-A
|
— | 5,838 | 8,312 | — | 14,150 | |||||||||||||||
|
Subprime
|
— | — | 10,746 | — | 10,746 | |||||||||||||||
|
CMBS
|
— | 13,193 | — | — | 13,193 | |||||||||||||||
|
Mortgage revenue bonds
|
— | 26 | 12,820 | — | 12,846 | |||||||||||||||
|
Other
|
— | 22 | 3,530 | — | 3,552 | |||||||||||||||
|
Total
available-for-sale
securities
|
— | 201,574 | 36,154 | — | 237,728 | |||||||||||||||
|
Derivative assets
|
— | 19,724 | 150 | (18,400 | ) | 1,474 | ||||||||||||||
|
Guaranty assets and
buy-ups
|
— | — | 2,577 | — | 2,577 | |||||||||||||||
|
Total assets at fair value
|
$ | 3 | $ | 324,373 | $ | 47,742 | $ | (18,400 | ) | $ | 353,718 | |||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Long-term debt
|
$ | — | $ | 2,673 | $ | 601 | $ | — | $ | 3,274 | ||||||||||
|
Derivative liabilities
|
— | 23,815 | 27 | (22,813 | ) | 1,029 | ||||||||||||||
|
Other liabilities
|
— | 270 | — | — | 270 | |||||||||||||||
|
Total liabilities at fair value
|
$ | — | $ | 26,758 | $ | 628 | $ | (22,813 | ) | $ | 4,573 | |||||||||
167
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| (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 agreements to settle with the same counterparty on a net basis, as well as cash collateral. |
The following tables display a reconciliation of all assets and
liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the
three months ended March 31, 2010 and 2009. The tables also
display gains and losses due to changes in fair value, including
both realized and unrealized gains and losses, recognized in our
condensed consolidated statements of operations for Level 3
assets and liabilities for the three months ended March 31,
2010 and 2009. When assets and liabilities are transferred
between levels, we recognize the transfer at the end of each
quarter.
|
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
|
||||||||||||||||||||||||||||||||||||
| For the Three Months Ended March 31, 2010 | ||||||||||||||||||||||||||||||||||||
|
Total Gains or (Losses)
|
||||||||||||||||||||||||||||||||||||
| (Realized/Unrealized) | ||||||||||||||||||||||||||||||||||||
|
Net Unrealized
|
||||||||||||||||||||||||||||||||||||
|
Purchases,
|
Gains (Losses)
|
|||||||||||||||||||||||||||||||||||
|
Sales,
|
Included in Net Loss
|
|||||||||||||||||||||||||||||||||||
|
Impact of
|
Included in
|
Issuances,
|
Related to Assets
|
|||||||||||||||||||||||||||||||||
|
Balance,
|
New
|
Other
|
and
|
Transfers
|
Transfers
|
Balance,
|
and Liabilities Still
|
|||||||||||||||||||||||||||||
|
December 31,
|
Accounting
|
Included
|
Comprehensive
|
Settlements,
|
out of
|
into
|
March 31,
|
Held as of
|
||||||||||||||||||||||||||||
| 2009 | Standards | in Net Loss | Loss | Net | Level 3 (1) | Level 3 (1) | 2010 | March 31, 2010 (2) | ||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||
|
Trading securities:
|
||||||||||||||||||||||||||||||||||||
|
Mortgage-related:
|
||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$ | 5,656 | $ | (2 | ) | $ | 38 | $ | — | $ | (131 | ) | $ | (1,490 | ) | $ | 5 | $ | 4,076 | $ | 43 | |||||||||||||||
|
Alt-A private-label securities
|
564 | 62 | 23 | — | (36 | ) | (490 | ) | 30 | 153 | — | |||||||||||||||||||||||||
|
Subprime private-label securities
|
1,780 | — | (26 | ) | — | (71 | ) | — | — | 1,683 | (26 | ) | ||||||||||||||||||||||||
|
Mortgage revenue bonds
|
600 | — | 50 | — | (39 | ) | — | — | 611 | 47 | ||||||||||||||||||||||||||
|
Other
|
154 | — | 5 | — | (1 | ) | — | — | 158 | 5 | ||||||||||||||||||||||||||
|
Non-mortgage-related:
|
||||||||||||||||||||||||||||||||||||
|
Asset-backed securities
|
107 | — | (1 | ) | — | (36 | ) | (40 | ) | 13 | 43 | 1 | ||||||||||||||||||||||||
|
Total trading securities
|
8,861 | 60 | 89 | — | (314 | ) | (2,020 | ) | 48 | 6,724 | 70 | |||||||||||||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||||||||||||||||||
|
Mortgage-related:
|
||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
596 | (203 | ) | (2 | ) | 1 | 167 | (344 | ) | 2 | 217 | — | ||||||||||||||||||||||||
|
Freddie Mac
|
27 | — | — | — | (3 | ) | — | 6 | 30 | — | ||||||||||||||||||||||||||
|
Ginnie Mae
|
123 | — | — | — | — | — | — | 123 | — | |||||||||||||||||||||||||||
|
Alt-A private-label securities
|
8,312 | 471 | (4 | ) | 267 | (312 | ) | (1,011 | ) | 794 | 8,517 | — | ||||||||||||||||||||||||
|
Subprime private-label securities
|
10,746 | (118 | ) | (88 | ) | 463 | (492 | ) | — | — | 10,511 | — | ||||||||||||||||||||||||
|
Mortgage revenue bonds
|
12,820 | 21 | (1 | ) | 233 | (514 | ) | — | — | 12,559 | — | |||||||||||||||||||||||||
|
Other
|
3,530 | 366 | (5 | ) | 110 | (128 | ) | — | — | 3,873 | — | |||||||||||||||||||||||||
|
Total
available-for-sale
securities
|
36,154 | 537 | (100 | ) | 1,074 | (1,282 | ) | (1,355 | ) | 802 | 35,830 | — | ||||||||||||||||||||||||
|
Net derivatives
|
123 | — | 35 | — | (18 | ) | — | — | 140 | (2 | ) | |||||||||||||||||||||||||
|
Guaranty assets and
buy-ups
|
2,577 | (2,568 | ) | — | — | 2 | — | — | 11 | 1 | ||||||||||||||||||||||||||
|
Long-term debt
|
||||||||||||||||||||||||||||||||||||
|
Of Fannie Mae
|
||||||||||||||||||||||||||||||||||||
|
Senior floating
|
(601 | ) | — | 14 | — | 5 | — | — | (582 | ) | 15 | |||||||||||||||||||||||||
|
Of consolidated trust
|
— | (77 | ) | (1 | ) | — | — | 9 | (2 | ) | (71 | ) | — | |||||||||||||||||||||||
|
Total long-term debt
|
$ | (601 | ) | $ | (77 | ) | $ | 13 | $ | — | $ | 5 | $ | 9 | $ | (2 | ) | $ | (653 | ) | $ | 15 | ||||||||||||||
168
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
|
Fair Value Measurements Using Significant
|
||||||||||||||||||||
|
Unobservable Inputs (Level 3)
|
||||||||||||||||||||
| For the Three Months Ended March 31, 2009 | ||||||||||||||||||||
|
Guaranty
|
||||||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Trading
|
Available-for-sale
|
Net
|
and
|
Long-Term
|
||||||||||||||||
| Securities | Securities | Derivatives | Buy-ups | Debt | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Beginning balance as of January 1, 2009
|
$ | 12,765 | $ | 47,837 | $ | 310 | $ | 1,083 | $ | (2,898 | ) | |||||||||
|
Realized/unrealized gains (losses) included in net loss
|
(165 | ) | (3,944 | ) | (5 | ) | 40 | 58 | ||||||||||||
|
Unrealized gains included in other comprehensive loss
|
— | 3,440 | — | 28 | — | |||||||||||||||
|
Purchases, sales, issuances, and settlements, net
|
(658 | ) | (2,057 | ) | 3 | 28 | 1,449 | |||||||||||||
|
Transfers in/out of level 3,
net
(1)
|
(1,634 | ) | (4,864 | ) | — | — | 524 | |||||||||||||
|
Ending balance as of March 31, 2009
|
$ | 10,308 | $ | 40,412 | $ | 308 | $ | 1,179 | $ | (867 | ) | |||||||||
|
Net unrealized gains (losses) included in net loss related to
assets and liabilities still held as of March 31,
2009
(2)
|
$ | (105 | ) | $ | — | $ | (12 | ) | $ | 45 | $ | 44 | ||||||||
| (1) | The transfers out of Level 3 consisted primarily of Fannie Mae guaranteed mortgage-related securities and private-label mortgage-related securities backed by Alt-A loans. Prices for these securities were obtained from multiple third-party vendors supported by market observable inputs. The transfers into Level 3 consisted primarily of private-label mortgage-related securities backed by Alt-A loans. Prices for these securities are based on inputs from a single source or inputs that were not readily observable. | |
| (2) | Amount represents temporary changes in fair value. Amortization, accretion and other-than-temporary impairments are not considered unrealized and are not included in this amount. |
The following tables display realized and unrealized gains and
losses recorded in our condensed consolidated statements of
operations for the three months ended March 31, 2010 and
2009, for assets and liabilities transferred into Level 3
and measured in our condensed consolidated balance sheets at
fair value on a recurring basis.
|
Fair Value Measurements Using Significant
|
||||||||||||||||
|
Unobservable Inputs (Level 3)
|
||||||||||||||||
| For the Three Months Ended March 31, 2010 | ||||||||||||||||
|
Trading
|
Available-for-sale
|
Long-term
|
||||||||||||||
| Securities | Securities | Debt | ||||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Realized and unrealized gains included in net loss
|
$ | 1 | $ | 11 | $ | — | ||||||||||
|
Unrealized losses included in other comprehensive loss
|
— | (9 | ) | — | ||||||||||||
|
Total gains
|
$ | 1 | $ | 2 | $ | — | ||||||||||
|
Amount of Level 3 transfers in
|
$ | 48 | $ | 802 | $ | (2 | ) | |||||||||
169
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
|
Fair Value Measurements Using Significant
|
||||||||||||||||
|
Unobservable Inputs (Level 3)
|
||||||||||||||||
| For the Three Months Ended March 31, 2009 | ||||||||||||||||
|
Trading
|
Available-for-sale
|
Long-term
|
||||||||||||||
| Securities | Securities | Debt | ||||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Realized and unrealized losses included in net loss
|
$ | (8 | ) | $ | (199 | ) | $ | — | ||||||||
|
Unrealized gains included in other comprehensive loss
|
— | 228 | — | |||||||||||||
|
Total gains (losses)
|
$ | (8 | ) | $ | 29 | $ | — | |||||||||
|
Amount of Level 3 transfers in
|
$ | 236 | $ | 1,727 | $ | — | ||||||||||
The following tables display realized and unrealized gains and
losses included in our condensed consolidated statements of
operations for the three months ended March 31, 2010 and
2009, for our Level 3 assets and liabilities measured in
our condensed consolidated balance sheets at fair value on a
recurring basis.
