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 | |
| For the quarterly period ended March 31, 2011 | ||
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OR
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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
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Federally chartered corporation
(State or other jurisdiction of incorporation or organization) |
52-0883107
(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
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Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
þ
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer þ | 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, 2011, there were 1,119,602,427 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, 2010 (“2010
Form 10-K”)
in “Business—Conservatorship and Treasury
Agreements.”
You should read this Management’s Discussion and
Analysis of Financial Condition and Results of Operations
(“MD&A”) in conjunction with our unaudited
condensed consolidated financial statements and related notes
and the more detailed information in our 2010
Form 10-K.
This report contains forward-looking statements that are
based on management’s current expectations and are subject
to significant uncertainties and changes in circumstances.
Please review “Forward-Looking Statements” for more
information on the forward-looking statements in this report.
Our actual results may differ materially from those reflected in
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 2010
Form 10-K.
You can find a “Glossary of Terms Used in This
Report” in the “MD&A” of our 2010
Form 10-K.
INTRODUCTION
Fannie Mae is a government-sponsored enterprise
(“GSE”) that was chartered by Congress in 1938 to
support liquidity, stability and affordability in the secondary
mortgage market, where existing mortgage-related assets are
purchased and sold. Our charter does not permit us to originate
loans or lend money directly to consumers in the primary
mortgage market. Our most significant activities are
securitizing mortgage loans originated by lenders into Fannie
Mae mortgage-backed securities, which we refer to as Fannie Mae
MBS, and purchasing mortgage loans and mortgage-related
securities for our mortgage portfolio. We use the term
“acquire” in this report to refer both to our
securitization activity and our purchase activity.
We obtain 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.
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.
Our common stock was delisted from the New York Stock Exchange
and the Chicago Stock Exchange on July 8, 2010 and since
then has been traded in the
over-the-counter
market and quoted on the OTC Bulletin Board under the
symbol “FNMA.” Our debt securities are actively traded
in the
over-the-counter
market.
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EXECUTIVE
SUMMARY
Summary
of Our Financial Performance for the First Quarter of
2011
Our financial results for the first quarter of 2011 reflect
continued weakness in the housing and mortgage markets, which
remain under pressure from high levels of unemployment,
underemployment and the prolonged decline in home prices.
Comprehensive loss.
Our total comprehensive
loss for the first quarter of 2011 was $6.3 billion,
consisting of a net loss of $6.5 billion and other
comprehensive income of $181 million. In comparison, we
recognized a total comprehensive loss of $435 million in
the fourth quarter of 2010, consisting of net income of
$65 million and other comprehensive loss of
$500 million, and a total comprehensive loss of
$10.2 billion in the first quarter of 2010, consisting of a
net loss of $11.5 billion and other comprehensive income of
$1.4 billion.
The change from net income in the fourth quarter of 2010 to net
loss in the first quarter of 2011 was primarily due to a
$6.7 billion increase in credit-related expenses.
Credit-related expenses consist of the provision for loan
losses, the provision for guaranty losses and foreclosed
property expense. Our higher provision for loan losses during
the period was primarily driven by an increase in our total loss
reserves due to: (1) a decline in home prices and increase
in initial charge-off severity during the period, (2) the
number of loans that entered a trial modification period during
the quarter, (3) a decline in future expected home prices
and (4) loans continuing to remain delinquent for an
extended period of time. In addition, the fourth quarter of 2010
reflects a $1.2 billion reduction to credit-related
expenses resulting from the resolution of outstanding repurchase
requests with Bank of America, N.A. and its affiliates.
The $5.1 billion decrease in our net loss in the first
quarter of 2011 compared with the first quarter of 2010 was due
primarily to a $2.2 billion increase in net interest
income, driven by lower interest expense on debt;
$289 million in net fair value gains in the first quarter
of 2011 compared with $1.7 billion in net fair value losses
in the first quarter of 2010, primarily due to fair value gains
on derivatives and trading securities; and an $842 million
decrease in credit-related expenses, due to a decrease in our
provision for loan losses. Other comprehensive income in the
first quarter of 2010 was primarily driven by a reduction in our
unrealized loss due to significantly improved fair value of
available-for-sale
securities.
Net worth.
Our net worth deficit of
$8.4 billion as of March 31, 2011 reflects the
recognition of our total comprehensive loss of $6.3 billion
and our payment to Treasury of $2.2 billion in senior
preferred stock dividends during the first quarter of 2011. In
May 2011, the Acting Director of FHFA submitted a request to
Treasury on our behalf for $8.5 billion to eliminate our
net worth deficit.
In the first quarter of 2011, we received $2.6 billion in
funds from Treasury to eliminate our net worth deficit as of
December 31, 2010. Upon receipt of the additional funds
requested to eliminate our net worth deficit as of
March 31, 2011, the aggregate liquidation preference on the
senior preferred stock will be $99.7 billion, which will
require an annualized dividend payment of $10.0 billion.
This amount exceeds our reported annual net income for each year
since our inception. Through March 31, 2011, we have paid
an aggregate of $12.4 billion to Treasury in dividends on
the senior preferred stock.
Total loss reserves.
Our total loss reserves,
which reflect our estimate of the probable losses we have
incurred in our guaranty book of business, increased to
$72.1 billion as of March 31, 2011 from
$66.3 billion as of December 31, 2010. Our total loss
reserve coverage to total nonperforming loans was 34.66% as of
March 31, 2011, compared with 30.85% as of
December 31, 2010. The continued stress on a broad segment
of borrowers from persistent high levels of unemployment and
underemployment and the prolonged decline in home prices have
caused our total loss reserves to remain high for the past
several quarters. Further, the shift in our nonperforming loan
balance from loans in our collective reserve to loans that are
individually impaired has caused our coverage ratio to increase.
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Providing
Liquidity, Our Strong New Book of Business and Expected Losses
on Single-Family Loans We Acquired before 2009 (Our
“Legacy” Book of Business)
In the first quarter of 2011, we continued our work to provide
liquidity to the mortgage market, grow the strong new book of
business we have acquired since January 1, 2009, shortly
after we entered into conservatorship, and minimize our losses
from delinquent loans.
| • | From January 1, 2009 to March 31, 2011, we acquired approximately 6,595,000 single-family conventional loans, excluding delinquent loans we purchased from our MBS trusts, and we acquired multifamily loans secured by multifamily properties with approximately 761,000 units. | |
| • | The single-family loans we have acquired since the beginning of 2009, which we refer to in this discussion as our “new single-family book of business,” have a strong overall credit profile and are performing well. We expect these loans will be profitable over their lifetime, by which we mean they will generate more fee income than credit losses and administrative costs, as we discuss below in “Building a Strong New Single-Family Book of Business—Expected Profitability of Our Single-Family Acquisitions.” For further information, see “Table 2: Single-Family Serious Delinquency Rates by Year of Acquisition” and “Table 3: Credit Profile of Single-Family Conventional Loans Acquired.” | |
| • | The vast majority of our realized credit losses in 2009, 2010 and the first quarter of 2011 were attributable to single-family loans that we purchased or guaranteed from 2005 through 2008. While these loans will give rise to additional credit losses that we will realize when the loans are charged-off (upon foreclosure or our acceptance of a short sale or deed-in-lieu of foreclosure), we estimate that we have reserved for the substantial majority of the remaining losses on these loans. Even though we believe a substantial majority of the credit losses we have yet to realize on these loans has already been reflected in our results of operations as credit-related expenses, we expect that our credit-related expenses will be higher in 2011 than in 2010 as weakness in the housing and mortgage markets continues. We are taking a number of actions to reduce our credit losses, which we discuss in our 2010 Form 10-K in “Business—Executive Summary—Our Strategies and Actions to Reduce Credit Losses on Loans in our Single-Family Guaranty Book of Business” and in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.” |
Factors
that Could Cause Actual Results to be Materially Different from
Our Estimates and Expectations
We present a number of estimates and expectations in this
executive summary regarding the profitability of single-family
loans we have acquired, our single-family credit losses and
credit-related expenses, and our draws from and dividends to be
paid to Treasury. These estimates and expectations are
forward-looking statements based on our current assumptions
regarding numerous factors, including future home prices and the
future performance of our loans. Our future estimates of these
amounts, as well as the actual amounts, may differ materially
from our current estimates and expectations as a result of home
price changes, changes in interest rates, unemployment, direct
and indirect consequences resulting from failures by servicers
to follow proper procedures in the administration of foreclosure
cases, government policy, changes in generally accepted
accounting principles (“GAAP”), credit availability,
social behaviors, other macro-economic variables, the volume of
loans we modify, the effectiveness of our loss mitigation
strategies, management of our real-estate owned
(“REO”) inventory and pursuit of contractual remedies,
changes in the fair value of our assets and liabilities,
impairments of our assets, or many other factors, including
those discussed in “Risk Factors,”
“Forward-Looking Statements” and elsewhere in this
report and in “Risk Factors” in our 2010
Form 10-K.
For example, if the economy were to enter a deep recession, we
would expect actual outcomes to differ substantially from our
current expectations.
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 rental housing and for refinancing
existing mortgages. We provide this financing through the
activities of our three complementary businesses: our
Single-Family business (“Single-Family”), our
Multifamily Mortgage business (“Multifamily”) and our
Capital Markets group. Our Single-
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Family and Multifamily businesses work with our lender
customers, who deliver mortgage loans that we purchase and
securitize 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 also
works with lender customers to provide funds to the mortgage
market through short-term financing and other activities, making
short-term use of our balance sheet. These financing activities
include whole loan conduit transactions, early funding
transactions, Real Estate Mortgage Investment Conduit
(“REMIC”) and other structured securitization
activities, and dollar rolls, which we describe in more detail
in our 2010
Form 10-K
in “Business—Business Segments—Capital Markets
Group.”
In the first quarter of 2011, we purchased or guaranteed
approximately $189 billion in loans, measured by unpaid
principal balance, which includes approximately $20 billion
in delinquent loans we purchased from our single-family MBS
trusts. Excluding delinquent loans purchased from our MBS
trusts, our purchases and guarantees enabled our lender
customers to finance approximately 759,000 single-family
conventional loans and multifamily loans secured by multifamily
properties with approximately 83,000 units.
We remained the largest single issuer of mortgage-related
securities in the secondary market, with an estimated market
share of new single-family mortgage-related securities issuances
of 48.6% during the first quarter of 2011. In comparison, our
estimated market share of new single-family mortgage-related
securities issuances was 49.0% in the fourth quarter of 2010 and
40.8% in the first quarter of 2010. If the Federal Housing
Administration (“FHA”) continues to be the lower-cost
option for some consumers, and in some cases the only option,
for loans with higher
loan-to-value
(“LTV”) ratios, our market share could be adversely
impacted if the market shifts away from refinance activity,
which is likely to occur when interest rates rise. We remain a
constant source of liquidity in the multifamily market.
Currently, we own or guarantee approximately one-fifth of the
outstanding debt on multifamily properties.
Building
a Strong New Single-Family Book of Business
Our new single-family book of business has a strong overall
credit profile and is performing well. In this section, we
discuss our expectations for these loans and their performance
to date.
Expected
Profitability of Our Single-Family Acquisitions
While it is too early to know how loans in our new single-family
book of business will ultimately perform, given their strong
credit risk profile, low levels of payment delinquencies shortly
after acquisition, and low serious delinquency rates, we expect
that, over their lifetime, these loans will be profitable. Table
1 provides information about whether we expect loans we acquired
in 1991 through the first quarter of 2011 to be profitable, and
the percentage of our single-family guaranty book of business
represented by these loans as of March 31, 2011. The
expectations reflected in Table 1 are based on the credit risk
profile of the loans we have acquired, which we discuss in more
detail in “Table 3: Credit Profile of Single-Family
Conventional Loans Acquired” and in “Table 34: Risk
Characteristics of Single-Family Conventional Business Volume
and Guaranty Book of Business.” These expectations are also
based on numerous other assumptions, including our expectations
regarding home price declines set forth below in
“Outlook.” As shown in Table 1, we expect loans we
have acquired in 2009, 2010 and the first quarter of 2011 to be
profitable. If future macroeconomic conditions turn out to be
significantly more adverse than our expectations, these loans
could become unprofitable. For example, we believe that these
loans would become unprofitable if home prices declined more
than 15% from their March 2011 levels over the next five years
based on our home price index, which would be an approximately
34% decline from their peak in the third quarter of 2006.
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| Table 1: | Expected Lifetime Profitability of Single-Family Loans Acquired in 1991 through the First Quarter of 2011 |
As Table 1 shows, the key years in which we acquired loans that
we expect will be unprofitable are 2005 through 2008. The vast
majority of our realized credit losses since the beginning of
2009 were attributable to these loans. Although loans we
acquired in 2004 were originated under more conservative
acquisition policies than loans we acquired from 2005 through
2008, our 2004 acquisitions were made during a time when home
prices were rapidly increasing, and their performance has
suffered from the subsequent decline in home prices, which
continued in the first quarter of 2011. We currently expect
these loans to perform close to break-even, but changes in home
prices, other economic conditions or borrower behavior could
change our expectation regarding whether these loans will be
profitable.
Loans we have acquired since the beginning of 2009 comprised 45%
of our single-family guaranty book of business as of
March 31, 2011. Our 2005 to 2008 acquisitions are becoming
a smaller percentage of our guaranty book of business, having
decreased from 39% of our guaranty book of business as of
December 31, 2010 to 36% as of March 31, 2011.
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Serious
Delinquency Rates by Year of Acquisition
In our experience, an early predictor of the ultimate
performance of loans is the rate at which the loans become
seriously delinquent within a short period of time after
acquisition. Loans we acquired in 2009 and 2010 have experienced
historically low levels of delinquencies shortly after their
acquisition. Table 2 shows, for single-family loans we acquired
in each year from 2001 to 2010, the percentage that were
seriously delinquent (three or more months past due or in the
foreclosure process) as of the end of the first quarter
following the acquisition year. Loans we acquired in 2011 are
not included in this table because they were originated so
recently that they could not yet have become seriously
delinquent. As Table 2 shows, the percentage of our 2009
acquisitions that were seriously delinquent as of the end of the
first quarter following their acquisition year was more than
seven times lower than the average comparable serious
delinquency rate for loans acquired in 2005 through 2008. For
loans originated in 2010, this percentage was more than nine
times lower than the average comparable rate for loans acquired
in 2005 through 2008. Table 2 also shows serious delinquency
rates for each year’s acquisitions as of March 31,
2011. Except for the most recent acquisition years, whose
serious delinquency rates are likely lower than they will be
after the loans have aged, Table 2 shows that the current
serious delinquency rate generally tracks the trend of the
serious delinquency rate as of the end of the first quarter
following the year of acquisition. Below the table we provide
information about the economic environment in which the loans
were acquired, specifically home price appreciation and
unemployment levels.
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| Table 2: | Single-Family Serious Delinquency Rates by Year of Acquisition |
| * | For 2010, the serious delinquency rate as of March 31, 2011 is the same as the serious delinquency rate as of the end of the first quarter following the acquisition year. | |
| (1) | Based on Fannie Mae’s Home Price Index (HPI), which measures average price changes based on repeat sales on the same properties. For 2011, the data show an initial estimate based on purchase transactions in Fannie-Freddie acquisition and public deed data available through the end of March 2011, supplemented by preliminary data that became available in April 2011. Previously reported data has been revised to reflect additional available historical data. Including subsequently available data may lead to materially different results. | |
| (2) | Based on the average national unemployment rates for each month reported in the labor force statistics current population survey (CPS), Bureau of Labor Statistics. |
Credit
Profile of Our Single-Family Acquisitions
Single-family loans we purchased or guaranteed from 2005 through
2008 were acquired during a period when home prices were rising
rapidly, peaked, and then started to decline sharply, and
underwriting and eligibility standards were more relaxed than
they are now. These loans were characterized, on average and as
discussed below, by higher LTV ratios and lower FICO credit
scores than loans we have acquired since January 1, 2009.
In addition, many of these loans were Alt-A loans or had other
higher-risk loan attributes such as interest-only
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payment features. As a result of the sharp declines in home
prices, 34% of the loans that we acquired from 2005 through 2008
had
mark-to-market
LTV ratios that were greater than 100% as of March 31,
2011, which means the principal balance of the borrower’s
primary mortgage exceeded the current market value of the
borrower’s home. This percentage is higher when second lien
loans secured by the same properties that secure our loans are
included. The sharp decline in home prices, the severe economic
recession that began in December 2007 and continued through June
2009, and continuing high unemployment and underemployment have
significantly and adversely impacted the performance of loans we
acquired from 2005 through 2008. We are taking a number of
actions to reduce our credit losses. We discuss these actions
and our strategy in our 2010
Form 10-K
in “Business—Executive Summary—Our Strategies and
Actions to Reduce Credit Losses on Loans in our Single-Family
Guaranty Book of Business” and in “MD&A—Risk
Management—Credit Risk Management—Single-Family
Mortgage Credit Risk Management.”
In 2009, we began to see the effect of actions we took,
beginning in 2008, to significantly strengthen our underwriting
and eligibility standards and change our pricing to promote
sustainable homeownership and stability in the housing market.
As a result of these changes and other market dynamics, we
reduced our acquisitions of loans with higher-risk attributes.
Compared with the loans we acquired in 2005 through 2008, the
loans we have acquired since January 1, 2009 have had
better overall credit risk profiles at the time we acquired them
and their early performance has been strong. Our experience has
been that loans with characteristics such as lower original LTV
ratios (that is, more equity held by the borrowers in the
underlying properties), higher FICO credit scores and more
stable payments will perform better than loans with risk
characteristics such as higher original LTV ratios, lower FICO
credit scores, Alt-A underwriting and payments that may adjust
over the term of the loan. Table 3 shows improvements in the
credit risk profile of single-family loans we have acquired
since January 1, 2009 compared to loans we acquired from
2005 through 2008.
Table
3: Credit Profile of Single-Family Conventional Loans
Acquired
(1)
|
Acquisitions from 2009
|
Acquisitions from 2005
|
|||||||
| through the first quarter of 2011 | through 2008 | |||||||
|
Weighted average
loan-to-value
ratio at origination
|
68 | % | 73 | % | ||||
|
Weighted average FICO credit score at origination
|
762 | 722 | ||||||
|
Fully amortizing, fixed-rate loans
|
95 | % | 86 | % | ||||
|
Alt-A
loans
(2)
|
1 | % | 14 | % | ||||
|
Interest-only
|
1 | % | 12 | % | ||||
|
Original
loan-to-value
ratio > 90%
|
5 | % | 11 | % | ||||
|
FICO credit score < 620
|
* | 5 | % | |||||
| * | Represent less than 0.5% of the total acquisitions. | |
| (1) | Loans that meet more than one category are included in each applicable category. | |
| (2) | Newly originated Alt-A loans acquired in 2009 through 2011 consist of the refinance of existing loans. |
Improvements in the credit risk profile of our acquisitions
since the beginning of 2009 over acquisitions in prior years
reflect changes that we made to our pricing and eligibility
standards, as well as changes that mortgage insurers made to
their eligibility standards. We discuss these changes in our
2010
Form 10-K
in “Business—Executive Summary—Our Expectations
Regarding Profitability, the Single-Family Loans We Acquired
Beginning in 2009, and Credit Losses—Credit Profile of Our
Single-Family Acquisitions.” In addition, FHA’s role
as the lower-cost option for some consumers for loans with
higher LTV ratios has also reduced our acquisitions of these
types of loans. The credit risk profile of our acquisitions
since the beginning of 2009 has been influenced further by its
significant percentage of refinanced loans. Refinanced loans
generally perform better than purchase money loans, as the
borrower has demonstrated a desire to maintain homeownership. As
we discuss in “Outlook” below, we expect fewer
refinancings in 2011 than in 2010.
In 2010 and 2011 our acquisitions of refinanced loans included a
significant number of loans under our Refi
Plus
tm
initiative. Under Refi Plus we acquire refinancings of
performing Fannie Mae loans that have current LTV ratios up to
125% and, in some cases, lower FICO credit scores than we
generally require. Refi Plus
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loans reduce the borrowers’ monthly payments or are
otherwise more sustainable than the borrowers’ old loans.
Our acquisitions under Refi Plus include our acquisitions under
the Home Affordable Refinance Program (“HARP”), which
was established by the Administration to help borrowers who may
be unable to refinance the mortgage loan on their primary
residence due to a decline in home values. The LTV ratios at
origination for our 2010 and 2011 acquisitions are higher than
for our 2009 acquisitions, primarily due to our acquisition of
Refi Plus loans. The percentage of loans with LTV ratios at
origination greater than 90% has increased from 4% for 2009
acquisitions to 7% for 2010 acquisitions and 8% for acquisitions
in the first quarter of 2011.
Despite the increases in LTV ratios at origination associated
with Refi Plus, the overall credit profile of our 2010 and 2011
acquisitions remains significantly stronger than the credit
profile of our 2005 through 2008 acquisitions. Whether the loans
we acquire in the future exhibit an overall credit profile
similar to our acquisitions since the beginning of 2009 will
depend on a number of factors, including our future eligibility
standards and those of mortgage insurers, the percentage of loan
originations representing refinancings, our future objectives,
government policy, and market and competitive conditions.
Expected
Losses on Our Legacy Book of Business
The single-family credit losses we realized from January 1,
2009 through March 31, 2011, combined with the amounts we
have reserved for single-family credit losses as of
March 31, 2011, as described below, total approximately
$120 billion. The vast majority of these losses are
attributable to single-family loans we purchased or guaranteed
from 2005 through 2008.
While loans we acquired in 2005 through 2008 will give rise to
additional credit losses that we have not yet realized, we
estimate that we have reserved for the substantial majority of
the remaining losses on these loans. Even though we believe a
substantial majority of the credit losses we have yet to realize
on these loans has already been reflected in our results of
operations as credit-related expenses, we expect that our
credit-related expenses will be higher in 2011 than in 2010 as
weakness in the housing and mortgage markets continues. We also
expect that future defaults on our legacy book of business and
the resulting charge-offs will occur over a period of years. In
addition, given the large current and anticipated supply of
single-family homes in the market, we anticipate that it will
take years before our REO inventory is reduced to pre-2008
levels.
We show how we calculate our realized credit losses in
“Table 13: Credit Loss Performance Metrics.” Our
reserves for credit losses described in this discussion consist
of (1) our allowance for loan losses, (2) our
allowance for accrued interest receivable, (3) our
allowance for preforeclosure property taxes and insurance
receivables, and (4) our reserve for guaranty losses
(collectively, our “total loss reserves”), plus the
portion of fair value losses on loans purchased out of MBS
trusts reflected in our condensed consolidated balance sheets
that we estimate represents accelerated credit losses we expect
to realize. For more information on our reserves for credit
losses, please see “Table 10: Total Loss Reserves.”
The fair value losses that we consider part of our reserves are
not included in our “total loss reserves.” The
majority of the fair value losses were recorded prior to our
adoption in 2010 of new accounting standards on the transfers of
financial assets and the consolidation of variable interest
entities. Prior to our adoption of the new standards, upon our
acquisition of credit-impaired loans out of unconsolidated MBS
trusts, we recorded fair value loss charge-offs against our
reserve for guaranty losses to the extent that the acquisition
cost of these loans exceeded their estimated fair value. We
expect to realize a portion of these fair value losses as credit
losses in the future (for loans that eventually involve
charge-offs or foreclosure), yet these fair value losses have
already reduced the mortgage loan balances reflected in our
condensed consolidated balance sheets and have effectively been
recognized in our condensed consolidated statements of
operations and comprehensive loss through our provision for
guaranty losses. We consider these fair value losses as an
“effective reserve,” apart from our total loss
reserves, to the extent that we expect to realize credit losses
on the acquired loans in the future.
9
Table of Contents
Credit
Performance
Table 4 presents information for each of the last five quarters
about the credit performance of mortgage loans in our
single-family guaranty book of business and actions taken by our
servicers with borrowers to resolve existing or potential
delinquent loan payments. We refer to these actions as
“workouts.” The workout information in Table 4 does
not reflect repayment plans and forbearances that have been
initiated but not completed, nor does it reflect trial
modifications that have not become permanent.
Table
4: Credit Statistics, Single-Family Guaranty Book of
Business
(1)
| 2011 | 2010 | |||||||||||||||||||||||
|
Full
|
||||||||||||||||||||||||
| Q1 | Year | Q4 | Q3 | Q2 | Q1 | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
As of the end of each period:
|
||||||||||||||||||||||||
|
Serious delinquency
rate
(2)
|
4.27 | % | 4.48 | % | 4.48 | % | 4.56 | % | 4.99 | % | 5.47 | % | ||||||||||||
|
Nonperforming
loans
(3)
|
$ | 206,098 | $ | 212,858 | $ | 212,858 | $ | 212,305 | $ | 217,216 | $ | 222,892 | ||||||||||||
|
Foreclosed property inventory:
|
||||||||||||||||||||||||
|
Number of properties
|
153,224 | 162,489 | 162,489 | 166,787 | 129,310 | 109,989 | ||||||||||||||||||
|
Carrying value
|
$ | 14,086 | $ | 14,955 | $ | 14,955 | $ | 16,394 | $ | 13,043 | $ | 11,423 | ||||||||||||
|
Combined loss
reserves
(4)
|
$ | 66,240 | $ | 60,163 | $ | 60,163 | $ | 58,451 | $ | 59,087 | $ | 58,900 | ||||||||||||
|
Total loss
reserves
(5)
|
$ | 70,466 | $ | 64,469 | $ | 64,469 | $ | 63,105 | $ | 64,877 | $ | 66,479 | ||||||||||||
|
During the period:
|
||||||||||||||||||||||||
|
Foreclosed property (number of properties):
|
||||||||||||||||||||||||
|
Acquisitions
(6)
|
53,549 | 262,078 | 45,962 | 85,349 | 68,838 | 61,929 | ||||||||||||||||||
|
Dispositions
|
(62,814 | ) | (185,744 | ) | (50,260 | ) | (47,872 | ) | (49,517 | ) | (38,095 | ) | ||||||||||||
|
Credit-related
expenses
(7)
|
$ | 11,106 | $ | 26,420 | $ | 4,064 | $ | 5,559 | $ | 4,871 | $ | 11,926 | ||||||||||||
|
Credit
losses
(8)
|
$ | 5,604 | $ | 23,133 | $ | 3,111 | $ | 8,037 | $ | 6,923 | $ | 5,062 | ||||||||||||
|
Loan workout activity (number of loans):
|
||||||||||||||||||||||||
|
Home retention loan
workouts
(9)
|
60,959 | 440,276 | 89,691 | 113,367 | 132,192 | 105,026 | ||||||||||||||||||
|
Preforeclosure sales and
deeds-in-lieu
of foreclosure
|
17,120 | 75,391 | 15,632 | 20,918 | 21,515 | 17,326 | ||||||||||||||||||
|
Total loan workouts
|
78,079 | 515,667 | 105,323 | 134,285 | 153,707 | 122,352 | ||||||||||||||||||
|
Loan workouts as a percentage of delinquent loans in our
guaranty book of
business
(10)
|
25.01 | % | 37.30 | % | 30.47 | % | 37.86 | % | 41.18 | % | 31.59 | % | ||||||||||||
| (1) | Our single-family guaranty book of business consists of (a) single-family mortgage loans held in our mortgage portfolio, (b) single-family mortgage loans underlying Fannie Mae MBS, and (c) other credit enhancements that we provide on single-family mortgage assets, such as long-term standby commitments. It excludes non-Fannie Mae mortgage-related securities held in our mortgage portfolio for which we do not provide a guaranty. | |
| (2) | Calculated based on the number of single-family conventional loans that are three or more months past due and loans that have been referred to foreclosure but not yet foreclosed upon, divided by the number of loans in our single-family conventional guaranty book of business. We include all of the single-family conventional loans that we own and those that back Fannie Mae MBS in the calculation of the single-family serious delinquency rate. | |
| (3) | Represents the total amount of nonperforming loans that are on accrual status, including troubled debt restructurings and HomeSaver Advance (HSA) first-lien loans. A troubled debt restructuring is a restructuring of a mortgage loan in which a concession is granted to a borrower experiencing financial difficulty. HSA first-lien loans are unsecured personal loans in the amount of past due payments used to bring mortgage loans current. 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. |
10
Table of Contents
| For additional information on the change in our loss reserves see “Consolidated Results of Operations—Credit-Related Expenses—Provision for Credit Losses.” | ||
| (5) | Consists of (a) the combined loss reserves, (b) allowance for accrued interest receivable, and (c) allowance for preforeclosure property taxes and insurance receivables. | |
| (6) | Includes acquisitions through deeds-in-lieu of foreclosure. | |
| (7) | Consists of the provision for loan losses, the provision (benefit) for guaranty losses and foreclosed property expense (income). | |
| (8) | Consists of (a) charge-offs, net of recoveries and (b) foreclosed property expense; adjusted to exclude the impact of fair value losses resulting from credit-impaired loans acquired from MBS trusts. | |
| (9) | Consists of (a) modifications, which do not include trial modifications 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. | |
| (10) | Calculated based on annualized problem loan workouts during the period as a percentage of delinquent loans in our single-family guaranty book of business as of the end of the period. |
We provide additional information on our credit-related expenses
in “Consolidated Results of Operations—Credit-Related
Expenses” and on the credit performance of mortgage loans
in our single-family book of business and our loan workouts in
“Risk Management—Credit Risk
Management—Single-Family Mortgage Credit Risk
Management.”
Housing
and Mortgage Market and Economic Conditions
During the first quarter of 2011, the United States economic
recovery continued at a very slow pace. The U.S. gross
domestic product, or GDP, rose by 1.8% on an annualized basis
during the quarter, according to the Bureau of Economic Analysis
advance estimate. The overall economy gained an estimated
478,000 jobs in the first quarter as a result of employment
growth in the private sector. According to the U.S. Bureau
of Labor Statistics, as of March 2011, over the past
12 months there has been an increase of 1.3 million
non-farm jobs. The unemployment rate was 8.8% in March 2011,
compared with 9.0% in January 2011, based on data from the
U.S. Bureau of Labor Statistics. Employment will likely
need to post sustained improvement for an extended period to
have a positive impact on housing.
Housing activity remained weak during the first quarter of 2011.
Although home sales during the quarter increased modestly from
the fourth quarter’s levels, sales of foreclosed homes and
short sales (“distressed sales”) represented an
outsized portion of the market. Distressed sales accounted for
40% of existing home sales in March 2011, up from 35% in March
2010, according to the National Association of
REALTORS
®
.
In the face of competition from distressed sales, sales of new
homes remained very low.
The overall mortgage market serious delinquency rate has trended
down since peaking in the fourth quarter of 2009 but has
remained historically high, with an estimated four million loans
seriously delinquent (90 days or more past due or in the
foreclosure process) as of December 31, 2010, based on the
Mortgage Bankers Association National Delinquency Survey. In
March, the supply of single-family homes as measured by the
inventory/sales ratio remained above long-term average levels.
Properties that are vacant and held off the market, combined
with the portion of properties backing seriously delinquent
mortgages not currently listed for sale, represent a significant
shadow inventory putting downward pressure on home prices.
We estimate that home prices on a national basis declined by
1.8% in the first quarter of 2011 and have declined by 22.5%
from their peak in the third quarter of 2006. Our home price
estimates are based on preliminary data and are subject to
change as additional data become available. The decline in home
prices has left many homeowners with “negative equity”
in their mortgages, which means their principal mortgage balance
exceeds the current market value of their home. According to
CoreLogic, approximately 11 million, or 23%, of all
residential properties with mortgages were in a negative equity
position in the fourth quarter of 2010. This increases the risk
that borrowers might walk away from their mortgage obligations,
causing the loans to become delinquent and proceed to
foreclosure.
11
Table of Contents
During the first quarter of 2011, the multifamily sector
continued to improve due to increased rental demand and
improving job growth. Based on preliminary third-party data, we
estimate that the national multifamily vacancy rate on average
fell by 25 basis points during the first quarter of 2011 to
7.0%, after having held steady in the fourth quarter of 2010. In
addition, it appears that asking rents increased in the first
quarter of 2011 by an estimated 50 basis points on a
national basis. As indicated by data from Axiometrics, Inc.,
multifamily concession rates, the rental discount rate as a
percentage of asking rents, declined during the first quarter of
the year to 4.64% as of February 2011, after having increased
during the fourth quarter of 2010 to end the year at 5.07%. The
increase in rental demand is also reflected in an estimated
increase of 44,000 units in the number of occupied rental
units during the first three months of 2011, according to
preliminary data from REIS, Inc. National multifamily
fundamentals, which generally include factors such as effective
rents, vacancy rates, supply and demand, job growth, and
demographic trends, continued to improve in the first quarter.
However, certain local markets and properties continue to
exhibit weak fundamentals.
Outlook
Overall Market Conditions.
We expect weakness
in the housing and mortgage markets to continue in 2011. The
high level of delinquent mortgage loans will result in the
foreclosure of troubled loans, which is likely to add to the
excess housing inventory. Home sales are unlikely to rise before
the unemployment rate improves further. In addition, servicer
foreclosure process deficiencies and their consequences have
created uncertainty for potential home buyers, because
foreclosed homes account for a substantial part of the existing
home market. Thus, widespread concerns about foreclosure process
deficiencies could suppress home sales in the near term and
interfere with the housing recovery.
We expect that single-family default and severity rates, as well
as the level of single-family foreclosures, will remain high in
2011. Despite signs of multifamily sector improvement at the
national level, we expect multifamily charge-offs in 2011 to
remain commensurate with 2010 levels as certain local markets
and properties continue to exhibit weak fundamentals. Conditions
may worsen if the unemployment rate increases on either a
national or regional basis.
We expect the pace of our loan acquisitions for the remainder of
2011 will be significantly lower than in 2010 and the first
quarter of 2011, primarily because we expect fewer refinancings
as a result of increasing mortgage rates and, to a lesser
extent, the high number of mortgages that have already
refinanced to low rates in recent years. To the extent our
acquisitions decline, we will receive fewer risk-based fees,
which are charged at loan acquisition and recognized over time;
as a result, our future revenues will be negatively impacted. We
estimate that total originations in the U.S. single-family
mortgage market in 2011 will decrease from 2010 levels by
approximately one-third, from an estimated $1.5 trillion to an
estimated $1.0 trillion, and that the amount of originations in
the U.S. single-family mortgage market that are
refinancings will decline from approximately $1.1 trillion to
approximately $413 billion. Refinancings comprised
approximately 82% of our single-family business volume in the
first quarter of 2011, compared with 78% for all of 2010.
Home Price Declines.
We expect that home
prices on a national basis will decline further, with greater
declines in some geographic areas than others, before
stabilizing in late 2011. We now expect that the
peak-to-trough
home price decline on a national basis will range between 22%
and 29%, as compared with our expectation at the time we filed
our 2010
Form 10-K
that the
peak-to-trough
home price decline on a national basis would range between 21%
and 26%. 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 housing finance reform; the management of the Federal
Reserve’s MBS holdings; 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.
12
Table of Contents
Our 22% to 29%
peak-to-trough
home price decline estimate corresponds to an approximate 32% to
40%
peak-to-trough
decline using the S&P/Case-Shiller index method. Our
estimates differ from the S&P/Case-Shiller index in two
principal ways: (1) our estimates weight expectations by
number of properties, whereas the S&P/Case-Shiller index
weights expectations based on property value, causing home price
declines on higher priced homes to have a greater effect on the
overall result; and (2) our estimates attempt to exclude
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,
whereas the S&P/Case-Shiller index includes foreclosed
homes sales. The S&P/Case-Shiller comparison numbers are
calculated using our models and assumptions, but modified to
account for weighting based on property value and the impact of
foreclosed property sales. In addition to these differences, our
estimates are based on our own internally available data
combined with publicly available data, and are therefore based
on data collected nationwide, whereas the S&P/Case-Shiller
index is based 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. We
are working on enhancing our home price estimates to identify
and exclude a greater portion of foreclosed home sales. When we
begin reporting these enhanced home price estimates, we expect
that some period to period comparisons of home prices may differ
from those determined using our current estimates.
Credit-Related Expenses and Credit Losses.
We
expect that our credit-related expenses and our credit losses
will be higher in 2011 than in 2010. We describe our credit loss
outlook above under “Providing Liquidity, Our Strong New
Book of Business and Expected Losses on Single-Family Loans We
Acquired before 2009—Expected Losses on Our Legacy Book of
Business.”
Uncertainty Regarding our Long-Term Financial Sustainability
and Future Status.
There is significant
uncertainty in the current market environment, and any changes
in the trends in macroeconomic factors that we currently
anticipate, such as home prices and unemployment, may cause our
future credit-related expenses and credit losses to vary
significantly from our current expectations. Although
Treasury’s funds under the senior preferred stock purchase
agreement permit us to remain solvent and avoid receivership,
the resulting dividend payments are substantial. 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 about our
long-term financial sustainability.
In addition, there is significant uncertainty regarding the
future of our company, including how long we will continue to be
in existence, the extent of our role in the market, what form we
will have, and what ownership interest, if any, our current
common and preferred stockholders will hold in us after the
conservatorship is terminated. We expect this uncertainty to
continue. On February 11, 2011 Treasury and the Department
of Housing and Urban Development (“HUD”) released a
report to Congress on reforming America’s housing finance
market. The report states that the Administration will work with
FHFA to determine the best way to responsibly wind down both
Fannie Mae and Freddie Mac. The report emphasizes the importance
of providing the necessary financial support to Fannie Mae and
Freddie Mac during the transition period. We cannot predict the
prospects for the enactment, timing or content of legislative
proposals regarding long-term reform of the GSEs. Please see
“Legislation and GSE Reform” in this report and in our
2010
Form 10-K
for a discussion of recent legislative reform of the financial
services industry, and proposals for GSE reform, that could
affect our business and “Risk Factors” for a
discussion of the risks to our business relating to the
uncertain future of our company.
LEGISLATIVE
AND REGULATORY DEVELOPMENTS
GSE
Reform
As required by the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”), on
February 11, 2011, Treasury and HUD released their report
to Congress on ending the conservatorships of Fannie Mae and
Freddie Mac and reforming the housing finance market. The report
provides that the Administration will work with FHFA to
determine the best way to responsibly reduce Fannie Mae’s
and Freddie Mac’s role in the market and ultimately wind
down both institutions.
13
Table of Contents
The report identifies a number of policy steps that could be
used to wind down Fannie Mae and Freddie Mac, reduce the
government’s role in housing finance and help bring private
capital back to the mortgage market. These steps include
(1) increasing guaranty fees, (2) gradually increasing
the level of required down payments so that any mortgages
insured by Fannie Mae or Freddie Mac eventually have at least a
10% down payment, (3) reducing conforming loan limits to
those established in the Federal Housing Finance Regulatory
Reform Act of 2008 (the “2008 Reform Act”),
(4) encouraging Fannie Mae and Freddie Mac to pursue
additional credit loss protection and (5) reducing Fannie
Mae’s and Freddie Mac’s portfolios, consistent with
Treasury’s senior preferred stock purchase agreements with
the companies.
In addition, the report outlines three potential options for a
new long-term structure for the housing finance system following
the wind-down of Fannie Mae and Freddie Mac. The first option
would privatize housing finance almost entirely. The second
option would add a government guaranty mechanism that could
scale up during times of crisis. The third option would involve
the government offering catastrophic reinsurance behind private
mortgage guarantors. Each of these options assumes the continued
presence of programs operated by FHA, the Department of
Agriculture and the Veterans Administration to assist targeted
groups of borrowers. The report does not state whether or how
the existing infrastructure or human capital of Fannie Mae may
be used in the establishment of such a reformed system. The
report emphasizes the importance of proceeding with a careful
transition plan and providing the necessary financial support to
Fannie Mae and Freddie Mac during the transition period. A copy
of the report can be found on the Housing Finance Reform section
of Treasury’s Web site, www.Treasury.gov. We are providing
Treasury’s Web site address solely for your information,
and information appearing on Treasury’s Web site is not
incorporated into this quarterly report on
Form 10-Q.
We expect that Congress will continue to hold hearings and
consider legislation in 2011 on the future status of Fannie Mae
and Freddie Mac. In both the House of Representatives and the
Senate, legislation has been introduced that would require FHFA
to make a determination within two years of enactment whether
the GSEs were financially viable and, if the GSEs were
determined to be not financially viable, to place them into
receivership. As drafted, these bills may upon enactment impair
our ability to issue securities in the capital markets and
therefore our ability to conduct our business, absent the
federal government providing an explicit guarantee of their
existing and ongoing liabilities.
In the House of Representatives, the Subcommittee on Capital
Markets and Government Sponsored Enterprises of the Financial
Services Committee has also approved several specific bills
relating to GSE operations, including the following:
(1) suspending current compensation packages and applying a
government pay scale for GSE employees; (2) requiring the
GSEs to increase guarantee fees; (3) subjecting GSE loans
to the risk retention standards in the Dodd-Frank Act;
(4) requiring a quicker reduction of GSE portfolios than
required under the senior preferred stock purchase agreement;
(5) requiring Treasury to pre-approve all GSE debt
issuances; (6) repealing the GSEs’ affordable housing
goals; and (7) prohibiting FHFA from approving any new GSE
products during conservatorship or receivership, with certain
exceptions.
We expect additional legislation relating to the GSEs to be
introduced and considered by Congress in 2011. We cannot predict
the prospects for the enactment, timing or content of
legislative proposals regarding the future status of the GSEs.
In sum, there continues to be uncertainty regarding the future
of our company, including how long we will continue to be in
existence, the extent of our role in the market, what form we
will have, and what ownership interest, if any, our current
common and preferred stockholders will hold in us after the
conservatorship is terminated. Please see “Risk
Factors” for a discussion of the risks to our business
relating to the uncertain future of our company.
Proposed
Rules Implementing the Dodd-Frank Act
Below we describe some rules that have been proposed by various
government agencies to implement provisions of the Dodd-Frank
Act. We are currently evaluating these proposed rules and how
they may impact our business and the housing finance industry.
14
Table of Contents
Risk Retention.
On March 29, 2011, the
Office of the Comptroller of the Currency, the Federal Reserve
System, the Federal Deposit Insurance Corporation, the
U.S. Securities and Exchange Commission, FHFA and HUD
issued a joint proposed rule implementing the risk retention
requirements established by the Dodd-Frank Act. Under the
proposed rule, securitizers would be required to retain at least
5% of the credit risk with respect to the assets they
securitize. The proposed rule offers several options for
compliance by parties with assets to securitize, one of which is
to have either Fannie Mae or Freddie Mac securitize the assets.
As long as Fannie Mae or Freddie Mac (1) fully guarantees
the assets, thereby taking on 100% of their credit risk, and
(2) is in conservatorship or receivership at the time the
assets are securitized, no further retention of credit risk is
required. Certain mortgage loans meeting the definition of a
“Qualified Residential Mortgage” are exempt from the
requirements of the rule. Only mortgage loans that are first
lien mortgages on primary residences with
loan-to-value
ratios not exceeding 80% (75% for refinancings and 70% for
cash-out refinancings) and that meet certain other underwriting
requirements, would meet the definition of “Qualified
Residential Mortgage” under the proposal.
Ability to Repay.
On April 19, 2011, the
Federal Reserve Board issued a proposed rule pursuant to the
Dodd-Frank Act that, among others things, requires creditors to
determine a borrower’s “ability to repay” a
mortgage loan under Regulation Z, which implements the
Truth in Lending Act. If a creditor fails to comply, a borrower
may be able to offset amounts owed as part of a foreclosure or
recoup monetary damages. The proposed rule offers several
options for complying with the ability to repay requirement,
including making loans that meet certain terms and
characteristics (so-called “qualified mortgages”),
which may provide creditors with special protection from
liability. As proposed, a loan is generally a qualified mortgage
if, among other things, the borrower’s income and assets
are verified, the loan term does not exceed 30 years, the
loan is fully amortizing with no negative amortization,
interest-only or balloon features, and the loan is underwritten
at the maximum interest rate applicable in the first five years
of the loan, taking into account all mortgage-related
obligations.
Derivatives.
On April 12, 2011, the
Federal Reserve Board, the Federal Deposit Insurance
Corporation, FHFA, the Farm Credit Administration and the Office
of the Comptroller of the Currency proposed rules under the
Dodd-Frank Act governing margin and capital requirements
applicable to entities that are subject to their oversight. On
April 28, 2011, the Commodity Futures Trading Commission
proposed rules under the Dodd-Frank Act governing margin
requirements for swap dealers and major swap participants
engaging in derivative trades that are not submitted for
clearing to a derivatives clearing organization (“uncleared
trades”). These proposed rules would require that, for all
uncleared trades, we collect from our counterparties and provide
to our counterparties collateral in excess of the amounts we
have historically collected or provided, regardless of whether
we are deemed to be a major swap participant.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP
requires management to make a number of judgments, estimates and
assumptions that affect the reported amount of assets,
liabilities, income and expenses in the condensed consolidated
financial statements. Understanding our accounting policies and
the extent to which we use management judgment and estimates in
applying these policies is integral to understanding our
financial statements. We describe our most significant
accounting policies in “Note 1, Summary of Significant
Accounting Policies” of this report and in our 2010
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. We have identified three of our accounting
policies as critical because they involve significant judgments
and assumptions about highly complex and inherently uncertain
matters, and the use of
15
Table of Contents
reasonably different estimates and assumptions could have a
material impact on our reported results of operations or
financial condition. These critical accounting policies and
estimates are as follows:
| • | Fair Value Measurement | |
| • | Total Loss Reserves | |
| • | Other-Than-Temporary Impairment of Investment Securities |
See “MD&A—Critical Accounting Policies and
Estimates” in our 2010
Form 10-K
for a detailed discussion of these critical accounting policies
and estimates. We provide below information about our
Level 3 assets and liabilities as of March 31, 2011 as
compared with December 31, 2010.
Fair
Value Measurement
The use of fair value to measure our assets and liabilities is
fundamental to our financial statements and is a critical
accounting estimate because we account for and record a portion
of our assets and liabilities at fair value. In determining fair
value, we use various valuation techniques. We describe the
valuation techniques and inputs used to determine the fair value
of our assets and liabilities and disclose their carrying value
and fair value in “Note 13, Fair Value.”
Fair
Value Hierarchy—Level 3 Assets and
Liabilities
The assets and liabilities that we have classified as
Level 3 consist primarily of financial instruments for
which there is limited market activity and therefore little or
no price transparency. As a result, the valuation techniques
that we use to estimate the fair value of Level 3
instruments involve significant unobservable inputs, which
generally are more subjective and involve a high degree of
management judgment and assumptions. Our Level 3 assets and
liabilities consist of certain mortgage- and asset-backed
securities and residual interests, certain mortgage loans,
certain acquired property, certain long-term debt arrangements
and certain highly structured, complex derivative instruments.
Table 5 presents a comparison, by balance sheet category, of the
amount of financial assets carried in our condensed consolidated
balance sheets at fair value on a recurring basis
(“recurring asset”) that were classified as
Level 3 as of March 31, 2011 and December 31,
2010. 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
5: Level 3 Recurring Financial Assets at Fair
Value
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
|
|
2011 | 2010 | ||||||
| (Dollars in millions) | ||||||||
|
Trading securities
|
$ | 3,981 | $ | 4,576 | ||||
|
Available-for-sale
securities
|
31,762 | 31,934 | ||||||
|
Mortgage loans
|
2,221 | 2,207 | ||||||
|
Other assets
|
239 | 247 | ||||||
|
Level 3 recurring assets
|
$ | 38,203 | $ | 38,964 | ||||
|
Total assets
|
$ | 3,227,042 | $ | 3,221,972 | ||||
|
Total recurring assets measured at fair value
|
$ | 155,996 | $ | 161,696 | ||||
|
Level 3 recurring assets as a percentage of total assets
|
1 | % | 1 | % | ||||
|
Level 3 recurring assets as a percentage of total recurring
assets measured at fair value
|
24 | % | 24 | % | ||||
|
Total recurring assets measured at fair value as a percentage of
total assets
|
5 | % | 5 | % | ||||
Assets measured at fair value on a nonrecurring basis and
classified as Level 3, which are not presented in the table
above, primarily include mortgage loans and acquired property.
The fair value of Level 3 nonrecurring
16
Table of Contents
assets totaled $42.7 billion during the quarter ended
March 31, 2011 and $63.0 billion during the year ended
December 31, 2010.
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 $1.1 billion as of March 31, 2011
and $1.0 billion as of December 31, 2010, and other
liabilities with a fair value of $121 million as of
March 31, 2011 and $143 million as of
December 31, 2010.
CONSOLIDATED
RESULTS OF OPERATIONS
In this section we discuss 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.
Table 6 summarizes our condensed consolidated results of
operations for the periods indicated.
Table
6: Summary of Condensed Consolidated Results of
Operations
|
For the
|
||||||||||||
|
Three Months Ended
|
||||||||||||
| March 31, | ||||||||||||
| 2011 | 2010 | Variance | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Net interest income
|
$ | 4,960 | $ | 2,789 | $ | 2,171 | ||||||
|
Fee and other income
|
237 | 233 | 4 | |||||||||
|
Net revenues
|
$ | 5,197 | $ | 3,022 | $ | 2,175 | ||||||
|
Investment gains, net
|
75 | 166 | (91 | ) | ||||||||
|
Net
other-than-temporary
impairments
|
(44 | ) | (236 | ) | 192 | |||||||
|
Fair value gains (losses), net
|
289 | (1,705 | ) | 1,994 | ||||||||
|
Administrative expenses
|
(605 | ) | (605 | ) | — | |||||||
|
Credit-related
expenses
(1)
|
(11,042 | ) | (11,884 | ) | 842 | |||||||
|
Other non-interest
expenses
(2)
|
(339 | ) | (354 | ) | 15 | |||||||
|
Loss before federal income taxes
|
(6,469 | ) | (11,596 | ) | 5,127 | |||||||
|
Benefit (provision) for federal income taxes
|
(2 | ) | 67 | (69 | ) | |||||||
|
Net loss
|
(6,471 | ) | (11,529 | ) | 5,058 | |||||||
|
Less: Net income attributable to the noncontrolling interest
|
— | (1 | ) | 1 | ||||||||
|
Net loss attributable to Fannie Mae
|
$ | (6,471 | ) | $ | (11,530 | ) | $ | 5,059 | ||||
| (1) | Consists of provision for loan losses, reserve for guaranty losses, and foreclosed property income (expense). | |
| (2) | Consists of debt extinguishment losses, net and other expenses. |
Net
Interest Income
Table 7 presents an analysis of our net interest income, average
balances, and related yields earned on assets and incurred on
liabilities for the periods indicated. For most components of
the average balances, we used a daily weighted average of
amortized cost. When daily average balance information was not
available, such as for mortgage loans, we used monthly averages.
Table 8 presents the change in our net interest income between
periods and the extent to which that variance is attributable
to: (1) changes in the volume of our interest-earning
assets and interest-bearing liabilities or (2) changes in
the interest rates of these assets and liabilities. In the
fourth quarter of 2010, we changed the presentation to
distinguish the change in net interest income of Fannie Mae from
the change in net interest income of consolidated trusts. We
have revised the presentation of results for prior periods to
conform to the current period presentation.
17
Table of Contents
Table
7: Analysis of Net Interest Income and
Yield
| For the Three Months Ended March 31, | ||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||
|
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 of Fannie
Mae
(1)
|
$ | 405,820 | $ | 3,725 | 3.67 | % | $ | 276,346 | $ | 3,298 | 4.77 | % | ||||||||||||
|
Mortgage loans of consolidated
trusts
(1)
|
2,598,508 | 31,865 | 4.91 | 2,713,611 | 34,321 | 5.06 | ||||||||||||||||||
|
Total mortgage loans
|
3,004,328 | 35,590 | 4.74 | 2,989,957 | 37,619 | 5.03 | ||||||||||||||||||
|
Mortgage-related securities
|
334,057 | 4,245 | 5.08 | 435,754 | 5,550 | 5.09 | ||||||||||||||||||
|
Elimination of Fannie Mae MBS held in portfolio
|
(214,370 | ) | (2,793 | ) | 5.21 | (286,701 | ) | (3,799 | ) | 5.30 | ||||||||||||||
|
Total mortgage-related securities, net
|
119,687 | 1,452 | 4.85 | 149,053 | 1,751 | 4.70 | ||||||||||||||||||
|
Non-mortgage
securities
(2)
|
79,719 | 45 | 0.23 | 66,860 | 37 | 0.22 | ||||||||||||||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
13,743 | 7 | 0.20 | 40,061 | 21 | 0.21 | ||||||||||||||||||
|
Advances to lenders
|
4,089 | 21 | 2.05 | 2,512 | 18 | 2.87 | ||||||||||||||||||
|
Total interest-earning assets
|
$ | 3,221,566 | $ | 37,115 | 4.61 | % | $ | 3,248,443 | $ | 39,446 | 4.86 | % | ||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Short-term
debt
(3)
|
$ | 138,848 | $ | 104 | 0.30 | % | $ | 185,042 | $ | 116 | 0.25 | % | ||||||||||||
|
Long-term debt
|
631,917 | 4,196 | 2.66 | 564,875 | 5,081 | 3.60 | ||||||||||||||||||
|
Total short-term and long-term funding debt
|
770,765 | 4,300 | 2.23 | 749,917 | 5,197 | 2.77 | ||||||||||||||||||
|
Debt securities of consolidated trusts
|
2,652,024 | 30,648 | 4.62 | 2,758,387 | 35,259 | 5.11 | ||||||||||||||||||
|
Elimination of Fannie Mae MBS held in portfolio
|
(214,370 | ) | (2,793 | ) | 5.21 | (286,701 | ) | (3,799 | ) | 5.30 | ||||||||||||||
|
Total debt securities of consolidated trusts held by third
parties
|
2,437,654 | 27,855 | 4.57 | 2,471,686 | 31,460 | 5.09 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
$ | 3,208,419 | $ | 32,155 | 4.01 | % | $ | 3,221,603 | $ | 36,657 | 4.55 | % | ||||||||||||
|
Impact of net non-interest bearing funding
|
$ | 13,147 | 0.02 | % | $ | 26,840 | 0.03 | % | ||||||||||||||||
|
Net interest income/net interest yield
|
$ | 4,960 | 0.62 | % | $ | 2,789 | 0.34 | % | ||||||||||||||||
|
Net interest income/net interest yield of consolidated
trusts
(4)
|
$ | 1,217 | 0.19 | % | $ | (938 | ) | (0.14 | )% | |||||||||||||||
|
Selected benchmark interest rates at end of
period:
(5)
|
||||||||||||||||||||||||
|
3-month
LIBOR
|
0.30 | % | 0.29 | % | ||||||||||||||||||||
|
2-year
swap
interest rate
|
1.00 | 1.19 | ||||||||||||||||||||||
|
5-year
swap
interest rate
|
2.47 | 2.73 | ||||||||||||||||||||||
|
30-year
Fannie Mae MBS par coupon rate
|
4.30 | 4.51 | ||||||||||||||||||||||
| (1) | Interest income includes interest income on acquired credit-impaired loans of $486 million and $587 million for the three months ended March 31, 2011 and 2010, respectively. These amounts include accretion income of $231 million and $266 million for the three months ended March 31, 2011 and 2010, respectively, relating to a portion of the fair value losses recorded upon the acquisition of the loans. Average balance includes loans on nonaccrual status, for which interest income is recognized when collected. | |
| (2) | Includes cash equivalents. | |
| (3) | Includes federal funds purchased and securities sold under agreements to repurchase. | |
| (4) | Net interest income of consolidated trusts represents interest income from mortgage loans of consolidated trusts less interest expense from debt securities of consolidated trusts. Net interest yield is calculated based on net interest income from consolidated trusts divided by average balance of mortgage loans of consolidated trusts. | |
| (5) | Data from British Bankers’ Association, Thomson Reuters Indices and Bloomberg. |
18
Table of Contents
Table
8: Rate/Volume Analysis of Changes in Net Interest
Income
|
For the Three Months Ended
|
||||||||||||
| March 31, 2011 vs. 2010 | ||||||||||||
|
Total
|
Variance Due to: (1) | |||||||||||
| Variance | Volume | Rate | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Interest income:
|
||||||||||||
|
Mortgage loans of Fannie Mae
|
$ | 427 | $ | 1,306 | $ | (879 | ) | |||||
|
Mortgage loans of consolidated trusts
|
(2,456 | ) | (1,430 | ) | (1,026 | ) | ||||||
|
Total mortgage loans
|
(2,029 | ) | (124 | ) | (1,905 | ) | ||||||
|
Mortgage-related securities
|
(1,305 | ) | (1,292 | ) | (13 | ) | ||||||
|
Elimination of Fannie Mae MBS held in portfolio
|
1,006 | 943 | 63 | |||||||||
|
Total mortgage-related securities, net
|
(299 | ) | (349 | ) | 50 | |||||||
|
Non-mortgage
securities
(2)
|
8 | 7 | 1 | |||||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
(14 | ) | (13 | ) | (1 | ) | ||||||
|
Advances to lenders
|
3 | 9 | (6 | ) | ||||||||
|
Total interest income
|
(2,331 | ) | (470 | ) | (1,861 | ) | ||||||
|
Interest expense:
|
||||||||||||
|
Short-term debt
|
(12 | ) | (32 | ) | 20 | |||||||
|
Long-term debt
|
(885 | ) | 554 | (1,439 | ) | |||||||
|
Total short-term and long-term funding debt
|
(897 | ) | 522 | (1,419 | ) | |||||||
|
Debt securities of consolidated trusts
|
(4,611 | ) | (1,322 | ) | (3,289 | ) | ||||||
|
Elimination of Fannie Mae MBS held in portfolio
|
1,006 | 943 | 63 | |||||||||
|
Total debt securities of consolidated trusts held by third
parties
|
(3,605 | ) | (379 | ) | (3,226 | ) | ||||||
|
Total interest expense
|
(4,502 | ) | 143 | (4,645 | ) | |||||||
|
Net interest income
|
$ | 2,171 | $ | (613 | ) | $ | 2,784 | |||||
| (1) | Combined rate/volume variances are allocated to both rate and volume based on the relative size of each variance. | |
| (2) | Includes cash equivalents. |
Net interest income increased in the first quarter of 2011, as
compared with the first quarter of 2010, due to lower interest
expense on debt, which was partially offset by lower interest
income on loans and securities. The primary drivers of this
change were:
| • | a reduction in the interest expense on debt of consolidated trusts as we purchased the majority of delinquent loans from our MBS trusts after the first quarter of 2010; | |
| • | lower interest expense on funding debt as lower borrowing rates allowed us to replace higher-cost debt with lower-cost debt; | |
| • | a decrease in volume of our mortgage securities, as we continue to manage our portfolio requirements; and | |
| • | lower yields on mortgage loans as new business acquisitions continue to replace higher-yielding loans with loans issued at lower mortgage rates. The reduction in interest income on loans from lower yields was partially offset by a reduction in the amount of interest income not recognized for nonaccrual mortgage loans, due to a decline in the balance of nonaccrual loans on our condensed consolidated balance sheets as we continue to complete a high number of loan modifications and foreclosures. |
For the first quarter of 2011, interest income that we did not
recognize for nonaccrual mortgage loans, net of recoveries, was
$1.6 billion, which resulted in a 20 basis point
reduction in net interest yield, compared with $2.7 billion
for the first quarter of 2010, which resulted in a 33 basis
point reduction in net interest yield. Of
19
Table of Contents
the $1.6 billion of interest income that we did not
recognize for nonaccrual mortgage loans for the first quarter of
2011, $1.4 billion was related to the unsecuritized
mortgage loans that we owned during the period. Of the
$2.7 billion of interest income that we did not recognize
for nonaccrual mortgage loans for the first quarter of 2010,
$566 million was related to the unsecuritized mortgage
loans that we own.
For a discussion of the interest income from the assets we have
purchased and the interest expense from the debt we have issued,
see the discussion of our Capital Markets group’s net
interest income in “Business Segment Results.”
Fair
Value Gains (Losses), Net
Table 9 presents the components of our fair value gains and
losses.
Table
9: Fair Value Gains (Losses), Net
|
For the Three Months
|
||||||||||||
| Ended March 31, | ||||||||||||
| 2011 | 2010 | |||||||||||
| (Dollars in millions) | ||||||||||||
|
Risk management derivatives fair value gains (losses)
attributable to:
|
||||||||||||
|
Net contractual interest expense accruals on interest rate swaps
|
$ | (635 | ) | $ | (835 | ) | ||||||
|
Net change in fair value during the period
|
751 | (1,326 | ) | |||||||||
|
Total risk management derivatives fair value gains (losses), net
|
116 | (2,161 | ) | |||||||||
|
Mortgage commitment derivatives fair value gains (losses), net
|
23 | (601 | ) | |||||||||
|
Total derivatives fair value gains (losses), net
|
139 | (2,762 | ) | |||||||||
|
Trading securities gains, net
|
225 | 1,058 | ||||||||||
|
Other
|
(75 | ) | (1 | ) | ||||||||
|
Fair value gains (losses), net
|
$ | 289 | $ | (1,705 | ) | |||||||
| 2011 | 2010 | |||||||||||
|
5-year
swap
interest rate:
|
||||||||||||
|
As of January 1
|
2.18 | % | 2.98 | % | ||||||||
|
As of March 31
|
2.47 | 2.73 | ||||||||||
Risk
Management Derivatives Fair Value Gains (Losses),
Net
We supplement our issuance of debt securities with derivative
instruments to further reduce duration and prepayment risks. We
recorded risk management derivative fair value gains in the
first quarter of 2011 primarily as a result of an increase in
the fair value of our pay-fixed derivatives due to an increase
in swap interest rates during the first quarter of 2011, which
was partially offset by fair value losses due to time decay on
our purchased options.
We recorded risk management 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 the fair value of our
pay-fixed derivatives due to a decline in swap interest rates;
and (3) time decay on our purchased options.
We present, by derivative instrument type, the fair value gains
and losses on our derivatives for the three months ended
March 31, 2011 and 2010 in “Note 9, Derivative
Instruments.”
Mortgage
Commitment Derivatives Fair Value Gains (Losses),
Net
Commitments to purchase or sell some mortgage-related securities
and to purchase single-family mortgage loans are generally
accounted for as derivatives. For open mortgage commitment
derivatives, we include
20
Table of Contents
changes in their fair value in our condensed consolidated
statements of operations and comprehensive loss. When derivative
purchase commitments settle, we include the fair value of the
commitment on the settlement date in the cost basis of the loan
or security we purchase. When derivative commitments to sell
securities settle, we include the fair value of the commitment
on the settlement date in the cost basis of the security we
sell. Purchases of securities issued by our consolidated MBS
trusts are treated as extinguishments of debt; we recognize the
fair value of the commitment on the settlement date as a
component of debt extinguishment gains and losses. Sales of
securities issued by our consolidated MBS trusts are treated as
issuances of consolidated debt; we recognize the fair value of
the commitment on the settlement date as a component of debt in
the cost basis of the debt issued.
We recognized gains on our mortgage commitments in the first
quarter of 2011 primarily due to gains on commitments to sell
mortgage-related securities as a result of a decrease in prices
as interest rates increased during the commitment period.
We recognized losses on our mortgage commitments in the first
quarter of 2010 primarily due to losses on commitments to sell
mortgage-related securities as a result of an increase in prices
as interest rates decreased during the commitment period.
Trading
Securities Gains (Losses), Net
The gains from our trading securities in the first quarter of
2011 and 2010 were primarily driven by the narrowing of credit
spreads on commercial mortgage-backed securities
(“CMBS”); gains in the first quarter of 2010 were also
driven by a decrease in interest rates.
Credit-Related
Expenses
We refer to our provision for loan losses and the provision for
guaranty losses collectively as our “provision for credit
losses.” Credit-related expenses consist of our provision
for credit losses and foreclosed property expense.
Provision
for Credit Losses
Our total loss reserves provide for an estimate of credit losses
incurred in our guaranty book of business as of each balance
sheet date. We establish our loss reserves through the provision
for credit losses for losses that we believe have been incurred
and will eventually be reflected over time in our charge-offs.
When we determine that a loan is uncollectible, typically upon
foreclosure, we record a charge-off against our loss reserves.
We record recoveries of previously charged-off amounts as a
reduction to charge-offs, which results in an increase to our
loss reserves.
Table 10 displays the components of our total loss reserves and
our total fair value losses previously recognized on loans
purchased out of MBS trusts reflected in our condensed
consolidated balance sheets. Because these fair value losses
lowered our recorded loan balances, we have fewer inherent
losses in our guaranty book of business and consequently require
lower total loss reserves. For these reasons, we consider these
fair value losses as an “effective reserve,” apart
from our total loss reserves, to the extent that we expect to
realize credit losses on the acquired loans in the future. We
estimate that approximately two-thirds of this amount, as of
March 31, 2011, represents credit losses we expect to
realize in the future and approximately one-third will
eventually be recovered through our condensed consolidated
statements of operations and comprehensive loss, primarily as
net interest income if the loan cures or as foreclosed property
income if the sale of the collateral exceeds the recorded
investment in the credit-impaired loan. How much of these fair
value losses we expect to realize as credit losses depends
primarily on home prices and loss severity. We exclude these
fair value losses from our credit loss calculation as described
in “Credit Loss Performance Metrics.”
21
Table of Contents
Table
10: Total Loss Reserves
| As of | ||||||||
| March 31, 2011 | December 31, 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Allowance for loan losses
|
$ | 67,557 | $ | 61,556 | ||||
|
Reserve for guaranty
losses
(1)
|
257 | 323 | ||||||
|
Combined loss reserves
|
67,814 | 61,879 | ||||||
|
Allowance for accrued interest receivable
|
2,930 | 3,414 | ||||||
|
Allowance for preforeclosure property taxes and insurance
receivable
(2)
|
1,356 | 958 | ||||||
|
Total loss reserves
|
72,100 | 66,251 | ||||||
|
Fair value losses previously recognized on acquired credit
impaired
loans
(3)
|
18,457 | 19,171 | ||||||
|
Total loss reserves and fair value losses previously recognized
on acquired credit-impaired loans
|
$ | 90,557 | $ | 85,422 | ||||
| (1) | Amount included in “Other liabilities” in our condensed consolidated balance sheets. | |
| (2) | Amount included in “Other assets” in our condensed consolidated balance sheets. | |
| (3) | Represents the fair value losses on loans purchased out of MBS trusts reflected in our condensed consolidated balance sheets. |
We refer to our allowance for loan losses and reserve for
guaranty losses collectively as our combined loss reserves. We
summarize the changes in our combined loss reserves in Table 11.
22
Table of Contents
Table
11: Allowance for Loan Losses and Reserve for
Guaranty Losses (Combined Loss Reserves)
| For the Three Months Ended March 31, | ||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||
|
Of
|
Of
|
Of
|
Of
|
|||||||||||||||||||||
|
Fannie
|
Consolidated
|
Fannie
|
Consolidated
|
|||||||||||||||||||||
| Mae | Trusts | Total | Mae | Trusts | Total | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Changes in combined loss reserves:
|
||||||||||||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||||||
|
Beginning balance
|
$ | 48,530 | $ | 13,026 | $ | 61,556 | $ | 8,078 | $ | 1,847 | $ | 9,925 | ||||||||||||
|
Adoption of new accounting standards
|
— | — | — | — | 43,576 | 43,576 | ||||||||||||||||||
|
Provision for loan losses
|
7,159 | 3,428 | 10,587 | 6,271 | 5,668 | 11,939 | ||||||||||||||||||
|
Charge-offs
(1)
|
(5,705 | ) | (448 | ) | (6,153 | ) | (1,705 | ) | (3,455 | ) | (5,160 | ) | ||||||||||||
|
Recoveries
|
530 | 952 | 1,482 | 97 | 277 | 374 | ||||||||||||||||||
|
Transfers
(2)
|
3,207 | (3,207 | ) | — | 13,855 | (13,855 | ) | — | ||||||||||||||||
|
Net
reclassifications
(3)
|
(13 | ) | 98 | 85 | (921 | ) | 836 | (85 | ) | |||||||||||||||
|
Ending
balance
(4)
|
$ | 53,708 | $ | 13,849 | $ | 67,557 | $ | 25,675 | $ | 34,894 | $ | 60,569 | ||||||||||||
|
Reserve for guaranty losses:
|
||||||||||||||||||||||||
|
Beginning balance
|
$ | 323 | $ | — | $ | 323 | $ | 54,430 | $ | — | $ | 54,430 | ||||||||||||
|
Adoption of new accounting standards
|
— | — | — | (54,103 | ) | — | (54,103 | ) | ||||||||||||||||
|
Benefit for guaranty losses
|
(33 | ) | — | (33 | ) | (36 | ) | — | (36 | ) | ||||||||||||||
|
Charge-offs
|
(35 | ) | — | (35 | ) | (61 | ) | — | (61 | ) | ||||||||||||||
|
Recoveries
|
2 | — | 2 | 3 | — | 3 | ||||||||||||||||||
|
Ending balance
|
$ | 257 | $ | — | $ | 257 | $ | 233 | $ | — | $ | 233 | ||||||||||||
|
Combined loss reserves:
|
||||||||||||||||||||||||
|
Beginning balance
|
$ | 48,853 | $ | 13,026 | $ | 61,879 | $ | 62,508 | $ | 1,847 | $ | 64,355 | ||||||||||||
|
Adoption of new accounting standards
|
— | — | — | (54,103 | ) | 43,576 | (10,527 | ) | ||||||||||||||||
|
Total provision for credit losses
|
7,126 | 3,428 | 10,554 | 6,235 | 5,668 | 11,903 | ||||||||||||||||||
|
Charge-offs
(1)
|
(5,740 | ) | (448 | ) | (6,188 | ) | (1,766 | ) | (3,455 | ) | (5,221 | ) | ||||||||||||
|
Recoveries
|
532 | 952 | 1,484 | 100 | 277 | 377 | ||||||||||||||||||
|
Transfers
(2)
|
3,207 | (3,207 | ) | — | 13,855 | (13,855 | ) | — | ||||||||||||||||
|
Net
reclassifications
(3)
|
(13 | ) | 98 | 85 | (921 | ) | 836 | (85 | ) | |||||||||||||||
|
Ending
balance
(4)
|
$ | 53,965 | $ | 13,849 | $ | 67,814 | $ | 25,908 | $ | 34,894 | $ | 60,802 | ||||||||||||
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
|
Allocation of combined loss reserves:
|
||||||||
|
Balance at end of each period attributable to:
|
||||||||
|
Single-family
|
$ | 66,240 | $ | 60,163 | ||||
|
Multifamily
|
1,574 | 1,716 | ||||||
|
Total
|
$ | 67,814 | $ | 61,879 | ||||
|
Single-family and multifamily combined loss reserves as a
percentage of applicable guaranty book of business:
|
||||||||
|
Single-family
|
2.29 | % | 2.10 | % | ||||
|
Multifamily
|
0.83 | 0.91 | ||||||
|
Combined loss reserves as a percentage of:
|
||||||||
|
Total guaranty book of business
|
2.20 | % | 2.03 | % | ||||
|
Total nonperforming loans
|
32.60 | 28.81 | ||||||
23
Table of Contents
| (1) | Includes accrued interest of $386 million and $579 million for the three months ended March 31, 2011 and 2010, respectively. | |
| (2) | Includes transfers from trusts for delinquent loan purchases. | |
| (3) | Represents reclassification of amounts recorded in provision for loan losses and charge-offs that relate to allowances for accrued interest receivable and preforeclosure property taxes and insurance receivable from borrowers. | |
| (4) | Includes $412 million and $903 million as of March 31, 2011 and 2010, respectively, for acquired credit-impaired loans. |
The continued stress on a broad segment of borrowers from
continued high levels of unemployment and underemployment and
the prolonged decline in home prices have caused our total loss
reserves to remain high for the past several quarters. Our total
loss reserves increased in the first quarter of 2011 due to:
(1) a decline in home prices and increase in initial
charge-off severity during the period, (2) the number of
loans that entered a trial modification period during the
quarter, (3) a decline in future expected home prices and
(4) loans continuing to remain delinquent for an extended
period of time. Our provision for credit losses decreased in the
first quarter of 2011 compared with the first quarter of 2010,
primarily because our total loss reserves increased less in the
first quarter of 2011 than in the first quarter of 2010.