| For the Three Months Ended March 31, 2010 | ||||||||||||||||||||||||||||
|
Interest
|
Other-than-
|
Interest
|
||||||||||||||||||||||||||
|
Income
|
Guaranty
|
Investment
|
Fair Value
|
Temporary-
|
Expense
|
|||||||||||||||||||||||
|
Investment in
|
Fee
|
Gains,
|
Gains,
|
Impairments,
|
Long-Term
|
|||||||||||||||||||||||
| Securities | Income | net | net | net | Debt | Total | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
|
Total realized and unrealized gains (losses) included in net loss
|
$ | 111 | $ | — | $ | 1 | $ | 133 | $ | (212 | ) | $ | 4 | $ | 37 | |||||||||||||
|
Net unrealized gains related to Level 3 assets and
liabilities still held as of March 31, 2010
|
$ | — | $ | 1 | $ | — | $ | 83 | $ | — | $ | — | $ | 84 | ||||||||||||||
| For the Three Months Ended March 31, 2009 | ||||||||||||||||||||||||||||
|
Interest
|
Other-than-
|
|||||||||||||||||||||||||||
|
Income
|
Guaranty
|
Investment
|
Fair Value
|
Temporary-
|
||||||||||||||||||||||||
|
Investment
|
Fee
|
Gains,
|
(Losses),
|
Impairments,
|
||||||||||||||||||||||||
| in Securities | Income | net | net | net | Total | |||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
|
Total realized and unrealized gains (losses) included in net loss
|
$ | 335 | $ | (208 | ) | $ | 248 | $ | (109 | ) | $ | (4,282 | ) | $ | (4,016 | ) | ||||||||||||
|
Net unrealized gains (losses) related to Level 3 assets and
liabilities still held as of March 31, 2009
|
$ | — | $ | 45 | $ | — | $ | (73 | ) | $ | — | $ | (28 | ) | ||||||||||||||
We use valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs. The
following is a description of the valuation techniques used for
assets and liabilities measured at fair value on a recurring
basis, as well as the basis for classification of such
instruments pursuant to the valuation hierarchy established
under fair value measurement guidance.
Cash Equivalents, Trading Securities and
Available-for-Sale
Securities
—These securities are recorded in our
condensed consolidated balance sheets at fair value on a
recurring basis. Fair value is measured using quoted market
prices in active markets for identical assets, when available.
Securities, such as U.S. Treasuries, whose value is based
on quoted market prices in active markets for identical assets
are classified as Level 1. If quoted market prices in
active markets for identical assets are not available, we use
prices provided by up to four third-party pricing services that
are calibrated to the quoted market prices in active markets for
similar
170
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
securities, and thus are generally classified within
Level 2 of the valuation hierarchy. In the absence of
prices provided by third-party pricing services supported by
observable market data, we use internally developed estimates,
incorporating market-based assumptions wherever such information
is available. The fair values are estimated by using pricing
models, quoted prices of securities with similar
characteristics, or discounted cash flows. Such instruments are
generally classified as Level 2 of the valuation hierarchy.
Where there is limited activity or less transparency around
inputs to the valuation, securities are classified as
Level 3.
Derivatives Assets and Liabilities (collectively
“derivatives”)
—Derivatives are recorded in
our condensed consolidated balance sheets at fair value on a
recurring basis. The valuation process for the majority of our
risk management derivatives uses observable market data provided
by third-party sources, resulting in Level 2
classification. Interest rate swaps are valued by referencing
yield curves derived from observable interest rates and spreads
to project and discount swap cash flows to present value.
Option-based derivatives use a model that projects the
probability of various levels of interest rates by referencing
swaption and caplet volatilities provided by market
makers/dealers. The projected cash flows of the underlying swaps
of these option-based derivatives are discounted to present
value using yield curves derived from observable interest rates
and spreads. Certain highly complex structured derivatives use
only a single external source of price information due to lack
of transparency in the market and may be modeled using
observable interest rates and volatility levels as well as
significant assumptions, resulting in Level 3
classification. Mortgage commitment derivatives use observable
market data, quotes and actual transaction price levels adjusted
for market movement, and are typically classified as
Level 2. Adjustments for market movement based on internal
model results that cannot be corroborated by observable market
data are classified as Level 3.
Guaranty Assets and
Buy-ups
—Guaranty
assets related to our portfolio securitizations are recorded in
our condensed consolidated balance sheets at fair value on a
recurring basis and are classified within Level 3 of the
valuation hierarchy. Guaranty assets in lender swap transactions
are recorded in our condensed consolidated balance sheets at the
lower of cost or fair value. These assets, which are measured at
fair value on a nonrecurring basis, are classified within
Level 3 of the fair value hierarchy.
We estimate the fair value of guaranty assets based on the
present value of expected future cash flows of the underlying
mortgage assets using management’s best estimate of certain
key assumptions, which include prepayment speeds, forward yield
curves, and discount rates commensurate with the risks involved.
These cash flows are projected using proprietary prepayment,
interest rate and credit risk models. Because guaranty assets
are like an interest-only income stream, the projected cash
flows from our guaranty assets are discounted using one-month
LIBOR plus the option-adjusted spread (“OAS”) for
interest-only trust securities. The interest-only OAS is
calibrated using prices of a representative sample of
interest-only trust securities. We believe the remitted fee
income is less liquid than interest-only trust securities and
more like an excess servicing strip. We take a further haircut
of the present value for liquidity considerations. The haircut
is based on market quotes from dealers.
The fair value of the guaranty assets include the fair value of
any associated
buy-ups,
which is estimated in the same manner as guaranty assets but is
recorded separately as a component of “Other assets”
in our condensed consolidated balance sheets. While the fair
value of the guaranty assets reflect all guaranty arrangements,
the carrying value primarily reflects only those arrangements
entered into subsequent to our adoption of the accounting
standard on guarantor’s accounting and disclosure
requirements for guarantees.
Short-Term Debt and Long-Term Debt (collectively
“debt”)
—The majority of debt of Fannie Mae is
recorded in our condensed consolidated balance sheets at the
principal amount outstanding, net of cost basis
171
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
adjustments. We elected the fair value option for certain
structured debt instruments, which are recorded in our condensed
consolidated balance sheets at fair value on a recurring basis.
We use third-party pricing services that reference observable
market data such as interest rates and spreads to measure the
fair value of debt, and thus classify those valuations within
Level 2 of the valuation hierarchy. When third-party
pricing is not available, we use a discounted cash flow approach
based on a yield curve derived from market prices observed for
Fannie Mae Benchmark Notes and adjusted to reflect fair values
at the offer side of the market.
For structured debt instruments that are not valued by
third-party pricing services, cash flows are evaluated taking
into consideration any structured derivatives through which we
have swapped out of the structured features of the notes. The
resulting cash flows are discounted to present value using a
yield curve derived from market prices observed for Fannie Mae
Benchmark Notes and adjusted to reflect fair values at the offer
side of the market. Market swaption volatilities are also
referenced for the valuation of callable structured debt
instruments. Given that the derivatives considered in the
valuations of these structured debt instruments are classified
as Level 3, the valuations of the structured debt
instruments result in a Level 3 classification.
At the transition date, we recognized consolidated trusts’
debt held by third parties at their unpaid principal balance in
our condensed consolidated balance sheets. Consolidated MBS debt
is traded in the market as MBS assets. Accordingly, we estimate
the fair value of our consolidated MBS debt using quoted market
prices in active markets for similar liabilities when traded as
assets. The valuation methodology and inputs used in estimating
the fair value of MBS assets are described under “Cash
Equivalents, Trading Securities and
Available-for-Sale
Securities.” Certain consolidated MBS debt with embedded
derivatives is recorded in our condensed consolidated balance
sheets at fair value on a recurring basis.
Other Liabilities
- Represents dollar roll repurchase
transactions that reflect prices for similar securities in the
market. They are recorded in our condensed consolidated balance
sheets at fair value on a recurring basis. Fair value is based
on observable market-based inputs, quoted market prices and
actual transaction price levels adjusted for market movement and
are typically classified as Level 2. Adjustments for market
movement that require internal model results that cannot be
corroborated by observable market data are classified as
Level 3.
Nonrecurring
Changes in Fair Value
The following tables display assets and liabilities measured in
our condensed consolidated balance sheets 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 for
172
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
impairment), and the gains or losses recognized for these assets
and liabilities for the three months ended March 31, 2010
and 2009, as a result of fair value measurements.