Because of the substantial volume of loan modifications we
completed and the number of loans that entered a trial
modification period in 2010 and the first quarter of 2011, more
than half of our total loss reserves is attributable to
individual impairment rather than the collective reserve for
loan losses. Individual impairment for a troubled debt
restructuring (“TDR”) is based on the restructured
loan’s expected cash flows over the life of the loan,
taking into account the effect of any concessions granted to the
borrower, discounted at the loan’s original effective
interest rate. The model includes forward-looking assumptions
using multiple scenarios of the future economic environment,
including interest rates and home prices. Based on the structure
of the modifications, in particular the size of the concession
granted, and the performance of modified loans combined with the
forward-looking assumptions used in our model, the allowance
calculated for an individually impaired loan has generally been
greater than the allowance that would be calculated under the
collective reserve. Further, if we expect to recover our
recorded investment in an individually impaired loan through
probable foreclosure of the underlying collateral, we measure
the impairment based on the fair value of the collateral. The
loss reserve for a greater portion of our population of
individually impaired loans was based on the fair value of the
underlying collateral as of March 31, 2011 than as of
March 31, 2010.
Additionally, while delinquency rates on loans in our
single-family guaranty book of business have decreased,
borrowers’ inability or unwillingness to make their
mortgage payments, along with delays in foreclosures, continue
to cause loans to remain seriously delinquent for an extended
period of time as shown in “Table 35: Delinquency Status of
Single-Family Conventional Loans.”
For additional discussion of our loan workout activities,
delinquent loans and concentrations, see “Risk
Management—Credit Risk Management—Single-Family
Mortgage Credit Risk Management—Problem Loan
Management.” For a discussion of our charge-offs, see
“Credit Loss Performance Metrics.”
Our balance of nonperforming single-family loans remained high
as of March 31, 2011 due to both high levels of
delinquencies and an increase in TDRs. When a TDR is executed,
the loan status becomes current, but the loan will continue to
be classified as a nonperforming loan as the loan is not
performing in accordance with the original terms. The
composition of our nonperforming loans is shown in Table 12. For
information on the impact of TDRs and other individually
impaired loans on our allowance for loan losses, see
“Note 3, Mortgage Loans.”
24
Table of Contents
Table
12: Nonperforming Single-Family and Multifamily
Loans
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
On-balance sheet nonperforming loans including loans in
consolidated Fannie Mae MBS trusts:
|
||||||||
|
Nonaccrual loans
|
$ | 141,623 | $ | 152,756 | ||||
|
Troubled debt restructurings on accrual
status
(1)
|
66,342 | 61,907 | ||||||
|
Total on-balance sheet nonperforming loans
|
207,965 | 214,663 | ||||||
|
Off-balance sheet nonperforming loans in unconsolidated Fannie
Mae MBS
trusts
(2)
|
83 | 89 | ||||||
|
Total nonperforming loans
|
$ | 208,048 | $ | 214,752 | ||||
|
Accruing on-balance sheet loans past due 90 days or
more
(3)
|
$ | 850 | $ | 896 | ||||
|
For the
|
For The
|
|||||||
|
Three Months Ended
|
Year Ended
|
|||||||
|
March 31,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Interest related to on-balance sheet nonperforming loans:
|
||||||||
|
Interest income
forgone
(4)
|
$ | 2,827 | $ | 8,185 | ||||
|
Interest income recognized for the
period
(5)
|
1,388 | 7,995 | ||||||
| (1) | Includes HomeSaver Advance first-lien loans on accrual status. | |
| (2) | Represents loans that would meet our criteria for nonaccrual status if the loans had been on-balance sheet. Includes HomeSaver Advance first-lien loans. | |
| (3) | Recorded investment in loans as of the end of each period that are 90 days or more past due and continuing to accrue interest. The majority of this amount consists of 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. Includes primarily amounts accrued while loan was performing and cash payments received on nonaccrual loans. |
Foreclosed
Property Expense (Income)
The shift to foreclosed property expense during the first
quarter of 2011 from foreclosed property income during the first
quarter of 2010 was primarily due to higher REO inventory as of
March 31, 2011 compared with March 31, 2010 and an
increase in valuation adjustments that reduced the value of our
REO inventory. The foreclosed property income in the first
quarter of 2010 was primarily due to the recognition of
$562 million in fees from the cancellation and
restructuring of some of our mortgage insurance coverage; there
were no such fees recognized in the first quarter of 2011. 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.
Credit
Loss Performance Metrics
Our credit-related expenses should be considered in conjunction
with our credit loss performance. Our credit loss performance
metrics, however, are not defined terms within GAAP and may not
be calculated in the same manner as similarly titled measures
reported by other companies. Because management does not view
changes in the fair value of our mortgage loans as credit
losses, we adjust our credit loss performance metrics for the
impact associated with 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
25
Table of Contents
deterioration in the credit quality of our mortgage-related
securities and accretion of interest income on acquired
credit-impaired loans from credit losses.
Historically, management viewed our credit loss performance
metrics, which include our historical credit losses and our
credit loss ratio, as indicators of the effectiveness of our
credit risk management strategies. As our credit losses are now
at such high levels, management has shifted focus to our loss
mitigation strategies and the reduction of our total credit
losses and away from the credit loss ratio to measure
performance. However, we believe that credit loss performance
metrics may be useful to investors as the losses are presented
as a percentage of our book of business and have historically
been used by analysts, investors and other companies within the
financial services industry. They also provide a consistent
treatment of credit losses for on- and off-balance sheet loans.
Moreover, by presenting credit losses with and without the
effect of fair value losses associated with the acquisition of
credit-impaired loans, investors are able to evaluate our credit
performance on a more consistent basis among periods. Table 13
details the components of our credit loss performance metrics as
well as our average single-family and multifamily default rate
and initial charge-off severity rate.
Table
13: Credit Loss Performance Metrics
| For the Three Months Ended March 31, | ||||||||||||||||
| 2011 | 2010 | |||||||||||||||
| Amount | Ratio (1) | Amount | Ratio (1) | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Charge-offs, net of
recoveries
(2)
|
$ | 4,704 | 61.2 | bp | $ | 4,844 | 62.9 | bp | ||||||||
|
Foreclosed property (income)
expense
(2)
|
488 | 6.4 | (19 | ) | (0.2 | ) | ||||||||||
|
Credit losses including the effect of fair value losses on
acquired credit-impaired loans
|
5,192 | 67.6 | 4,825 | 62.7 | ||||||||||||
|
Less: Fair value losses resulting from acquired credit-impaired
loans
|
(31 | ) | (0.4 | ) | (58 | ) | (0.8 | ) | ||||||||
|
Plus: Impact of acquired credit-impaired loans on charge-offs
and foreclosed property expense
|
525 | 6.9 | 380 | 4.9 | ||||||||||||
|
Credit losses and credit loss ratio
|
$ | 5,686 | 74.1 | bp | $ | 5,147 | 66.8 | bp | ||||||||
|
Credit losses attributable to:
|
||||||||||||||||
|
Single-family
|
$ | 5,604 | $ | 5,062 | ||||||||||||
|
Multifamily
|
82 | 85 | ||||||||||||||
|
Total
|
$ | 5,686 | $ | 5,147 | ||||||||||||
|
Average single-family default rate
|
0.44 | % | 0.46 | % | ||||||||||||
|
Average single-family initial charge-off severity
rate
(3)
|
35.93 | % | 35.40 | % | ||||||||||||
|
Average multifamily default rate
|
0.12 | % | 0.09 | % | ||||||||||||
|
Average multifamily initial charge-off severity
rate
(3)
|
36.85 | % | 40.25 | % | ||||||||||||
| (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) | In the first quarter of 2011, expenses relating to preforeclosure taxes and insurance were recorded as charge-offs. These expenses were recorded as foreclosed property expense in the first quarter of 2010. The impact of including these costs in charge-offs for the first quarter of 2011 was 5.7 basis points. | |
| (3) | Single-family and multifamily rates exclude fair value losses on credit-impaired loans acquired from MBS trusts and any costs, gains or losses associated with REO after initial acquisition through final disposition; single-family rate excludes charge-offs from preforeclosure sales. |
The increase in our credit losses is primarily due to an
increase in foreclosed property expense. During the first
quarter of 2010, we recognized $562 million of fees from
the cancellation and restructuring of some of our mortgage
insurance as a reduction to foreclosed property expense; no such
fees were received in the first quarter of 2011. In addition,
while defaults remain high, defaults in the first quarter of
2011 were lower than
26
Table of Contents
they would have been due to delays caused by the servicer
foreclosure process deficiencies and the resulting foreclosure
pause.
Our 2009, 2010 and first quarter of 2011 vintages accounted for
approximately 1% of our single-family credit losses for the
first quarter of 2011. 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 FHFA’s predecessor,
the Office of Federal Housing Enterprise Oversight, we are
required to disclose on a quarterly basis the present value of
the change in future expected credit losses from our existing
single-family guaranty book of business from an immediate 5%
decline in single-family home prices for the entire United
States. Although other provisions of the September 2005
agreement were suspended in March 2009 by FHFA until further
notice, this disclosure requirement was not suspended. For
purposes of this calculation, we assume that, after the initial
5% shock, home price growth rates return to the average of the
possible growth rate paths used in our internal credit pricing
models. The sensitivity results represent the difference between
future expected credit losses under our base case scenario,
which is derived from our internal home price path forecast, and
a scenario that assumes an instantaneous nationwide 5% decline
in home prices.
Table 14 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 enhancements.
Table
14: Single-Family Credit Loss
Sensitivity
(1)
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Gross single-family credit loss sensitivity
|
$ | 26,774 | $ | 25,937 | ||||
|
Less: Projected credit risk sharing proceeds
|
(2,581 | ) | (2,771 | ) | ||||
|
Net single-family credit loss sensitivity
|
$ | 24,193 | $ | 23,166 | ||||
|
Outstanding single-family whole loans and Fannie Mae MBS
|
$ | 2,815,575 | $ | 2,782,512 | ||||
|
Single-family net credit loss sensitivity as a percentage of
outstanding single-family whole loans and Fannie Mae MBS
|
0.86 | % | 0.83 | % | ||||
| (1) | Represents total economic credit losses, which consist of credit losses and forgone interest. Calculations are based on 97% of our total single-family guaranty book of business as of both March 31, 2011 and December 31, 2010. 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. |
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.
27
Table of Contents
Financial
Impact of the Making Home Affordable Program on Fannie
Mae
Home
Affordable Refinance Program
Because we already own or guarantee the original mortgages that
we refinance under HARP, our expenses under that program consist
mostly of limited administrative costs.
Home
Affordable Modification Program
We incurred impairments related to loans that had entered a
trial modification under the Home Affordable Modification
Program (“HAMP”) of $2.7 billion during the first
quarter of 2011 compared with $7.6 billion during the first
quarter of 2010. These include impairments on 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. These impairments
have been included in the calculation of our provision for loan
losses in our condensed consolidated results of operations and
comprehensive loss. The impairments do not include the reduction
in our collective loss reserves which occurred as a result of
beginning to individually assess the loan for impairment upon
entering a trial modification. Please see
“MD&A—Consolidated Results of
Operations—Financial Impact of the Making Home Affordable
Program on Fannie Mae” in our 2010
Form 10-K
for a detailed discussion on these impairments.
We paid or accrued incentive fees for servicers of
$80 million during the first quarter of 2011 compared with
$68 million during the first quarter of 2010. These fees
were related to loans modified under HAMP, which we recorded as
part of “Other expenses.” Borrower incentive payments
are included in the calculation of our allowance for loan losses
for individually impaired loans. Additionally, our expenses
under HAMP also include administrative costs.
Overall
Impact of the Making Home Affordable Program
Because of the unprecedented nature of the circumstances that
led to the Making Home Affordable Program, we cannot quantify
what the impact would have been on Fannie Mae if the Making Home
Affordable Program had not been introduced. We do not know how
many loans we would have modified under alternative programs,
what the terms or costs of those modifications would have been,
how many foreclosures would have resulted nationwide, and at
what pace, or the impact on housing prices if the program had
not been put in place. As a result, the amounts we discuss above
are not intended to measure how much the program is costing us
in comparison to what it would have cost us if we did not have
the program at all.
BUSINESS
SEGMENT RESULTS
Results of our three business segments are intended to reflect
each segment as if it were a stand-alone business. Under our
segment reporting structure, the sum of the results for our
three business segments does not equal our condensed
consolidated results of operations as we separate the activity
related to our consolidated trusts from the results generated by
our three segments. In addition, because we apply accounting
methods that differ from our condensed consolidated results for
segment reporting purposes, we include an
eliminations/adjustments category to reconcile our business
segment results and the activity related to our consolidated
trusts to our condensed consolidated results of operations. We
describe the management reporting and allocation process used to
generate our segment results in our 2010
Form 10-K
in “Notes to Consolidated Financial
Statements—Note 15, Segment Reporting.” We are
working on reorganizing our company by function rather than by
business in order to improve our operational efficiencies and
effectiveness. When we begin operating under a functional
structure, we may change some of our management reporting and
how we report our business segment results.
In this section, we summarize our segment results for the first
quarters of 2011 and 2010 in the tables below and provide a
comparative discussion of these results. This section should be
read together with our comparative discussion of our condensed
consolidated results of operations in “Consolidated Results
of Operations.” See “Note 10, Segment
Reporting” of this report for a reconciliation of our
segment results to our condensed consolidated results.
28
Table of Contents
Single-Family
Business Results
Table 15 summarizes the financial results of our Single-Family
business for the periods indicated. 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, net interest expense and administrative
expenses.
Table
15: Single-Family Business Results
| For the Three Months Ended March 31, | ||||||||||||
| 2011 | 2010 | Variance | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Statement of operations
data:
(1)
|
||||||||||||
|
Net interest expense
|
$ | (898 | ) | $ | (1,945 | ) | $ | 1,047 | ||||
|
Guaranty fee
income
(2)
|
1,871 | 1,768 | 103 | |||||||||
|
Credit-related
expenses
(3)
|
(11,106 | ) | (11,926 | ) | 820 | |||||||
|
Other
expenses
(4)
|
(586 | ) | (513 | ) | (73 | ) | ||||||
|
Loss before federal income taxes
|
(10,719 | ) | (12,616 | ) | 1,897 | |||||||
|
Benefit (provision) for federal income taxes
|
(2 | ) | 51 | (53 | ) | |||||||
|
Net loss attributable to Fannie Mae
|
$ | (10,721 | ) | $ | (12,565 | ) | $ | 1,844 | ||||
|
Other key performance data:
|
||||||||||||
|
Single-family effective guaranty fee rate (in basis
points)
(5)
|
26.0 | 24.4 | ||||||||||
|
Single-family average charged guaranty fee on new acquisitions
(in basis
points)
(6)
|
26.1 | 26.9 | ||||||||||
|
Average single-family guaranty book of
business
(7)
|
$ | 2,881,300 | $ | 2,893,988 | ||||||||
|
Single-family Fannie Mae MBS
issues
(8)
|
$ | 166,673 | $ | 124,358 | ||||||||
| (1) | Certain prior period amounts have been reclassified to conform to the current period presentation. | |
| (2) | Guaranty fee income is included in fee and other income in our condensed consolidated statements of operations and comprehensive loss. | |
| (3) | Consists of the provision for loan losses, provision for guaranty losses and foreclosed property income or expense. | |
| (4) | Consists of investment gains and losses, fee and other income, administrative expenses and other expenses. | |
| (5) | Calculated based on annualized Single-Family segment guaranty fee income divided by the average single-family guaranty book of business, expressed in basis points. | |
| (6) | Calculated based on the average contractual fee rate for our single-family guaranty arrangements entered into during the period plus the recognition of any upfront cash payments ratably over an estimated average life, expressed in basis points. | |
| (7) | Consists of single-family mortgage loans held in our mortgage portfolio, single-family mortgage loans held by consolidated trusts, single-family Fannie Mae MBS issued from unconsolidated trusts held by either third parties or within our retained portfolio, and other credit enhancements that we provide on single-family mortgage assets. Excludes non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a guaranty. | |
| (8) | Reflects unpaid principal balance of Fannie Mae MBS issued and guaranteed by the Single-Family segment during the period. The three months ended March 31, 2010 includes Housing Finance Agency (HFA) new issue bond program issuances of $3.1 billion. There were no HFA new issue bond program issuances in 2011. |
Net
Interest Expense
Net interest expense for the Single-Family business segment
includes: (1) the cost to reimburse the Capital Markets
group for interest income not recognized for loans in our
mortgage portfolio on nonaccrual status; (2) the cost to
reimburse MBS trusts for interest income not recognized for
loans in consolidated trusts on nonaccrual status; (3) cash
payments received on loans that have been placed on nonaccrual
status; and (4) an allocated cost of capital charge among
our three business segments. Net interest expense decreased in
the first quarter of 2011 compared with the first quarter of
2010 primarily due to a significant decrease in interest
29
Table of Contents
income not recognized for loans on nonaccrual status because of
a decline in the number of loans on nonaccrual status.
Guaranty
Fee Income
Guaranty fee income increased in the first quarter of 2011
compared with the first quarter of 2010 due to an increase in
the amortization of risk-based pricing adjustments.
Our average single-family guaranty book of business was
relatively flat period over period despite our continued high
market share because of the decline in U.S. residential
mortgage debt outstanding. There were fewer new mortgage
originations due to weakness in the housing market and an
increase in liquidations due to the high level of foreclosures.
Our estimated market share of new single-family mortgage-related
securities issuances, which is based on publicly available data
and excludes previously securitized mortgages, remained high at
48.6% for the first quarter of 2011.
Credit-Related
Expenses
Single-family credit-related expenses decreased in the first
quarter of 2011 compared with the first quarter of 2010,
primarily because our total single-family loss reserves
increased less in the first quarter of 2011 compared with the
first quarter of 2010.
Credit-related expenses and credit losses in the Single-Family
business represent the substantial majority of our consolidated
totals. We provide additional information on our credit-related
expenses in “Consolidated Results of
Operations—Credit-Related Expenses.”
Multifamily
Business Results
Table 16 summarizes the financial results of our Multifamily
business for the periods indicated. The primary sources of
revenue for our Multifamily business are guaranty fee income and
fee and other income. Expenses and other items that impact
income or loss primarily include credit-related expenses,
administrative expenses and net operating losses from our
partnership investments.
30
Table of Contents
Table
16: Multifamily Business Results
| For the Three Months Ended March 31, | ||||||||||||
| 2011 | 2010 | Variance | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Statement of operations data:
|
||||||||||||
|
Guaranty fee
income
(1)
|
$ | 209 | $ | 194 | $ | 15 | ||||||
|
Fee and other income
|
58 | 35 | 23 | |||||||||
|
Losses from partnership
investments
(2)
|
(12 | ) | (58 | ) | 46 | |||||||
|
Credit-related
income
(3)
|
64 | 42 | 22 | |||||||||
|
Other
expenses
(4)
|
(67 | ) | (101 | ) | 34 | |||||||
|
Income before federal income taxes
|
252 | 112 | 140 | |||||||||
|
Provision for federal income taxes
|
(5 | ) | (13 | ) | 8 | |||||||
|
Net income attributable to Fannie Mae
|
$ | 247 | $ | 99 | $ | 148 | ||||||
|
Other key performance data:
|
||||||||||||
|
Multifamily effective guaranty fee rate (in basis
points)
(5)
|
44.0 | 41.8 | ||||||||||
|
Credit loss performance ratio (in basis
points)
(6)
|
17.3 | 18.3 | ||||||||||
|
Average multifamily guaranty book of
business
(7)
|
$ | 190,012 | $ | 185,703 | ||||||||
|
Multifamily new business
volumes
(8)
|
5,024 | 4,162 | ||||||||||
|
Multifamily units financed from new business
volumes
(9)
|
83,000 | 61,000 | ||||||||||
|
Fannie Mae multifamily MBS
issuances
(10)
|
8,581 | 4,073 | ||||||||||
|
Fannie Mae multifamily structured securities issuances (issued
by Capital Markets
group)
(11)
|
1,400 | 1,821 | ||||||||||
|
Additional net interest income earned on Fannie Mae multifamily
mortgage loans and MBS (included in Capital Markets Group’s
results)
(12)
|
230 | 205 | ||||||||||
|
Average Fannie Mae multifamily mortgage loans and MBS in Capital
Markets Group’s
portfolio
(13)
|
114,375 | 117,709 | ||||||||||
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Multifamily serious delinquency rate
|
0.64 | % | 0.71 | % | ||||
|
Percentage of guaranty book of business with credit enhancement
|
90 | 89 | ||||||
|
Fannie Mae percentage of total multifamily mortgage debt
outstanding
(14)
|
20.5 | 20.1 | ||||||
|
Fannie Mae multifamily MBS
outstanding
(15)
|
$ | 83,145 | $ | 77,251 | ||||
| (1) | Guaranty fee income is included in fee and other income in our condensed consolidated statements of operations and comprehensive loss. | |
| (2) | Losses from partnership investments is included in other expenses in our condensed consolidated statements of operations and comprehensive loss. | |
| (3) | Consists of the benefit for loan losses, benefit for guaranty losses and foreclosed property expense. | |
| (4) | Consists of net interest income or expense, investment gains, other income or expenses, and administrative expenses. | |
| (5) | Calculated based on annualized Multifamily segment guaranty fee income divided by the average multifamily guaranty book of business, expressed in basis points. | |
| (6) | Calculated based on the annualized credit losses divided by the average multifamily guaranty book of business, expressed in basis points. | |
| (7) | 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. |
31
Table of Contents
| (8) | Reflects unpaid principal balance of Fannie Mae MBS issued (excluding portfolio securitizations) and loans purchased during the period. The three months ended March 31, 2010 includes $1.0 billion of HFA new issue bond program issuances. There were no HFA new issue bond program issuances for the three months ended March 31, 2011. | |
| (9) | Excludes HFA new issue bond program. | |
| (10) | Reflects unpaid principal balance of Fannie Mae MBS issued during the period. Includes: (a) issuances of new MBS volumes, (b) $3.5 billion of Fannie Mae portfolio securitization transactions and (c) $119 million of conversion of adjustable rate loans to fixed rate loans and DMBS securities to MBS securities for the three months ended March 31, 2011. There were no Fannie Mae portfolio securitizations transactions or conversions of adjustable rate loans to fixed rate loans and DMBS securities to MBS securities for the three months ended March 31, 2010. | |
| (11) | Reflects original unpaid principal balance of out-of-portfolio structured securities issuances by our Capital Markets Group. | |
| (12) | Interest expense estimate based on allocated duration matched funding costs. Net interest income was reduced by guaranty fees allocated to Multifamily from the Capital Markets Group on multifamily loans in Fannie Mae’s portfolio. | |
| (13) | Based on unpaid principal balance. | |
| (14) | Includes mortgage loans and Fannie Mae MBS issued and guaranteed by the Multifamily segment. Information as of March 31, 2011 is through December 31, 2010 and is based on the Federal Reserve’s March 2011 mortgage debt outstanding release, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for multifamily residences. Information as of December 31, 2010 is through September 30, 2010. | |
| (15) | Includes $23.4 billion and $19.9 billion of Fannie Mae multifamily MBS held in the mortgage portfolio, the vast majority of which have been consolidated to loans in our condensed consolidated balance sheet, as of March 31, 2011 and December 31, 2010, respectively; and $1.4 billion of bonds issued by HFAs as of both March 31, 2011 and December 31, 2010. |
Guaranty
Fee Income
Multifamily guaranty fee income increased in the first quarter
of 2011 compared with the first quarter of 2010 primarily due to
higher fees charged on new acquisitions in recent years. New
acquisitions with higher guaranty fees have become an
increasingly large part of our book of business.
Credit-Related
Income
Multifamily credit-related income increased in the first quarter
of 2011 compared with the first quarter of 2010 primarily due to
a modest decrease in the allowance for loan losses as the
multifamily sector continued to show improvement.
Multifamily credit losses were relatively flat period over
period at $82 million in the first quarter of 2011 compared
with $85 million in the first quarter of 2010. While
national multifamily market fundamentals improved during the
first quarter of 2011, certain local markets and properties
continue to exhibit weak fundamentals. As a result, we may
continue to experience losses commensurate with 2010 levels for
the remainder of 2011 despite generally improving market
fundamentals.
Capital
Markets Group Results
Table 17 summarizes the financial results of our Capital Markets
group for the periods indicated. Following the table we discuss
the Capital Markets group’s financial results and describe
the Capital Markets group’s mortgage portfolio. For a
discussion on the debt issued by the Capital Markets group to
fund its investment activities, see “Liquidity and Capital
Management.” For a discussion on the derivative instruments
that Capital Markets uses to manage interest rate risk, see
“Consolidated Balance Sheet Analysis—Derivative
Instruments” in this report and “Risk
Management—Market Risk Management, Including Interest Rate
Risk Management—Derivative Instruments” and
“Notes to Consolidated Financial
Statements—Note 10, Derivative Instruments and Hedging
Activities” in our 2010
Form 10-K.
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, allocated
guaranty fee expense,
other-than-temporary
impairment and administrative expenses.
32
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Table
17: Capital Markets Group Results
|
For the Three Months
|
||||||||||||
| Ended March 31, | ||||||||||||
| 2011 | 2010 | Variance | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Statement of operations data:
|
||||||||||||
|
Net interest
income
(1)
|
$ | 3,710 | $ | 3,057 | $ | 653 | ||||||
|
Investment gains,
net
(2)
|
870 | 792 | 78 | |||||||||
|
Net
other-than-temporary
impairments
|
(44 | ) | (236 | ) | 192 | |||||||
|
Fair value gains (losses),
net
(3)
|
218 | (1,186 | ) | 1,404 | ||||||||
|
Fee and other income
|
75 | 104 | (29 | ) | ||||||||
|
Other
expenses
(4)
|
(553 | ) | (423 | ) | (130 | ) | ||||||
|
Income before federal income taxes
|
4,276 | 2,108 | 2,168 | |||||||||
|
Benefit for federal income taxes
|
5 | 29 | (24 | ) | ||||||||
|
Net income attributable to Fannie Mae
|
$ | 4,281 | $ | 2,137 | $ | 2,144 | ||||||
| (1) | Includes $2.0 billion and $795 million of contractual interest, excluding recoveries, on nonaccrual loans received from the Single-Family segment for the three months ended March 31, 2011 and 2010, respectively. 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. | |
| (2) | We include the securities that we own regardless of whether the trust has been consolidated in reporting of gains and losses on securitizations and sales of available-for-sale securities. | |
| (3) | Fair value gains or losses on trading securities include the trading securities that we own, regardless of whether the trust has been consolidated. | |
| (4) | Includes allocated guaranty fee expense, debt extinguishment gains or losses, net, administrative expenses, and other income or expenses. Gains or losses related to the extinguishment of debt issued by consolidated trusts are excluded from the Capital Markets group’s results because purchases of securities are recognized as such. |
Net
Interest Income
The Capital Markets group reports interest income and
amortization of cost basis adjustments only on securities and
loans that are held in our portfolio. For mortgage loans held in
our mortgage portfolio, when interest income is no longer
recognized in accordance with our nonaccrual accounting policy,
the Capital Markets group recognizes interest income
reimbursements that the group receives, primarily from
Single-Family, for the contractual interest due. The interest
expense recognized on the Capital Markets group’s statement
of operations is limited to our funding debt, which is reported
as “Debt of Fannie Mae” in our condensed consolidated
balance sheets. Net interest expense also includes a cost of
capital charge allocated among the three business segments.
The Capital Markets group’s net interest income increased
in the first quarter of 2011 compared with the first quarter of
2010 primarily due to a decline in funding costs as we replaced
higher cost debt with lower cost debt. This increase of net
interest income was partially offset by a decline in interest
income from our mortgage portfolio. Although our mortgage
portfolio loan balance increased, the reduction of our mortgage
securities balance and increase in the balance of nonperforming
loans, mainly loans modified in a TDR and our purchases of
delinquent loans from MBS trusts, caused the yield on our
portfolio and our interest income to decline. The reimbursements
of contractual interest due on nonaccrual loans, from the
Single-Family business, were a significant portion of the
Capital Markets group’s interest income during the first
quarter of 2011. However, the increase in these reimbursements
was offset by the decline in interest income on our
mortgage-related securities because our securities portfolio
balance has declined.
Additionally, Capital Markets’ net interest income and net
interest yield increased in the first quarter of 2011 and 2010
as a result of funds we received from Treasury under the senior
preferred stock purchase agreement
33
Table of Contents
because the cash received was used to reduce our debt and the
cost of these funds is included in dividends rather than
interest expense.
We supplement our issuance of debt with interest rate-related
derivatives to manage the prepayment and duration risk inherent
in our mortgage investments. The effect of these derivatives, in
particular the periodic net interest expense accruals on
interest rate swaps, is not reflected in Capital Markets’
net interest income but is included in our results as a
component of “Fair value gains (losses), net” and is
shown in “Table 9: Fair Value Gains (Losses), Net.” If
we had included the economic impact of adding the net
contractual interest accruals on our interest rate swaps in our
Capital Markets’ interest expense, Capital Markets’
net interest income would have decreased by $635 million in
the first quarter of 2011 compared with an $835 million
decrease in the first quarter of 2010.
Net
Other-Than-Temporary
Impairments
The net
other-than-temporary
impairments recognized by the Capital Markets group is generally
consistent with the amount reported in our condensed
consolidated results of operations. See “Note 5,
Investments in Securities” for information on our
other-than-temporary
impairments by major security type and primary drivers for
other-than-temporary
impairments recorded in the first quarter of 2011.
Fair
Value Gains (Losses), Net
The derivative gains and losses that are reported for the
Capital Markets group are consistent with the same gains and
losses reported in our condensed consolidated results of
operations. We discuss details of these components of fair value
gains and losses in “Consolidated Results of
Operations—Fair Value Gains (Losses), Net.”
The gains on our trading securities for the segment during the
first quarter of 2011 were attributable to a narrowing of
spreads on CMBS, partially offset by losses on agency MBS due to
an increase in interest rates during the period.
The gains on our trading securities for the segment during the
first quarter of 2010 were attributable to a narrowing of
spreads on CMBS and decreases in interest rates during the
period.
The
Capital Markets Group’s Mortgage Portfolio
The Capital Markets group’s mortgage portfolio consists of
mortgage-related securities and mortgage loans that we own.
Mortgage-related securities held by Capital Markets include
Fannie Mae MBS and non-Fannie Mae mortgage-related securities.
The Fannie Mae MBS that we own are maintained as securities on
the Capital Markets group’s balance sheets.
Mortgage-related assets held by consolidated MBS trusts are not
included in the Capital Markets group’s mortgage portfolio.
We are restricted by our senior preferred stock purchase
agreement with Treasury in the amount of mortgage assets that we
may own. Beginning on each December 31 and thereafter, we are
required to reduce our mortgage assets to 90% of the maximum
allowable amount that we were permitted to own as of December 31
of the immediately preceding calendar year, until the amount of
our mortgage assets reaches $250 billion. The maximum
allowable amount of mortgage assets we may own was reduced to
$810 billion as of December 31, 2010 and will be
reduced to $729 billion as of December 31, 2011. As of
March 31, 2011, we owned $757.6 billion in mortgage
assets, compared with $788.8 billion as of
December 31, 2010.
Table 18 summarizes our Capital Markets group’s mortgage
portfolio activity for the periods indicated.
34
Table of Contents
Table
18: Capital Markets Group’s Mortgage Portfolio
Activity
(1)
|
For the Three Months
|
||||||||
| Ended March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Total Capital Markets mortgage portfolio, beginning balance
as of January 1
|
$ | 788,771 | $ | 772,728 | ||||
|
Mortgage loans:
|
||||||||
|
Beginning balance as of January 1
|
427,074 | 281,162 | ||||||
|
Purchases
|
38,074 | 70,561 | ||||||
|
Securitizations
(2)
|
(23,983 | ) | (14,254 | ) | ||||
|
Liquidations
(3)
|
(19,309 | ) | (7,192 | ) | ||||
|
Mortgage loans, ending balance as of March 31
|
421,856 | 330,277 | ||||||
|
Mortgage securities:
|
||||||||
|
Beginning balance as of January 1
|
$ | 361,697 | $ | 491,566 | ||||
|
Purchases
(4)
|
5,090 | 29,186 | ||||||
|
Securitizations
(2)
|
23,983 | 14,254 | ||||||
|
Sales
|
(35,426 | ) | (79,784 | ) | ||||
|
Liquidations
(3)
|
(19,582 | ) | (20,690 | ) | ||||
|
Mortgage securities, ending balance as of March 31
|
335,762 | 434,532 | ||||||
|
Total Capital Markets mortgage portfolio, ending balance as
of March 31
|
$ | 757,618 | $ | 764,809 | ||||
| (1) | Based on unpaid principal balance. | |
| (2) | Includes portfolio securitization transactions that do not qualify for sale treatment under the accounting standards on the transfers of financial assets. | |
| (3) | Includes scheduled repayments, prepayments, foreclosures and lender repurchases. | |
| (4) | Includes purchases of Fannie Mae MBS issued by consolidated trusts. |
Table 19 shows the composition of the Capital Markets
group’s mortgage portfolio as of March 31, 2011 and
December 31, 2010.
35
Table of Contents
Table
19: Capital Markets Group’s Mortgage Portfolio
Composition
(1)
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Capital Markets group’s mortgage loans:
|
||||||||
|
Single-family loans
|
||||||||
|
Government insured or guaranteed
|
$ | 51,348 | $ | 51,783 | ||||
|
Conventional:
|
||||||||
|
Long-term, fixed-rate
|
239,723 | 237,096 | ||||||
|
Intermediate-term, fixed-rate
|
10,721 | 11,446 | ||||||
|
Adjustable-rate
|
29,496 | 31,526 | ||||||
|
Total single-family conventional
|
279,940 | 280,068 | ||||||
|
Total single-family loans
|
331,288 | 331,851 | ||||||
|
Multifamily loans
|
||||||||
|
Government insured or guaranteed
|
413 | 431 | ||||||
|
Conventional:
|
||||||||
|
Long-term, fixed-rate
|
4,180 | 4,413 | ||||||
|
Intermediate-term, fixed-rate
|
67,375 | 71,010 | ||||||
|
Adjustable-rate
|
18,600 | 19,369 | ||||||
|
Total multifamily conventional
|
90,155 | 94,792 | ||||||
|
Total multifamily loans
|
90,568 | 95,223 | ||||||
|
Total Capital Markets group’s mortgage loans
|
421,856 | 427,074 | ||||||
|
Capital Markets group’s mortgage-related securities:
|
||||||||
|
Fannie Mae
|
238,330 | 260,429 | ||||||
|
Freddie Mac
|
15,659 | 17,332 | ||||||
|
Ginnie Mae
|
1,170 | 1,425 | ||||||
|
Alt-A private-label securities
|
21,590 | 22,283 | ||||||
|
Subprime private-label securities
|
17,653 | 18,038 | ||||||
|
CMBS
|
24,844 | 25,052 | ||||||
|
Mortgage revenue bonds
|
12,008 | 12,525 | ||||||
|
Other mortgage-related securities
|
4,508 | 4,613 | ||||||
|
Total Capital Markets group’s mortgage-related
securities
(2)
|
335,762 | 361,697 | ||||||
|
Total Capital Markets group’s mortgage portfolio
|
$ | 757,618 | $ | 788,771 | ||||
| (1) | Based on unpaid principal balance. | |
| (2) | The fair value of these mortgage-related securities was $339.8 billion and $365.8 billion as of March 31, 2011 and December 31, 2010, respectively. |
The Capital Markets group’s mortgage portfolio decreased
from December 31, 2010 to March 31, 2011 primarily due
to sales and liquidations, partially offset by purchases of
delinquent loans from MBS trusts. We expect our mortgage
portfolio to continue to decrease due to the restrictions on the
amount of mortgage assets we may own under the terms of our
senior preferred stock purchase agreement with Treasury.
We purchased approximately 113,000 delinquent loans with an
unpaid principal balance of approximately $20 billion from
our single-family MBS trusts in the first quarter of 2011. The
total unpaid principal balance of nonperforming loans in the
Capital Markets group’s mortgage portfolio was
$231.3 billion as of March 31, 2011. This population
includes loans that have been modified and have been classified
as TDRs as well as unmodified delinquent loans that are on
nonaccrual status in our condensed consolidated financial
statements.
We expect to continue to purchase loans from MBS trusts as they
become four or more consecutive monthly payments delinquent
subject to market conditions, economic benefit, servicer
capacity, and other factors
36
Table of Contents
including the limit on the mortgage assets that we may own
pursuant to the senior preferred stock purchase agreement. As of
March 31, 2011, 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 $6.8 billion.
In April 2011, we purchased approximately 32,000 delinquent
loans with an unpaid principal balance of $5.7 billion from
our single-family MBS trusts.
CONSOLIDATED
BALANCE SHEET ANALYSIS
The section below provides a discussion of our condensed
consolidated balance sheets as of the dates indicated. You
should read this section together with our condensed
consolidated financial statements, including the accompanying
notes.
Table 20 presents a summary of our condensed consolidated
balance sheets as of March 31, 2011 and December 31,
2010.
Table
20: Summary of Condensed Consolidated Balance
Sheets
| As of | ||||||||||||
|
March 31,
|
December 31,
|
|||||||||||
| 2011 | 2010 | Variance | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Assets
|
||||||||||||
|
Cash and cash equivalents and federal funds sold and securities
purchased under agreements to resell or similar arrangements
|
$ | 46,081 | $ | 29,048 | $ | 17,033 | ||||||
|
Restricted cash
|
36,730 | 63,678 | (26,948 | ) | ||||||||
|
Investments in
securities
(1)
|
146,648 | 151,248 | (4,600 | ) | ||||||||
|
Mortgage loans
|
||||||||||||
|
Of Fannie Mae
|
402,711 | 407,482 | (4,771 | ) | ||||||||
|
Of consolidated trusts
|
2,614,903 | 2,577,794 | 37,109 | |||||||||
|
Allowance for loan losses
|
(67,557 | ) | (61,556 | ) | (6,001 | ) | ||||||
|
Mortgage loans, net of allowance for loan losses
|
2,950,057 | 2,923,720 | 26,337 | |||||||||
|
Other
assets
(2)
|
47,526 | 54,278 | (6,752 | ) | ||||||||
|
Total assets
|
$ | 3,227,042 | $ | 3,221,972 | $ | 5,070 | ||||||
|
Liabilities and equity (deficit)
|
||||||||||||
|
Debt
|
||||||||||||
|
Of Fannie Mae
|
$ | 761,187 | $ | 780,044 | $ | (18,857 | ) | |||||
|
Of consolidated trusts
|
2,447,589 | 2,416,956 | 30,633 | |||||||||
|
Other
liabilities
(3)
|
26,684 | 27,489 | (805 | ) | ||||||||
|
Total liabilities
|
3,235,460 | 3,224,489 | 10,971 | |||||||||
|
Senior preferred stock
|
91,200 | 88,600 | 2,600 | |||||||||
|
Other equity
(deficit)
(4)
|
(99,618 | ) | (91,117 | ) | (8,501 | ) | ||||||
|
Total stockholders’ equity (deficit)
|
(8,418 | ) | (2,517 | ) | (5,901 | ) | ||||||
|
Total liabilities and stockholders’ deficit
|
$ | 3,227,042 | $ | 3,221,972 | $ | 5,070 | ||||||
| (1) | Includes $33.5 billion as of March 31, 2011 and $32.8 billion as of December 31, 2010 of non-mortgage-related securities that are included in our other investments portfolio, which we present in “Table 31: Cash and Other Investments Portfolio.” | |
| (2) | Consists of accrued interest receivable, net; acquired property, net; and other assets. | |
| (3) | Consists of accrued interest payable, federal funds purchased and securities sold under agreements to repurchase, and other liabilities. | |
| (4) | Consists of preferred stock, common stock, additional paid-in capital, accumulated deficit, accumulated other comprehensive loss, treasury stock, and noncontrolling interest. |
37
Table of Contents
Cash and
Other Investments Portfolio
Cash and cash equivalents and federal funds sold and securities
purchased under agreements to resell or similar arrangements are
included in our cash and other investments portfolio. See
“Liquidity and Capital Management—Liquidity
Management—Cash and Other Investments Portfolio” for
additional information on our cash and other investments
portfolio.
Restricted
Cash
Restricted cash primarily includes cash payments received by the
servicer or consolidated trusts due to be remitted to the MBS
certificateholders. Our restricted cash decreased in the first
quarter of 2011 primarily due to a decline in the volume of
refinance activity as interest rates increased, resulting in a
decrease in unscheduled payments received.
Investments
in Mortgage-Related Securities
Our investments in mortgage-related securities are classified in
our condensed consolidated balance sheets as either trading or
available-for-sale
and are measured at fair value. Unrealized and realized gains
and losses on trading securities are included as a component of
“Fair value gains (losses), net” and unrealized gains
and losses on
available-for-sale
securities are included in “Other comprehensive
income” in our condensed consolidated statements of
operations and comprehensive loss. Realized gains and losses on
available-for-sale
securities are recognized when securities are sold in
“Investment gains, net” in our condensed consolidated
statements of operations and comprehensive loss. See
“Note 5, Investments in Securities” for
additional information on our investments in mortgage-related
securities, including the composition of our trading and
available-for-sale
securities at amortized cost and fair value and the gross
unrealized gains and losses related to our
available-for-sale
securities as of March 31, 2011. Table 21 presents the fair
value of our investments in mortgage-related securities,
including trading and
available-for-sale
securities, as of March 31, 2011 and December 31, 2010.
Table
21: Summary of Mortgage-Related Securities at Fair
Value
| As of | ||||||||
| March 31, 2011 | December 31, 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Mortgage-related securities:
|
||||||||
|
Fannie Mae
|
$ | 27,774 | $ | 30,226 | ||||
|
Freddie Mac
|
16,557 | 18,322 | ||||||
|
Ginnie Mae
|
1,315 | 1,629 | ||||||
|
Alt-A private-label securities
|
15,350 | 15,573 | ||||||
|
Subprime private-label securities
|
11,207 | 11,513 | ||||||
|
CMBS
|
25,867 | 25,608 | ||||||
|
Mortgage revenue bonds
|
11,148 | 11,650 | ||||||
|
Other mortgage-related securities
|
3,947 | 3,974 | ||||||
|
Total
|
$ | 113,165 | $ | 118,495 | ||||
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, including sustained weakness in the housing market
and high unemployment, has adversely affected the performance of
our Alt-A and subprime private-label securities. The unpaid
principal balance of our investments in Alt-A and subprime
securities was $39.6 billion as of March 31, 2011, of
which $32.0 billion was rated below investment grade. Table
22
38
Table of Contents
presents the fair value of our investments in Alt-A and subprime
private-label securities and an analysis of the cumulative
losses on these investments as of March 31, 2011. As of
March 31, 2011, we had realized actual cumulative principal
shortfalls of approximately 3% of the total cumulative credit
losses reported in this table and reflected in our condensed
consolidated financial statements.
Table
22: Analysis of Losses on Alt-A and Subprime
Private-Label Mortgage-Related Securities
| As of March 31, 2011 | ||||||||||||||||||||
|
Unpaid
|
Total
|
|||||||||||||||||||
|
Principal
|
Fair
|
Cumulative
|
Noncredit
|
Credit
|
||||||||||||||||
| Balance | Value | Losses (1) | Component (2) | Component (3) | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Trading
securities:
(4)
|
||||||||||||||||||||
|
Alt-A private-label securities
|
$ | 2,991 | $ | 1,658 | $ | (1,287 | ) | $ | (124 | ) | $ | (1,163 | ) | |||||||
|
Subprime private-label securities
|
2,724 | 1,547 | (1,176 | ) | (268 | ) | (908 | ) | ||||||||||||
|
Total
|
$ | 5,715 | $ | 3,205 | $ | (2,463 | ) | $ | (392 | ) | $ | (2,071 | ) | |||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||
|
Alt-A private-label securities
|
$ | 18,599 | $ | 13,692 | $ | (5,107 | ) | $ | (1,645 | ) | $ | (3,462 | ) | |||||||
|
Subprime private-label
securities
(5)
|
15,298 | 9,660 | (5,678 | ) | (1,449 | ) | (4,229 | ) | ||||||||||||
|
Total
|
$ | 33,897 | $ | 23,352 | $ | (10,785 | ) | $ | (3,094 | ) | $ | (7,691 | ) | |||||||
|
Grand Total
|
$ | 39,612 | $ | 26,557 | $ | (13,248 | ) | $ | (3,486 | ) | $ | (9,762 | ) | |||||||
| (1) | Amounts reflect the difference between the fair value and unpaid principal balance net of unamortized premiums, discounts and certain other cost basis adjustments. | |
| (2) | 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. | |
| (3) | 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 estimated portion of total cumulative other-than-temporary credit impairment losses, net of accretion, that are recognized in earnings. | |
| (4) | Excludes resecuritizations, or wraps, of private-label securities backed by subprime loans that we have guaranteed and hold in our mortgage portfolio as Fannie Mae securities. | |
| (5) | 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. |
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 CoreLogic, LoanPerformance
(“CoreLogic”). We also present the average credit
enhancement and monoline financial guaranteed amount for these
securities as of March 31, 2011. Based on the stressed
condition of some of our financial guarantors, we believe some
of these counterparties will not fully meet their obligation to
us in the future. See “Risk Management—Credit 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.
39
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, 2011 | ||||||||||||||||||||||||||||
| 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
|
$ | — | $ | 511 | $ | — | 33.1 | % | 64.5 | % | 18.2 | % | $ | — | ||||||||||||||
|
2005
|
— | 1,375 | — | 45.0 | 57.4 | 43.0 | 268 | |||||||||||||||||||||
|
2006
|
— | 1,335 | — | 46.5 | 65.8 | 32.3 | 144 | |||||||||||||||||||||
|
2007
|
2,078 | — | — | 45.9 | 61.7 | 59.5 | 752 | |||||||||||||||||||||
|
Other Alt-A mortgage loans:
|
||||||||||||||||||||||||||||
|
2004 and prior
|
— | 6,704 | — | 10.2 | 46.8 | 12.4 | 13 | |||||||||||||||||||||
|
2005
|
90 | 4,347 | 129 | 24.4 | 57.0 | 6.6 | — | |||||||||||||||||||||
|
2006
|
67 | 4,201 | — | 30.6 | 59.8 | 1.8 | — | |||||||||||||||||||||
|
2007
|
756 | — | 194 | 44.4 | 67.2 | 30.2 | 314 | |||||||||||||||||||||
|
2008
(8)
|
— | 126 | — | — | — | — | — | |||||||||||||||||||||
|
Total Alt-A mortgage loans:
|
2,991 | 18,599 | 323 | 1,491 | ||||||||||||||||||||||||
|
Subprime mortgage loans:
|
||||||||||||||||||||||||||||
|
2004 and
prior
(9)
|
— | 2,159 | 652 | 24.8 | 70.4 | 60.4 | 674 | |||||||||||||||||||||
|
2005
(8)
|
— | 197 | 1,440 | 44.6 | 73.9 | 58.1 | 229 | |||||||||||||||||||||
|
2006
|
— | 12,303 | — | 49.7 | 78.0 | 19.6 | 52 | |||||||||||||||||||||
|
2007
|
2,724 | 639 | 5,728 | 50.2 | 76.1 | 23.6 | 182 | |||||||||||||||||||||
|
Total subprime mortgage loans:
|
2,724 | 15,298 | 7,820 | 1,137 | ||||||||||||||||||||||||
|
Total Alt-A and subprime mortgage loans:
|
$ | 5,715 | $ | 33,897 | $ | 8,143 | $ | 2,628 | ||||||||||||||||||||
| (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 reflect information from March 2011 remittances for February 2011 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 CoreLogic, where available, for loans backing Alt-A and subprime private-label mortgage-related securities that we own or guarantee. The CoreLogic severity data reflect information from March 2011 remittances for February 2011 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 enhancements in the form of subordination or financial guarantee of the security divided by the 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. |
40
Table of Contents
| (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 $126 million for the 2008 vintage of other Alt-A loans and $20 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. |
Mortgage
Loans
The increase in mortgage loans, net of an allowance for loan
losses in the first quarter of 2011 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 3, Mortgage Loans.” For
additional information on the mortgage loan purchase and sale
activities reported by our Capital Markets group, see
“Business Segment Results—Capital Markets Group
Results.”
Debt
Instruments
Debt of Fannie Mae is the primary means of funding our mortgage
investments. 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, 2011 and 2010 in “Liquidity and Capital
Management—Liquidity Management—Debt Funding.”
Also see “Note 8, Short-Term Borrowings and Long-Term
Debt” for additional information on our outstanding debt.
The increase in debt of consolidated trusts in the first quarter
of 2011 was primarily driven by sales of Fannie Mae MBS, which
are accounted for as reissuances of debt of consolidated trusts
in our condensed consolidated balance sheets, since the MBS
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 and the related outstanding notional amounts as of
March 31, 2011 and December 31, 2010 in
“Note 9, Derivative Instruments.” Table 24
provides an analysis of the factors driving the change from
December 31, 2010 to March 31, 2011 in the estimated
fair value of our net derivative liability related to our risk
management derivatives recorded in our condensed consolidated
balance sheets.
41
Table of Contents
| Table 24: | Changes in Risk Management Derivative Assets (Liabilities) at Fair Value, Net |
|
For the Three
|
||||
|
Months Ended
|
||||
| March 31, 2011 | ||||
| (Dollars in millions) | ||||
|
Net risk management derivative liability as of December 31,
2010
|
$ | (789 | ) | |
|
Effect of cash payments:
|
||||
|
Fair value at inception of contracts entered into during the
period
(1)
|
58 | |||
|
Fair value at date of termination of contracts settled during
the
period
(2)
|
308 | |||
|
Net collateral received
|
(705 | ) | ||
|
Periodic net cash contractual interest
payments
(3)
|
391 | |||
|
Total cash payments
|
52 | |||
|
Statement of operations impact of recognized amounts:
|
||||
|
Net contractual interest expense accruals on interest rate swaps
|
(635 | ) | ||
|
Net change in fair value during the period
|
751 | |||
|
Risk management derivatives fair value gains, net
|
116 | |||
|
Net risk management derivative liability as of March 31,
2011
|
$ | (621 | ) | |
| (1) | Cash receipts from sale of derivative option contracts increase the derivative liability recorded in our condensed consolidated balance sheets. Cash payments made to purchase derivative option contracts (purchased option premiums) increase the derivative asset recorded in our condensed consolidated balance sheets. | |
| (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 and comprehensive loss. Net periodic interest receipts reduce the derivative asset and net periodic interest payments reduce the derivative liability. Also includes cash paid (received) on other derivatives contracts. |
For additional information on our derivative instruments, see
“Consolidated Results of Operations—Fair Value Gains
(Losses), Net,” “Risk Management—Market Risk
Management, Including Interest Rate Risk Management” and
“Note 9, Derivative Instruments.”
Stockholders’
Deficit
Our net deficit increased in the first quarter of 2011. 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 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 for the three months ended
March 31, 2011. The estimated fair value of our net assets
is calculated based on the difference between the fair value of
our assets and the fair value of our liabilities, adjusted for
noncontrolling interests. 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 used to determine fair value and disclose the
carrying value and fair value of our financial assets and
liabilities in “Note 13, Fair Value.”
42
Table of Contents
| 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, 2011 | ||||
| (Dollars in millions) | ||||
|
GAAP consolidated balance sheets:
|
||||
|
Fannie Mae stockholders’ deficit as of December 31,
2010
(1)
|
$ | (2,599 | ) | |
|
Total comprehensive loss
|
(6,290 | ) | ||
|
Capital
transactions:
(2)
|
||||
|
Funds received from Treasury under the senior preferred stock
purchase agreement
|
2,600 | |||
|
Senior preferred stock dividends
|
(2,216 | ) | ||
|
Capital transactions, net
|
384 | |||
|
Other
|
6 | |||
|
Fannie Mae stockholders’ deficit as of March 31,
2011
(1)
|
$ | (8,499 | ) | |
|
Non-GAAP consolidated fair value balance sheets:
|
||||
|
Estimated fair value of net assets as of December 31, 2010
|
$ | (120,294 | ) | |
|
Capital transactions, net
|
384 | |||
|
Change in estimated fair value of net assets, excluding capital
transactions
|
(11,231 | ) | ||
|
Decrease in estimated fair value of net assets, net
|
(10,847 | ) | ||
|
Estimated fair value of net assets as of March 31, 2011
|
$ | (131,141 | ) | |
| (1) | 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, consists of “Total Fannie Mae’s stockholders’ equity (deficit)” and “Noncontrolling interests” reported in our condensed consolidated balance sheets. | |
| (2) | Represents capital transactions, which are reported in our condensed consolidated financial statements. |
The $11.2 billion decrease in the fair value of our net
assets, excluding capital transactions, during the first quarter
of 2011 was attributable to:
| • | A net decrease in the fair value due to credit-related items principally related to declining actual and expected home prices as well as a decrease in the estimated rate of prepayments, which increased the expected life of the guaranty book of business and increased expected credit losses. This net decrease due to credit-related items was partially offset by | |
| • | An increase in the fair value of the net portfolio attributable to the positive impact of 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 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
legislation or 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. 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.
43
Table of Contents
In addition, 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 or what we expect to draw from
Treasury under the terms of our senior preferred stock purchase
agreement, primarily because:
| • | The estimated fair value of our credit exposures significantly exceeds our projected credit losses as fair value takes into account certain assumptions about liquidity and required rates of return that a market participant may demand in assuming a credit obligation. Because we do not intend to have another party assume the credit risk inherent in our book of business, and therefore would not be obligated to pay a market premium for its assumption, we do not expect the current market premium portion of our current estimate of fair value to impact future Treasury draws; | |
| • | The fair value balance sheet does not reflect amounts we expect to draw in the future to pay dividends on the senior preferred stock; and | |
| • | The fair value of our net assets reflects a point in time estimate of the fair value of our existing assets and liabilities, and does not incorporate the value associated with new business that may be added in the future. |
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.
Supplemental
Non-GAAP Consolidated Fair Value Balance Sheets
We present our non-GAAP fair value balance sheets in Table 26
below.
44
Table of Contents
Table
26: Supplemental Non-GAAP Consolidated Fair
Value Balance Sheets
| As of March 31, 2011 | As of December 31, 2010 | |||||||||||||||||||||||
|
GAAP
|
GAAP
|
|||||||||||||||||||||||
|
Carrying
|
Fair Value
|
Estimated
|
Carrying
|
Fair Value
|
Estimated
|
|||||||||||||||||||
| Value | Adjustment (1) | Fair Value | Value | Adjustment (1) | Fair Value | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 56,561 | $ | — | $ | 56,561 | $ | 80,975 | $ | — | $ | 80,975 | ||||||||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
26,250 | — | 26,250 | 11,751 | — | 11,751 | ||||||||||||||||||
|
Trading securities
|
57,035 | — | 57,035 | 56,856 | — | 56,856 | ||||||||||||||||||
|
Available-for-sale
securities
|
89,613 | — | 89,613 | 94,392 | — | 94,392 | ||||||||||||||||||
|
Mortgage loans:
|
||||||||||||||||||||||||
|
Mortgage loans held for sale
|
1,414 | 44 | 1,458 | 915 | — | 915 | ||||||||||||||||||
|
Mortgage loans held for investment, net of allowance for loan
losses:
|
||||||||||||||||||||||||
|
Of Fannie Mae
|
348,644 | (35,472 | ) | 313,172 | 358,698 | (39,331 | ) | 319,367 | ||||||||||||||||
|
Of consolidated trusts
|
2,599,999 | 18,737 | (2) | 2,618,736 | (3) | 2,564,107 | 46,038 | (2) | 2,610,145 | (3) | ||||||||||||||
|
Total mortgage loans
|
2,950,057 | (16,691 | ) | 2,933,366 | (4) | 2,923,720 | 6,707 | 2,930,427 | (4) | |||||||||||||||
|
Advances to lenders
|
3,091 | (151 | ) | 2,940 | (5)(6) | 7,215 | (225 | ) | 6,990 | (5)(6) | ||||||||||||||
|
Derivative assets at fair value
|
279 | — | 279 | (5)(6) | 1,137 | — | 1,137 | (5)(6) | ||||||||||||||||
|
Guaranty assets and
buy-ups,
net
|
459 | 440 | 899 | (5)(6) | 458 | 356 | 814 | (5)(6) | ||||||||||||||||
|
Total financial assets
|
3,183,345 | (16,402 | ) | 3,166,943 | (7) | 3,176,504 | 6,838 | 3,183,342 | (7) | |||||||||||||||
|
Credit enhancements
|
471 | 3,406 | 3,877 | (5)(6) | 479 | 3,286 | 3,765 | (5)(6) | ||||||||||||||||
|
Other assets
|
43,226 | (240 | ) | 42,986 | (5)(6) | 44,989 | (261 | ) | 44,728 | (5)(6) | ||||||||||||||
|
Total assets
|
$ | 3,227,042 | $ | (13,236 | ) | $ | 3,213,806 | $ | 3,221,972 | $ | 9,863 | $ | 3,231,835 | |||||||||||
|
Liabilities:
|
||||||||||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
$ | 25 | $ | — | $ | 25 | $ | 52 | $ | (1 | ) | $ | 51 | |||||||||||
|
Short-term debt:
|
||||||||||||||||||||||||
|
Of Fannie Mae
|
147,092 | 41 | 147,133 | 151,884 | 90 | 151,974 | ||||||||||||||||||
|
Of consolidated trusts
|
5,156 | — | 5,156 | 5,359 | — | 5,359 | ||||||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||
|
Of Fannie Mae
|
614,095 | (8) | 19,055 | 633,150 | 628,160 | (8) | 21,524 | 649,684 | ||||||||||||||||
|
Of consolidated trusts
|
2,442,433 | (8) | 88,041 | (2) | 2,530,474 | 2,411,597 | (8) | 103,332 | (2) | 2,514,929 | ||||||||||||||
|
Derivative liabilities at fair value
|
941 | — | 941 | (9)(10) | 1,715 | — | 1,715 | (9)(10) | ||||||||||||||||
|
Guaranty obligations
|
760 | 2,667 | 3,427 | (9)(10) | 769 | 3,085 | 3,854 | (9)(10) | ||||||||||||||||
|
Total financial liabilities
|
3,210,502 | 109,804 | 3,320,306 | (7) | 3,199,536 | 128,030 | 3,327,566 | (7) | ||||||||||||||||
|
Other liabilities
|
24,958 | (398 | ) | 24,560 | (9)(10) | 24,953 | (472 | ) | 24,481 | (9)(10) | ||||||||||||||
|
Total liabilities
|
3,235,460 | 109,406 | 3,344,866 | 3,224,489 | 127,558 | 3,352,047 | ||||||||||||||||||
|
Equity (deficit):
|
||||||||||||||||||||||||
|
Fannie Mae stockholders’ equity (deficit):
|
||||||||||||||||||||||||
|
Senior
preferred
(11)
|
91,200 | — | 91,200 | 88,600 | — | 88,600 | ||||||||||||||||||
|
Preferred
|
20,204 | (18,987 | ) | 1,217 | 20,204 | (19,829 | ) | 375 | ||||||||||||||||
|
Common
|
(119,903 | ) | (103,655 | ) | (223,558 | ) | (111,403 | ) | (97,866 | ) | (209,269 | ) | ||||||||||||
|
Total Fannie Mae stockholders’ deficit/non-GAAP fair
value of net assets
|
$ | (8,499 | ) | $ | (122,642 | ) | $ | (131,141 | ) | $ | (2,599 | ) | $ | (117,695 | ) | $ | (120,294 | ) | ||||||
|
Noncontrolling interests
|
81 | — | 81 | 82 | — | 82 | ||||||||||||||||||
|
Total deficit
|
(8,418 | ) | (122,642 | ) | (131,060 | ) | (2,517 | ) | (117,695 | ) | (120,212 | ) | ||||||||||||
|
Total liabilities and equity (deficit)
|
$ | 3,227,042 | $ | (13,236 | ) | $ | 3,213,806 | $ | 3,221,972 | $ | 9,863 | $ | 3,231,835 | |||||||||||
Explanation
and Reconciliation of Non-GAAP Measures to
GAAP Measures
| (1) | 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. | |
| (2) | Fair value exceeds carrying value of consolidated loans and consolidated debt as a significant portion of these were consolidated at unpaid principal balance as of January 1, 2010, upon adoption of accounting standards on transfers of financial assets and consolidation of VIEs. Also impacting the difference between fair value and carrying value of the consolidated loans is the credit component included in consolidated loans, which has no corresponding impact on the consolidated debt. |
45
Table of Contents
| (3) | Includes certain mortgage loans that we elected to report at fair value in our GAAP condensed consolidated balance sheet of $3.0 billion as of both March 31, 2011 and December 31, 2010. | |
| (4) | Performing loans had both a fair value and an unpaid principal balance of $2.8 trillion as of March 31, 2011 compared with a fair value of $2.8 trillion and an unpaid principal balance of $2.7 trillion as of December 31, 2010. Nonperforming loans, which include loans that are delinquent by one or more payments, had a fair value of $143.4 billion and an unpaid principal balance of $254.4 billion as of March 31, 2011 compared with a fair value of $168.5 billion and an unpaid principal balance of $287.4 billion as of December 31, 2010. See “Note 13, Fair Value” for additional information on valuation techniques for performing and nonperforming loans. | |
| (5) | The following line items: (a) Advances to lenders; (b) Derivative assets at fair value; (c) Guaranty assets and buy-ups, net; (d) Credit enhancements; and (e) Other assets, together consist of the following assets presented in our GAAP condensed consolidated balance sheets: (a) Accrued interest receivable, net; (b) Acquired property, net; and (c) Other assets. | |
| (6) | “Other assets” include the following GAAP condensed consolidated balance sheets line items: (a) Accrued interest receivable, net and (b) Acquired property, net. The carrying value of these items in our GAAP condensed consolidated balance sheets totaled $26.6 billion and $27.5 billion as of March 31, 2011 and December 31, 2010, respectively. “Other assets” in our GAAP condensed consolidated balance sheets include the following: (a) Advances to Lenders; (b) Derivative assets at fair value; (c) Guaranty assets and buy-ups, net; and (d) Credit enhancements. The carrying value of these items totaled $4.3 billion and $9.3 billion as of March 31, 2011 and December 31, 2010, respectively. | |
| (7) | We determined the estimated fair value of these financial instruments in accordance with the fair value accounting standard as described in “Note 13, Fair Value.” | |
| (8) | Includes certain long-term debt instruments that we elected to report at fair value in our GAAP condensed consolidated balance sheets of $3.1 billion and $3.2 billion as of March 31, 2011 and December 31, 2010, respectively. | |
| (9) | The following line items: (a) Derivative liabilities at fair value; (b) Guaranty obligations; and (c) Other liabilities, consist of the following liabilities presented in our GAAP condensed consolidated balance sheets: (a) Accrued interest payable and (b) Other liabilities. | |
| (10) | “Other liabilities” include the Accrued interest payable in our GAAP condensed consolidated balance sheets. The carrying value of this item in our GAAP condensed consolidated balance sheets totaled $13.8 billion as of both March 31, 2011 and December 31, 2010. We assume that certain other liabilities, such as deferred revenues, have no fair value. Although we report the “Reserve for guaranty losses” as part of “Other liabilities” in our GAAP 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. “Other liabilities” in our GAAP condensed consolidated balance sheets include the following: (a) Derivative liabilities at fair value and (b) Guaranty obligations. The carrying value of these items totaled $1.7 billion and $2.5 billion as of March 31, 2011 and December 31, 2010, respectively. | |
| (11) | 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. Our liquidity risk management
policy is designed to address our liquidity risk. Liquidity risk
is the risk that we will not be able to meet our funding
obligations in a timely manner. Liquidity risk management
involves forecasting funding requirements and maintaining
sufficient capacity to meet these needs.
Our Treasury group is responsible for implementing our liquidity
and contingency planning strategies. We conduct liquidity
contingency planning to prepare for an event in which our access
to the unsecured debt markets becomes limited. We plan for
alternative sources of liquidity that are designed to allow us
to meet our cash obligations without relying upon the issuance
of unsecured debt. While our liquidity contingency planning
attempts to address stressed market conditions and our status
under conservatorship and Treasury arrangements, we believe that
our liquidity contingency planning may be difficult or
impossible to execute for a company of our size in our
circumstances. See “Risk Factors” in our 2010
Form 10-K
for a description of the risks associated with our contingency
planning.
Our liquidity position could be adversely affected by many
causes, both internal and external to our business, including:
actions taken by the conservator, the Federal Reserve,
U.S. Treasury or other government agencies; legislation
relating to us or our business; an unexpected systemic event
leading to the withdrawal of liquidity from the market; an
extreme market-wide widening of credit spreads; public
statements by key policy makers; a downgrade in the credit
ratings of our senior unsecured debt or the
U.S. government’s debt from the major
46
Table of Contents
ratings organizations; a significant further decline in our net
worth; loss of demand for our debt, or certain types of our
debt, from a major group of investors; a significant credit
event involving one of our major institutional counterparties; a
sudden catastrophic operational failure in the financial sector;
or elimination of our GSE status.
Debt
Funding
We fund our business primarily through the issuance of
short-term and long-term debt securities in the domestic and
international capital markets. Because debt issuance is our
primary funding source, we are subject to “roll-over,”
or refinancing, risk on our outstanding debt.
We have a diversified funding base of domestic and international
investors. Purchasers of our debt securities are geographically
diversified and include fund managers, commercial banks, pension
funds, insurance companies, foreign central banks, corporations,
state and local governments, and other municipal authorities.
Although our funding needs may vary from quarter to quarter
depending on market conditions, we currently expect our debt
funding needs will decline in future periods as we reduce the
size of our mortgage portfolio in compliance with the
requirement of the senior preferred stock purchase agreement
that we reduce our mortgage portfolio 10% per year until it
reaches $250 billion.
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 of Contents
| Table 27: | Activity in Debt of Fannie Mae |
|
For the Three Months
|
||||||||
| Ended March 31, | ||||||||
| 2011 | 2010 (2) | |||||||
| (Dollars in millions) | ||||||||
|
Issued during the period:
|
||||||||
|
Short-term:
|
||||||||
|
Amount
|
$ | 88,201 | $ | 138,480 | ||||
|
Weighted-average interest rate
|
0.15 | % | 0.23 | % | ||||
|
Long-term:
|
||||||||
|
Amount
|
$ | 51,737 | $ | 101,964 | ||||
|
Weighted-average interest rate
|
2.13 | % | 2.28 | % | ||||
|
Total issued:
|
||||||||
|
Amount
|
$ | 139,938 | $ | 240,444 | ||||
|
Weighted-average interest rate
|
0.88 | % | 1.09 | % | ||||
|
Paid off during the
period:
(1)
|
||||||||
|
Short-term:
|
||||||||
|
Amount
|
$ | 93,031 | $ | 130,866 | ||||
|
Weighted-average interest rate
|
0.26 | % | 0.23 | % | ||||
|
Long-term:
|
||||||||
|
Amount
|
$ | 66,857 | $ | 95,163 | ||||
|
Weighted-average interest rate
|
2.82 | % | 3.30 | % | ||||
|
Total paid off:
|
||||||||
|
Amount
|
$ | 159,888 | $ | 226,029 | ||||
|
Weighted-average interest rate
|
1.33 | % | 1.53 | % | ||||
| (1) | Consists of all payments on debt, including regularly scheduled principal payments, payments at maturity, payments resulting from calls and payments for any other repurchases. | |
| (2) | For the three months ended March 31, 2010, we revised the weighted-average interest rate on short-term issued and total issued debt primarily to reflect weighting based on transaction level data. |
Debt funding activity in the first quarter of 2011 was lower
compared with the first quarter of 2010 primarily because we
decreased our redemptions of callable debt and had a lower
amount of outstanding debt that matured in the first quarter of
2011, which reduced the amount of debt we needed to issue. In
addition, our funding needs decreased because of a decrease in
purchases of delinquent loans from MBS trusts. During the first
half of 2010, we purchased a significant amount of loans from
MBS trusts that were four or more consecutive monthly payments
delinquent.