|
For the Three
|
||||||||||||||||||||
|
Fair Value Measurements
|
Months Ended
|
|||||||||||||||||||
| For the Three Months Ended March 31, 2010 | March 31, 2010 | |||||||||||||||||||
|
Quoted
|
||||||||||||||||||||
|
Prices in
|
||||||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
Estimated
|
|||||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
Fair
|
Total Gains
|
||||||||||||||||
|
|
(Level 1) | (Level 2) | (Level 3) | Value | (Losses) | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Mortgage loans held for sale, at lower of cost or fair value
|
$ | — | $ | 6,690 | $ | 473 | $ | 7,163 | (1)(5) | $ | (69 | ) (5) | ||||||||
|
Single-family mortgage loans held for investment, at amortized
cost:
|
||||||||||||||||||||
|
Of Fannie Mae
|
— | — | 3,621 | 3,621 | (2) | 109 | ||||||||||||||
|
Multifamily mortgage loans held for investment, at amortized
cost:
|
||||||||||||||||||||
|
Of Fannie Mae
|
— | — | 1,089 | 1,089 | (2) | (91 | ) | |||||||||||||
|
Acquired property, net:
|
||||||||||||||||||||
|
Single-family
|
— | — | 5,827 | 5,827 | (3) | (332 | ) | |||||||||||||
|
Multifamily
|
— | — | 73 | 73 | (3) | (15 | ) | |||||||||||||
|
Guaranty assets
|
— | — | 18 | 18 | (3 | ) | ||||||||||||||
|
Partnership investments
|
— | — | 69 | 69 | (63 | ) (4) | ||||||||||||||
|
Total assets at fair value
|
$ | — | $ | 6,690 | $ | 11,170 | $ | 17,860 | $ | (464 | ) | |||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Master servicing liabilities
|
$ | — | $ | — | $ | 3 | $ | 3 | $ | (6 | ) | |||||||||
|
Total liabilities at fair value
|
$ | — | $ | — | $ | 3 | $ | 3 | $ | (6 | ) | |||||||||
|
For the Three
|
||||||||||||||||||||
|
Fair Value Measurements
|
Months Ended
|
|||||||||||||||||||
| For the Three Months Ended March 31, 2009 | March 31, 2009 | |||||||||||||||||||
|
Quoted
|
||||||||||||||||||||
|
Prices in
|
||||||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
Estimated
|
|||||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
Fair
|
|||||||||||||||||
|
|
(Level 1) | (Level 2) | (Level 3) | Value | Total Losses | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Mortgage loans held for sale, at lower of cost or fair value
|
$ | — | $ | 1,272 | $ | 2,067 | $ | 3,339 | (1) | $ | (205 | ) | ||||||||
|
Mortgage loans held for investment, at amortized cost
|
— | — | 528 | 528 | (2) | (55 | ) | |||||||||||||
|
Acquired property, net
|
— | — | 6,040 | 6,040 | (3) | (338 | ) | |||||||||||||
|
Guaranty assets
|
— | — | 1,669 | 1,669 | (137 | ) | ||||||||||||||
|
Master servicing assets
|
— | — | 453 | 453 | (139 | ) | ||||||||||||||
|
Partnership investments
|
— | — | 4,666 | 4,666 | (147 | ) (4) | ||||||||||||||
|
Total assets at fair value
|
$ | — | $ | 1,272 | $ | 15,423 | $ | 16,695 | $ | (1,021 | ) | |||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Master servicing liabilities
|
$ | — | $ | — | $ | 48 | $ | 48 | $ | (13 | ) | |||||||||
|
Total liabilities at fair value
|
$ | — | $ | — | $ | 48 | $ | 48 | $ | (13 | ) | |||||||||
173
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| (1) | Includes $7.1 billion and $722 million of mortgage loans held for sale that were sold, retained as a mortgage-related security or redesignated to mortgage loans held for investment as of March 31, 2010 and 2009, respectively. | |
| (2) | Includes $161 million and $18 million of mortgage loans held for investment that were redesignated to mortgage loans held for sale, liquidated or transferred to foreclosed properties as of March 31, 2010 and 2009, respectively. | |
| (3) | Includes $1.6 billion and $1.9 billion of acquired properties that were sold as of March 31, 2010 and 2009, respectively. | |
| (4) | Represents impairment charges related to LIHTC partnerships and other equity investments in multifamily properties as of March 31, 2010 and 2009, respectively. | |
| (5) | Includes $7.1 billion of estimated fair value and $68 million in losses due to the adoption of the new accounting standards. |
The following is a description of the fair valuation techniques
used for assets and liabilities measured at fair value on a
nonrecurring basis under the accounting standard for fair value
measurements as well as the basis for classification of such
instruments pursuant to the valuation hierarchy established
under this guidance.
Mortgage Loans Held for Sale
—HFS loans are reported
at the lower of cost or fair value in our condensed consolidated
balance sheets. At the transition date, we reclassified the
majority of HFS loans to HFI, as the trusts do not have the
ability to sell mortgage loans and use of such loans is limited
exclusively to the settlement of obligations of the trust. The
valuation methodology and inputs used in estimating the fair
value of HFS loans are described below under Mortgage Loans Held
for Investment and are generally classified as Level 2. To
the extent that significant inputs are not observable or
determined by extrapolation of observable points, the fair
values are classified within Level 3 of the valuation
hierarchy.
Mortgage Loans Held for Investment
—HFI performing
loans and nonperforming loans that are not individually impaired
are reported in our condensed consolidated balance sheets at the
principal amount outstanding, net of cost basis adjustments and
an allowance for loan losses. A portion of the nonperforming
loans that are impaired are measured at fair value in our
condensed consolidated balance sheets on a nonrecurring basis.
These loans are classified within Level 3 of the valuation
hierarchy because significant inputs are unobservable. At the
transition date, we recorded consolidated trusts’ loans as
HFI at their unpaid principal balance net of an allowance for
loan losses.
Fair value of performing loans represents an estimate of the
prices we would receive if we were to securitize those loans and
is determined based on comparisons to Fannie Mae MBS with
similar characteristics, either on a pool or loan level. We use
the observable market values of our Fannie Mae MBS determined
from third-party pricing services and other observable
market-data as a base value, from which we add or subtract the
fair value of the associated guaranty asset, guaranty obligation
and master servicing arrangement. Certain loans that do not
qualify for Fannie Mae MBS securitization are valued using
market based data including for example credit spreads,
severities, pre-payment speeds for similar loans or through a
model approach incorporating both interest rate and credit risk
simulating a loan sale via a synthetic structure.
Fair value of single family nonperforming loans represents an
estimate of the prices we would receive if we were to sell those
loans in the nonperforming whole-loan market. We calculate the
fair value of nonperforming loans based on assumptions about key
factors, including loan performance, delinquency transition
rates, collateral value, foreclosure timeline, and mortgage
insurance repayment. Using these assumptions, along with
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
indicative bids for a representative sample of nonperforming
loans, we compute a market calibrated fair value. The bids on
sample loans are obtained from multiple active market
participants.
Fair value of multifamily nonperforming loans is determined by
external third-party valuations when available. If third-party
valuations are unavailable, we determine the value of the
collateral based on a derived property value estimation method
using current net operating income of the property and
capitalization rates.
Acquired Property, Net
—Acquired Property, Net mainly
represents foreclosed property received in full satisfaction of
a loan. Acquired property is initially recorded in our condensed
consolidated balance sheets at its fair value less its estimated
cost to sell. The initial fair value of foreclosed properties is
determined by third-party appraisals or independent broker
opinions, when available. When third-party appraisals or broker
opinions are not available, we estimate fair value based on
factors such as prices for similar properties in similar
geographical areas
and/or
assessment through observation of such properties performed at a
geographic level. Estimated cost to sell is based upon
historical sales cost at a geographic level.
Subsequent to initial measurement, the foreclosed properties
that we intend to sell are reported at the lower of the carrying
amount or fair value less estimated cost to sell. Foreclosed
properties classified as held for use are depreciated and are
impaired when circumstances indicate that the carrying amount of
the property is no longer recoverable. The fair value of our
single family foreclosed properties on an ongoing basis is
determined using inputs similar to those used at the point of
initial fair value measurement and also includes inputs for
sales price of offers accepted and listed price of the
foreclosed property, when available. The fair value of our
multifamily properties is derived using third-party valuations.
When third-party valuations are not available, we estimate the
fair value using current net operating income of the property
and capitalization rates.
Acquired property is classified within Level 3 of the
valuation hierarchy because significant inputs are unobservable.
Master Servicing Assets and Liabilities
—Master
Servicing Assets and Liabilities are reported at the lower of
cost or fair value in our condensed consolidated balance sheets.
We measure the fair value of master servicing assets and
liabilities based on the present value of expected cash flows of
the underlying mortgage assets using management’s best
estimates of certain key assumptions, which include prepayment
speeds, forward yield curves, adequate compensation, and
discount rates commensurate with the risks involved. Changes in
anticipated prepayment speeds, in particular, result in
fluctuations in the estimated fair values of our master
servicing assets and liabilities. If actual prepayment
experience differs from the anticipated rates used in our model,
this may result in a material change in the fair value. Master
servicing assets and liabilities are classified within
Level 3 of the valuation hierarchy.
Partnership Investments
—Unconsolidated investments
in limited partnerships are primarily accounted for under the
equity method of accounting. During 2009, we reduced the
carrying value of our LIHTC investments to zero. We determined
the fair value of our LIHTC investments using internal models
that estimated the present value of the expected future tax
benefits (tax credits and tax deductions for net operating
losses) expected to be generated from the properties underlying
these investments. Our estimates were based on assumptions that
other market participants would use in valuing these
investments. The key assumptions used in our models, which
required significant management judgment, included discount
rates and projections related to the amount and timing of tax
benefits. We compared our model results to independent
third-party valuations to validate the reasonableness of our
assumptions and valuation results. We also compared our model
results to the limited number of observed market transactions
and made adjustments to reflect differences between the risk
profile of the observed market transactions and our LIHTC
investments.
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
For our other equity method investments, we use a net present
value approach to estimate the fair value. The key assumptions
used in our approach, which require significant management
judgment, include discount rates and projections related to the
amount and timing of cash flows. Our equity investments in LIHTC
limited partnerships and other equity investments are classified
within the Level 3 hierarchy of fair value measurement
because they trade in a market with limited observable
transactions.
Fair
Value of Financial Instruments
The following table displays the carrying value and estimated
fair value of our financial instruments as of March 31,
2010 and December 31, 2009. Our disclosures of the fair
value of financial instruments include commitments to purchase
multifamily mortgage and single-family mortgage loans, which are
off-balance sheet financial instruments that we do not record in
our consolidated balance sheets. The fair values of these
commitments are included as “Mortgage loans held for
investment, net of allowance for loan losses.” The
disclosure excludes certain financial instruments, such as plan
obligations for pension and postretirement health care benefits,
employee stock option and stock purchase plans, and also
excludes all non-financial instruments. As a result, the fair
value of our financial assets and liabilities does not represent
the underlying fair value of our total consolidated assets and
liabilities.
| As of | ||||||||||||||||
| March 31, 2010 | December 31, 2009 (2) | |||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
|
|
Value | Fair Value | Value | Fair Value | ||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Financial assets:
|
||||||||||||||||
|
Cash and cash
equivalents
(1)
|
$ | 75,956 | $ | 75,956 | $ | 9,882 | $ | 9,882 | ||||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
62,446 | 62,446 | 53,684 | 53,656 | ||||||||||||
|
Trading securities
|
72,529 | 72,529 | 111,939 | 111,939 | ||||||||||||
|
Available-for-sale
securities
|
108,667 | 108,667 | 237,728 | 237,728 | ||||||||||||
|
Mortgage loans held for sale
|
980 | 982 | 18,462 | 18,615 | ||||||||||||
|
Mortgage loans held for investment, net of allowance for loan
losses:
|
||||||||||||||||
|
Of Fannie Mae
|
284,316 | 270,784 | 246,509 | 241,300 | ||||||||||||
|
Of consolidated trusts
|
2,644,442 | 2,639,444 | 129,590 | 129,545 | ||||||||||||
|
Mortgage loans HFI
|
2,928,758 | 2,910,228 | 376,099 | 370,845 | ||||||||||||
|
Advances to lenders
|
4,151 | 3,872 | 5,449 | 5,144 | ||||||||||||
|
Derivative assets at fair value
|
435 | 435 | 1,474 | 1,474 | ||||||||||||
|
Guaranty assets and
buy-ups
|
473 | 810 | 9,520 | 14,624 | ||||||||||||
|
Total financial assets
|
$ | 3,254,395 | $ | 3,235,925 | $ | 824,237 | $ | 823,907 | ||||||||
|
Financial liabilities:
|
||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
$ | 180 | $ | 180 | $ | — | $ | — | ||||||||
|
Short-term debt:
|
||||||||||||||||
|
Of Fannie Mae
|
207,822 | 207,866 | 200,437 | 200,493 | ||||||||||||
|
Of consolidated trusts
|
6,343 | 6,342 | — | — | ||||||||||||
|
Long-term debt:
|
||||||||||||||||
|
Of Fannie Mae
|
576,307 | 596,835 | 567,950 | 587,423 | ||||||||||||
|
Of consolidated trusts
|
2,472,192 | 2,570,954 | 6,167 | 6,310 | ||||||||||||
|
Derivative liabilities at fair value
|
957 | 957 | 1,029 | 1,029 | ||||||||||||
|
Guaranty obligations
|
827 | 4,324 | 13,996 | 138,582 | ||||||||||||
|
Total financial liabilities
|
$ | 3,264,628 | $ | 3,387,458 | $ | 789,579 | $ | 933,837 | ||||||||
| (1) | Includes restricted cash of $45.5 billion and $3.1 billion as of March 31, 2010 and December 31, 2009, respectively. | |
| (2) | Certain prior period amounts have been reclassified to conform to the current period presentation. |
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
The following are valuation techniques for items not subject to
the fair value hierarchy either because they are not measured at
fair value other than for the purpose of the above table or are
only measured at fair value at inception.