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 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. On February 11, 2011, Treasury and HUD released
a report to Congress on reforming America’s housing finance
market. The report provides that the Administration will work
with FHFA to determine the best way to responsibly wind down
both Fannie Mae and Freddie Mac. The report emphasizes the
importance of proceeding with a careful transition plan and
providing the necessary financial support to Fannie Mae and
Freddie Mac during the transition period. For more information
on GSE reform, see “Legislative and Regulatory
Developments—GSE Reform.”
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. See
“Risk Factors” in this report and in our 2010
Form 10-K
for a discussion of the risks we face relating to (1) the
uncertain future of our
48
Table of Contents
company; (2) our reliance on the issuance of debt
securities to obtain funds for our operations; and (3) our
liquidity contingency plans.
Outstanding
Debt
Total outstanding debt of Fannie Mae consists of federal funds
purchased and securities sold under agreements to repurchase and
short-term and long-term debt, excluding debt of consolidated
trusts.
As of March 31, 2011, our outstanding short-term debt,
based on its original contractual maturity, as a percentage of
our total outstanding debt remained constant at 19% compared
with December 31, 2010. 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, based on its original contractual maturity, decreased to
2.69% as of March 31, 2011 from 2.77% as of
December 31, 2010.
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 on December 31 of the immediately preceding
calendar year. Our debt cap under the senior preferred stock
purchase agreement was reduced to $972 billion in 2011. As
of March 31, 2011, our aggregate indebtedness totaled
$774.0 billion, which was $198.0 billion below our
debt limit. The 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.
Table 28 provides information as of March 31, 2011 and
December 31, 2010 on our outstanding short-term and
long-term debt based on its original contractual terms.
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Table of Contents
| Table 28: |
|
| As of | ||||||||||||||||||||||||
| March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
|
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
|
— | $ | 25 | 0.01 | % | — | $ | 52 | 2.20 | % | ||||||||||||||
|
Short-term debt:
|
||||||||||||||||||||||||
|
Fixed-rate:
|
||||||||||||||||||||||||
|
Discount notes
|
— | $ | 146,751 | 0.26 | % | — | $ | 151,500 | 0.32 | % | ||||||||||||||
|
Foreign exchange discount notes
|
— | 341 | 2.51 | — | 384 | 2.43 | ||||||||||||||||||
|
Total short-term debt of Fannie
Mae
(2)
|
147,092 | 0.27 | 151,884 | 0.32 | ||||||||||||||||||||
|
Debt of consolidated trusts
|
— | 5,156 | 0.22 | — | 5,359 | 0.23 | ||||||||||||||||||
|
Total short-term debt
|
$ | 152,248 | 0.27 | % | $ | 157,243 | 0.32 | % | ||||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||
|
Senior fixed:
|
||||||||||||||||||||||||
|
Benchmark notes and bonds
|
2011 - 2030 | $ | 291,851 | 3.14 | % | 2011 - 2030 | $ | 300,344 | 3.20 | % | ||||||||||||||
|
Medium-term notes
|
2011 - 2021 | 190,950 | 2.00 | 2011 - 2020 | 199,266 | 2.13 | ||||||||||||||||||
|
Foreign exchange notes and bonds
|
2017 - 2028 | 1,204 | 6.07 | 2017 - 2028 | 1,177 | 6.21 | ||||||||||||||||||
|
Other long-term
debt
(3)
|
2011 - 2040 | 47,630 | 5.64 | 2011 - 2040 | 44,893 | 5.64 | ||||||||||||||||||
|
Total senior fixed
|
531,635 | 2.96 | 545,680 | 3.02 | ||||||||||||||||||||
|
Senior floating:
|
||||||||||||||||||||||||
|
Medium-term notes
|
2011 - 2016 | 74,454 | 0.30 | 2011 - 2015 | 72,039 | 0.31 | ||||||||||||||||||
|
Other long-term
debt
(3)
|
2020 - 2037 | 389 | 5.27 | 2020 - 2037 | 386 | 4.92 | ||||||||||||||||||
|
Total senior floating
|
74,843 | 0.32 | 72,425 | 0.34 | ||||||||||||||||||||
|
Subordinated fixed-rate:
|
||||||||||||||||||||||||
|
Qualifying
subordinated
(4)
|
2012 - 2014 | 4,893 | 5.08 | 2011 - 2014 | 7,392 | 5.47 | ||||||||||||||||||
|
Subordinated debentures
|
2019 | 2,724 | 9.91 | 2019 | 2,663 | 9.91 | ||||||||||||||||||
|
Total subordinated fixed-rate
|
7,617 | 6.80 | 10,055 | 6.65 | ||||||||||||||||||||
|
Total long-term debt of Fannie
Mae
(5)
|
614,095 | 2.69 | 628,160 | 2.77 | ||||||||||||||||||||
|
Debt of consolidated
trusts
(3)
|
2011 - 2051 | 2,442,433 | 4.61 | 2011 - 2051 | 2,411,597 | 4.59 | ||||||||||||||||||
|
Total long-term debt
|
$ | 3,056,528 | 4.23 | % | $ | 3,039,757 | 4.22 | % | ||||||||||||||||
|
Outstanding callable debt of Fannie
Mae
(6)
|
$ | 204,664 | 2.50 | % | $ | 219,804 | 2.53 | % | ||||||||||||||||
| (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 of Fannie Mae, which excludes unamortized discounts, premiums and other cost basis adjustments and debt of consolidated trusts, totaled $772.6 billion and $792.6 billion as of March 31, 2011 and December 31, 2010, respectively. | |
| (2) | 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 $67 million and $128 million as of March 31, 2011 and December 31, 2010, respectively. | |
| (3) | Includes a portion of structured debt instruments that is reported at fair value. | |
| (4) | Consists of subordinated debt with an interest deferral feature. | |
| (5) | 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 $87.5 billion and $95.4 billion as of March 31, 2011 and December 31, 2010, respectively. Reported amounts also include unamortized discounts, premiums and other cost basis adjustments of $11.4 billion and $12.4 billion as of March 31, |
50
Table of Contents
| 2011 and December 31, 2010, respectively. The unpaid principal balance of long-term debt of Fannie Mae, which excludes unamortized discounts, premiums, fair value adjustments and other cost basis adjustments and amounts related to debt of consolidated trusts, totaled $625.5 billion and $640.5 billion as of March 31, 2011 and December 31, 2010, respectively. | ||
| (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,
2011, of our outstanding debt maturing within one year, by
month, including amounts we have announced for early 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 31% as of March 31, 2011,
compared with 32% as of December 31, 2010. The
weighted-average maturity of our outstanding debt that is
maturing within one year was 98 days as of March 31,
2011, compared with 116 days as of December 31, 2010.
| 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 $103 million as of March 31, 2011. Excludes debt of consolidated trusts maturing within one year of $9.6 billion and federal funds purchased and securities sold under agreements to repurchase of $25 million as of March 31, 2011. |
Table 30 presents the maturity profile, as of March 31,
2011, 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 for
early redemption within one year. The weighted-average maturity
of our outstanding debt maturing in more than one year was
approximately 58 months as of both March 31, 2011 and
December 31, 2010.
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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 $11.4 billion as of March 31, 2011. Excludes debt of consolidated trusts of $2.4 trillion as of March 31, 2011. |
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.
Cash
and Other Investments Portfolio
Table 31 provides information on the composition of our cash and
other investments portfolio for the periods indicated.
| Table 31: | Cash and Other Investments Portfolio |
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Cash and cash equivalents
|
$ | 19,831 | $ | 17,297 | ||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
26,250 | 11,751 | ||||||
|
Non-mortgage-related securities:
|
||||||||
|
U.S. Treasury
securities
(1)
|
29,383 | 27,432 | ||||||
|
Asset-backed
securities
(2)
|
4,100 | 5,321 | ||||||
|
Total non-mortgage-related securities
|
33,483 | 32,753 | ||||||
|
Total cash and other investments
|
$ | 79,564 | $ | 61,801 | ||||
| (1) | Excludes $3.1 billion and $4.0 billion of U.S. Treasury securities which are a component of cash equivalents as of March 31, 2011 and December 31, 2010, respectively, as these securities had a maturity at the date of acquisition of three months or less. | |
| (2) | Includes securities primarily backed by credit cards loans, student loans and automobile loans. |
Our cash and other investments portfolio increased from
December 31, 2010 to March 31, 2011 primarily due to a
decrease in the weighted-average maturity of our outstanding
debt in the first quarter of 2011, which resulted in an increase
in the amount of cash and highly liquid non-mortgage securities
we were required to hold pursuant to our liquidity risk
management policy.
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Table of Contents
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.
While there have been no changes in our credit ratings from
December 31, 2010 to May 2, 2011, on April 20,
2011, Standard & Poor’s revised its outlook on
the debt issues of Fannie Mae to negative from stable. This
action followed Standard & Poor’s revision to the
outlook of the U.S. government’s long-term credit
rating to negative from stable. Standard & Poor’s
noted that the ratings on Fannie Mae and other
government-related entities are constrained by the long-term
sovereign rating on the U.S. government and noted that it
will not raise the outlooks or ratings on these entities above
the U.S. government as long as the ratings and outlook on
the U.S. remain unchanged. Standard & Poor’s
also stated that if it were to lower its ratings on the
U.S. government, it would likely lower the ratings on the
debt of Fannie Mae and other government-related entities.
Table 32 presents the credit ratings issued by the three
major credit rating agencies as of May 2, 2011.
| Table 32: | Fannie Mae Credit Ratings |
| As of May 2, 2011 | ||||||
| Standard & Poor’s | Moody’s | Fitch | ||||
|
Long-term senior debt
|
AAA | Aaa | AAA | |||
|
Short-term senior debt
|
A-1+ | P-1 | F1+ | |||
|
Qualifying subordinated debt
|
A | Aa2 | AA- | |||
|
Preferred stock
|
C | Ca | C/RR6 | |||
|
Bank financial strength rating
|
— | E+ | — | |||
|
Outlook
|
Negative | Stable | Stable | |||
| (for Long Term Senior Debt | (for all ratings) | (for AAA rated Long Term | ||||
| and Qualifying Subordinated Debt) | Issuer Default Rating) | |||||
Cash
Flows
Three Months Ended March 31,
2011
. Cash and cash equivalents of
$19.8 billion as of March 31, 2011 increased by
$2.5 billion from December 31, 2010 driven by net cash
inflows provided by operating activities of $2.6 billion.
Net cash generated from investing activities totaled
$123.8 billion, resulting primarily from proceeds received
from repayments of loans held for investment. These net cash
inflows were offset by net cash used in financing activities of
$123.9 billion primarily attributable to a significant
amount of debt redemptions in excess of proceeds received from
the issuances of debt.
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 $108.7 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
$30.9 billion resulting primarily from purchases of trading
securities. The net cash used in financing activities of
$54.2 billion was primarily attributable to a significant
amount of debt redemptions in excess of proceeds received from
the issuances of debt as well as proceeds received from Treasury
under the senior preferred stock purchase agreement.
Capital
Management
Regulatory
Capital
FHFA has announced that, during the conservatorship, our
existing statutory and FHFA-directed regulatory capital
requirements will not be binding and FHFA will not issue
quarterly capital classifications. We submit capital reports to
FHFA during the conservatorship and FHFA monitors 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-
53
Table of Contents
based capital or subordinated debt levels during the
conservatorship. For information on our minimum capital
requirements see “Note 11, 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 the 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.
Under the senior preferred stock purchase agreement, Treasury
made a commitment to provide funding, under certain conditions,
to eliminate deficits in our net worth. We have received a total
of $90.2 billion from Treasury pursuant to the senior
preferred stock purchase agreement as of March 31, 2011. In
May 2011, the Acting Director of FHFA submitted a request for
$8.5 billion from Treasury under the senior preferred stock
purchase agreement to eliminate our net worth deficit as of
March 31, 2011, and requested receipt of those funds on or
prior to June 30, 2011. 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 $99.7 billion.
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 as of December 31, 2012,
Treasury’s remaining funding commitment will be
$124.8 billion ($200 billion less $75.2 billion
cumulatively drawn through March 31, 2010) less the
smaller of either (a) our positive net worth as of
December 31, 2012 or (b) our cumulative draws from
Treasury for the calendar quarters in 2010 through 2012.
As consideration for Treasury’s funding commitment, we
issued one million shares of senior preferred stock and a
warrant to purchase shares of our common stock to Treasury. A
quarterly commitment fee was scheduled to be set by Treasury
beginning on March 31, 2011. This commitment fee was waived
by Treasury for the first quarter of 2011. On March 31,
2011, FHFA was notified by Treasury that it was waiving the
commitment fee for the second quarter of 2011 due to the
continued fragility of the U.S. mortgage market and because
Treasury believed that imposing the commitment fee would not
generate increased compensation for taxpayers. Treasury further
noted that it would reevaluate the situation during the next
calendar quarter to determine whether to set the quarterly
commitment fee for the next quarter under the senior preferred
stock purchase agreement.
Dividends
Holders of the senior preferred stock are entitled to receive,
when, as and if declared by our Board of Directors, cumulative
quarterly cash dividends at the annual rate of 10% per year on
the then-current liquidation preference of the senior preferred
stock. Treasury is the current holder of our 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 do not pay cash dividends on the senior
preferred stock when they are due, then immediately following
the period we did not pay dividends 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.
Our first quarter dividend of $2.2 billion was declared by
the conservator and paid by us on March 31, 2011. Upon
receipt of additional funds from Treasury in June 2011, which
FHFA requested on our behalf in May 2011, the annualized
dividend on the senior preferred stock will be
$10.0 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
54
Table of Contents
conservator requests additional funds on our behalf from
Treasury under the senior preferred stock purchase agreement.
OFF-BALANCE
SHEET ARRANGEMENTS
Our maximum potential exposure to credit losses relating to our
outstanding and unconsolidated Fannie Mae MBS and other
financial guarantees is primarily represented by the unpaid
principal balance of the mortgage loans underlying outstanding
and unconsolidated Fannie Mae MBS and other financial guarantees
of $56.7 billion as of March 31, 2011 and
$56.9 billion as of December 31, 2010.
Under the temporary credit and liquidity facilities program in
which we provide assistance to housing finance agencies
(“HFAs”) and in which Treasury has purchased
participation interests, our outstanding commitments totaled
$3.5 billion as of March 31, 2011 and
$3.7 billion as of December 31, 2010. Our total
outstanding liquidity commitments to advance funds for
securities backed by multifamily housing revenue bonds totaled
$17.7 billion as of March 31, 2011 and
$17.8 billion as of December 31, 2010. As of both
March 31, 2011 and December 31, 2010, there were no
liquidity guarantee advances outstanding. For a description of
these programs, see “MD&A—Off-Balance Sheet
Arrangements—Treasury Housing Finance Agency
Initiative” in our 2010
Form 10-K.
RISK
MANAGEMENT
Our business activities expose us to the following three major
categories of financial risk: credit risk, market risk
(including interest rate and liquidity risk) and operational
risk. We 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. In
addition to these financial risks, there is significant
uncertainty regarding the future of our company, including how
long we will continue to be in existence, which we discuss in
more detail in “Legislative and Regulatory
Developments—GSE Reform” and “Risk Factors.”
We are also subject to a number of other risks that could
adversely impact our business, financial condition, earnings and
cash flow, including model, 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
financial risks we face and how we manage credit risk, market
risk and operational risk, see “MD&A—Risk
Management” in our 2010
Form 10-K
and “Risk Factors” in our 2010
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. The metrics used to measure credit risk are
generated using internal models. Our internal models require
numerous assumptions and there are inherent limitations in any
methodology used to estimate macro-economic factors such as home
prices, unemployment and interest rates and their impact on
borrower behavior. When market conditions change rapidly and
dramatically, the assumptions of our models may no longer
accurately capture or reflect the changing conditions. On a
continuous basis, management makes judgments about the
appropriateness of the risk assessments indicated by the models.
See “Risk Factors” in our 2010
Form 10-K
for a discussion of the risks associated with our use of models.
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
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Table of Contents
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 total
single-family mortgage credit book of business accounted for 93%
of our total mortgage credit book of business as of both
March 31, 2011 and December 31, 2010.
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.
Table
33: Composition of Mortgage Credit Book of
Business
(1)
| As of March 31, 2011 | ||||||||||||||||||||||||
| Single-Family | Multifamily | Total | ||||||||||||||||||||||
| Conventional (2) | Government (3) | Conventional (2) | Government (3) | Conventional (2) | Government (3) | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Mortgage assets:
|
||||||||||||||||||||||||
|
Mortgage
loans
(4)
|
$ | 2,799,337 | $ | 52,516 | $ | 171,425 | $ | 453 | $ | 2,970,762 | $ | 52,969 | ||||||||||||
|
Fannie Mae
MBS
(5)(7)
|
6,177 | 1,543 | — | 2 | 6,177 | 1,545 | ||||||||||||||||||
|
Agency mortgage-related
securities
(5)(6)
|
15,616 | 1,186 | — | 32 | 15,616 | 1,218 | ||||||||||||||||||
|
Mortgage revenue
bonds
(5)
|
2,140 | 1,077 | 7,192 | 1,599 | 9,332 | 2,676 | ||||||||||||||||||
|
Other mortgage-related
securities
(5)
|
42,475 | 1,629 | 24,844 | 15 | 67,319 | 1,644 | ||||||||||||||||||
|
Total mortgage assets
|
2,865,745 | 57,951 | 203,461 | 2,101 | 3,069,206 | 60,052 | ||||||||||||||||||
|
Unconsolidated Fannie Mae
MBS
(5)(7)
|
1,814 | 16,985 | 37 | 1,791 | 1,851 | 18,776 | ||||||||||||||||||
|
Other credit
guarantees
(8)
|
16,191 | 2,949 | 16,536 | 380 | 32,727 | 3,329 | ||||||||||||||||||
|
Mortgage credit book of business
|
$ | 2,883,750 | $ | 77,885 | $ | 220,034 | $ | 4,272 | $ | 3,103,784 | $ | 82,157 | ||||||||||||
|
Guaranty book of business
|
$ | 2,823,519 | $ | 73,993 | $ | 187,998 | $ | 2,626 | $ | 3,011,517 | $ | 76,619 | ||||||||||||
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Table of Contents
| As of December 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)
|
$ | 2,766,870 | $ | 52,577 | $ | 170,074 | $ | 476 | $ | 2,936,944 | $ | 53,053 | ||||||||||||
|
Fannie Mae
MBS
(5)(7)
|
5,961 | 1,586 | — | 2 | 5,961 | 1,588 | ||||||||||||||||||
|
Agency mortgage-related
securities
(5)(6)
|
17,291 | 1,506 | — | 24 | 17,291 | 1,530 | ||||||||||||||||||
|
Mortgage revenue
bonds
(5)
|
2,197 | 1,190 | 7,449 | 1,689 | 9,646 | 2,879 | ||||||||||||||||||
|
Other mortgage-related
securities
(5)
|
43,634 | 1,657 | 25,052 | 15 | 68,686 | 1,672 | ||||||||||||||||||
|
Total mortgage assets
|
2,835,953 | 58,516 | 202,575 | 2,206 | 3,038,528 | 60,722 | ||||||||||||||||||
|
Unconsolidated Fannie Mae
MBS
(5)(7)
|
2,230 | 17,238 | 37 | 1,818 | 2,267 | 19,056 | ||||||||||||||||||
|
Other credit
guarantees
(8)
|
15,529 | 3,096 | 16,601 | 393 | 32,130 | 3,489 | ||||||||||||||||||
|
Mortgage credit book of business
|
$ | 2,853,712 | $ | 78,850 | $ | 219,213 | $ | 4,417 | $ | 3,072,925 | $ | 83,267 | ||||||||||||
|
Guaranty book of business
|
$ | 2,790,590 | $ | 74,497 | $ | 186,712 | $ | 2,689 | $ | 2,977,302 | $ | 77,186 | ||||||||||||
| (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. |
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 underwriting and servicing standards,
including the use of credit enhancements; (2) portfolio
diversification and monitoring; (3) management of problem
loans; and (4) REO management. These 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 risk profile of our single-family mortgage credit
book of business is influenced by, among other things, the
credit profile of the borrower, features of the loan, loan
product type, the type of property securing the loan and the
housing market and general economy. We focus more on loans that
we believe pose a higher risk of default, which typically have
been loans associated with higher
mark-to-market
LTV ratios, loans to borrowers with lower FICO credit scores and
certain higher risk loan product categories, such as Alt-A
loans. 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.
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
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Table of Contents
constituted over 99% of our single-family conventional guaranty
book of business as of both March 31, 2011 and
December 31, 2010. We typically obtain this data from the
sellers or servicers of the mortgage loans in our guaranty book
of business and receive representations and warranties from them
as to the accuracy of the information. While we perform various
quality assurance checks by sampling loans to assess compliance
with our underwriting and eligibility criteria, we do not
independently verify all reported information. See “Risk
Factors” in our 2010
Form 10-K
for a discussion of the risk that we could experience mortgage
fraud as a result of this reliance on lender representations.
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
single-family conventional 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 and
Servicing Standards
In evaluating our single-family mortgage credit risk, we closely
monitor changes in housing and economic conditions and the
impact of those changes on the credit risk profile of our
single-family mortgage credit book of business. We regularly
review and provide updates to our underwriting standards and
eligibility guidelines that take into consideration changing
market conditions.
For additional discussion of our acquisition policy,
underwriting standards and use of mortgage insurance as a form
of credit enhancement see “MD&A—Risk
Management—Credit Risk Management—Single-Family
Mortgage Credit Risk Management” in our 2010
Form 10-K.
For a discussion of our aggregate mortgage insurance coverage as
of March 31, 2011 and December 31, 2010, see
“Risk Management—Credit Risk
Management—Institutional Counterparty Credit Risk
Management—Mortgage Insurers.”
Single-Family
Portfolio Diversification and Monitoring
Diversification within our single-family mortgage credit book of
business by product type, loan characteristics and geography is
an important factor that influences credit quality and
performance and may reduce our credit risk. We monitor various
loan attributes, in conjunction with housing market and economic
conditions, to determine if our pricing 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.
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Table of Contents
Table 34 presents our single-family conventional business
volumes and our single-family conventional 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 Single-Family
Conventional Business Volume and Guaranty Book of
Business
(1)
|
Percent of Single-Family
|
Percent of Single-Family
|
|||||||||||||||
|
Conventional Business
Volume
(2)
|
Conventional Guaranty
|
|||||||||||||||
|
For the Three Months Ended
|
Book of
Business
(3)(4)
|
|||||||||||||||
| March 31, | As of | |||||||||||||||
| 2011 | 2010 | March 31, 2011 | December 31, 2010 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Original LTV
ratio:
(5)
|
||||||||||||||||
|
<= 60%
|
30 | % | 30 | % | 24 | % | 24 | % | ||||||||
|
60.01% to 70%
|
16 | 16 | 16 | 16 | ||||||||||||
|
70.01% to 80%
|
38 | 37 | 42 | 41 | ||||||||||||
|
80.01% to
90%
(6)
|
8 | 9 | 9 | 9 | ||||||||||||
|
90.01% to
100%
(6)
|
6 | 6 | 8 | 9 | ||||||||||||
|
Greater than
100%
(6)
|
2 | 2 | 1 | 1 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Weighted average
|
69 | % | 69 | % | 71 | % | 71 | % | ||||||||
|
Average loan amount
|
$ | 213,710 | $ | 224,719 | $ | 156,557 | $ | 155,531 | ||||||||
|
Estimated
mark-to-market
LTV
ratio:
(7)
|
||||||||||||||||
|
<= 60%
|
27 | % | 28 | % | ||||||||||||
|
60.01% to 70%
|
12 | 13 | ||||||||||||||
|
70.01% to 80%
|
17 | 19 | ||||||||||||||
|
80.01% to 90%
|
16 | 15 | ||||||||||||||
|
90.01% to 100%
|
10 | 9 | ||||||||||||||
|
Greater than 100%
|
18 | 16 | ||||||||||||||
|
Total
|
100 | % | 100 | % | ||||||||||||
|
Weighted average
|
79 | % | 77 | % | ||||||||||||
|
Product type:
|
||||||||||||||||
|
Fixed-rate:
(8)
|
||||||||||||||||
|
Long-term
|
68 | % | 72 | % | 74 | % | 74 | % | ||||||||
|
Intermediate-term
|
25 | 20 | 14 | 14 | ||||||||||||
|
Interest-only
|
* | * | 2 | 2 | ||||||||||||
|
Total fixed-rate
|
93 | 92 | 90 | 90 | ||||||||||||
|
Adjustable-rate:
|
||||||||||||||||
|
Interest-only
|
1 | 2 | 3 | 4 | ||||||||||||
|
Other ARMs
|
6 | 6 | 7 | 6 | ||||||||||||
|
Total adjustable-rate
|
7 | 8 | 10 | 10 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Number of property units:
|
||||||||||||||||
|
1 unit
|
98 | % | 98 | % | 97 | % | 97 | % | ||||||||
|
2-4 units
|
2 | 2 | 3 | 3 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
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Table of Contents
|
Percent of Single-Family
|
Percent of Single-Family
|
|||||||||||||||
|
Conventional Business
Volume
(2)
|
Conventional Guaranty
|
|||||||||||||||
|
For the Three Months Ended
|
Book of
Business
(3)(4)
|
|||||||||||||||
| March 31, | As of | |||||||||||||||
| 2011 | 2010 | March 31, 2011 | December 31, 2010 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Property type:
|
||||||||||||||||
|
Single-family homes
|
91 | % | 90 | % | 91 | % | 91 | % | ||||||||
|
Condo/Co-op
|
9 | 10 | 9 | 9 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Occupancy type:
|
||||||||||||||||
|
Primary residence
|
89 | % | 90 | % | 89 | % | 90 | % | ||||||||
|
Second/vacation home
|
5 | 5 | 5 | 4 | ||||||||||||
|
Investor
|
6 | 5 | 6 | 6 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
FICO credit score:
|
||||||||||||||||
|
< 620
|
* | % | 1 | % | 3 | % | 4 | % | ||||||||
|
620 to < 660
|
2 | 2 | 7 | 7 | ||||||||||||
|
660 to < 700
|
7 | 8 | 14 | 15 | ||||||||||||
|
700 to < 740
|
17 | 18 | 21 | 21 | ||||||||||||
|
>= 740
|
74 | 71 | 55 | 53 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Weighted average
|
762 | 758 | 736 | 735 | ||||||||||||
|
Loan purpose:
|
||||||||||||||||
|
Purchase
|
18 | % | 22 | % | 32 | % | 33 | % | ||||||||
|
Cash-out refinance
|
19 | 20 | 29 | 29 | ||||||||||||
|
Other refinance
|
63 | 58 | 39 | 38 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Geographic
concentration:
(9)
|
||||||||||||||||
|
Midwest
|
15 | % | 15 | % | 15 | % | 15 | % | ||||||||
|
Northeast
|
20 | 21 | 19 | 19 | ||||||||||||
|
Southeast
|
20 | 18 | 24 | 24 | ||||||||||||
|
Southwest
|
15 | 14 | 15 | 15 | ||||||||||||
|
West
|
30 | 32 | 27 | 27 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Origination year:
|
||||||||||||||||
|
<= 2001
|
2 | % | 2 | % | ||||||||||||
|
2002
|
3 | 3 | ||||||||||||||
|
2003
|
10 | 11 | ||||||||||||||
|
2004
|
6 | 7 | ||||||||||||||
|
2005
|
8 | 9 | ||||||||||||||
|
2006
|
8 | 8 | ||||||||||||||
|
2007
|
11 | 12 | ||||||||||||||
|
2008
|
8 | 9 | ||||||||||||||
|
2009
|
20 | 21 | ||||||||||||||
|
2010
|
21 | 18 | ||||||||||||||
|
2011
|
3 | — | ||||||||||||||
|
Total
|
100 | % | 100 | % | ||||||||||||
| * | Represents less than 0.5% of single-family conventional business volume or book of business. | |
| (1) | We reflect second lien mortgage loans in the original LTV ratio calculation only when we own both the first and second lien mortgage loans or we own only the second lien mortgage loan. Second lien mortgage loans represented less than 0.5% of our single-family conventional guaranty book of business as of both March 31, 2011 and December 31, 2010. Second lien mortgage loans held by third parties are not reflected in the original LTV or mark-to-market LTV ratios in this table. |
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Table of Contents
| (2) | Calculated based on unpaid principal balance of single-family loans for each category 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) | Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business as of the end of each period. | |
| (4) | Our single-family conventional guaranty book of business includes jumbo-conforming and high-balance loans that represented approximately 4.3% of our single-family conventional guaranty book of business as of March 31, 2011 and 3.9% as of December 31, 2010. See “Business—Our Charter and Regulation of Our Activities—Charter Act-Loan Standards” in our 2010 Form 10-K for additional information on 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 Refi Plus, 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
We continue to see the positive effects of actions we took
beginning in 2008 to significantly strengthen our underwriting
and eligibility standards and change our pricing to promote
sustainable homeownership and stability in the housing market.
The single-family loans we purchased or guaranteed in the first
quarter of 2011 have a strong credit profile with a weighted
average original LTV ratio of 69%, a weighted average FICO
credit score of 762, and a product mix with a significant
percentage of fully amortizing fixed-rate mortgage loans. Due to
lower acquisition volume and the relatively high volume of Refi
Plus loans (including HARP), the LTV ratios at origination for
our 2011 acquisitions to date are higher than for our 2009 and
2010 acquisitions.
Whether our acquisitions throughout 2011 will exhibit the same
credit profile as our recent acquisitions depends 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 market conditions. FHA’s role as the
lower-cost option for some consumers, or in some cases the only
option, for loans with higher LTV ratios 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 acquisitions in the first quarter of
2011 was further influenced by a significant percentage of our
acquisitions representing refinanced loans, which generally have
a strong credit profile because refinancing indicates the
borrower’s ability to make their mortgage payment and
desire to maintain homeownership. Refinancings represented 82%
of our single-family acquisitions in the first quarter of 2011.
While refinanced loans have historically tended to perform
better than loans used for initial home purchase, Refi Plus
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 as high as 125% and, in some cases,
lower FICO credit scores than we generally require. In the first
quarter of 2011, our regulator granted our request for an
extension of our ability to acquire loans under Refi Plus with
LTV ratios greater than 80% and up to 125% for loans originated
through June 2012. Approximately 17% of our single-family
conventional business volume for the first quarter of 2010
consisted of loans with LTV ratios higher than 80% at the time
of purchase. For the first quarter of 2011, these loans
accounted for 16% of our single-family business volume.
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Table of Contents
The prolonged and severe decline in home prices has resulted in
the overall estimated weighted average
mark-to-market
LTV ratio of our single-family conventional guaranty book of
business to remain high at 79% as of March 31, 2011, and
77% as of December 31, 2010. The portion of our
single-family conventional guaranty book of business with an
estimated
mark-to-market
LTV ratio greater than 100% was 18% as of March 31, 2011,
and 16% as of December 31, 2010. If home prices decline
further, more loans may 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 conventional
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. See
“Consolidated Balance Sheet Analysis—Investments in
Mortgage-Related Securities—Investments in Private-Label
Mortgage-Related Securities” for a discussion of our
exposure to private-label mortgage-related securities backed by
Alt-A and subprime loans. As a result of our decision to
discontinue the purchase of newly originated Alt-A loans, except
for those that represent the refinancing of an existing Fannie
Mae loan, 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 will continue to
decrease over time. We are also not currently acquiring newly
originated subprime loans. We have classified a mortgage loan as
Alt-A if the lender that delivered the loan to us classified the
loan as Alt-A based on documentation or other features. We have
classified a mortgage loan as subprime if the loan was
originated by a lender specializing in subprime business or by a
subprime division of a large lender. We exclude from the
subprime classification loans originated by these lenders if we
acquired the loans in accordance with our standard underwriting
criteria, which typically require compliance by the seller with
our Selling Guide (including standard representations and
warranties)
and/or
evaluation of the loans through our Desktop Underwriter system.
We apply our 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 loans included in our single-family
conventional guaranty book of business of $203.7 billion as
of March 31, 2011, represented approximately 7.2% of our
single-family conventional guaranty book of business. The unpaid
principal balance of subprime loans included in our
single-family conventional guaranty book of business of
$6.3 billion as of March 31, 2011, represented
approximately 0.2% of our single-family conventional guaranty
book of business. See “Table 34: Risk Characteristics of
Single-Family Conventional Business Volume and Guaranty Book of
Business” for information on our single-family book of
business.
The outstanding unpaid principal balance of our jumbo-conforming
and high-balance loans was $122.4 billion, or 4.3% of our
single-family conventional guaranty book of business, as of
March 31, 2011 and $109.7 billion, or 3.9% of our
single-family conventional guaranty book of business, as of
December 31, 2010. Jumbo-conforming and high-balance loans
refer to high-balance loans we acquired pursuant to the Economic
Stimulus Act of 2008, the 2008 Reform Act and the American
Recovery and Reinvestment Act of 2009, which increased our
conforming loan limits in certain high-cost areas above our
standard conforming loan limit. These increases are currently in
effect for mortgages originated through September 30, 2011
and will expire at that time, unless Congress acts to extend
them. The standard conforming loan limit for a
one-unit
property was $417,000 in 2011 and 2010. See
“Business—Our Charter and Regulation of Our
Activities—Charter Act—Loan Standards” in our
2010
Form 10-K
for additional information on our loan limits.
The outstanding unpaid principal balance of reverse mortgage
whole loans included in our mortgage portfolio was
$50.9 billion as of March 31, 2011 and
$50.8 billion as of December 31, 2010. Our
reverse-mortgage portfolio could increase over time, as each
month the scheduled and unscheduled payments, interest, mortgage
insurance premium, servicing fee, and default-related costs
accrue to increase the unpaid principal balance. The majority of
these loans are home equity conversion mortgages insured by the
federal government through the FHA. Because home equity
conversion mortgages are insured by the federal government, we
believe that we have limited exposure to losses on these loans.
In December 2010, we communicated to our lenders that we are
exiting the reverse mortgage business and will no longer acquire
newly originated home equity conversion mortgages.
62
Table of Contents
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. 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 existing or potential delinquent loan
payments as “workouts.” Our loan workouts reflect our
various types of home retention strategies and foreclosure
alternatives.
Our home retention solutions are intended to help borrowers stay
in their homes and include loan modifications, repayment plans
and forbearances. Because we believe that reducing delays and
implementing solutions that can be executed in a timely manner
and early in the delinquency increases the likelihood that our
problem loan management strategies will be successful in
avoiding a default or minimizing severity, it is important for
our servicers to work with borrowers to complete these solutions
as early in their delinquency as feasible. If the servicer
cannot provide a viable home retention solution for a problem
loan, the servicer will 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. However, the
existence of a second lien may limit our ability to provide
borrowers with loan workout options, including those that are
part of our foreclosure prevention efforts. We occasionally
execute third-party sales, where we sell the property to a third
party immediately prior to entering the foreclosure process.
When appropriate, we seek to move to foreclosure expeditiously.
Our mortgage servicers are the primary point of contact for
borrowers and perform a vital role in our efforts to reduce
defaults and pursue foreclosure alternatives. We seek to improve
the servicing of our delinquent loans through a variety of
means, including improving our communications with and training
of our servicers, increasing the number of our personnel who
manage our servicers, directing servicers to contact borrowers
at an earlier stage of delinquency and improve their telephone
communications with borrowers, and holding our servicers
accountable for following our requirements. We continue to work
with some of our servicers to test and implement
“high-touch” servicing protocols designed for managing
higher-risk loans, which include lower ratios of loans per
servicer employee, beginning borrower outreach strategies
earlier in the delinquency cycle and establishing a single point
of resolution for distressed borrowers.
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 single-family conventional loans that we own and that
back Fannie Mae MBS in the calculation of the single-family
delinquency rate. Percentage of book outstanding calculations
are based on the unpaid principal balance of loans for each
category divided by the unpaid principal balance of our total
single-family guaranty book of business for which we have
detailed loan-level information.
63
Table of Contents
Problem
Loan Statistics
The following table displays the delinquency status of loans in
our single-family conventional guaranty book of business (based
on number of loans) as of the periods indicated.
Table
35: Delinquency Status of Single-Family Conventional
Loans
| As of | ||||||||||||
|
March 31,
|
December 31,
|
March 31,
|
||||||||||
| 2011 | 2010 | 2010 | ||||||||||
|
As of period end:
|
||||||||||||
|
Delinquency status:
|
||||||||||||
|
30 to 59 days delinquent
|
1.93 | % | 2.32 | % | 2.09 | % | ||||||
|
60 to 89 days delinquent
|
0.70 | 0.87 | 0.90 | |||||||||
|
Seriously delinquent
|
4.27 | 4.48 | 5.47 | |||||||||
|
Percentage of seriously delinquent loans that have been
delinquent for more than 180 days
|
71 | % | 67 | % | 62 | % | ||||||
Early Stage Delinquency
The prolonged and severe decline in home prices, coupled with
continued high unemployment, caused an overall increase in the
number of early stage delinquencies—loans that are
delinquent but less than three monthly payments past
due—over the past several years. However, the number of
early stage delinquencies has decreased as of March 31,
2011 compared with December 31, 2010.
Serious Delinquency
The number of loans at risk of becoming seriously delinquent has
diminished in 2011 as early stage delinquencies have decreased.
As of March 31, 2011, the percentage and number of our
single-family conventional loans that were seriously delinquent
decreased, as compared with December 31, 2010, and has
decreased every month since February 2010. The decrease in our
serious delinquency rate in 2010 and the first quarter of 2011
was primarily the result of home retention solutions, mainly
loan modifications, and foreclosure alternatives completed,
combined with foreclosures when a viable solution was not
available. The volume of loans impacted by these actions
continues to exceed the number of loans becoming seriously
delinquent, thereby decreasing our percentage of seriously
delinquent loans. The decrease is also attributable to our
acquisition of loans with stronger credit profiles in 2010 and
the first quarter of 2011.
We expect serious delinquency rates will continue to be affected
in the future by changes in economic factors such as home
prices, unemployment rates and household wealth, and by the
extent to which borrowers with modified loans again become
delinquent in their payments.
We continue to work with our servicers to reduce delays in
determining and executing the appropriate workout solution.
However, the continued negative conditions in the current
economic environment, such as the sustained weakness in the
housing market and high unemployment, have continued to
adversely affect the serious delinquency rates across our
single-family conventional guaranty book of business and the
serious delinquency rate remains elevated. Additionally, the
period of time that loans are seriously delinquent continues to
remain extended.
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 single-family
conventional loans in our single-family guaranty book of
business.
64
Table of Contents
Table
36: Serious Delinquency Rates
| March 31, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||||||||||||||
|
Percentage of
|
Serious
|
Percentage of
|
Serious
|
Percentage of
|
Serious
|
|||||||||||||||||||
|
Book
|
Delinquency
|
Book
|
Delinquency
|
Book
|
Delinquency
|
|||||||||||||||||||
| Outstanding | Rate | Outstanding | Rate | Outstanding | Rate | |||||||||||||||||||
|
Single-family conventional delinquency rates by geographic
region:
(1)
|
||||||||||||||||||||||||
|
Midwest
|
15 | % | 3.99 | % | 15 | % | 4.16 | % | 16 | % | 4.96 | % | ||||||||||||
|
Northeast
|
19 | 4.30 | 19 | 4.38 | 19 | 4.74 | ||||||||||||||||||
|
Southeast
|
24 | 6.08 | 24 | 6.15 | 24 | 7.22 | ||||||||||||||||||
|
Southwest
|
15 | 2.73 | 15 | 3.05 | 15 | 4.17 | ||||||||||||||||||
|
West
|
27 | 3.61 | 27 | 4.06 | 26 | 5.55 | ||||||||||||||||||
|
Total single-family conventional loans
|
100 | % | 4.27 | % | 100 | % | 4.48 | % | 100 | % | 5.47 | % | ||||||||||||
|
Single-family conventional loans:
|
||||||||||||||||||||||||
|
Credit enhanced
|
15 | % | 10.13 | % | 15 | % | 10.60 | % | 17 | % | 13.29 | % | ||||||||||||
|
Non-credit enhanced
|
85 | 3.26 | 85 | 3.40 | 83 | 3.90 | ||||||||||||||||||
|
Total single-family conventional loans
|
100 | % | 4.27 | % | 100 | % | 4.48 | % | 100 | % | 5.47 | % | ||||||||||||
| (1) | See footnote 9 to “Table 34: Risk Characteristics of Single - Family Conventional Business Volume and Guaranty Book of Business” for states included in each geographic region. |
While loans across our single-family guaranty book of business
have been affected by the weak market conditions, loans in
certain states, certain higher-risk loan categories, such as
Alt-A loans, subprime loans and loans with higher
mark-to-market
LTVs, and our 2006 and 2007 loan vintages continue to exhibit
higher than average delinquency rates
and/or
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 high.
65
Table of Contents
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.
Table
37: Single-Family Conventional Serious Delinquency
Rate Concentration Analysis
| As of | ||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||||||||||||||||||||||||||||||||||||||
|
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) | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
States:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Arizona
|
$ | 70,055 | 2 | % | 5.16 | % | 110 | % | $ | 71,052 | 2 | % | 6.23 | % | 105 | % | $ | 74,831 | 3 | % | 8.76 | % | 103 | % | ||||||||||||||||||||||||
|
California
|
518,569 | 19 | 3.35 | 78 | 507,598 | 18 | 3.89 | 76 | 492,294 | 17 | 5.72 | 77 | ||||||||||||||||||||||||||||||||||||
|
Florida
|
182,943 | 7 | 12.40 | 110 | 184,101 | 7 | 12.31 | 107 | 192,724 | 7 | 13.27 | 103 | ||||||||||||||||||||||||||||||||||||
|
Nevada
|
30,856 | 1 | 9.40 | 133 | 31,661 | 1 | 10.66 | 128 | 34,166 | 1 | 13.95 | 130 | ||||||||||||||||||||||||||||||||||||
|
Select Midwest
states
(2)
|
294,182 | 10 | 4.62 | 82 | 292,734 | 11 | 4.80 | 80 | 302,017 | 11 | 5.65 | 80 | ||||||||||||||||||||||||||||||||||||
|
All other states
|
1,718,421 | 61 | 3.34 | 73 | 1,695,615 | 61 | 3.46 | 71 | 1,701,543 | 61 | 4.19 | 70 | ||||||||||||||||||||||||||||||||||||
|
Product type:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Alt-A
|
203,709 | 7 | 13.45 | 100 | 211,770 | 8 | 13.87 | 96 | 238,325 | 9 | 16.22 | 94 | ||||||||||||||||||||||||||||||||||||
|
Subprime
|
6,328 | * | 27.47 | 108 | 6,499 | * | 28.20 | 103 | 7,179 | * | 31.47 | 100 | ||||||||||||||||||||||||||||||||||||
|
Vintages:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
2006
|
218,938 | 8 | 12.12 | 109 | 232,009 | 8 | 12.19 | 104 | 277,752 | 10 | 13.42 | 100 | ||||||||||||||||||||||||||||||||||||
|
2007
|
315,420 | 11 | 13.08 | 109 | 334,110 | 12 | 13.24 | 104 | 401,782 | 14 | 14.85 | 99 | ||||||||||||||||||||||||||||||||||||
|
All other vintages
|
2,280,667 | 81 | 2.50 | 72 | 2,216,642 | 80 | 2.62 | 70 | 2,118,041 | 76 | 3.12 | 68 | ||||||||||||||||||||||||||||||||||||
|
Estimated
mark-to-
market LTV ratio: |
||||||||||||||||||||||||||||||||||||||||||||||||
|
Greater than
100%
(1)
|
499,432 | 18 | 15.72 | 130 | 435,991 | 16 | 17.70 | 130 | 439,327 | 16 | 21.79 | 129 | ||||||||||||||||||||||||||||||||||||
|
Select combined risk characteristics:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Original LTV ratio > 90% and FICO score < 620
|
20,656 | 1 | 20.20 | 113 | 21,205 | 1 | 21.41 | 109 | 23,395 | 1 | 26.94 | 106 | ||||||||||||||||||||||||||||||||||||
| * | Percentage is less than 0.5%. | |
| (1) | Second lien mortgage 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. |
Loan
Workout Metrics
The efforts of our mortgage servicers are critical in keeping
people in their homes, preventing foreclosures and providing
homeowner assistance. 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. Additionally, partnering with our servicers, civic
and community leaders and housing industry partners, we have
launched a series of nationwide Mortgage Help Centers to
accelerate the response time for struggling borrowers with loans
owned by us. As of March 31, 2011, we have established six
Mortgage Help Centers which completed approximately 800 home
retention plans in the first quarter of 2011.
66
Table of Contents
Our approach to workouts continues to address the large number
of borrowers facing long-term, rather than short-term, financial
hardships due to prolonged economic stress and high levels of
unemployment. Accordingly, the vast majority of loan
modifications we completed during the first quarter of 2011
were, as in recent periods, concentrated on lowering or
deferring the borrowers’ monthly mortgage payments for a
predetermined period of time to allow borrowers to work through
their hardships.
In addition, we continue to focus on alternatives to foreclosure
for borrowers who are unable to retain their homes. Our
servicers work with a borrower to sell their home prior to
foreclosure in a preforeclosure sale or accept a
deed-in-lieu
of foreclosure whereby the borrower voluntarily signs over the
title to their property to the servicer. These alternatives are
designed to reduce our credit losses while helping borrowers
avoid having to go through a foreclosure. Further, in
cooperation with several Multiple Listing Services
(“MLS”) across the nation, we developed the Short Sale
Assistance Desk (“Assistance Desk”) to assist real
estate professionals in handling post-offer short sale issues
that may relate to servicer responsiveness, the existence of a
second lien, or issues involving mortgage insurance. The
Assistance Desk leverages the relationship between the
participating MLSs and their members to collect and submit
information to us using a dedicated submission form on the MLS
website. Complementing this streamlined service, the
participating MLS provides us with data to help improve
valuations and make quicker decisions regarding short sale
requests. The Assistance Desk is meant to serve as a catalyst
for progress towards a resolution for the homeowner.
Table 38 provides statistics on our single-family loan workouts
that were completed, by type, for the periods indicated. These
statistics include loan modifications but do not include trial
modifications 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, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||||||||||||||
|
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
|
$ | 10,668 | 51,043 | $ | 82,826 | 403,506 | $ | 19,005 | 93,756 | |||||||||||||||
|
Repayment plans and forbearances completed
|
1,374 | 9,916 | 4,385 | 31,579 | 1,137 | 8,682 | ||||||||||||||||||
|
HomeSaver Advance first-lien loans
|
— | — | 688 | 5,191 | 178 | 2,588 | ||||||||||||||||||
| $ | 12,042 | 60,959 | $ | 87,899 | 440,276 | $ | 20,320 | 105,026 | ||||||||||||||||
|
Foreclosure alternatives:
|
||||||||||||||||||||||||
|
Preforeclosure sales
|
$ | 3,415 | 15,344 | $ | 15,899 | 69,634 | $ | 3,817 | 16,457 | |||||||||||||||
|
Deeds-in-lieu
of foreclosure
|
318 | 1,776 | 1,053 | 5,757 | 158 | 869 | ||||||||||||||||||
| $ | 3,733 | 17,120 | $ | 16,952 | 75,391 | $ | 3,975 | 17,326 | ||||||||||||||||
|
Total loan workouts
|
$ | 15,775 | 78,079 | $ | 104,851 | 515,667 | $ | 24,295 | 122,352 | |||||||||||||||
|
Loan workouts as a percentage of single-family guaranty book of
business
(1)
|
2.18 | % | 1.73 | % | 3.66 | % | 2.87 | % | 3.38 | % | 2.68 | % | ||||||||||||
| (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. |
The volume of workouts completed in the first quarter of 2011
decreased compared with the first quarter of 2010, in part
because we began to require that certain non-HAMP modifications
go through a trial period, which lowered the number of
modifications that became permanent. The number of foreclosure
alternatives we agreed to during the first quarter of 2011
remains high as these are favorable solutions for a growing
number of borrowers. We expect the volume of our foreclosure
alternatives to remain high throughout the remainder of 2011.
67
Table of Contents
During the first quarter of 2011, approximately two-thirds of
our loan modifications were completed under HAMP. During the
first quarter of 2011, we initiated approximately 31,000 trial
modifications under HAMP compared with 92,000 during the first
quarter of 2010. We also initiated other types of loan
modifications, repayment plans and forbearances. It is difficult
to predict how many of these trial modifications and initiated
plans will be completed.
Table 39 displays the profile of loan modifications (HAMP and
non-HAMP) provided to borrowers for the three months ended
March 31, 2011 and the year ended December 31, 2010.
Table
39: Loan Modification Profile
|
For the
|
For The
|
|||||||
|
Three Months Ended
|
Year Ended
|
|||||||
| March 31, 2011 | December 31, 2010 | |||||||
|
Term extension, interest rate reduction, or combination of
both
(1)
|
96 | % | 93 | % | ||||
|
Initial reduction in monthly
payment
(2)
|
94 | 91 | ||||||
|
Estimated
mark-to-market
LTV ratio > 100%
|
64 | 53 | ||||||
|
Troubled debt restructurings
|
97 | 94 | ||||||
| (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. |
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 refinance their mortgages or sell their
homes for a price that allows them to pay off their mortgage
obligation as their mortgages are greater than the value of
their homes. Additionally, the serious delinquency rate for
these loans tends to be significantly higher than the overall
average serious delinquency rate. As of March 31, 2011, the
serious delinquency rate for loans with a
mark-to-market
LTV ratio greater than 100% was 16%, compared with our overall
average single-family serious delinquency rate of 4.27%.
Approximately 65% of loans modified during the first quarter of
2010 were current or had paid off as of one year following the
loan modification date. In comparison, 39% of loans modified
during the first quarter of 2009 were current or had paid off as
of one year following the loan modification date. There is
significant uncertainty regarding the ultimate long term success
of our current modification efforts because of the economic and
financial pressures on borrowers. Modifications, even those with
reduced monthly payments, may also not be sufficient to help
borrowers with second liens and other significant non-mortgage
debt obligations. FHFA, other agencies of the
U.S. government or Congress may ask us to undertake new
initiatives to support the housing and mortgage markets should
our current modification efforts ultimately not perform in a
manner that results in the stabilization of these markets.
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, household wealth and home prices.
68
Table of Contents
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, | ||||||||
| 2011 | 2010 | |||||||
|
Single-family foreclosed properties (number of properties):
|
||||||||
|
Beginning of period inventory of single-family foreclosed
properties
(REO)
(1)
|
162,489 | 86,155 | ||||||
|
Acquisitions by geographic
area:
(2)
|
||||||||
|
Midwest
|
11,285 | 15,095 | ||||||
|
Northeast
|
2,004 | 3,590 | ||||||
|
Southeast
|
10,976 | 17,748 | ||||||
|
Southwest
|
13,666 | 12,882 | ||||||
|
West
|
15,618 | 12,614 | ||||||
|
Total properties acquired through foreclosure
|
53,549 | 61,929 | ||||||
|
Dispositions of REO
|
(62,814 | ) | (38,095 | ) | ||||
|
End of period inventory of single-family foreclosed properties
(REO)
(1)
|
153,224 | 109,989 | ||||||
|
Carrying value of single-family foreclosed properties (dollars
in
millions)
(3)
|
$ | 14,086 | $ | 11,423 | ||||
|
Single-family foreclosure
rate
(4)
|
1.19 | % | 1.36 | % | ||||
| (1) | Includes acquisitions through deeds-in-lieu of foreclosure. | |
| (2) | See footnote 9 to “Table 34: Risk Characteristics of Single-Family Conventional 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 condensed consolidated balance sheets as a component of “Acquired property, net.” | |
| (4) | Estimated based on the annualized total number of properties acquired through foreclosure as a percentage of the total number of loans in our single-family conventional guaranty book of business as of the end of each respective period. |
The continued weak economy, as well as high unemployment rates,
continue to result in an increase in the percentage of our
mortgage loans that transition from delinquent to REO status,
either through foreclosure or
deed-in-lieu
of foreclosure. Additionally, the prolonged decline in home
prices on a national basis has significantly reduced the values
of our single-family REO. Our foreclosure rates remain high.
However, foreclosure levels were lower than what they otherwise
would have been in the first quarter of 2011 due to the delays
caused by servicer foreclosure process deficiencies and the
resulting foreclosure pause. Additionally, foreclosure levels
during 2010 were affected by 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 home retention and foreclosure prevention alternatives
have been exhausted.
The percentage of our properties that we are unable to market
for sale remains high. The most common reasons for our inability
to market properties for sale are: (1) properties are
within the period during which state law allows the former
mortgagor and second lien holders to redeem the property (states
which allow this are known as “redemption states”);
(2) properties are still occupied by the person or personal
property and the eviction process is not yet complete
(“occupied status”); 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 and increases our foreclosed property expense related
to costs associated with ensuring that the property is vacant
and maintaining the property. For example, as of March 31,
2011, approximately 25% compared with 27% as of
December 31, 2010, of our properties that we were unable to
market for sale were in redemption status, which lengthens the
time a property is in our REO inventory by an average of three
to six months.
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Additionally, as of March 31, 2011, approximately 39%
compared with 40% as of December 31, 2010, of our
properties that we were unable to market for sale were in
occupied status, which lengthens the time a property is in our
REO inventory by an average of one to three months.
As shown in Table 41 we have experienced a disproportionate
share of foreclosures in certain states as compared with their
share of our guaranty book of business. This is primarily
because these states have had significant home price
depreciation or weak economies, and in the case of California
and Florida specifically, a significant number of Alt-A loans.
Table
41: Single-Family Acquired Property Concentration
Analysis
| For the Three Months Ended | ||||||||||||||||
| As of | March 31, 2011 | March 31, 2010 | ||||||||||||||
| March 31, 2011 | December 31, 2010 |
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
|
29 | % | 28 | % | 39 | % | 36 | % | ||||||||
|
Illinois, Indiana, Michigan, and Ohio
|
10 | 11 | 17 | 19 | ||||||||||||
| (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) | Calculated based on the number of properties acquired through foreclosure during the period divided by the total number of properties acquired through foreclosure. |
We continue to work with our servicers to manage our foreclosure
timelines and although we have expanded our loan workout
initiatives to help borrowers stay in their homes, our
foreclosure levels for the first quarter of 2011 remain high as
a result of the continued adverse impact that the weak economy
and high unemployment have had on the financial condition of
borrowers. Although the foreclosure pause has negatively
affected our foreclosure timelines and reduced the number of new
REO acquisitions, we cannot yet predict the full impact of the
pause.
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 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. We typically obtain this data from the sellers or
servicers of the mortgage loans in our guaranty book of business
and receive representations and warranties from them as to the
accuracy of the information. While we perform various quality
assurance checks by sampling loans to assess compliance with our
underwriting and eligibility criteria, we do not independently
verify all reported information. The portion of our multifamily
guaranty book of business for which we have detailed loan
level-information, excluding loans that have been defeased,
constituted 99% of our total multifamily guaranty book as of
both March 31, 2011 and December 31, 2010.
70
Table of Contents
See “Risk Factors” in our 2010
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.
Multifamily
Acquisition Policy and Underwriting Standards
Our Multifamily 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 (“DUS”) program, which is
comprised of multiple lenders that span the spectrum from large
financial institutions 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 depending
on the product type
and/or
loan
size. Loans delivered to us by DUS lenders and their affiliates
represented 84% of our multifamily guaranty book of business as
of March 31, 2011 and December 31, 2010.
We use various types of credit enhancement arrangements for our
multifamily loans, including lender risk-sharing, lender
repurchase agreements, pool insurance, subordinated
participations in mortgage loans or structured pools, cash and
letter of credit collateral agreements, and
cross-collateralization/cross-default provisions. The most
prevalent form of credit enhancement on multifamily loans is
lender risk-sharing. Lenders in the DUS program typically share
in loan-level credit losses in one of two ways: (1) they
bear losses up to the first 5% of unpaid principal balance of
the loan and share in remaining losses up to a prescribed limit;
or (2) they share up to one-third of the credit losses on
an equal basis with us. Other lenders typically share or absorb
credit losses based on a negotiated percentage of the loan or
the pool balance.
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 66% as of March 31, 2011 and
67% as of December 31, 2010. The percentage of our
multifamily guaranty book of business with an original LTV ratio
greater than 80% was 5% as of both March 31, 2011 and
December 31, 2010. We present the current risk profile of
our multifamily guaranty book of business in “Note 6,
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. We are managing our exposure to refinancing risk for
multifamily loans maturing in the next several years. We have a
team that proactively manages upcoming loan maturities to
minimize losses on maturing loans. This team assists lenders and
borrowers with timely and appropriate refinancing of maturing
loans with the goal of reducing defaults and foreclosures
related to loans maturing in the near term. 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
Unfavorable economic conditions have caused our multifamily
serious delinquency rate and the level of defaults to remain
elevated. Since delinquency rates are a lagging indicator, even
if the market shows some improvement, we expect to incur
additional credit losses. We periodically refine our
underwriting standards in response to market conditions and
enact proactive portfolio management and monitoring which are
each designed to keep credit losses to a low level relative to
our multifamily guaranty book of business.
71
Table of Contents
Problem
Loan Statistics
Table 42 provides a comparison of our multifamily serious
delinquency rates for loans with and without credit enhancement
in our multifamily guaranty book of business. We classify
multifamily loans as seriously delinquent when payment is
60 days or more past due. We include the unpaid principal
balance of 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
| As of | ||||||||||||||||||||||||
| March 31, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||||||||||||||
|
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
|
90 | % | 0.59 | % | 89 | % | 0.67 | % | 89 | % | 0.69 | % | ||||||||||||
|
Non-credit enhanced
|
10 | 1.05 | 11 | 1.01 | 11 | 1.56 | ||||||||||||||||||
|
Total multifamily
loans |
100 | % | 0.64 | % | 100 | % | 0.71 | % | 100 | % | 0.79 | % | ||||||||||||
The multifamily serious delinquency rate decreased as of
March 31, 2011 compared with both December 31, 2010
and March 31, 2010 as national multifamily market
fundamentals continue to improve. Table 43 provides a comparison
of our multifamily serious delinquency rates for loans acquired
through DUS lenders and loans acquired through non-DUS lenders.
Table
43: Multifamily Concentration Analysis
| As of |
Percentage of
|
|||||||||||||||||||||||||||||||
| March 31, 2011 | December 31, 2010 | March 31, 2010 |
Multifamily Credit Losses
|
|||||||||||||||||||||||||||||
|
Percentage
|
Serious
|
Percentage
|
Serious
|
Percentage
|
Serious
|
For the Three Months Ended
|
||||||||||||||||||||||||||
|
of Book
|
Delinquency
|
of Book
|
Delinquency
|
of Book
|
Delinquency
|
March 31, | ||||||||||||||||||||||||||
| Outstanding | Rate | Outstanding | Rate | Outstanding | Rate | 2011 | 2010 | |||||||||||||||||||||||||
|
DUS small balance
loans
(1)
|
8 | % | 0.68 | % | 8 | % | 0.55 | % | 8 | % | 0.47 | % | 8 | % | 12 | % | ||||||||||||||||
|
DUS non small balance
loans (2) |
70 | 0.48 | 70 | 0.56 | 68 | 0.56 | 70 | 72 | ||||||||||||||||||||||||
|
Non-DUS small balance
loans
(1)
|
10 | 1.41 | 10 | 1.47 | 11 | 1.41 | 15 | 11 | ||||||||||||||||||||||||
|
Non-DUS non small balance
loans
(2)
|
12 | 0.88 | 12 | 0.97 | 13 | 1.62 | 7 | 5 | ||||||||||||||||||||||||
| (1) | Loans with original unpaid principal balances less than or equal to $3 million except in high cost markets where they are loans with original unpaid principal balances less than or equal to $5 million. | |
| (2) | Loans with original unpaid principal balances greater than $3 million except in high cost markets where they are loans with original unpaid principal balances greater than $5 million. |
The DUS loans in our guaranty book of business have lower
delinquency rates when compared with the non-DUS loans in our
guaranty book primarily due to the DUS model, which has several
features that align our interest with those of the borrowers and
lenders. Smaller balance non-DUS loans continue to represent a
disproportionate share of delinquencies but they are generally
covered by loss sharing arrangements, which limit the credit
losses incurred by us.
In addition, Arizona, Florida, Georgia, and Ohio, have a
disproportionate share of seriously delinquent loans compared
with their share of the multifamily guaranty book of business as
a result of slow economic recovery in certain areas of these
states. These states accounted for 39% of multifamily serious
delinquencies but only 10% of the multifamily guaranty book of
business.
72
Table of Contents
REO
Management
Foreclosure and REO activity affect the level of credit losses.
Table 44 compares our held for sale multifamily REO balances for
the periods indicated.
Table
44: Multifamily Foreclosed Properties
|
For the Three Months Ended
|
||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
|
Multifamily foreclosed properties (number of properties):
|
||||||||
|
Beginning of period inventory of multifamily foreclosed
properties (REO)
|
222 | 73 | ||||||
|
Total properties acquired through foreclosure
|
50 | 47 | ||||||
|
Disposition of REO
|
(37 | ) | (13 | ) | ||||
|
End of period inventory of multifamily foreclosed properties
(REO)
|
235 | 107 | ||||||
|
Carrying value of multifamily foreclosed properties (dollars in
millions)
|
$ | 576 | $ | 319 | ||||
The increase in our multifamily foreclosed property inventory
reflects the continuing stress on our multifamily guaranty book
of business as certain local markets and properties continue to
exhibit weak fundamentals, though national multifamily market
fundamentals improved in 2011.
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 credit risk is the risk that these
institutional counterparties may fail to fulfill their
contractual obligations to us, including seller/servicers who
are obligated to repurchase loans from us or reimburse us for
losses in certain circumstances. Defaults by a counterparty with
significant obligations to us could result in significant
financial losses to us.
See “MD&A—Risk Management—Credit Risk
Management—Institutional Counterparty Credit Risk
Management” in our 2010
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 Seller/Servicers
Our business with our mortgage seller/servicers is concentrated.
Our ten largest single-family mortgage servicers, including
their affiliates, serviced 76% of our single-family guaranty
book of business as of March 31, 2011, compared to 77% as
of December 31, 2010. Our largest mortgage servicer is Bank
of America which, together with its affiliates, serviced
approximately 25% of our single-family guaranty book of business
as of March 31, 2011, compared with 26% as of
December 31, 2010. In addition, we had two other mortgage
servicers, JPMorgan Chase & Co. and Wells Fargo Bank,
N.A., that, with their affiliates, each serviced over 10% of our
single-family guaranty book of business as of March 31,
2011. In addition, Wells Fargo Bank serviced over 10% of our
multifamily guaranty book of business as of both March 31,
2011 and December 31, 2010. Because we delegate the
servicing of our mortgage loans to mortgage servicers and do not
have our own servicing function, servicers’ lack of
appropriate process controls or 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 2011, our primary mortgage servicer
counterparties have generally continued to meet their
obligations to us. The large 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.
73
Table of Contents
Our mortgage seller/servicers are obligated to repurchase loans
or foreclosed properties, or reimburse us for losses if the
foreclosed property has been sold, under certain circumstances,
such as if it is determined that the mortgage loan did not meet
our underwriting or eligibility requirements, if loan
representations and warranties are violated or if mortgage
insurers rescind coverage. We refer to our demands that
seller/servicers meet these obligations collectively as
“repurchase requests.” During the first quarter of
2011, the number of our repurchase requests remained high. The
aggregate unpaid principal balance of loans repurchased by our
seller/servicers pursuant to their contractual obligations was
approximately $1.6 billion, compared to $1.8 billion
during the first quarter of 2010. In addition, as of
March 31, 2011, we had $8.6 billion in outstanding
repurchase requests related to loans that had been reviewed for
potential breaches of contractual obligations, compared to
$5.0 billion as of December 31, 2010. As of
March 31, 2011, approximately 58% of our total outstanding
repurchase requests had been made to one of our
seller/servicers, compared to 41% as of December 31, 2010.
As of March 31, 2011, 20% of our outstanding repurchase
requests had been outstanding for more than 120 days from
either the original loan repurchase request date or, for lenders
remitting after the REO is disposed, the date of our final loss
determination, compared to 30% as of December 31, 2010.
The amount of our outstanding repurchase requests provided above
is based on the unpaid principal balance of the loans underlying
the repurchase request issued, not the actual amount we have
requested from the lenders. In some cases, we allow lenders to
remit payment equal to our loss, including imputed interest, on
the loan after we have disposed of the REO, which is less than
the unpaid principal balance of the loan. As a result, we expect
our actual cash receipts relating to these outstanding
repurchase requests to be significantly lower than this amount.
In addition, amounts relating to repurchase requests originating
from missing documentation or loan files are excluded from the
total requests outstanding until the completion of a full
underwriting review, once the documents and loan files are
received.
We continue to work with our mortgage seller/servicers to
fulfill outstanding repurchase requests; however, as the volume
of repurchase requests increases, the risk increases that
affected seller/servicers will not be willing or able to meet
the terms of their repurchase obligations and we may be unable
to recover on all outstanding loan repurchase obligations
resulting from seller/servicers’ breaches of contractual
obligations. If a significant seller/servicer counterparty, or a
number of seller/servicer counterparties, fails to fulfill its
repurchase obligations to us, it could result in a significant
increase in our credit losses and have a material adverse effect
on our results of operations and financial condition. We expect
that the amount of our outstanding repurchase requests could
remain high in 2011.
We are exposed to the risk that a mortgage seller/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. See “Risk
Factors” in our 2010
Form 10-K
for additional discussion on risks of mortgage fraud to which we
are exposed.
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 $94.8 billion
on the single-family mortgage loans in our guaranty book of
business as of March 31, 2011, which represented
approximately 3% of our single-family guaranty book of business
as of March 31, 2011. Primary mortgage insurance
represented $90.2 billion of this total, and pool mortgage
insurance was $4.6 billion. We had total mortgage insurance
coverage risk in force of $95.9 billion on the
single-family mortgage loans in our guaranty book of business as
of December 31, 2010, which represented approximately 3% of
our single-family guaranty book of business as of
December 31, 2010. Primary mortgage insurance represented
$91.2 billion of this total, and pool mortgage insurance
was $4.7 billion of this total.
74
Table of Contents
Table 45 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, 2011. 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, 2011.
Table
45: Mortgage Insurance Coverage
| As of March 31, 2011 | ||||||||||||
| Maximum Coverage (2) | ||||||||||||
|
Counterparty:
(1)
|
Primary | Pool | Total | |||||||||
| (Dollars in millions) | ||||||||||||
|
Mortgage Guaranty Insurance Corporation
|
$ | 21,073 | $ | 1,781 | $ | 22,854 | ||||||
|
Radian Guaranty, Inc.
|
14,956 | 339 | 15,295 | |||||||||
|
Genworth Mortgage Insurance Corporation
|
14,080 | 76 | 14,156 | |||||||||
|
United Guaranty Residential Insurance Company
|
13,779 | 172 | 13,951 | |||||||||
|
PMI Mortgage Insurance Co.
|
11,901 | 289 | 12,190 | |||||||||
|
Republic Mortgage Insurance Company
|
9,317 | 1,206 | 10,523 | |||||||||
|
Triad Guaranty Insurance Corporation
|
2,877 | 779 | 3,656 | |||||||||
|
CMG Mortgage Insurance
Company
(3)
|
1,940 | — | 1,940 | |||||||||
| (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 Insurance Society. |
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, should they fall below their
regulatory capital requirements. In anticipation that a waiver
may not be granted or continued by their regulator, at least one
of our mortgage insurers arranged for another mortgage insurer
subsidiary or affiliate to write new business on its behalf. The
parent companies of several of our largest mortgage insurer
counterparties raised capital, which may improve their ability
to meet state-imposed
risk-to-capital
limits and their ability to continue paying our claims in full
as they come due, to the extent that the capital raised by the
parent companies is contributed to their respective mortgage
insurance entities. Though we are unable to determine how long
certain of our mortgage insurer counterparties will remain below
their state-imposed
risk-to-capital
limits, at this time we continue to receive payments on our
claims as they come due, except where deferred payment terms
have been established.
Our mortgage insurer counterparties have increased the number of
mortgage loans for which they have rescinded coverage. In those
cases where mortgage insurance was obtained and the mortgage
insurer has rescinded coverage, we generally require the
seller/servicer to repurchase the loan or indemnify us against
loss.
In 2010, some mortgage insurers disclosed that they entered into
agreements with lenders whereby they agreed to waive certain
rights to investigate claims for some of the lenders’
insured loans in return for some compensation against loss.
Although these agreements do not affect our rights to demand
repurchase in the event of violations of lender representations
and warranties, these agreements are likely to result in fewer
mortgage insurance rescissions for certain groups of loans.
Fewer rescissions may result in Fannie Mae devoting more
resources to an independent review process to determine whether
loans subject to these agreements have underlying origination
defects.
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Table of Contents
In April 2011, we issued an announcement which prohibited
servicers from entering into any agreement that modifies the
terms of an approved mortgage insurance master policy on loans
delivered to us. We also required servicers to disclose any such
agreements with mortgage insurers to us. With respect to our
mortgage insurance counterparties, changes to the substance of
their master policies have required our prior approval since
2005. In October 2010, we required our top mortgage insurers to
notify us promptly of any agreement that affects their
investigative or rescission rights. In April 2011, we further
clarified and amended our mortgage insurer requirements to
prohibit any agreement that has the effect of modifying a master
policy, including any investigative or rescission rights, absent
our approval. By taking these steps, we hope to mitigate the
risk of loss for loans that would have resulted in mortgage
insurance rescission, and—as a result—a lender
repurchase, for loan defects that we may not have otherwise
uncovered in our independent review process.
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 Guaranty
Insurance Corporation, as of May 6, 2011, our private
mortgage insurer counterparties remain qualified to conduct
business with us.