Financial Instruments for which fair value approximates
carrying value—
We hold certain financial instruments
which are not carried at fair value but the carrying value
approximates fair value due to the short-term nature and
negligible credit risk inherent in them. These financial
instruments include cash and cash equivalents, federal funds and
securities sold/purchased under agreements to repurchase
/ resell (exclusive of dollar roll repurchase transactions)
and the majority of advances to lenders.
Advances to Lenders
- The carrying value for the majority
of the advances to lenders approximates the fair value due to
the short-term nature of the specific instruments. Other
instruments include loans for which the carrying value does not
approximate fair value. These loans are valued using collateral
values of similar loans as a proxy.
Guaranty Obligations—
The fair value of all guaranty
obligations (“GO”), measured subsequent to their
initial recognition, is our estimate of a hypothetical
transaction price we would receive if we were to issue our
guaranty to an unrelated party in a standalone arm’s-length
transaction at the measurement date. We estimate the fair value
of the GO using our internal GO valuation models which calculate
the present value of expected cash flows based on
management’s best estimate of certain key assumptions such
as default rates, severity rates and required rate of return. We
further adjust the model values based on our current market
pricing when such transactions reflect credit characteristics
that are similar to our outstanding GO. While the fair value of
the GO reflects all guaranty arrangements, the carrying value
primarily reflects only those arrangements entered into
subsequent to our adoption of the current FASB guidance on
guarantor’s accounting and disclosure requirements for
guarantees.
Fair
Value Option
The following are the primary financial instruments for which we
made fair value elections and the basis for those elections.
Interest expense for these instruments is recorded in
“Long-term debt interest expense” in our condensed
consolidated statements of operations.
Long-term
debt-Of Fannie Mae
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 the recording
these structured debt instruments at cost while recording the
related derivatives at fair value.
As of both March 31, 2010, and December 31, 2009,
these instruments had an aggregate fair value of
$3.3 billion and an unpaid principal balance of
$3.2 billion recorded in “Long-term debt,” in our
condensed consolidated balance sheets.
Fair value gains of $11 million for these debt instruments
includes gains of $3 million attributable to changes in
instrument-specific credit risk and gains of $8 million
attributable to other changes in fair value for the
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
three months ended March 31, 2010. Fair value gains of
$24 million for these debt instruments includes gains of
$27 million attributable to changes in instrument-specific
credit risk and losses of $3 million attributable to other
changes in fair value for the three months ended March 31,
2009. These amounts are recorded as a component of “Fair
value losses, net” in our condensed consolidated statements
of operations.
Long-term
debt-Of consolidated trusts
During the three months ended March 31, 2010, we elected
the fair value option for certain consolidated debt instruments
recorded in our condensed consolidated balance sheets as a
result of consolidating VIEs. These instruments 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 the
debt instrument.
As of March 31, 2010, these instruments had an aggregate
fair value and unpaid principal balance of $95 million and
$86 million, respectively, recorded in “Long-term
debt—Of consolidated trusts,” in our condensed
consolidated balance sheet. We also had interest-only debt
instruments with no unpaid principal balance and fair value of
$215 million as of March 31, 2010. We recorded fair
value losses of $35 million for these instruments, none of
which was attributable to changes in instrument-specific credit
risk for the three months ended March 31, 2010.
| 17. | 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. Litigation claims and proceedings of all types are
subject to many uncertain factors that generally cannot be
predicted with assurance. The following describes our material
legal proceedings, investigations and other matters.
In view of the inherent difficulty of predicting the outcome of
these proceedings, we cannot determine the ultimate resolution
of the matters described below. We establish reserves for
litigation and regulatory matters when losses associated with
the claims become probable and the amounts can reasonably be
estimated. The actual costs of resolving legal matters may be
substantially higher or lower than the amounts reserved for
those matters. For matters where the likelihood or extent of a
loss is not probable or cannot be reasonably estimated, we have
not recorded a loss reserve. If certain of these matters are
determined against us, it could have a material adverse effect
on our earnings, liquidity and financial condition, including
our net worth. Based on our current knowledge with respect to
the lawsuits described below, we believe we have valid defenses
to the claims in these lawsuits and intend to defend these
lawsuits vigorously regardless of whether or not we have
recorded a loss reserve.
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. We have advanced
fees and expenses of certain current and former officers and
directors in connection with various legal proceedings pursuant
to indemnification agreements.
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
2004
Class Action Lawsuits
Fannie Mae is a defendant in two consolidated class action suits
filed in 2004 and currently pending in the U.S. District
Court for the District of Columbia—
In re Fannie Mae
Securities Litigation
and
In re Fannie Mae ERISA
Litigation
. Both cases rely on factual allegations that
Fannie Mae’s accounting statements were inconsistent with
the GAAP requirements relating to hedge accounting and the
amortization of premiums and discounts. Based largely on the
overlapping factual allegations, the Judicial Panel on
Multidistrict Litigation ordered that the cases be coordinated
for pretrial proceedings on May 17, 2005. On
October 17, 2008, FHFA, as conservator for Fannie Mae,
intervened in both of these cases.
In re
Fannie Mae Securities Litigation
In a consolidated complaint filed on March 4, 2005, lead
plaintiffs Ohio Public Employees Retirement System
(“OPERS”) and the State Teachers Retirement System of
Ohio (“STRS”) allege that we and certain former
officers, as well as our former outside auditor, made materially
false and misleading statements in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and SEC
Rule 10b-5
promulgated thereunder, and contend that the alleged fraud
resulted in artificially inflated prices for our common stock
and seek unspecified compensatory damages, attorneys’ fees,
and other fees and costs. On January 7, 2008, the court
defined the class as all purchasers of Fannie Mae common stock
and call options and all sellers of publicly traded Fannie Mae
put options during the period from April 17, 2001 through
December 22, 2004.
On April 16, 2007, KPMG LLP, our former outside auditor,
filed cross-claims against us in this action for breach of
contract, fraudulent misrepresentation, fraudulent inducement,
negligent misrepresentation and contribution. KPMG amended these
cross-claims on February 25, 2008. On April 28, 2010,
Fannie Mae and KPMG agreed to settle these cross-claims, and
claims brought by Fannie Mae against KPMG in a separate action
alleging negligence and breach of contract related to certain
audit and other services provided by KPMG, in exchange for
KPMG’s providing cash, discounted services, and contingent
payments to Fannie Mae.
In re
Fannie Mae ERISA Litigation
In a consolidated complaint filed on June 15, 2005,
plaintiffs David Gwyer, Gloria Sheppard, and Terry Gagliolo
allege that we and certain former officers and directors, as
well as the Compensation Committee of our Board of Directors,
violated the Employee Retirement Income Security Act of 1974
(“ERISA”) based on alleged breaches of fiduciary duty
relating to accounting matters. The plaintiffs seek unspecified
damages, attorneys’ fees, and other fees and costs, and
other injunctive and equitable relief.
On December 18, 2009, the parties reached an agreement in
principle to settle the suit. The amount of the settlement is
not material. On April 30, 2010, the parties filed a
stipulation of settlement with the court, which must approve the
settlement.
2008
Class Action Lawsuits
Fannie Mae is a defendant in two consolidated class actions
filed in 2008 and currently pending in the U.S. District
Court for the Southern District of New York—
In re Fannie
Mae 2008 Securities Litigation
and
In re 2008 Fannie Mae
ERISA Litigation
. On February 11, 2009, the Judicial
Panel on Multidistrict Litigation ordered that the cases be
coordinated for pretrial proceedings. On October 13, 2009,
the Court entered an order allowing FHFA to intervene in this
case.
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
In re
Fannie Mae 2008 Securities Litigation
In a consolidated complaint filed on June 22, 2009, lead
plaintiffs Massachusetts Pension Reserves Investment Management
Board and Boston Retirement Board (for common shareholders) and
Tennessee Consolidated Retirement System (for preferred
shareholders) allege that we, certain of our former officers,
and certain of our underwriters violated of
Sections 12(a)(2) and 15 of the Securities Act of 1933.
Lead plaintiffs also allege that we, certain of our former
officers, and our outside auditor, violated Sections 10(b)
(and
Rule 10b-5
promulgated thereunder) and 20(a) of the Securities Exchange Act
of 1934. Lead plaintiffs purport to represent a class of persons
who, between November 8, 2006 and September 5, 2008,
inclusive, purchased or acquired (a) Fannie Mae common
stock and options or (b) Fannie Mae preferred stock. Lead
plaintiffs seek various forms of relief, including rescission,
damages, interest, costs, attorneys’ and experts’
fees, and other equitable and injunctive relief.
On July 13, 2009, we and the other defendants against whom
the Securities Act claims were asserted filed a motion to
dismiss those claims. The Court granted this motion on
November 24, 2009. On September 18, 2009, we and the
remaining defendants filed motions to dismiss the Securities
Exchange Act claims.
An individual plaintiff, Daniel Kramer, is seeking to have his
Securities Act case heard in state court. Although the Court
denied his motion to remand his case to state court, Kramer
moved for the court to certify its ruling to the court of
appeals for review. Kramer’s motion is fully briefed and
remains pending.
In re
2008 Fannie Mae ERISA Litigation
In a consolidated complaint filed on September 11, 2009,
plaintiffs allege that certain of our current and former
officers and directors, including former members of Fannie
Mae’s Benefit Plans Committee and the Compensation
Committee of Fannie Mae’s Board of Directors, as
fiduciaries of Fannie Mae’s ESOP, breached their duties to
ESOP participants and beneficiaries by investing ESOP funds in
Fannie Mae common stock when it was no longer prudent to
continue to do so. Plaintiffs purport to represent a class of
participants and beneficiaries of the ESOP whose accounts
invested in Fannie Mae common stock beginning April 17,
2007. The plaintiffs seek unspecified damages, attorneys’
fees and other fees and costs and injunctive and other equitable
relief. On November 2, 2009, defendants filed motions to
dismiss these claims, which are now fully briefed and remain
pending.