As of March 31, 2011, our allowance for loan losses of
$67.6 billion, allowance for accrued interest receivable of
$2.9 billion and reserve for guaranty losses of
$257 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 collectively reserved. This amount is comprised
of the contractual recovery of approximately $17.4 billion
as of March 31, 2011 and an adjustment of approximately
$975 million which reduces the contractual recovery for our
assessment of our mortgage insurer counterparties’
inability to fully pay those claims. As of December 31,
2010, our allowance for loan losses of $61.6 billion,
allowance for accrued interest receivable of $3.4 billion
and reserve for guaranty losses of $323 million
incorporated an estimated recovery amount of approximately
$16.4 billion from mortgage insurance related both to loans
that are individually measured for impairment and those that are
collectively reserved. This amount is comprised of the
contractual recovery of approximately $17.5 billion as of
December 31, 2010 and an adjustment of approximately
$1.2 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 our mortgage portfolio subsequently
goes into foreclosure, we charge off the loan, eliminating any
previously-recorded loss reserves, and record REO and a mortgage
insurance receivable for the claim proceeds deemed probable of
recovery, as appropriate. However, if a mortgage insurer
rescinds insurance coverage, the initial receivable becomes due
from the mortgage seller/servicer. We had outstanding
receivables of $4.1 billion as of March 31, 2011 and
$4.4 billion as of December 31, 2010 related to
amounts claimed on insured, defaulted loans that we have not yet
received, of which $650 million as of March 31, 2011
and $648 million as of December 31, 2010 was due from
our mortgage seller/servicers. We assessed the receivables for
collectibility, and they were recorded net of a valuation
allowance of $271 million as of March 31, 2011 and
$317 million as of December 31, 2010 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
$1.6 billion for the first quarter of 2011 and
$6.4 billion for the year ended December 31, 2010.
Financial
Guarantors
We were the beneficiary of financial guarantees totaling
$8.6 billion as of March 31, 2011 and
$8.8 billion as of December 31, 2010 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 government and its agencies that totaled
$23.9 billion as of March 31, 2011 and
$25.7 billion as of December 31, 2010.
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With the exception of Ambac Assurance Corporation, none of our
financial guarantor counterparties has failed to repay us for
claims under guaranty contracts. However, 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. We model our securities assuming the
benefit of those external financial guarantees from guarantors
that we determine are creditworthy. For additional discussions
of our model methodology and key inputs used to estimate
other-than-temporary
impairment see “Note 5, Investments in
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 $14.8 billion as of March 31,
2011 and $15.6 billion as of December 31, 2010. As of
March 31, 2011, 55% of our maximum potential loss recovery
on single-family loans was from three lenders. As of
December 31, 2010, 56% of our maximum potential loss
recovery on single-family loans was from three lenders. Our
maximum potential loss recovery from lenders under these risk
sharing agreements on multifamily loans was $30.7 billion
as of March 31, 2011 and $30.3 billion as of
December 31, 2010. As of both March 31, 2011 and
December 31, 2010, 41% of our maximum potential loss
recovery on multifamily loans was from three lenders.
Unfavorable market conditions have adversely affected, and
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 46% as of both
March 31, 2011 and December 31, 2010. The percentage
of these recourse obligations to lender counterparties rated
below investment grade was 23% as of both March 31, 2011
and December 31, 2010. The remaining percentage of these
recourse obligations were to lender counterparties that were not
rated by rating agencies, which was 31% as of both
March 31, 2011 and December 31, 2010. Given the
stressed financial condition of some 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 lenders that span the
spectrum from large depositories to independent non-bank
financial institutions. As of March 31, 2011, approximately
54% of the unpaid principal balance of loans in our guaranty
book of business was serviced by our DUS lenders, which are
institutions with an external investment grade credit rating or
a guarantee from an affiliate with an external investment grade
credit rating. Given the recourse nature of the DUS program, the
lenders are bound by eligibility standards that dictate, among
other items, minimum capital and liquidity levels, and the
posting of collateral at a highly rated custodian to secure a
portion of the lenders’ future obligations. To ensure the
level of risk associated with these lenders remains within our
standards, we actively monitor their financial condition.
Custodial
Depository Institutions
A total of $47.9 billion in deposits for single-family
payments were received and held by 287 institutions in the month
of March 2011 and a total of $75.4 billion in deposits for
single-family payments were received and held by 289
institutions in the month of December 2010. Of these total
deposits, 93% as of March 31, 2011 and 92% as of
December 31, 2010 were held by institutions rated as
investment grade by Standard & Poor’s,
Moody’s and Fitch. Our ten largest custodial depository
institutions held 93% of these deposits as of both
March 31, 2011 and December 31, 2010.
Issuers
of Investments Held in our Cash and Other Investments
Portfolio
Our cash and other investments portfolio primarily consists of
cash and cash equivalents, federal funds sold and securities
purchased under agreements to resell or similar arrangements,
U.S. Treasury securities and
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asset-backed securities. See “Liquidity and Capital
Management—Liquidity Management—Cash and Other
Investments Portfolio” for more detailed information on our
cash and other investments portfolio. Our counterparty risk is
primarily with financial institutions and Treasury.
Our cash and other investments portfolio, which totaled
$79.6 billion as of March 31, 2011, included
$32.5 billion of U.S. Treasury securities and
$10.8 billion of unsecured positions. All of our unsecured
positions were short-term deposits with financial institutions
that had short-term credit ratings of
A-1,
P-1,
F1 (or
its equivalent) or higher from Standard & Poor’s,
Moody’s and Fitch ratings, respectively. As of
December 31, 2010, our cash and other investments portfolio
totaled $61.8 billion and included $31.5 billion of
U.S. Treasury securities and $10.3 billion of
unsecured positions. All of our unsecured positions were
short-term deposits with financial institutions which had
short-term credit ratings of
A-1,
P-1,
F1 (or
equivalent) or higher from Standard & Poor’s,
Moody’s and Fitch ratings, respectively.
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 included in our condensed
consolidated balance sheets in “Other assets.” We
manage our exposure to derivatives counterparties by requiring
collateral in specified instances.
Our net credit exposure on derivatives contracts decreased to
$104 million as of March 31, 2011, from
$152 million as of December 31, 2010. We had
outstanding interest rate and foreign currency derivative
transactions with 15 counterparties as of March 31, 2011
and December 31, 2010. Derivatives transactions with nine
of our counterparties accounted for approximately 91% of our
total outstanding notional amount as of March 31, 2011,
with each of these counterparties accounting for between
approximately 5% and 16% of the total outstanding notional
amount. In addition to the 15 counterparties with whom we had
outstanding notional amounts as of March 31, 2011, we had a
master netting agreement with one more counterparty with whom we
may enter into interest rate derivative or foreign currency
derivative transactions in the future.
See “Note 9, Derivative Instruments” for
information on the outstanding notional amount and additional
information on our risk management derivative contracts as of
March 31, 2011 and December 31, 2010. See “Risk
Factors” in our 2010
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 to 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 and spread risk in “MD&A—Risk
Management—Market Risk Management, Including Interest Rate
Risk Management” in our 2010
Form 10-K.
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 calculated using internal models that require standard
assumptions regarding interest rates and future prepayments of
principal over the remaining life of our securities. These
assumptions are derived based on the characteristics of the
underlying structure of the securities and historical prepayment
rates experienced at specified interest rate levels, taking into
account current market conditions, the current
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mortgage rates of our existing outstanding loans, loan age and
other factors. On a continuous basis, management makes judgments
about the appropriateness of the risk assessments and will make
adjustments as necessary to properly assess our interest rate
exposure and manage our interest rate risk. The methodologies
used to calculate risk estimates are periodically changed on a
prospective basis to reflect improvements in the underlying
estimation process.
Interest
Rate Sensitivity to Changes in Interest Rate Level and Slope of
Yield Curve
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 of 16.7 basis points for the
1-year
rate
and 8.3 basis points for the
30-year
rate. We believe the aforementioned interest rate shocks for our
monthly disclosures represent moderate movements in interest
rates over a one-month period.
Duration
Gap
Duration gap measures the price sensitivity of our assets and
liabilities 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 gap indicates that the duration of our assets
exceeds the duration of our liabilities. We disclose duration
gap on a monthly basis under the caption “Interest Rate
Risk Disclosures” in our Monthly Summaries, which are
available on our website and announced in a press release.
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; 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.
In addition, Table 46 also provides the average, minimum,
maximum and standard deviation for duration gap and for the most
adverse market value impact on the net portfolio for
non-parallel and parallel interest rate shocks for the three
months ended March 31, 2011.
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Table
46: Interest Rate Sensitivity of Net Portfolio to
Changes in Interest Rate Level and Slope of Yield
Curve
(1)
| As of | ||||||||
| March 31, 2011 | December 31, 2010 | |||||||
| (Dollars in billions) | ||||||||
|
Rate level shock:
|
||||||||
|
-100 basis points
|
$ | (0.2 | ) | $ | (0.8 | ) | ||
|
-50 basis points
|
— | (0.2 | ) | |||||
|
+50 basis points
|
(0.1 | ) | (0.2 | ) | ||||
|
+100 basis points
|
(0.3 | ) | (0.5 | ) | ||||
|
Rate slope shock:
|
||||||||
|
-25 basis points (flattening)
|
— | (0.1 | ) | |||||
|
+25 basis points (steepening)
|
— | 0.1 | ||||||
| For the Three Months Ended March 31, 2011 | ||||||||||||
|
Duration
|
Rate Slope Shock
|
Rate Level Shock
|
||||||||||
| Gap | 25 Bps | 50 Bps | ||||||||||
| Exposure | ||||||||||||
| (In months) | ||||||||||||
| (Dollars in billions) | ||||||||||||
|
Average
|
0.4 | $ | 0.1 | $ | 0.2 | |||||||
|
Minimum
|
(0.4 | ) | — | 0.1 | ||||||||
|
Maximum
|
0.8 | 0.2 | 0.4 | |||||||||
|
Standard deviation
|
0.2 | — | 0.1 | |||||||||
| (1) | Computed based on changes in LIBOR swap rates. |
A majority of the interest rate risk associated with our
mortgage-related securities and loans is hedged with our debt
issuance, which includes callable debt. We use derivatives to
help manage the residual interest rate risk exposure between our
assets and liabilities. Derivatives have enabled us to keep our
interest rate risk exposure at consistently low levels in a wide
range of interest-rate environments. Table 47 shows an example
of how derivatives impacted the net market value exposure for a
50 basis point parallel interest rate shock.
Table
47: Derivative Impact on Interest Rate Risk (50 Basis
Points)
|
Before
|
After
|
Effect of
|
||||||||||
| Derivatives | Derivatives | Derivatives | ||||||||||
| (Dollars in billions) | ||||||||||||
|
As of March 31, 2011
|
$ | (1.3 | ) | $ | (0.1 | ) | $ | 1.2 | ||||
|
As of December 31, 2010
|
$ | (0.9 | ) | $ | (0.2 | ) | $ | 0.7 | ||||
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.
In “MD&A—Risk Management—Market Risk
Management, Including Interest Rate Risk
Management—Measurement of Interest Rate Risk—Other
Interest Rate Risk Information” in our 2010
Form 10-K,
we provided additional interest rate sensitivities including
separate disclosure of the potential impact on the fair value of
our trading assets and other financial instruments. As of
March 31, 2011, these sensitivities were relatively
unchanged as compared with December 31, 2010. The fair
value of our trading financial instruments and our other
financial instruments as of March 31, 2011 and
December 31, 2010 can be found in “Note 13, Fair
Value.”
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Table of Contents
Liquidity
Risk Management
See “Liquidity and Capital Management—Liquidity
Management” for a discussion on how we manage liquidity
risk.
IMPACT OF
FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
We identify and discuss the expected impact on our condensed
consolidated financial statements of recently issued accounting
pronouncements in “Note 1, Summary of Significant
Accounting Policies.”
FORWARD-LOOKING
STATEMENTS
This report includes statements that constitute forward-looking
statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 (“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 expectation that loans in our new single-family book of business will be profitable over their lifetime; | |
| • | Our estimate that, while single-family loans that we acquired from 2005 through 2008 will give rise to additional credit losses that we have not yet realized, we have reserved for the substantial majority of the remaining losses; | |
| • | Our expectation that, if FHA continues to be the lower-cost option for some consumers, and in some cases the only option, for loans with higher LTV ratios, our market share could be adversely impacted if the market shifts away from refinance activity, which is likely to occur when interest rates rise; | |
| • | Our belief that loans we have acquired since 2009 would become unprofitable if home prices declined by more than 15% from their March 2011 levels over the next five years based on our home price index; | |
| • | Our expectations regarding whether loans we acquired in specific years will be profitable or unprofitable, or perform close to break-even; | |
| • | The possibility that changes in home prices, other economic conditions or borrower behavior could change our expectations regarding whether loans we acquired in 2004 will be profitable; | |
| • | Our expectation that defaults on loans we acquired from 2005 through 2008 and the resulting charge-offs will occur over a period of years; | |
| • | Our expectation that it will take years before our REO inventory is reduced to pre-2008 levels; | |
| • | Our expectation that we will realize as credit losses an estimated two-thirds of the fair value losses on loans purchased out of MBS trusts that are reflected in our condensed consolidated balance sheets, and recover the remaining one-third through our condensed consolidated results of operations, depending primarily on changes in home prices and loss severity; | |
| • | Our expectation that employment will likely need to post sustained improvement for an extended period to have a positive impact on housing; | |
| • | Our expectation that weakness in the housing and mortgage markets will continue in 2011; | |
| • | Our expectation that home sales are unlikely to increase until the unemployment rate improves further; |
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| • | Our expectation that single-family default and severity rates, as well as the level of single-family foreclosures, will remain high in 2011; | |
| • | Our expectation that multifamily charge-offs in 2011 will remain commensurate with 2010 levels as certain local markets and properties continue to exhibit weak fundamentals; | |
| • | Our expectation that the pace of our loan acquisitions for the remainder of 2011 will be significantly lower than in 2010 and the first quarter of 2011 because we expect increasing mortgage rates and, to a lesser extent, the high number of mortgages that have already refinanced to low rates in recent years will lead to fewer refinancings; | |
| • | Our expectation that our future revenues will be negatively impacted to the extent our acquisitions decline and we receive fewer risk-based fees; | |
| • | Our estimation that total originations in the U.S. single-family mortgage market in 2011 will decrease from 2010 levels by approximately one-third, from an estimated $1.5 trillion to an estimated $1.0 trillion, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will decline from approximately $1.1 trillion to approximately $413 billion; | |
| • | Our expectation that home prices on a national basis will decline further, with greater declines in some geographic areas than others, before stabilizing in late 2011; | |
| • | Our expectation that the peak-to-trough home price decline on a national basis will range between 22% and 29%, as compared with our expectation at the time we filed our 2010 Form 10-K that the peak-to-trough home price decline on a national basis would range between 21% and 26%; | |
| • | Our expectation that our credit-related expenses and our credit losses will be higher in 2011 than in 2010; | |
| • | Our expectation that we will not earn profits in excess of our annual dividend obligation to Treasury for the indefinite future; | |
| • | Our expectation that Congress will continue to hold hearings and consider legislation in 2011 on the future status of Fannie Mae and Freddie Mac; | |
| • | Our expectation that, as drafted, bills introduced in Congress that would require FHFA to make a determination within two years of enactment whether the GSEs were financially viable and, if the GSEs were determined to be not financially viable, to place them into receivership may upon enactment impair our ability to issue securities in the capital markets and therefore our ability to conduct our business, absent the federal government providing an explicit guarantee of their existing and ongoing liabilities; | |
| • | Our expectation that we will continue to purchase loans from MBS trusts as they become four or more consecutive monthly payments delinquent subject to market conditions, servicer capacity, and other constraints, including the limit on mortgage assets that we may own pursuant to the senior preferred stock purchase agreement; | |
| • | Our expectation that our mortgage portfolio will continue to decrease due to the restrictions on the amount of mortgage assets we may own under the terms of our senior preferred stock purchase agreement with Treasury; | |
| • | Our expectation that the current market premium portion of our current estimate of fair value will not impact future Treasury draws, which is based on our intention not to have another party assume the credit risk inherent in our book of business; | |
| • | Our expectation that our debt funding needs will decline in future periods as we reduce the size of our mortgage portfolio in compliance with the requirements of the senior preferred stock purchase agreement; | |
| • | Our expectation that our acquisitions of Alt-A mortgage loans will continue to be minimal in future periods and the percentage of the book of business attributable to Alt-A will continue to decrease over time; |
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| • | Our expectation that serious delinquency rates will continue to be affected in the future by changes in economic factors such as home prices, unemployment rates and household wealth, and by the extent to which borrowers with modified loans again become delinquent in their payments; | |
| • | Our expectation that the volume of our foreclosure alternatives will remain high throughout the remainder of 2011; | |
| • | Our belief that the performance of our workouts will be highly dependent on economic factors, such as unemployment rates, household wealth and home prices; | |
| • | Our expectation that the amount of our outstanding repurchase requests to seller/servicers could remain high in 2011; | |
| • | The possibility that, in light of agreements by mortgage insurers with lenders to waive certain rights to investigate claims, fewer rescissions of mortgage insurance may result in our devoting more resources to an independent review process to determine whether there are underlying origination defects in loans subject to these agreements; | |
| • | Our belief that one or more of our financial guarantor counterparties may not be able to fully meet their obligations to us in the future; | |
| • | Our expectation that we will continue to need funding from Treasury to avoid triggering FHFA’s obligation to place us into receivership if the Director of FHFA makes a written determination that our assets are less than our obligations for a period of 60 days after the filing deadline for our Form 10-K or Form 10-Q with the SEC; | |
| • | Our belief 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; and | |
| • | Our expectation that the pause in foreclosures as a result of servicer foreclosure process deficiencies will likely continue to result in longer foreclosure timelines and higher credit-related expenses. |
Forward-looking statements reflect our management’s
expectations, forecasts or predictions of future conditions,
events or results based on various assumptions and
management’s estimates of trends and economic factors in
the markets in which we are active, as well as our business
plans. They are not guarantees of future performance. By their
nature, forward-looking statements are subject to risks and
uncertainties. Our actual results and financial condition may
differ, possibly materially, from the anticipated results and
financial condition indicated in these forward-looking
statements. There are a number of factors that could cause
actual conditions, events or results to differ materially from
those described in the forward-looking statements contained in
this report, including, but not limited to the following: the
uncertainty of our future; legislative and regulatory changes
affecting us; challenges we face in retaining and hiring
qualified employees; the deteriorated credit performance of many
loans in our guaranty book of business; the conservatorship and
its effect on our business; the investment by Treasury and its
effect on our business; adverse effects from activities we
undertake to support the mortgage market and help borrowers;
limitations on our ability to access the debt capital markets;
further disruptions in the housing and credit markets; defaults
by one or more institutional counterparties; our reliance on
mortgage servicers; deficiencies in servicer and law firm
foreclosure processes and the consequences of those
deficiencies; guidance by the Financial Accounting Standards
Board (“FASB”); operational control weaknesses; our
reliance on models; the level and volatility of interest rates
and credit spreads; changes in the structure and regulation of
the financial services industry; and those factors described in
“Risk Factors” in this report and in our 2010
Form 10-K,
as well as the factors described in “Executive
Summary—Providing Liquidity, Our Strong New Book of
Business and Our Expected Losses on our Legacy Book of Loans
Acquired before 2009—Factors that Could Cause Actual
Results to be Materially Different from Our Estimates and
Expectations” in this report.
Readers are cautioned to place forward-looking statements in
this report or that we make from time to time into proper
context by carefully considering the factors discussed in
“Risk Factors” in our 2010
Form 10-K
and 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 because of new information,
future events or otherwise, except as required under the federal
securities laws.
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| Item 1. | Financial Statements |
FANNIE
MAE
(In conservatorship)
Condensed Consolidated Balance Sheets—(Unaudited)
(Dollars in millions, except share amounts)
(In conservatorship)
Condensed Consolidated Balance Sheets—(Unaudited)
(Dollars in millions, except share amounts)
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents (includes $717 and $348, respectively,
related to consolidated trusts)
|
$ | 19,831 | $ | 17,297 | ||||
|
Restricted cash (includes $33,405 and $59,619, respectively,
related to consolidated trusts)
|
36,730 | 63,678 | ||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
26,250 | 11,751 | ||||||
|
Investments in securities:
|
||||||||
|
Trading, at fair value (includes $21 as of both periods related
to consolidated trusts)
|
57,035 | 56,856 | ||||||
|
Available-for-sale,
at fair value (includes $1,678 and $1,055, respectively, related
to consolidated trusts)
|
89,613 | 94,392 | ||||||
|
Total investments in securities
|
146,648 | 151,248 | ||||||
|
Mortgage loans:
|
||||||||
|
Loans held for sale, at lower of cost or fair value (includes
$1,055 and $661, respectively, related
|
||||||||
|
to consolidated trusts)
|
1,414 | 915 | ||||||
|
Loans held for investment, at amortized cost:
|
||||||||
|
Of Fannie Mae
|
402,352 | 407,228 | ||||||
|
Of consolidated trusts (includes $2,969 and $2,962,
respectively, at fair value and loans pledged as collateral that
may be sold or repledged of $2,241 and $2,522, respectively)
|
2,613,848 | 2,577,133 | ||||||
|
Total loans held for investment
|
3,016,200 | 2,984,361 | ||||||
|
Allowance for loan losses
|
(67,557 | ) | (61,556 | ) | ||||
|
Total loans held for investment, net of allowance
|
2,948,643 | 2,922,805 | ||||||
|
Total mortgage loans
|
2,950,057 | 2,923,720 | ||||||
|
Accrued interest receivable, net (includes $8,918 and $8,910,
respectively, related to consolidated trusts)
|
11,303 | 11,279 | ||||||
|
Acquired property, net
|
15,264 | 16,173 | ||||||
|
Other assets (includes $242 and $593, respectively, related to
consolidated trusts)
|
20,959 | 26,826 | ||||||
|
Total assets
|
$ | 3,227,042 | $ | 3,221,972 | ||||
| LIABILITIES AND EQUITY (DEFICIT) | ||||||||
|
Liabilities:
|
||||||||
|
Accrued interest payable (includes $9,673 and $9,712,
respectively, related to consolidated trusts)
|
$ | 13,828 | $ | 13,764 | ||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
25 | 52 | ||||||
|
Debt:
|
||||||||
|
Of Fannie Mae (includes $884 and $893, respectively, at fair
value)
|
761,187 | 780,044 | ||||||
|
Of consolidated trusts (includes $2,193 and $2,271,
respectively, at fair value)
|
2,447,589 | 2,416,956 | ||||||
|
Other liabilities (includes $713 and $893, respectively, related
to consolidated trusts)
|
12,831 | 13,673 | ||||||
|
Total liabilities
|
3,235,460 | 3,224,489 | ||||||
|
Commitments and contingencies (Note 14)
|
— | — | ||||||
|
Fannie Mae stockholders’ equity (deficit):
|
||||||||
|
Senior preferred stock, 1,000,000 shares issued and
outstanding
|
91,200 | 88,600 | ||||||
|
Preferred stock, 700,000,000 shares are
authorized—576,868,039 and 576,868,139 shares issued
|
||||||||
|
and outstanding, respectively
|
20,204 | 20,204 | ||||||
|
Common stock, no par value, no maximum
authorization—1,270,092,862 and 1,270,092,708 shares
|
||||||||
|
issued, respectively; 1,119,073,956 and
1,118,504,194 shares outstanding, respectively
|
667 | 667 | ||||||
|
Accumulated deficit
|
(111,669 | ) | (102,986 | ) | ||||
|
Accumulated other comprehensive loss
|
(1,501 | ) | (1,682 | ) | ||||
|
Treasury stock, at cost, 151,018,906 and
151,588,514 shares, respectively
|
(7,400 | ) | (7,402 | ) | ||||
|
Total Fannie Mae stockholders’ deficit
|
(8,499 | ) | (2,599 | ) | ||||
|
Noncontrolling interest
|
81 | 82 | ||||||
|
Total deficit
|
(8,418 | ) | (2,517 | ) | ||||
|
Total liabilities and equity (deficit)
|
$ | 3,227,042 | $ | 3,221,972 | ||||
See Notes to Condensed Consolidated Financial Statements
84
Table of Contents
(In conservatorship)
Condensed Consolidated Statements of Operations and Comprehensive Loss—(Unaudited)
(Dollars and shares in millions, except per share amounts)
|
For the Three
|
||||||||
|
Months Ended
|
||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
|
Interest income:
|
||||||||
|
Trading securities
|
$ | 284 | $ | 315 | ||||
|
Available-for-sale
securities
|
1,213 | 1,473 | ||||||
|
Mortgage loans (includes $31,865 and $34,321, respectively,
related to consolidated trusts)
|
35,590 | 37,619 | ||||||
|
Other
|
28 | 39 | ||||||
|
Total interest income
|
37,115 | 39,446 | ||||||
|
Interest expense:
|
||||||||
|
Short-term debt (includes $3 and $2, respectively, related to
consolidated trusts)
|
107 | 118 | ||||||
|
Long-term debt (includes $27,852 and $31,458, respectively,
related to consolidated trusts)
|
32,048 | 36,539 | ||||||
|
Total interest expense
|
32,155 | 36,657 | ||||||
|
Net interest income
|
4,960 | 2,789 | ||||||
|
Provision for loan losses
|
(10,587 | ) | (11,939 | ) | ||||
|
Net interest loss after provision for loan losses
|
(5,627 | ) | (9,150 | ) | ||||
|
Investment gains, net
|
75 | 166 | ||||||
|
Other-than-temporary
impairments
|
(57 | ) | (186 | ) | ||||
|
Noncredit portion of
other-than-temporary
impairments recognized in other comprehensive income
|
13 | (50 | ) | |||||
|
Net
other-than-temporary
impairments
|
(44 | ) | (236 | ) | ||||
|
Fair value gains (losses), net
|
289 | (1,705 | ) | |||||
|
Debt extinguishment gains (losses), net
|
13 | (124 | ) | |||||
|
Fee and other income
|
237 | 233 | ||||||
|
Non-interest income (loss)
|
570 | (1,666 | ) | |||||
|
Administrative expenses:
|
||||||||
|
Salaries and employee benefits
|
320 | 324 | ||||||
|
Professional services
|
189 | 194 | ||||||
|
Occupancy expenses
|
42 | 41 | ||||||
|
Other administrative expenses
|
54 | 46 | ||||||
|
Total administrative expenses
|
605 | 605 | ||||||
|
Benefit for guaranty losses
|
(33 | ) | (36 | ) | ||||
|
Foreclosed property expense (income)
|
488 | (19 | ) | |||||
|
Other expenses
|
352 | 230 | ||||||
|
Total expenses
|
1,412 | 780 | ||||||
|
Loss before federal income taxes
|
(6,469 | ) | (11,596 | ) | ||||
|
Provision (benefit) for federal income taxes
|
2 | (67 | ) | |||||
|
Net loss
|
(6,471 | ) | (11,529 | ) | ||||
|
Other comprehensive income:
|
||||||||
|
Changes in unrealized losses on
available-for-sale
securities, net of reclassification adjustments and taxes
|
179 | 1,370 | ||||||
|
Other
|
2 | 2 | ||||||
|
Total other comprehensive income
|
181 | 1,372 | ||||||
|
Total comprehensive loss
|
(6,290 | ) | (10,157 | ) | ||||
|
Less: Comprehensive income attributable to the noncontrolling
interest
|
— | (1 | ) | |||||
|
Total comprehensive loss attributable to Fannie Mae
|
$ | (6,290 | ) | $ | (10,158 | ) | ||
|
Net loss
|
$ | (6,471 | ) | $ | (11,529 | ) | ||
|
Less: Net income attributable to the noncontrolling interest
|
— | (1 | ) | |||||
|
Net loss attributable to Fannie Mae
|
(6,471 | ) | (11,530 | ) | ||||
|
Preferred stock dividends
|
(2,216 | ) | (1,527 | ) | ||||
|
Net loss attributable to common stockholders
|
$ | (8,687 | ) | $ | (13,057 | ) | ||
|
Loss per share—Basic and Diluted
|
$ | (1.52 | ) | $ | (2.29 | ) | ||
|
Weighted-average common shares outstanding—Basic and Diluted
|
5,698 | 5,692 | ||||||
See Notes to Condensed Consolidated Financial Statements
85
Table of Contents
(In conservatorship)
Condensed Consolidated Statements of Cash Flows—(Unaudited)
(Dollars in millions)
|
For the Three
|
||||||||
|
Months Ended
|
||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
|
Net cash provided by (used in) operating activities
|
$ | 2,566 | $ | (30,885 | ) | |||
|
Cash flows provided by investing activities:
|
||||||||
|
Purchases of trading securities held for investment
|
(185 | ) | (6,695 | ) | ||||
|
Proceeds from maturities of trading securities held for
investment
|
522 | 805 | ||||||
|
Proceeds from sales of trading securities held for investment
|
409 | 15,068 | ||||||
|
Purchases of
available-for-sale
securities
|
(44 | ) | (107 | ) | ||||
|
Proceeds from maturities of
available-for-sale
securities
|
3,851 | 4,120 | ||||||
|
Proceeds from sales of
available-for-sale
securities
|
498 | 4,428 | ||||||
|
Purchases of loans held for investment
|
(15,745 | ) | (12,725 | ) | ||||
|
Proceeds from repayments of loans held for investment of Fannie
Mae
|
5,381 | 3,920 | ||||||
|
Proceeds from repayments of loans held for investment of
consolidated trusts
|
121,533 | 108,903 | ||||||
|
Net change in restricted cash
|
26,948 | 3,174 | ||||||
|
Advances to lenders
|
(15,646 | ) | (10,338 | ) | ||||
|
Proceeds from disposition of acquired property and
preforeclosure sales
|
10,979 | 7,678 | ||||||
|
Net change in federal funds sold and securities purchased under
agreements to resell or similar agreements
|
(14,499 | ) | (9,135 | ) | ||||
|
Other, net
|
(163 | ) | (382 | ) | ||||
|
Net cash provided by investing activities
|
123,839 | 108,714 | ||||||
|
Cash flows used in financing activities:
|
||||||||
|
Proceeds from issuance of debt of Fannie Mae
|
163,776 | 293,013 | ||||||
|
Payments to redeem debt of Fannie Mae
|
(183,073 | ) | (277,495 | ) | ||||
|
Proceeds from issuance of debt of consolidated trusts
|
72,567 | 88,750 | ||||||
|
Payments to redeem debt of consolidated trusts
|
(177,551 | ) | (172,385 | ) | ||||
|
Payments of cash dividends on senior preferred stock to Treasury
|
(2,216 | ) | (1,527 | ) | ||||
|
Proceeds from senior preferred stock purchase agreement with
Treasury
|
2,600 | 15,300 | ||||||
|
Net change in federal funds purchased and securities sold under
agreements to repurchase
|
26 | 180 | ||||||
|
Net cash used in financing activities
|
(123,871 | ) | (54,164 | ) | ||||
|
Net increase in cash and cash equivalents
|
2,534 | 23,665 | ||||||
|
Cash and cash equivalents at beginning of period
|
17,297 | 6,812 | ||||||
|
Cash and cash equivalents at end of period
|
$ | 19,831 | $ | 30,477 | ||||
|
Cash paid during the period for interest
|
$ | 32,689 | $ | 36,788 | ||||
See Notes to Condensed Consolidated Financial Statements
86
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 subject to
government oversight and regulation. Our regulators include the
Federal Housing Finance Agency (“FHFA”), the
U.S. Department of Housing and Urban Development
(“HUD”), the U.S. Securities and Exchange
Commission (“SEC”), and the U.S. Department of
the Treasury (“Treasury”). The U.S. government
does not guarantee our securities or other obligations.
Conservatorship
On September 7, 2008, the Secretary of the Treasury and the
Director of FHFA announced several actions taken by Treasury and
FHFA regarding Fannie Mae, which included: (1) placing us
in conservatorship; (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 Federal Housing Finance
Regulatory Reform Act of 2008, (together, the “GSE
Act”), the conservator immediately succeeded to
(1) all rights, titles, powers and privileges of Fannie
Mae, and of any stockholder, officer or director of Fannie Mae
with respect to Fannie Mae and its assets, and (2) title to
the books, records and assets of any other legal custodian of
Fannie Mae. The conservator has since delegated specified
authorities to our Board of Directors and has delegated to
management the authority to conduct our
day-to-day
operations. The conservator retains the authority to withdraw
its delegations at any time.
We were directed by FHFA to voluntarily delist our common stock
and each listed series of our preferred stock from the New York
Stock Exchange and the Chicago Stock Exchange. The last trading
day for the listed securities on the New York Stock Exchange and
the Chicago Stock Exchange was July 7, 2010, and since
July 8, 2010, the securities have been traded on the
over-the-counter
market.
As of May 6, 2011, 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. FHFA’s proposed rule on
conservatorship and receivership operations, published on
July 9, 2010, defines “reasonable period” as a
period of 18 months following the appointment of a
conservator or receiver. This proposed rule has not been
finalized.
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 6, 2011, FHFA has not exercised this power.
Neither the conservatorship nor the terms of our agreements with
Treasury change 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 there
continues to be uncertainty regarding the future of our company,
including how long we will continue to be in existence, the
extent of our role in the
87
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)
market, what form we will have, and what ownership interest, if
any, our current common and preferred stockholders will hold in
us after the conservatorship is terminated. 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 former 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. We are
not aware of any plans of FHFA to significantly change our
business model or capital structure in the near-term.
Impact
of U.S. Government Support
We 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 $90.2 billion as of March 31, 2011
under Treasury’s funding commitment and the Acting Director
of FHFA has submitted a request for an additional
$8.5 billion from Treasury to eliminate our net worth
deficit as of March 31, 2011. The aggregate liquidation
preference of the senior preferred stock was $91.2 billion
as of March 31, 2011 and will increase to
$99.7 billion as a result of FHFA’s request on our
behalf for funds to eliminate our net worth deficit as of
March 31, 2011.
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 as of December 31, 2012, Treasury’s remaining
funding commitment will be $124.8 billion
($200 billion less $75.2 billion cumulatively drawn
through March 31, 2010) less the smaller of either
(a) our positive net worth as of December 31, 2012 or
(b) our cumulative draws from Treasury for the calendar
quarters in 2010 through 2012.
As consideration for Treasury’s funding commitment, we
issued one million shares of senior preferred stock and a
warrant to purchase shares of our common stock to Treasury. A
quarterly commitment fee was scheduled to be set by Treasury
beginning on March 31, 2011. This commitment fee was waived
by Treasury for the first quarter of 2011. On March 31,
2011, FHFA was notified by Treasury that it was waiving the
commitment fee for the second quarter of 2011 due to the
continued fragility of the U.S. mortgage market and because
Treasury believed that imposing the commitment fee would not
generate increased compensation for taxpayers. Treasury further
noted that it would reevaluate the situation during the next
calendar quarter to determine whether to set the quarterly
commitment fee for the next quarter under the senior preferred
stock purchase agreement.
We fund our business primarily through the issuance of
short-term and long-term debt securities in the domestic and
international capital markets. Because debt issuance is our
primary funding source, we are subject to “roll-over,”
or refinancing, risk on our outstanding debt. Our ability to
issue long-term debt has been strong primarily due to actions
taken by the federal government to support us and the financial
markets.
88
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)
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 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.
On February 11, 2011, Treasury and HUD released a report to
Congress on reforming America’s housing finance market. The
report provides that the Administration will work with FHFA to
determine the best way to responsibly reduce Fannie Mae’s
and Freddie Mac’s role in the market and ultimately wind
down both institutions. The report emphasizes the importance of
proceeding with a careful transition plan and providing the
necessary financial support to Fannie Mae and Freddie Mac during
the transition period. We expect that Congress will continue to
hold hearings and consider legislation in 2011 on the future
status of Fannie Mae and Freddie Mac, including proposals that
would result in a substantial change to our business structure,
or our operations, or that involve Fannie Mae’s liquidation
or dissolution. We cannot predict the prospects for the
enactment, timing or content of legislative proposals regarding
the future status of the GSEs.