Comprehensive
Investment Services v. Mudd, et al.
On May 13, 2009, Comprehensive Investment Services, Inc.
filed an individual securities action against certain of our
former officers and directors, and certain of our underwriters
in the Southern District of Texas. Plaintiff alleges violations
of Section 12(a)(2) of the Securities Act of 1933;
violation of § 10(b) of the Securities Exchange Act of
1934 and
Rule 10b-5
promulgated thereunder; violation of § 20(a) of the
Securities Exchange Act of 1934; and violations of the Texas
Business and Commerce Code, common law fraud, and negligent
misrepresentation in connection with Fannie Mae’s May 2008
$2 billion offering of 8.25% non-cumulative preferred
Series T stock. The complaint seeks various forms of
relief, including rescission, damages, interest, costs,
attorneys’ and experts’ fees, and other equitable and
injunctive relief. On July 7, 2009, the Judicial Panel on
Multidistrict Litigation transferred the case to the Southern
District of New York, where it is currently coordinated with
In re Fannie Mae 2008 Securities Litigation
and
In re
2008 Fannie Mae ERISA Litigation
for pretrial purposes.
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Smith v.
Fannie Mae, et al.
On February 25, 2010, plaintiff Edward Smith filed an
individual complaint against Fannie Mae and certain of its
former officers as well as several underwriters in the
U.S. District Court for the Southern District of
California. Plaintiff alleges violation of § 10(b) of
the Securities Exchange Act of 1934 and
Rule 10b-5
promulgated thereunder; violation of § 20(a) of the
Securities Exchange Act of 1934; common law fraud and negligence
claims in connection with Fannie Mae’s December 2007
$7 billion offering of 7.75%
fixed-to-floating
rate non-cumulative preferred Series S stock. Plaintiff
seeks relief in the form of rescission, actual damages
(including interest), and exemplary and punitive damages. On
March 12, 2010, the Judicial Panel on Multidistrict
Litigation issued a conditional order transferring the case to
the Southern District of New York for coordination with the 2008
class action lawsuits pending there. That order became effective
on March 26, 2010. The Smith case is currently coordinated
with
In re Fannie Mae 2008 Securities Litigation
.
Investigation
by the Securities and Exchange Commission
On September 26, 2008, we received notice of an ongoing
investigation into Fannie Mae by the SEC regarding certain
accounting and disclosure matters. On January 8, 2009, the
SEC issued a formal order of investigation. We are cooperating
with this investigation.
Investigation
by the Department of Justice
On September 26, 2008, we received notice of an ongoing
federal investigation by the U.S. Attorney for the Southern
District of New York into certain accounting, disclosure and
corporate governance matters. In connection with that
investigation, Fannie Mae received a Grand Jury subpoena for
documents. That subpoena was subsequently withdrawn. However, we
were informed that the Department of Justice was continuing an
investigation and on March 15, 2010, we received another
Grand Jury subpoena for documents. We are cooperating with this
investigation.
Escrow
Litigation
Casa Orlando Apartments, Ltd., et al. v. Federal
National Mortgage Association (formerly known as Medlock
Southwest Management Corp., et al. v. Federal National
Mortgage Association)
A complaint was filed against us in the U.S. District Court
for the Eastern District of Texas (Texarkana Division) on
June 2, 2004, in which plaintiffs purport to represent a
class of multifamily borrowers whose mortgages are insured under
Sections 221(d)(3), 236 and other sections of the National
Housing Act and are held or serviced by us. The complaint
identified as a proposed class low- and moderate-income
apartment building developers who maintained uninvested escrow
accounts with us or our servicer. Plaintiffs Casa Orlando
Apartments, Ltd., Jasper Housing Development Company and the
Porkolab Family Trust No. 1 allege that we violated
fiduciary obligations that they contend we owed to borrowers
with respect to certain escrow accounts and that we were
unjustly enriched. In particular, plaintiffs contend that,
starting in 1969, we misused these escrow funds and are
therefore liable for any economic benefit we received from the
use of these funds. The plaintiffs seek a return of any profits,
with accrued interest, earned by us related to the escrow
accounts at issue, as well as attorneys’ fees and costs.
Our motions to dismiss and for summary judgment with respect to
the statute of limitations were denied. Plaintiffs filed an
amended complaint on December 16, 2005. On July 13,
2009, the Court denied plaintiffs’ motion for class
certification. Plaintiffs have appealed the Court’s denial
to the U.S. Court of Appeals for the Fifth Circuit. That
appeal is fully briefed and remains pending.
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| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Information about market risk is set forth in
“MD&A—Risk Management—Market Risk
Management, Including Interest Rate Risk Management.”
| Item 4. | Controls and Procedures |
Overview
We are required under applicable laws and regulations to
maintain controls and procedures, which include disclosure
controls and procedures as well as internal control over
financial reporting, as further described below.
Evaluation
of Disclosure Controls and Procedures
Disclosure
Controls and Procedures
Disclosure controls and procedures refer to controls and other
procedures designed to provide reasonable assurance that
information required to be disclosed in the reports we file or
submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and
forms of the SEC. Disclosure controls and procedures include,
without limitation, controls and procedures designed to provide
reasonable assurance that information required to be disclosed
by us in the reports that we file or submit under the Exchange
Act is accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding our required
disclosure. In designing and evaluating our disclosure controls
and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management was required to apply its
judgment in evaluating and implementing possible controls and
procedures.
Evaluation
of Disclosure Controls and Procedures
As required by
Rule 13a-15
under the Exchange Act, management has evaluated, with the
participation of our Chief Executive Officer and Chief Financial
Officer, the effectiveness of our disclosure controls and
procedures as in effect as of March 31, 2010, the end of
the period covered by this report. As a result of
management’s evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls
and procedures were not effective at a reasonable assurance
level as of March 31, 2010 or as of the date of filing this
report.
Our disclosure controls and procedures were not effective as of
March 31, 2010 or as of the date of filing this report for
two reasons:
| • | Our disclosure controls and procedures 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; and | |
| • | we had a material weakness in our internal control over financial reporting with respect to our controls over the change management process we apply to applications and models we use in accounting for (1) our provision for credit losses and (2) other-than-temporary impairment on our private-label mortgage-related securities. |
As a result, we were not able to rely upon the disclosure
controls and procedures that were in place as of March 31,
2010 or as of the date of this filing, and we continue to have
two material weaknesses in our internal control over financial
reporting. These material weaknesses are described in more
detail below under “Description of Material
Weaknesses.”
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We intend to design, implement and test new controls to
remediate the material weakness in the design of our controls
over the change management process we apply to applications and
models we use in accounting for (1) our provision for
credit losses and
(2) other-than-temporary
impairment on our private-label mortgage-related securities by
December 31, 2010. However, based on discussions with FHFA
and the structural nature of the weakness in our disclosure
controls and procedures, it is likely that we will not remediate
the weakness in our disclosure controls and procedures relating
to information known to FHFA while we are under conservatorship.
Description
of Material Weaknesses
The Public Company Accounting Oversight Board’s Auditing
Standard No. 5 defines a material weakness as a deficiency
or a combination of deficiencies in internal control over
financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or
interim financial statements will not be prevented or detected
on a timely basis.
Management has determined that we continued to have the
following material weaknesses as of March 31, 2010 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 Federal Housing Finance Regulatory Reform Act of 2008 (“2008 Reform Act”), FHFA is an independent agency that currently functions as both our conservator and our regulator with respect to our safety, soundness and mission. Because of the nature of the conservatorship under the 2008 Reform Act, which places us under the “control” of FHFA (as that term is defined by securities laws), some of the information that we may need to meet our disclosure obligations may be solely within the knowledge of FHFA. As our conservator, FHFA has the power to take actions without our knowledge that could be material to our shareholders and other stakeholders, and could significantly affect our financial performance or our continued existence as an ongoing business. Although we and FHFA attempted to design and implement disclosure policies and procedures that would account for the conservatorship and accomplish the same objectives as a disclosure controls and procedures policy of a typical reporting company, there are inherent structural limitations on our ability to design, implement, test or operate effective disclosure controls and procedures. As both our regulator and our conservator under the 2008 Reform Act, FHFA is limited in its ability to design and implement a complete set of disclosure controls and procedures relating to Fannie Mae, particularly with respect to current reporting pursuant to Form 8-K. Similarly, as a regulated entity, we are limited in our ability to design, implement, operate and test the controls and procedures for which FHFA is responsible. |
Due to these circumstances, we have not been able to update our
disclosure controls and procedures in a manner that adequately
ensures the accumulation and communication to management of
information known to FHFA that is needed to meet our disclosure
obligations under the federal securities laws, including
disclosures affecting our consolidated financial statements. As
a result, we did not maintain effective controls and procedures
designed to ensure complete and accurate disclosure as required
by GAAP as of March 31, 2010 or as of the date of filing
this report. Based on discussions with FHFA and the structural
nature of this weakness, it is likely that we will not remediate
this material weakness while we are under conservatorship.
| • | Change Management for Applications and Models used in Accounting for Our Provision for Credit Losses and for Other-than-temporary Impairment on Our Private-label Mortgage-related Securities. We did not maintain effective internal control over financial reporting with respect to our controls over the change management process we apply to applications and models we use in accounting for (1) our provision for credit losses and (2) other-than-temporary impairment on our private-label mortgage-related securities. Specifically, requirements definition, and systems and user-acceptance testing were not adequate to prevent or identify errors that affected (a) the identification of loan populations and (b) the estimation of cash flows. As a result, incorrect data and assumptions were discovered during the preparation of our financial statements for the year ended December 31, 2009 for our provision for credit losses and for other-than-temporary impairment on our private-label mortgage-related securities. Although management reviewed and corrected the applications, |
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| models, and our accounting for the affected areas, we have not remediated the design of the controls over change management that constitute this material weakness as of March 31, 2010. |
Changes
in Internal Control over Financial Reporting
Overview
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. Below we describe
changes in our internal control over financial reporting since
December 31, 2009 that management believes have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Implementation
of New Accounting Standards
Effective January 1, 2010, we adopted two new accounting
standards that amend the accounting for transfers of financial
assets and the consolidation model for variable interest
entities. These accounting standards have had a major impact on
the presentation of our consolidated financial statements. They
require that we consolidate the substantial majority of our MBS
trusts and record the underlying assets (typically mortgage
loans) and debt (typically bonds issued by the trusts in the
form of Fannie Mae MBS certificates) of these trusts as assets
and liabilities in our consolidated balance sheet.
Our implementation of these new accounting standards required us
to make major operational and system changes to enable the
reporting of these previously unconsolidated assets and
liabilities in our consolidated balance sheet. As a result, we
have made material changes in our internal control over
financial reporting.
A large-scale initiative was undertaken to manage the business
process and system changes necessary to comply with the new
requirements. The operational and system changes that were
implemented provide support for (1) the process by which we
determine whether to consolidate loans and (2) our
compliance with the associated accounting requirements for loans
and securities. In developing system functionality across
multiple areas to support the new requirements, we have created
new controls, amended existing controls and, in some cases,
removed controls that are no longer applicable under the new
accounting guidance.
The associated control activities have been integrated into
management’s ongoing program to evaluate and monitor
internal control over financial reporting.
Remediation
Activities Relating to Material Weakness
As we reported in our 2009
Form 10-K,
during the first quarter of 2010, management identified a
material weakness in our internal control over financial
reporting as of December 31, 2009 with respect to our
controls over the change management process we apply to
applications and models we use in accounting for (1) our
provision for credit losses and
(2) other-than-temporary
impairment on our private-label mortgage-related securities.
This material weakness is described above under
“Description of Material Weaknesses.”
Although we have not yet remediated this material weakness, we
began implementing additional business and technology controls
during the first quarter of 2010 over the change management
process we apply to these applications and models. During the
first quarter of 2010, we re-designed the change management
processes we apply to these applications and models. We are now
in the process of implementing these newly re-designed
processes, and intend to complete this implementation and the
remediation of this material weakness by December 31, 2010.
Below we describe mitigating actions we have taken relating to
this material weakness.
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Mitigating
Actions Relating to Material Weaknesses
Disclosure
Controls and Procedures
As described above under “Description of Material
Weaknesses,” 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 Office of Conservatorship Operations, which is intended to facilitate operation of the company with the oversight of the conservator. | |
| • | We have provided drafts of our SEC filings to FHFA personnel for their review and comment prior to filing. We also have provided drafts of external press releases, statements and speeches to FHFA personnel for their review and comment prior to release. | |
| • | FHFA personnel, including senior officials, have reviewed our SEC filings prior to filing, including this quarterly report on Form 10-Q for the quarter ended March 31, 2010 (“First Quarter 2010 Form 10-Q”), and engaged in discussions regarding issues associated with the information contained in those filings. Prior to filing our First Quarter 2010 Form 10-Q, FHFA provided Fannie Mae management with a written acknowledgement that it had reviewed the First Quarter 2010 Form 10-Q, and it was not aware of any material misstatements or omissions in the First Quarter 2010 Form 10-Q and had no objection to our filing the First Quarter 2010 Form 10-Q. | |
| • | The Acting Director of FHFA and our Chief Executive Officer have been in frequent communication, typically meeting on a weekly basis. | |
| • | FHFA representatives attend meetings frequently with various groups within the company to enhance the flow of information and to provide oversight on a variety of matters, including accounting, credit and market risk management, liquidity, 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. |
Change
Management for Applications and Models used in Accounting for
Our Provision for Credit Losses and for
Other-than-temporary
Impairment on Our Private-label Mortgage-related
Securities
As described above under “Description of Material
Weaknesses,” we have a material weakness in our internal
control over financial reporting with respect to our controls
over the change management process we apply to applications and
models we use in accounting for (1) our provision for
credit losses and
(2) other-than-temporary
impairment on our private-label mortgage-related securities. As
a result, incorrect data and assumptions were used in our
accounting for our provision for credit losses and for
other-than-temporary
impairment on our private-label mortgage-related securities in
the preparation of our financial statements for the year ended
December 31, 2009.
Management identified these weaknesses in the course of
preparing our financial statements for the year ended
December 31, 2009. As soon as the weaknesses were
identified, management reviewed and corrected the applications,
the models and our accounting for the affected areas. Because of
the additional procedures management has conducted to date, even
though we have not yet remediated the design of the controls
over change management that constitute this material weakness,
we have recorded the appropriate provision for credit losses and
the appropriate amount of
other-than-temporary
impairment on our private-label mortgage-related securities in
our financial statements for the quarter ended March 31,
2010 that are included in this report. We are currently taking
steps to remediate this material weakness and we intend to
complete remediation by December 31, 2010.
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| Item 1. | Legal Proceedings |
The following information supplements and amends our discussion
set forth in “Legal Proceedings” in our 2009
Form 10-K.
We provide information regarding additional material legal
proceedings in “Note 17, Commitments and
Contingencies,” which is incorporated herein by reference.
In addition to the matters specifically described or
incorporated by reference in this item, we are involved in a
number of legal and regulatory proceedings that arise in the
ordinary course of business that do not have a material impact
on our business. Litigation claims and proceedings of all types
are subject to many factors that generally cannot be predicted
accurately.
We record reserves for legal claims when losses associated with
the claims become probable and the amounts can reasonably be
estimated. The actual costs of resolving legal claims may be
substantially higher or lower than the amounts reserved for
those claims. For matters where the likelihood or extent of a
loss is not probable or cannot be reasonably estimated, we have
not recognized in our condensed consolidated financial
statements the potential liability that may result from these
matters. We presently cannot determine the ultimate resolution
of the matters described or incorporated by reference in this
item or in our 2009
Form 10-K.
We have recorded a reserve for legal claims related to those
matters for which we were able to determine a loss was both
probable and reasonably estimable. If certain of these matters
are determined against us, it could have a material adverse
effect on our results of operations, liquidity and financial
condition, including our net worth.
Shareholder
Derivative Litigation
On March 18, 2010, FHFA, as our conservator, filed a motion
to dismiss plaintiffs Kellmer and Agnes’ appeal of the
district court’s substitution order for lack of subject
matter jurisdiction. In light of FHFA’s filing, the D.C.
Circuit suspended merits briefing pending further order of the
Court.
| 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 our 2009
Form 10-K
in “Risk Factors.” This section supplements and
updates that discussion and, for a complete understanding of the
subject, you should read both together. Please also refer to
“MD&A—Risk Management” in this report and in
the 2009
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. Additional risks and
uncertainties not currently known to us or that we currently
believe are immaterial also may materially adversely affect our
business, results of operations, financial condition, liquidity
or net worth, or our investors or cause our actual results to
differ materially from our past results or the results
contemplated by forward-looking statements in this report.
The
future of our company following termination of the
conservatorship and the timing of the conservatorship’s end
are uncertain.
We do not know when or how the conservatorship will be
terminated or what changes to our business structure will be
made during or following the termination of the conservatorship.
We do not know whether we will continue to exist in the same or
a similar form after conservatorship is terminated or whether
the conservatorship will end in receivership or in some other
manner. Since June 2009, Congressional committees and
subcommittees have held hearings to discuss the present
condition and future status of Fannie Mae and
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Freddie Mac and at least one legislative proposal addressing the
future status of the GSEs has been offered. We cannot predict
the prospects for the enactment, timing or content of
legislative proposals regarding the future status of the GSEs.
On April 14, 2010, the Obama Administration released seven
broad questions for public comment on the future of the housing
finance system, including Fannie Mae and Freddie Mac, and
announced that it would hold a series of public forums across
the country on housing finance reform. Treasury Secretary
Geithner testified in March 2010 that the administration expects
to present its proposals for reform to Congress “next
year.” Accordingly, there continues to be uncertainty
regarding the future of Fannie Mae, including whether we will
continue to exist in our current form after conservatorship is
terminated. The options for reform of the GSEs include options
that would result in a substantial change to our business
structure or in Fannie Mae’s liquidation or dissolution.
We
have experienced substantial deterioration in the credit
performance of mortgage loans that we own or that back our
guaranteed Fannie Mae MBS, which we expect to continue and
result in additional
credit-related
expenses.
We are exposed to mortgage credit risk relating to the mortgage
loans that we hold in our investment portfolio and the mortgage
loans that back our guaranteed Fannie Mae MBS. When borrowers
fail to make required payments of principal and interest on
their mortgage loans, we are exposed to the risk of credit
losses and credit-related expenses.
Conditions in the housing and financial markets worsened
dramatically during 2008 and remained stressed in 2009 and into
2010, contributing to a deterioration in the credit performance
of our book of business, negatively impacting the serious
delinquency rates, default rates and average loan loss severity
on the mortgage loans we hold or that back our guaranteed Fannie
Mae MBS, as well as increasing our inventory of foreclosed
properties. Increases in delinquencies, default rates and loss
severity cause us to experience higher credit-related expenses.
The credit performance of our book of business has also been
negatively affected by the extent and duration of the decline in
home prices and high unemployment. These deteriorating credit
performance trends have been notable in certain of our higher
risk loan categories, states and vintages. In addition, home
price declines, adverse market conditions, and continuing high
levels of unemployment have also increasingly affected the
credit performance of our broader book of business. Further, as
social acceptability of defaulting on a mortgage increases, more
borrowers may default on their mortgages because they owe more
than their houses are worth. We present detailed information
about the risk characteristics of our conventional single-family
guaranty book of business in “MD&A—Risk
Management—Single-Family Mortgage Credit Risk
Management” and we present detailed information on our
first quarter credit-related expenses, credit losses and results
of operations in “MD&A—Consolidated Results of
Operations.”
Adverse credit performance trends may continue, particularly if
we experience further national and regional declines in home
prices, weak economic conditions and high unemployment.
The
credit losses we experience in future periods are likely to be
larger, and perhaps substantially larger, than our current
combined loss reserves. As a result, we likely will experience
credit losses for which we have not yet
provisioned.
In accordance with GAAP, our combined loss reserves, as
reflected in our consolidated balance sheets, do not reflect our
estimate of the future credit losses inherent in our existing
guaranty book of business. Rather, they reflect only the
probable losses that we believe we have already incurred as of
the balance sheet date. Accordingly, although we believe that
our credit losses will increase in the future due to the weak
housing and mortgage markets, and possibly also, in the near
term, due to the costs of our activities under various programs
designed to keep borrowers in their homes, high unemployment and
other negative trends, we are not permitted under GAAP to
reflect these future trends in our loss reserve calculations.
Because of these negative trends, there is significant
uncertainty regarding the full extent of our future credit
losses but they likely will exceed, perhaps substantially, our
current combined loss reserves. The credit losses we experience
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in future periods will adversely affect our business, results of
operations, financial condition, liquidity and net worth.
Our
liquidity contingency planning may not provide sufficient
liquidity to operate our business and meet our obligations if we
cannot access the unsecured debt markets.
We plan for alternative sources of liquidity that are designed
to allow us to meet our cash obligations for 365 days
without relying on the issuance of unsecured debt. We believe,
however, that market conditions over the last two years have had
an adverse impact on our ability to effectively plan for a
liquidity crisis. During periods of adverse market conditions,
our ability to repay maturing indebtedness and fund our
operations could be significantly impaired. Our liquidity
contingency planning during 2010 relies on our ability to pledge
mortgage assets as collateral for secured borrowings and sell
other assets. Our ability to pledge or sell mortgage assets may
be impaired, or the assets may be reduced in value if other
market participants are seeking to pledge or sell similar assets
at the same time. We may be unable to find sufficient
alternative sources of liquidity in the event our access to the
unsecured debt markets is impaired. See
“MD&A—Liquidity and Capital
Management—Liquidity Management—Liquidity Contingency
Planning” for a discussion of our contingency plans if we
become unable to issue unsecured debt.
Deterioration
in the credit quality of, or defaults by, one or more of our
mortgage insurer counterparties could result in nonpayment of
claims under mortgage insurance policies, business disruption
and increased concentration risk.
We rely heavily on mortgage insurers to provide insurance
against borrower defaults on conventional single-family mortgage
loans with LTV ratios over 80% at the time of acquisition. The
current weakened financial condition of our mortgage insurer
counterparties creates a risk that these counterparties will
fail to fulfill their obligations to reimburse us for claims
under insurance policies. Since January 1, 2009, the
insurer financial strength ratings of all of our major mortgage
insurer counterparties have been downgraded to reflect their
weakened financial condition, in some cases more than once. One
of our mortgage insurer counterparties ceased issuing
commitments for new mortgage insurance in 2008, and, under an
order received from its regulator, is now paying all valid
claims 60% in cash and 40% by the creation of a deferred payment
obligation, which may be paid in the future.
A number of our mortgage insurers publicly disclosed that they
might exceed the state-imposed
risk-to-capital
limits under which they operate and they might not have access
to sufficient capital to continue to write new business in
accordance with state regulatory requirements. In addition, a
number of our mortgage insurers have received waivers from their
regulators regarding state-imposed
risk-to-capital
limits. However, we cannot be certain that a regulator will
grant such relief for a regulated entity. Some mortgage insurers
have been exploring corporate restructurings, intended to
provide relief from
risk-to-capital
limits in certain states. A restructuring plan that would
involve contributing capital to a subsidiary would result in
less liquidity available to its parent company to pay claims on
its existing book of business, and an increased risk that its
parent company will not pay its claims in full in the future.
In addition, many mortgage insurers have pursued and continue to
explore capital raising options and, in April 2010, two of our
mortgage insurer counterparties raised capital. If mortgage
insurers are not able to raise capital and then exceed their
risk-to-capital
limits, they will likely be forced into run-off or receivership
unless they can secure a waiver from their state regulator. This
would increase the risk that they will fail to pay our claims
under insurance policies, and could also cause the quality and
speed of their claims processing to deteriorate. If our
assessment of one or more of our mortgage insurer
counterparty’s ability to fulfill its obligations to us
worsens and our internal credit rating for the insurer is
further downgraded, it could result in a significant increase in
our loss reserves and a significant increase in the fair value
of our guaranty obligations.
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Many mortgage insurers have stopped insuring new mortgage loans
with higher
loan-to-value
ratios or with lower borrower credit scores or on select
property types, which has contributed to the reduction in our
business volumes for high
loan-to-value
ratio loans. As our charter generally requires us to obtain
credit enhancement on conventional single-family mortgage loans
with
loan-to-value
ratios over 80% at the time of purchase, an inability to find
suitable credit enhancement may inhibit our ability to pursue
new business opportunities, meet our housing goals and otherwise
support the housing and mortgage markets. For example, where
mortgage insurance or other credit enhancement is not available,
we may be hindered in our ability to refinance loans that we do
not own or guarantee into more affordable loans. In addition,
access to fewer mortgage insurer counterparties will increase
our concentration risk with the remaining mortgage insurers in
the industry.
Operational
control weaknesses could materially adversely affect our
business, cause financial losses and harm our
reputation.
Shortcomings or failures in our internal processes, people or
systems could have a material adverse effect on our risk
management, liquidity, financial statement reliability,
financial condition and results of operations; disrupt our
business; and result in legislative or regulatory intervention,
liability to customers, and financial losses or damage to our
reputation, including as a result of our inadvertent
dissemination of confidential or inaccurate information. For
example, our business is dependent on our ability to manage and
process, on a daily basis, an extremely large number of
transactions across numerous and diverse markets and in an
environment in which we must make frequent changes to our core
processes in response to changing external conditions. These
transactions are subject to various legal and regulatory
standards. We rely upon business processes that are highly
dependent on people, technology and the use of numerous complex
systems and models to manage our business and produce books and
records upon which our financial statements are prepared. We
experienced a number of operational incidents in 2009 related to
inadequately designed or failed execution of internal processes
or systems.
We are implementing our operational risk management framework,
which consists of a set of integrated processes, tools, and
strategies designed to support the identification, assessment,
mitigation and control, and reporting and monitoring of
operational risk. We also have made a number of changes in our
structure, business focus and operations, as well as changes to
our risk management processes, to keep pace with changing
external conditions. These changes, in turn, have necessitated
modifications to or development of new business models,
processes, systems, policies, standards and controls. While we
believe that the steps we have taken and are taking to enhance
our technology and operational controls and organizational
structure will help identify, assess, mitigate, control, and
monitor operational risk, our implementation of our operational
risk management framework may not be effective to manage or
prevent these risks and may create additional operational risk
as we execute these enhancements.
In addition, we have experienced substantial changes in
management, employees and our business structure and practices
since the conservatorship began. These changes could increase
our operational risk and result in business interruptions and
financial losses. In addition, due to events that are wholly or
partially beyond our control, employees or third parties could
engage in improper or unauthorized actions, or these systems
could fail to operate properly, which could lead to financial
losses, business disruptions, legal and regulatory sanctions,
and reputational damage.
Our
business is subject to laws and regulations that restrict our
activities and operations, which may prohibit us from
undertaking activities that management believes would benefit
our business and limits our ability to diversify our
business.
As a federally chartered corporation, we are subject to the
limitations imposed by the Charter Act, extensive regulation,
supervision and examination by FHFA, and regulation by other
federal agencies, including Treasury, HUD and the SEC. We are
also subject to many laws and regulations that affect our
business, including those regarding taxation and privacy. As a
company under conservatorship, our primary regulator has
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management authority over us in its role as our conservator. In
its capacity as conservator, FHFA announced on February 2,
2010, that, while in conservatorship, Fannie Mae would not be
permitted to engage in new products, but would be limited to
continuing our existing business activities and taking actions
necessary to advance the goals of the conservatorship.
The Charter Act defines our permissible business activities. For
example, we may not purchase single-family loans in excess of
the conforming loan limits. In addition, under the Charter Act,
our business is limited to the U.S. housing finance sector.
As a result of these limitations on our ability to diversify our
operations, our financial condition and earnings depend almost
entirely on conditions in a single sector of the
U.S. economy, specifically, the U.S. housing market.
The deteriorating conditions in the U.S. housing market
over the past approximately three years has therefore had a
significant adverse effect on our results of operations,
financial condition and net worth, which is likely to continue.
We
could be required to pay substantial judgments, settlements or
other penalties as a result of pending government investigations
and civil litigation.
We are subject to investigations by the Department of Justice
and the SEC, and are a party to a number of lawsuits. We are
unable at this time to estimate our potential liability in these
matters, but may be required to pay substantial judgments,
settlements or other penalties and incur significant expenses in
connection with these investigations and lawsuits, which could
have a material adverse effect on our business, results of
operations, financial condition, liquidity and net worth. In
addition, responding to requests for information in these
investigations and lawsuits may divert significant internal
resources away from managing our business. More information
regarding these investigations and lawsuits is included in
“Legal Proceedings” and “Note 17,
Commitments and Contingencies.”
If our
common stock trades below one dollar per share, or our
conservator determines that our securities should not continue
to be listed on a national securities exchange, our common and
preferred stock could be delisted from the NYSE, which likely
would result in a significant decline in trading volume and
liquidity, and possibly a decline in price, of our
securities.
The average closing price of our common stock for the 30
consecutive trading days ended May 6, 2010 was $1.16 per
share. Under NYSE rules, we would not meet the NYSE’s
standards for continued listing of our common stock if the
average closing price of our common stock were less than one
dollar per share during a consecutive 30
trading-day
period. If we receive notice from the NYSE that we have failed
to satisfy this requirement, and the average price of our common
stock does not subsequently rise above one dollar for a period
of 30 consecutive trading days within a specified period, the
NYSE rules provide that the NYSE will initiate suspension and
delisting procedures unless we present a plan to the NYSE to
cure this deficiency.
If we were to receive notice from the NYSE that we failed to
satisfy the average minimum closing price requirement for our
common stock, our conservator would be involved in any decision
made on whether or not we submit a plan to the NYSE to cure this
deficiency. Our conservator could decline to permit any such
submission, which would result in the NYSE initiating suspension
and delisting procedures. Our conservator would be involved in
any decision regarding the continued listing of our common and
preferred stock on the NYSE. For example, our conservator could
direct us to voluntarily delist our common and preferred stock
from the NYSE.
If our common and preferred stock were to be delisted from the
NYSE, it likely would result in a significant decline in the
trading volume and liquidity of both our common stock and the
classes of our preferred stock listed on the NYSE. As a result,
it could become more difficult for our shareholders to sell
their shares at prices comparable to those in effect prior to
delisting, or at all.
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| 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.
We previously provided stock compensation to employees and
members of the Board of Directors under the Fannie Mae Stock
Compensation Plan of 1993 and the Fannie Mae Stock Compensation
Plan of 2003 (the “Plans”). During the quarter ended
March 31, 2010, 80,008 restricted stock units vested, as a
result of which 49,766 shares of common stock were issued,
and 30,242 shares of common stock that otherwise would have
been issued were withheld by us in lieu of requiring the
recipients to pay us the withholding taxes due upon vesting. All
of these restricted stock units were granted prior to
September 7, 2008. Restricted stock units granted under the
Plans typically vest in equal annual installments over three or
four years beginning on the first anniversary of the date of
grant. Each restricted stock unit represents the right to
receive a share of common stock at the time of vesting. As a
result, restricted stock units are generally similar to
restricted stock, except that restricted stock units do not
confer voting rights on their holders. All restricted stock
units were granted to persons who were employees or members of
the Board of Directors of Fannie Mae. We did not issue any
shares of common stock during the quarter ended March 31,
2010 upon the payout of previously deferred shares.
During the quarter ended March 31, 2010,
1,751,616 shares of common stock were issued upon
conversion of 1,136,826 shares of 8.75% Non-Cumulative
Mandatory Convertible Preferred Stock,
Series 2008-1,
at the option of the holders pursuant to the terms of the
preferred stock. All series of preferred stock, other than the
senior preferred stock, were issued prior to September 7,
2008.
The securities we issue are “exempted securities”
under laws administered by the SEC to the same extent as
securities that are obligations of, or are guaranteed as to
principal and interest by, the United States, except that, under
the Federal Housing Enterprises Financial Safety and Soundness
Act of 1992, as amended by the 2008 Reform Act (together, the
“GSE Act”), our equity securities are not treated as
exempted securities for purposes of Section 12, 13, 14 or
16 of the Exchange Act. As a result, our securities offerings
are exempt from SEC registration requirements and we do not file
registration statements or prospectuses with the SEC under the
Securities Act with respect to our securities offerings.
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.
To comply with the disclosure requirements of
Form 8-K
relating to the incurrence of material financial obligations, we
report our incurrence of these types of obligations either in
offering circulars or prospectuses (or supplements thereto) that
we post on our Web site or in a current report on
Form 8-K,
in accordance with a “no-action” letter we received
from the SEC staff in 2004. In cases where the information is
disclosed in a prospectus or offering circular posted on our Web
site, the document will be posted on our Web site within the
same time period that a prospectus for a non-exempt securities
offering would be required to be filed with the SEC.
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The Web site address for disclosure about our debt securities is
www.fanniemae.com/debtsearch. From this address, investors can
access the offering circular and related supplements for debt
securities offerings under Fannie Mae’s universal debt
facility, including pricing supplements for individual issuances
of debt securities.
Disclosure about our obligations pursuant to some of the MBS we
issue, some of which may be off-balance sheet obligations, can
be found at www.fanniemae.com/mbsdisclosure. From this address,
investors can access information and documents about our MBS,
including prospectuses and related prospectus supplements.
We are providing our Web site address solely for your
information. Information appearing on our Web site is not
incorporated into this report.
Our
Purchases of Equity Securities
The following table shows shares of our common stock we
repurchased during the first quarter of 2010.
|
Total Number of
|
Maximum Number of
|
|||||||||||||||
|
Total
|
Shares Purchased as
|
Shares that
|
||||||||||||||
|
Number of
|
Average
|
Part of Publicly
|
May Yet be
|
|||||||||||||
|
Shares
|
Price Paid
|
Announced
|
Purchased Under
|
|||||||||||||
|
Period
|
Purchased (1) | per Share | Program (2) | the Program (3) | ||||||||||||
| (Shares in thousands) | ||||||||||||||||
|
2010
|
||||||||||||||||
|
January 1-31
|
395 | $ | 0.99 | — | 43,173 | |||||||||||
|
February 1-28
|
34 | 1.02 | — | 42,532 | ||||||||||||
|
March 1-31
|
1 | 1.04 | — | 42,494 | ||||||||||||
|
Total
|
430 | |||||||||||||||
| (1) | Consists of shares of common stock reacquired from employees to pay an aggregate of approximately $427,026 in withholding taxes due upon the vesting of previously issued restricted stock. Does not include 1,136,826 shares of 8.75% Non-Cumulative Mandatory Convertible Series 2008-1 Preferred Stock received from holders upon conversion of those shares into 1,751,616 shares of common stock. | |
| (2) | On January 21, 2003, we publicly announced that the Board of Directors had approved a share repurchase program (the “General Repurchase Authority”) under which we could purchase in open market transactions the sum of (a) up to 5% of the shares of common stock outstanding as of December 31, 2002 (49.4 million shares) and (b) additional shares to offset stock issued or expected to be issued under our employee benefit plans. Since August 2004, no shares have been repurchased pursuant to the General Repurchase Authority. The General Repurchase Authority has no specified expiration date. Under the terms of the senior preferred stock purchase agreement, we are prohibited from purchasing Fannie Mae common stock without the prior written consent of Treasury. As a result of this prohibition, we do not intend to make further purchases under the General Repurchase Authority at this time. | |
| (3) | Consists of the total number of shares that may yet be purchased under the General Repurchase Authority as of the end of the month, including the number of shares that may be repurchased to offset stock that may be issued pursuant to awards outstanding under our employee benefit plans. Repurchased shares are first offset against any issuances of stock under our employee benefit plans. To the extent that we repurchase more shares in a given month than have been issued under our plans, the excess number of shares is deducted from the 49.4 million shares approved for repurchase under the General Repurchase Authority. Please see “Note 13, Stock-Based Compensation” of our 2009 Form 10-K for information about shares issued, shares expected to be issued, and shares remaining available for grant under our employee benefit plans. Shares that remain available for grant under our employee benefit plans are not included in the amount of shares that may yet be purchased reflected in the table. |
192
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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.
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 without the prior written consent
of Treasury.
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 GSE Act, we are not
permitted to make a capital distribution if, after making the
distribution, we would be undercapitalized, except the Director
of FHFA may permit us to repurchase shares if the repurchase is
made in connection with the issuance of additional shares or
obligations in at least an equivalent amount and will reduce our
financial obligations or otherwise improve our financial
condition.
Restrictions Relating to Subordinated
Debt.
During any period in which we defer payment
of interest on qualifying subordinated debt, we may not declare
or pay dividends on, or redeem, purchase or acquire, our common
stock or preferred stock.
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.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | [Removed and reserved] |
| 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.
193
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Federal National Mortgage Association
| By: |
/s/ Michael
J. Williams
|
Michael J. Williams
President and Chief Executive Officer
Date: May 10, 2010
| By: |
/s/
David
M. Johnson
|
David M. Johnson
Executive Vice President and
Chief Financial Officer
Date: May 10, 2010
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Table of Contents
INDEX TO
EXHIBITS
|
Item
|
Description
|
|||
| 3 | .1 | Fannie Mae Charter Act (12 U.S.C. § 1716 et seq.) as amended through July 30, 2008 (Incorporated by reference to Exhibit 3.1 to Fannie Mae’s Quarterly Report on Form 10-Q, filed August 8, 2008.) | ||
| 3 | .2 | Fannie Mae Bylaws, as amended through January 30, 2009 (Incorporated by reference to Exhibit 3.2 to Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2008, filed February 26, 2009.) | ||
| 4 | .1 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series D (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s registration statement on Form 10, filed March 31, 2003.) | ||
| 4 | .2 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series E (Incorporated by reference to Exhibit 4.2 to Fannie Mae’s registration statement on Form 10, filed March 31, 2003.) | ||
| 4 | .3 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series F (Incorporated by reference to Exhibit 4.3 to Fannie Mae’s registration statement on Form 10, filed March 31, 2003.) | ||
| 4 | .4 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series G (Incorporated by reference to Exhibit 4.4 to Fannie Mae’s registration statement on Form 10, filed March 31, 2003.) | ||
| 4 | .5 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series H (Incorporated by reference to Exhibit 4.5 to Fannie Mae’s registration statement on Form 10, filed March 31, 2003.) | ||
| 4 | .6 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series I (Incorporated by reference to Exhibit 4.6 to Fannie Mae’s registration statement on Form 10, filed March 31, 2003.) | ||
| 4 | .7 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series L (Incorporated by reference to Exhibit 4.7 to Fannie Mae’s Quarterly Report on Form 10-Q, filed August 8, 2008.) | ||
| 4 | .8 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series M (Incorporated by reference to Exhibit 4.8 to Fannie Mae’s Quarterly Report on Form 10-Q, filed August 8, 2008.) | ||
| 4 | .9 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series N (Incorporated by reference to Exhibit 4.9 to Fannie Mae’s Quarterly Report on Form 10-Q, filed August 8, 2008.) | ||
| 4 | .10 | Certificate of Designation of Terms of Fannie Mae Non-Cumulative Convertible Preferred Stock, Series 2004-1 (Incorporated by reference to Exhibit 4.10 to Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2009, filed February 26, 2010.) | ||
| 4 | .11 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series O (Incorporated by reference to Exhibit 4.11 to Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2009, filed February 26, 2010.) | ||
| 4 | .12 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series P (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed September 28, 2007.) | ||
| 4 | .13 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series Q (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed October 5, 2007.) | ||
| 4 | .14 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series R (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed November 21, 2007.) | ||
| 4 | .15 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series S (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed December 11, 2007.) | ||
| 4 | .16 | Certificate of Designation of Terms of Fannie Mae Non-Cumulative Mandatory Convertible Preferred Stock, Series 2008-1 (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed May 14, 2008.) | ||
| 4 | .17 | Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series T (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed May 19, 2008.) | ||
| 4 | .18 | Certificate of Designation of Terms of Variable Liquidation Preference Senior Preferred Stock, Series 2008-2 (Incorporated by reference to Exhibit 4.2 to Fannie Mae’s Current Report on Form 8-K, filed September 11, 2008.) | ||
| 4 | .19 | Warrant to Purchase Common Stock, dated September 7, 2008 conservator (Incorporated by reference to Exhibit 4.3 to Fannie Mae’s Current Report on Form 8-K, filed September 11, 2008.) | ||
E-1
Table of Contents
|
Item
|
Description
|
|||
| 4 | .20 | Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of September 26, 2008, between the United States Department of the Treasury and Federal National Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed conservator (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed October 2, 2008.) | ||
| 4 | .21 | Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of May 6, 2009, between the United States Department of the Treasury and Federal National Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed conservator (Incorporated by reference to Exhibit 4.21 to Fannie Mae’s Quarterly Report on Form 10-Q, filed May 8, 2009.) | ||
| 4 | .22 | Second Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of December 24, 2009, between the United States Department of the Treasury and Federal National Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed conservator (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed December 30, 2009.) | ||
| 31 | .1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a) | ||
| 31 | .2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a) | ||
| 32 | .1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 | ||
| 32 | .2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | ||
| 99 | .1 | Impact of New Accounting Standards on Fannie Mae’s 2010 First Quarter Form 10-Q: Overview and FAQ | ||
| 101 | .INS | XBRL Instance Document* | ||
| 101 | .SCH | XBRL Taxonomy Extension Schema* | ||
| 101 | .CAL | XBRL Taxonomy Extension Calculation* | ||
| 101 | .LAB | XBRL Taxonomy Extension Labels* | ||
| 101 | .PRE | XBRL Taxonomy Extension Presentation* | ||
| 101 | .DEF | XBRL Taxonomy Extension Definition* | ||
| * | The financial information contained in these XBRL documents is unaudited. The information in these exhibits shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of Section 18, nor shall they be deemed incorporated by reference into any disclosure document relating to Fannie Mae, except to the extent, if any, expressly set forth by specific reference in such filing. |
E-2
Table of Contents
FR002
TABLE OF CONTENTS
Part I Financial InformationItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem Consolidation ImpactItem 1. Financial StatementsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. [removed and Reserved]Item 5. Other InformationItem 6. ExhibitsItem Description