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, 2011 may not necessarily be indicative
of the results for the year ending December 31, 2011. The
unaudited interim condensed consolidated financial statements as
of March 31, 2011 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, 2010 (“2010
Form 10-K”),
filed with the SEC on February 24, 2011.
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, 2011,
Treasury held an investment in our senior preferred stock with a
liquidation preference of $91.2 billion. Our administrative
expenses were reduced by $35 million in the first quarter
of 2011 due to accrual and receipt of reimbursements from
Treasury and Freddie Mac for expenses incurred as program
administrator for the Home Affordable Modification Program
(“HAMP”) and other initiatives under the Making Home
Affordable Program.
During the three months ended March 31, 2011, we received a
refund of $1.1 billion from the IRS, a bureau of Treasury,
related to the carryback of our 2009 operating loss to the 2008
and 2007 tax years.
Under a temporary credit and liquidity facilities
(“TCLF”) program, we had $3.5 billion and
$3.7 billion outstanding, which includes principal and
interest, of three-year standby credit and liquidity support as
of March 31, 2011 and December 31, 2010, respectively.
Treasury has purchased participating interests in these
temporary credit and liquidity facilities. Under a new issue
bond (“NIB”) program, we had $7.6 billion
outstanding of pass-through securities backed by single-family
and multifamily housing bonds issued by housing finance agencies
(“HFAs”) as of March 31, 2011 and
December 31, 2010. Treasury bears the initial
89
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)
loss of principal under the TCLF program and the NIB program up
to 35% of the total principal on a combined program-wide basis.
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, 2011 and December 31, 2010, we
held Freddie Mac mortgage-related securities with a fair value
of $16.6 billion and $18.3 billion, respectively, and
accrued interest receivable of $83 million and
$93 million, respectively. We recognized interest income on
Freddie Mac mortgage-related securities held by us of
$188 million and $335 million for the three months
ended March 31, 2011 and 2010, respectively. In addition,
Freddie Mac may be an investor in variable interest entities
that we have consolidated, and we may be an investor in variable
interest entities that Freddie Mac has consolidated.
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 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”).
Cash
and Cash Equivalents and Statements of Cash Flows
During 2010, we identified certain servicer and consolidation
related transactions that were not appropriately reflected in
our condensed consolidated statements of cash flows for the
three months ended March 31, 2010. As a result, our
condensed consolidated statement of cash flows for the three
months ended March 31, 2010 includes a $2.0 billion
adjustment to decrease net cash used in operating activities, a
$3.5 billion adjustment to decrease net cash provided by
investing activities, primarily related to “Proceeds from
sales of
available-for-sale
securities,” “Purchases of loans held for
investment,” “Proceeds from repayments of loans held
for investment of consolidated trusts” and “Other,
net” and a $1.5 billion adjustment to decrease net
cash used in financing activities, primarily related to
“Proceeds from issuance of long-term debt of consolidated
trusts.” We have evaluated the effects of these
misstatements, both quantitatively and qualitatively, on our
previously reported condensed consolidated statements of cash
flows for the three months ended March 31, 2010 and
concluded that this prior period was not materially misstated.
90
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)
Collateral
Cash
Collateral
The following table displays cash collateral accepted and
pledged as of March 31, 2011 and December 31, 2010.
| As of | ||||||||
| March 31, 2011 | December 31, 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Cash collateral
accepted
(1)
|
$ | 3,056 | $ | 3,101 | ||||
|
Cash collateral pledged
|
$ | 6,049 | $ | 5,884 | ||||
|
Cash collateral pledged related to derivatives activities
|
2,849 | 3,453 | ||||||
|
Total cash collateral pledged
|
$ | 8,898 | $ | 9,337 | ||||
| (1) | Includes restricted cash of $2.4 billion and $2.5 billion as of March 31, 2011 and December 31, 2010, respectively. |
Non-Cash
Collateral
The following table displays non-cash collateral pledged and
accepted as of March 31, 2011 and December 31, 2010.
| As of | ||||||||
| March 31, 2011 | December 31, 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Non-cash collateral pledged where the secured party has the
right to sell or repledge:
|
||||||||
|
Held-for-investment
loans of consolidated trusts
|
$ | 2,241 | $ | 2,522 | ||||
|
Non-cash collateral accepted with the right to sell or
repledge
(1)
|
$ | 20,000 | $ | 7,500 | ||||
|
Non-cash collateral accepted without the right to sell or
repledge
|
11,249 | 6,744 | ||||||
| (1) | None of this collateral was sold or repledged as of March 31, 2011 and December 31, 2010. |
Additionally, we provide early funding to lenders on a
collateralized basis and account for the advances as secured
lending arrangements in “Other assets” in our
condensed consolidated balance sheets. These amounts totaled
$3.1 billion at March 31, 2011 and $7.2 billion
at December 31, 2010.
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 repurchase agreements
outstanding as of March 31, 2011 and $49 million in
repurchase agreements outstanding as of December 31, 2010.
91
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 Gains (Losses), Net
The following table displays the composition of “Fair value
gains (losses), net” for the three months ended
March 31, 2011 and 2010.
|
For the Three Months Ended
|
||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Derivatives fair value gains (losses), net
|
$ | 139 | $ | (2,762 | ) | |||
|
Trading securities gains, net
|
225 | 1,058 | ||||||
|
Other, net
|
(75 | ) | (1 | ) | ||||
|
Fair value gains (losses), net
|
$ | 289 | $ | (1,705 | ) | |||
Reclassifications
To conform to our current period presentation, we have
reclassified and condensed certain amounts reported in our
condensed consolidated financial statements. The following table
displays the line items that were reclassified and condensed in
our condensed consolidated balance sheet as of December 31,
2010.
| As of December 31, 2010 | ||||||||
|
Before
|
After
|
|||||||
| Reclassification | Reclassification | |||||||
| (Dollars in millions) | ||||||||
|
Reclassified lines to:
|
||||||||
|
Assets:
|
||||||||
|
Servicer and MBS trust receivable
|
$ | 951 | $ | |||||
|
Other assets
|
25,875 | 26,826 | ||||||
|
Liabilities:
|
||||||||
|
Short-term debt:
|
||||||||
|
Of Fannie Mae
|
151,884 | |||||||
|
Of consolidated trusts
|
5,359 | |||||||
|
Long-term debt:
|
||||||||
|
Of Fannie Mae
|
628,160 | |||||||
|
Of consolidated trusts
|
2,411,597 | |||||||
|
Debt:
|
||||||||
|
Of Fannie Mae
|
780,044 | |||||||
|
Of consolidated trusts
|
2,416,956 | |||||||
|
Reserve for guaranty losses
|
323 | |||||||
|
Service and MBS trust payable
|
2,950 | |||||||
|
Other liabilities
|
10,400 | 13,673 | ||||||
92
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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 represents the line items that we
reclassified and condensed in our condensed consolidated
statements of operations and comprehensive loss for the three
months ended March 31, 2010.
|
For the Three Months Ended
|
||||||||
| March 31, 2010 | ||||||||
|
Before
|
After
|
|||||||
| Reclassification | Reclassification | |||||||
| (Dollars in millions) | ||||||||
|
Reclassified lines to:
|
||||||||
|
Interest expense:
|
||||||||
|
Short-term debt:
|
||||||||
|
Of Fannie Mae
|
$ | 116 | $ | |||||
|
Of consolidated trusts
|
2 | |||||||
|
Long-term debt:
|
||||||||
|
Of Fannie Mae
|
5,081 | |||||||
|
Of consolidated trusts
|
31,458 | |||||||
|
Short-term debt (includes $2 related to consolidated trusts)
|
118 | |||||||
|
Long-term debt (includes $31,458 related to consolidated trusts)
|
36,539 | |||||||
|
Guaranty fee income
|
54 | |||||||
|
Fee and other income
|
179 | 233 | ||||||
|
Losses from partnership investments
|
58 | |||||||
|
Other expenses
|
172 | 230 | ||||||
In our condensed consolidated statements of cash flows for the
three months ended March 31, 2010, we reclassified the
following amounts within “Cash flows used in financing
activities” to conform to our current period presentation:
$192.4 billion from “Proceeds from issuance of
short-term debt of Fannie Mae” and $100.6 billion from
“Proceeds from issuance of long-term debt of Fannie
Mae” to “Proceeds from issuance of debt of Fannie
Mae,” $185.2 billion from “Payments to redeem
short-term debt of Fannie Mae” and $92.4 billion from
“Payments to redeem long-term debt of Fannie Mae” to
“Payments to redeem debt of Fannie Mae,”
$3.3 billion from “Proceeds from issuance of
short-term debt of consolidated trusts” and
$83.7 billion from “Proceeds from issuance of
long-term debt of consolidated trusts” to “Proceeds
from issuance of debt of consolidated trusts” and
$9.5 billion from “Payments to redeem short-term debt
of consolidated trusts” and $162.6 billion from
“Payments to redeem long-term debt of consolidated
trusts” to “Payments to redeem debt of consolidated
trusts.”
New
Accounting Pronouncements
In April 2011, the Financial Accounting Standards Board
(“FASB”) issued a new standard that clarifies when a
loan restructuring is considered a troubled debt restructuring
(“TDR”). Specifically, the new standard amends
existing guidance to clarify how to determine when a borrower is
experiencing financial difficulty, when a concession is granted
by a creditor, and when a delay in payment is considered
insignificant.
The new standard is effective for the first interim or annual
period beginning on or after June 15, 2011 and should be
applied retrospectively to the beginning of the annual period of
adoption. We will adopt this new guidance effective for the
period ending September 30, 2011 and are currently
assessing the impact that the new standard may have on our
condensed consolidated financial statements.
93
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)
| 2. | Consolidations and Transfers of Financial Assets |
We have interests in various entities that are considered to be
VIEs. The primary types of entities are securitization trusts
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 include investments in
securities issued by VIEs, such as Fannie Mae MBS created
pursuant to our securitization transactions and our guaranty to
the entity. We consolidate the substantial majority of our
single-class securitization trusts.
As of March 31, 2011, we consolidated certain Fannie Mae
multi-class resecuritization trusts that were not consolidated
as of December 31, 2010 because we now hold in our
portfolio a substantial portion of the certificates. As a result
of consolidating these multi-class resecuritization trusts,
which had combined total assets of $1.3 billion in unpaid
principal balance as of March 31, 2011, we derecognized our
investment in these trusts and recognized the assets and
liabilities of the consolidated trusts at their fair value.
We deconsolidate Fannie Mae multi-class resecuritization trusts
when we no longer hold in our portfolio a substantial portion of
the certificates, derecognizing the assets and liabilities of
the trusts and recognizing at fair value our retained interests
as securities in our condensed consolidated balance sheet. As of
March 31, 2011, there was no change in the consolidation
status of Fannie Mae multi-class resecuritization trusts that
were consolidated as of December 31, 2010.
Unconsolidated
VIEs
We also have interests 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 investment entities. The following table displays the
carrying amount and classification of our assets and liabilities
that relate to our involvement with unconsolidated VIEs as of
March 31, 2011 and December 31, 2010, as well as our
maximum exposure to loss and the total assets of those
unconsolidated VIEs.
| As of March 31, 2011 | ||||||||||||
|
Limited
|
||||||||||||
|
Mortgage-Backed
|
Asset-Backed
|
Partnership
|
||||||||||
| Trusts | Trusts | Investments | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Assets and liabilities recorded in our condensed consolidated
balance sheets:
|
||||||||||||
|
Assets:
|
||||||||||||
|
Available-for-sale
securities
(1)
|
$ | 80,570 | $ | — | $ | — | ||||||
|
Trading
securities
(1)
|
23,472 | 4,100 | — | |||||||||
|
Other assets
|
257 | — | 95 | |||||||||
|
Other liabilities
|
719 | — | 152 | |||||||||
|
Net carrying amount
|
$ | 103,580 | $ | 4,100 | $ | (57 | ) | |||||
|
Maximum exposure to
loss
(1)
|
$ | 107,416 | $ | 4,100 | $ | 336 | ||||||
|
Total assets of unconsolidated
VIEs
(1)
|
$ | 666,298 | $ | 343,868 | $ | 13,001 | ||||||
94
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)
| As of December 31, 2010 (2) | ||||||||||||
|
Limited
|
||||||||||||
|
Mortgage-Backed
|
Asset-Backed
|
Partnership
|
||||||||||
| Trusts | Trusts | Investments | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Assets and liabilities recorded in our condensed consolidated
balance sheets:
|
||||||||||||
|
Assets:
|
||||||||||||
|
Available-for-sale
securities
(1)
|
$ | 84,770 | $ | — | $ | — | ||||||
|
Trading
securities
(1)
|
24,021 | 5,321 | — | |||||||||
|
Other assets
|
257 | — | 94 | |||||||||
|
Other liabilities
|
773 | — | 170 | |||||||||
|
Net carrying amount
|
$ | 108,275 | $ | 5,321 | $ | (76 | ) | |||||
|
Maximum exposure to
loss
(1)
|
$ | 111,004 | $ | 5,321 | $ | 319 | ||||||
|
Total assets of unconsolidated
VIEs
(1)
|
$ | 740,387 | $ | 363,721 | $ | 13,102 | ||||||
| (1) | Contains securities exposed through consolidation which may also represent an interest in other unconsolidated VIEs. | |
| (2) | Certain prior period amounts have been reclassified to conform to the current period presentation. |
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, 2011 and 2010, the unpaid principal balance of
portfolio securitizations was $29.3 billion and
$17.8 billion, respectively.
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 is not 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.
The following table displays some key characteristics of the
REMIC and Stripped Mortgage-Backed Securities retained in
unconsolidated portfolio securitization trusts.
| As of | ||||||||
| March 31, 2011 | December 31, 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Unpaid principal balance
|
$ | 14,448 | $ | 15,771 | ||||
|
Fair value
|
15,238 | 16,745 | ||||||
|
Weighted-average coupon
|
6.18 | % | 6.28 | % | ||||
|
Weighted-average loan age
|
4.7 years | 4.4 years | ||||||
|
Weighted-average maturity
|
21.0 years | 22.0 years | ||||||
95
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)
For the three months ended March 31, 2011 and 2010, the
principal and interest received on retained interests was
$750 million and $836 million, respectively.
Managed
Loans
We define “managed loans” as on-balance sheet mortgage
loans as well as mortgage loans that we have securitized in
unconsolidated portfolio securitization trusts. The following
table displays the unpaid principal balances of managed loans,
including those managed loans that are delinquent as of
March 31, 2011 and December 31, 2010.
|
Unpaid Principal
|
Principal Amount of
|
|||||||
| Balance | Delinquent Loans (1) | |||||||
| (Dollars in millions) | ||||||||
|
As of March 31, 2011
|
||||||||
|
Loans held for investment
|
||||||||
|
Of Fannie Mae
|
$ | 418,770 | $ | 136,489 | ||||
|
Of consolidated trusts
|
2,603,491 | 27,972 | ||||||
|
Loans held for sale
|
1,470 | 116 | ||||||
|
Securitized loans
|
2,108 | 24 | ||||||
|
Total loans managed
|
$ | 3,025,839 | $ | 164,601 | ||||
|
As of December 31, 2010
|
||||||||
|
Loans held for investment
|
||||||||
|
Of Fannie Mae
|
$ | 423,686 | $ | 141,342 | ||||
|
Of consolidated trusts
|
2,565,347 | 34,080 | ||||||
|
Loans held for sale
|
964 | 127 | ||||||
|
Securitized loans
|
2,147 | 78 | ||||||
|
Total loans managed
|
$ | 2,992,144 | $ | 175,627 | ||||
| (1) | Represents the unpaid principal balance of loans held for investment and loans held for sale for which we are no longer accruing interest and loans 90 days or more delinquent which are continuing to accrue interest. |
Qualifying
Sales of Portfolio Securitizations
We recognize assets obtained and liabilities incurred in a
portfolio securitization at fair value. Proceeds from the
initial sale of securities from portfolio securitizations were
$108 million and $249 million for the three months
ended March 31, 2011 and 2010, respectively. For the three
months ended March 31, 2010, proceeds from the initial sale
of securities were reduced by $1.3 billion from the amount
previously disclosed, primarily related to deconsolidated REMICs
that should have been presented as proceeds from issuance of
long-term debt of consolidated trusts.
96
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)
| 3. | Mortgage Loans |
The following table displays our mortgage loans as of
March 31, 2011 and December 31, 2010.
| As of | ||||||||||||||||||||||||
| March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
|
Of
|
Of
|
Of
|
Of
|
|||||||||||||||||||||
|
Fannie
|
Consolidated
|
Fannie
|
Consolidated
|
|||||||||||||||||||||
| Mae | Trusts | Total | Mae | Trusts | Total | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Single-family
|
$ | 328,656 | $ | 2,523,197 | $ | 2,851,853 | $ | 328,824 | $ | 2,490,623 | $ | 2,819,447 | ||||||||||||
|
Multifamily
|
90,517 | 81,361 | 171,878 | 95,157 | 75,393 | 170,550 | ||||||||||||||||||
|
Total unpaid principal balance of mortgage loans
|
419,173 | 2,604,558 | 3,023,731 | 423,981 | 2,566,016 | 2,989,997 | ||||||||||||||||||
|
Cost basis and fair value adjustments, net
|
(16,462 | ) | 10,345 | (6,117 | ) | (16,498 | ) | 11,777 | (4,721 | ) | ||||||||||||||
|
Allowance for loan losses for loans held for investment
|
(53,708 | ) | (13,849 | ) | (67,557 | ) | (48,530 | ) | (13,026 | ) | (61,556 | ) | ||||||||||||
|
Total mortgage loans
|
$ | 349,003 | $ | 2,601,054 | $ | 2,950,057 | $ | 358,953 | $ | 2,564,767 | $ | 2,923,720 | ||||||||||||
During the three months ended March 31, 2011, we
redesignated loans with a carrying value of $561 million
from held for investment (“HFI”) to held for sale
(“HFS”).
The following tables display an aging analysis of the total
recorded investment in our HFI mortgage loans, excluding loans
for which we have elected the fair value option, by portfolio
segment and class as of March 31, 2011 and
December 31, 2010. For purposes of this table, each loan in
our portfolio is included in only one segment and class category.
| As of March 31, 2011 (1) | ||||||||||||||||||||||||||||||||
|
Recorded
|
||||||||||||||||||||||||||||||||
|
Investment in
|
||||||||||||||||||||||||||||||||
|
Loans Over
|
||||||||||||||||||||||||||||||||
|
90 Days
|
Recorded
|
|||||||||||||||||||||||||||||||
|
Delinquent
|
Investment
|
|||||||||||||||||||||||||||||||
|
and
|
in
|
|||||||||||||||||||||||||||||||
|
30 - 59 Days
|
60 - 89 Days
|
Seriously
|
Total
|
Accruing
|
Nonaccrual
|
|||||||||||||||||||||||||||
| Delinquent | Delinquent | Delinquent (2) | Delinquent | Current | Total | Interest | Loans | |||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||
|
Single-family:
|
||||||||||||||||||||||||||||||||
|
Primary
(3)
|
$ | 39,980 | $ | 14,949 | $ | 89,650 | $ | 144,579 | $ | 2,356,321 | $ | 2,500,900 | $ | 128 | $ | 104,375 | ||||||||||||||||
|
Government
(4)
|
96 | 48 | 320 | 464 | 51,486 | 51,950 | 320 | — | ||||||||||||||||||||||||
|
Alt-A
|
7,670 | 3,598 | 34,761 | 46,029 | 153,035 | 199,064 | 16 | 38,335 | ||||||||||||||||||||||||
|
Other
(5)
|
3,514 | 1,624 | 14,241 | 19,379 | 81,837 | 101,216 | 105 | 15,670 | ||||||||||||||||||||||||
|
Total single-family
|
51,260 | 20,219 | 138,972 | 210,451 | 2,642,679 | 2,853,130 | 569 | 158,380 | ||||||||||||||||||||||||
|
Multifamily
(6)
|
322 | NA | 1,094 | 1,416 | 172,385 | 173,801 | — | 1,047 | ||||||||||||||||||||||||
|
Total
|
$ | 51,582 | $ | 20,219 | $ | 140,066 | $ | 211,867 | $ | 2,815,064 | $ | 3,026,931 | $ | 569 | $ | 159,427 | ||||||||||||||||
97
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)
| As of December 31, 2010 (1) | ||||||||||||||||||||||||||||||||
|
Recorded
|
||||||||||||||||||||||||||||||||
|
Investment in
|
||||||||||||||||||||||||||||||||
|
Loans Over
|
Recorded
|
|||||||||||||||||||||||||||||||
|
90 Days
|
Investment
|
|||||||||||||||||||||||||||||||
|
Delinquent
|
in
|
|||||||||||||||||||||||||||||||
|
30 - 59 Days
|
60 - 89 Days
|
Seriously
|
Total
|
and Accruing
|
Nonaccrual
|
|||||||||||||||||||||||||||
| Delinquent | Delinquent | Delinquent (2) | Delinquent | Current | Total | Interest | Loans | |||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||
|
Single-family:
|
||||||||||||||||||||||||||||||||
|
Primary
(3)
|
$ | 47,048 | $ | 18,055 | $ | 93,302 | $ | 158,405 | $ | 2,299,080 | $ | 2,457,485 | $ | 139 | $ | 110,758 | ||||||||||||||||
|
Government
(4)
|
125 | 58 | 371 | 554 | 51,930 | 52,484 | 354 | — | ||||||||||||||||||||||||
|
Alt-A
|
8,547 | 4,097 | 37,557 | 50,201 | 156,951 | 207,152 | 21 | 41,566 | ||||||||||||||||||||||||
|
Other
(5)
|
3,785 | 1,831 | 15,290 | 20,906 | 84,473 | 105,379 | 80 | 17,022 | ||||||||||||||||||||||||
|
Total single-family
|
59,505 | 24,041 | 146,520 | 230,066 | 2,592,434 | 2,822,500 | 594 | 169,346 | ||||||||||||||||||||||||
|
Multifamily
(6)
|
382 | NA | 1,132 | 1,514 | 171,000 | 172,514 | — | 1,012 | ||||||||||||||||||||||||
|
Total
|
$ | 59,887 | $ | 24,041 | $ | 147,652 | $ | 231,580 | $ | 2,763,434 | $ | 2,995,014 | $ | 594 | $ | 170,358 | ||||||||||||||||
| (1) | Recorded investment consists of (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments; and (c) accrued interest receivable. | |
| (2) | Single-family seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process. Multifamily seriously delinquent loans are loans that are 60 days or more past due. | |
| (3) | Consists of mortgage loans that are not included in other loan classes. | |
| (4) | Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies that are not Alt-A. Primarily consists of reverse mortgages which due to their nature are not aged and included in the current column. | |
| (5) | Includes loans with higher-risk loan characteristics, such as interest-only loans and negative-amortizing loans that are neither government nor Alt-A. | |
| (6) | Multifamily loans 60-89 days delinquent are included in the seriously delinquent column. |
The following table displays the total recorded investment in
our HFI loans, excluding loans for which we have elected the
fair value option, by portfolio segment, class and credit
quality indicators as of March 31, 2011 and
December 31, 2010. The single-family credit quality
indicator is updated quarterly and the multifamily credit
quality indicators are as of the origination date of each loan.
| As of | ||||||||||||||||||||||||
| March 31, 2011 (1)(2) | December 31, 2010 (1)(2) | |||||||||||||||||||||||
| Primary (3) | Alt-A | Other (4) | Primary (3) | Alt-A | Other (4) | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Single-family
|
||||||||||||||||||||||||
|
Estimated
mark-to-market
LTV
ratio:
(5)
|
||||||||||||||||||||||||
|
Less than or equal to 80%
|
$ | 1,491,411 | $ | 70,592 | $ | 26,614 | $ | 1,561,202 | $ | 79,305 | $ | 29,854 | ||||||||||||
|
80.01% to 90%
|
426,344 | 25,620 | 11,794 | 376,414 | 27,472 | 13,394 | ||||||||||||||||||
|
90.01% to 100%
|
237,697 | 23,487 | 11,817 | 217,193 | 24,392 | 12,935 | ||||||||||||||||||
|
100.01% to 110%
|
129,197 | 18,260 | 10,893 | 112,376 | 18,022 | 11,400 | ||||||||||||||||||
|
110.01% to 120%
|
71,237 | 13,471 | 9,043 | 62,283 | 12,718 | 8,967 | ||||||||||||||||||
|
120.01% to 125%
|
24,542 | 5,295 | 3,817 | 21,729 | 5,083 | 3,733 | ||||||||||||||||||
|
Greater than 125%
|
120,472 | 42,339 | 27,238 | 106,288 | 40,160 | 25,096 | ||||||||||||||||||
|
Total
|
$ | 2,500,900 | $ | 199,064 | $ | 101,216 | $ | 2,457,485 | $ | 207,152 | $ | 105,379 | ||||||||||||
98
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)
| As of | ||||||||
| March 31, 2011 (1) | December 31, 2010 (1) | |||||||
| (Dollars in millions) | ||||||||
|
Multifamily
|
||||||||
|
Original LTV ratio:
|
||||||||
|
Less than or equal to 70%
|
$ | 98,355 | $ | 96,844 | ||||
|
70.01% to 80%
|
71,087 | 71,560 | ||||||
|
Greater than 80%
|
4,359 | 4,110 | ||||||
|
Total
|
$ | 173,801 | $ | 172,514 | ||||
|
Original debt service coverage ratio:
|
||||||||
|
Less than or equal to 1.10%
|
$ | 14,287 | $ | 15,034 | ||||
|
1.11% to 1.25%
|
51,765 | 50,745 | ||||||
|
Greater than 1.25%
|
107,749 | 106,735 | ||||||
|
Total
|
$ | 173,801 | $ | 172,514 | ||||
| (1) | Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments; and (c) accrued interest receivable. | |
| (2) | Excludes $52.0 billion and $52.5 billion as of March 31, 2011 and December 31, 2010, respectively, of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies that are not Alt-A loans. The segment class is primarily reverse mortgages for which we do not calculate an estimated mark-to-market LTV. | |
| (3) | Consists of mortgage loans that are not included in other loan classes. | |
| (4) | Includes loans with higher-risk loan characteristics, such as interest-only loans and negative-amortizing loans that are neither government nor Alt-A. | |
| (5) | 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. |
99
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)
Individually
Impaired Loans
Individually impaired loans include TDRs, acquired
credit-impaired loans, and other multifamily loans regardless of
whether we are currently accruing interest. The following tables
display the total recorded investment, unpaid principal balance,
related allowance and average recorded investment as of
March 31, 2011 and December 31, 2010 and interest
income recognized for the three months ended March 31, 2011
and 2010 for individually impaired loans.
| As of March 31, 2011 | For the Three Months Ended March 31, 2011 | |||||||||||||||||||||||||||
|
Related
|
||||||||||||||||||||||||||||
|
Allowance for
|
Interest
|
|||||||||||||||||||||||||||
|
Unpaid
|
Total
|
Related
|
Accrued
|
Average
|
Total Interest
|
Income
|
||||||||||||||||||||||
|
Principal
|
Recorded
|
Allowance for
|
Interest
|
Recorded
|
Income
|
Recognized on
|
||||||||||||||||||||||
| Balance | Investment (1) | Loan Losses | Receivable | Investment | Recognized (2) | a Cash Basis | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
|
Individually impaired loans:
|
||||||||||||||||||||||||||||
|
With related allowance recorded:
|
||||||||||||||||||||||||||||
|
Single-family:
|
||||||||||||||||||||||||||||
|
Primary
(3)
|
$ | 104,608 | $ | 97,149 | $ | 26,095 | $ | 737 | $ | 95,087 | $ | 904 | $ | 41 | ||||||||||||||
|
Government
(4)
|
218 | 217 | 45 | 7 | 232 | 3 | — | |||||||||||||||||||||
|
Alt-A
|
31,987 | 28,881 | 10,352 | 334 | 28,567 | 242 | 2 | |||||||||||||||||||||
|
Other
(5)
|
14,956 | 14,089 | 4,872 | 125 | 13,889 | 106 | 6 | |||||||||||||||||||||
|
Total single-family
|
151,769 | 140,336 | 41,364 | 1,203 | 137,775 | 1,255 | 49 | |||||||||||||||||||||
|
Multifamily
|
2,035 | 2,033 | 494 | 20 | 2,202 | 25 | 1 | |||||||||||||||||||||
|
Total individually impaired loans with related allowance recorded
|
153,804 | 142.369 | 41,858 | 1,223 | 139,977 | 1,280 | 50 | |||||||||||||||||||||
|
With no related allowance
recorded:
(6)
|
||||||||||||||||||||||||||||
|
Single-family:
|
||||||||||||||||||||||||||||
|
Primary
(3)
|
11,255 | 7,041 | — | — | 7,139 | 108 | 57 | |||||||||||||||||||||
|
Government
(4)
|
19 | 11 | — | — | 12 | 1 | — | |||||||||||||||||||||
|
Alt-A
|
4,062 | 1,841 | — | — | 1,863 | 33 | 19 | |||||||||||||||||||||
|
Other
(5)
|
1,013 | 515 | — | — | 513 | 8 | 4 | |||||||||||||||||||||
|
Total single-family
|
16,349 | 9,408 | — | — | 9,527 | 150 | 80 | |||||||||||||||||||||
|
Multifamily
|
710 | 696 | — | — | 754 | 15 | 3 | |||||||||||||||||||||
|
Total individually impaired loans with no related allowance
recorded
|
17,059 | 10,104 | — | — | 10,281 | 165 | 83 | |||||||||||||||||||||
|
Total individually impaired
loans
(7)
|
$ | 170,863 | $ | 152,473 | $ | 41,858 | $ | 1,223 | $ | 150,258 | $ | 1,445 | $ | 133 | ||||||||||||||
100
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)
| As of December 31, 2010 | For the Three Months Ended March 31, 2010 | |||||||||||||||||||||||||||
|
Related
|
||||||||||||||||||||||||||||
|
Allowance for
|
Interest
|
|||||||||||||||||||||||||||
|
Unpaid
|
Total
|
Related
|
Accrued
|
Average
|
Total Interest
|
Income
|
||||||||||||||||||||||
|
Principal
|
Recorded
|
Allowance for
|
Interest
|
Recorded
|
Income
|
Recognized on
|
||||||||||||||||||||||
| Balance | Investment (1) | Loan Losses | Receivable | Investment | Recognized (2) | a Cash Basis | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
|
Individually impaired loans:
|
||||||||||||||||||||||||||||
|
With related allowance recorded:
|
||||||||||||||||||||||||||||
|
Single-family:
|
||||||||||||||||||||||||||||
|
Primary
(3)
|
$ | 99,838 | $ | 93,024 | $ | 23,565 | $ | 772 | $ | 81,258 | $ | 1,198 | $ | 210 | ||||||||||||||
|
Government
(4)
|
240 | 248 | 38 | 7 | 141 | 1 | — | |||||||||||||||||||||
|
Alt-A
|
30,932 | 28,253 | 9,592 | 368 | 25,361 | 408 | 58 | |||||||||||||||||||||
|
Other
(5)
|
14,429 | 13,689 | 4,479 | 137 | 12,094 | 173 | 35 | |||||||||||||||||||||
|
Total single-family
|
145,439 | 135,214 | 37,674 | 1,284 | 118,854 | 1,780 | 303 | |||||||||||||||||||||
|
Multifamily
|
2,372 | 2,371 | 556 | 23 | 1,496 | 56 | 1 | |||||||||||||||||||||
|
Total individually impaired loans with related allowance recorded
|
147,811 | 137,585 | 38,230 | 1,307 | 120,350 | 1,836 | 304 | |||||||||||||||||||||
|
With no related allowance
recorded:
(6)
|
||||||||||||||||||||||||||||
|
Single-family:
|
||||||||||||||||||||||||||||
|
Primary
(3)
|
10,586 | 7,237 | — | — | 7,860 | 209 | 18 | |||||||||||||||||||||
|
Government
(4)
|
19 | 13 | — | — | 11 | 2 | — | |||||||||||||||||||||
|
Alt-A
|
3,600 | 1,884 | — | — | 2,091 | 88 | 9 | |||||||||||||||||||||
|
Other
(5)
|
879 | 512 | — | — | 589 | 24 | 2 | |||||||||||||||||||||
|
Total single-family
|
15,084 | 9,646 | — | — | 10,551 | 323 | 29 | |||||||||||||||||||||
|
Multifamily
|
789 | 811 | — | — | 642 | 18 | — | |||||||||||||||||||||
|
Total individually impaired loans with no related allowance
recorded
|
15,873 | 10,457 | — | — | 11,193 | 341 | 29 | |||||||||||||||||||||
|
Total individually impaired
loans
(7)
|
$ | 163,684 | $ | 148,042 | $ | 38,230 | $ | 1,307 | $ | 131,543 | $ | 2,177 | $ | 333 | ||||||||||||||
| (1) | Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments; and (c) accrued interest receivable. | |
| (2) | Total single-family interest income recognized of $1.4 billion consists of $1.1 billion of contractual interest and $352 million of effective yield adjustments for the three months ended March 31, 2011. Total single-family interest income recognized of $2.1 billion consists of $1.8 billion of contractual interest and $275 million of effective yield adjustments for the three months ended March 31, 2010. | |
| (3) | Consists of mortgage loans that are not included in other loan classes. | |
| (4) | Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies that are not Alt-A. | |
| (5) | Includes loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans that are neither government nor Alt-A. | |
| (6) | The discounted cash flows or collateral value equals or exceeds the carrying value of the loan and, as such, no valuation allowance is required. | |
| (7) | Includes single-family loans restructured in a TDR with a recorded investment of $145.4 billion and $140.1 billion as of March 31, 2011 and December 31, 2010, respectively. Includes multifamily loans restructured in a TDR with a recorded investment of $916 million and $939 million as of March 31, 2011 and December 31, 2010, respectively. |
101
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)
Loans
Acquired in a Transfer
We acquired delinquent loans from unconsolidated trusts and
long-term standby commitments with an unpaid principal balance
plus accrued interest of $48 million and $85 million
for the three months ended March 31, 2011 and 2010,
respectively. The following table displays the outstanding
balance, carrying amount and accretable yield of acquired
credit-impaired loans as of March 31, 2011 and
December 31, 2010, excluding loans that were modified as
TDRs subsequent to their acquisition from MBS trusts.
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Outstanding contractual balance
|
$ | 7,231 | $ | 8,519 | ||||
|
Carrying amount:
|
||||||||
|
Loans on accrual status
|
$ | 1,960 | $ | 2,029 | ||||
|
Loans on nonaccrual status
|
2,020 | 2,449 | ||||||
|
Total carrying amount of loans
|
$ | 3,980 | $ | 4,478 | ||||
|
Accretable yield
|
$ | 2,125 | $ | 2,412 | ||||
The following table displays interest income recognized and the
impact to the “Provision for credit 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, 2011 and 2010.
|
For the Three
|
||||||||
|
Months Ended
|
||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Accretion of fair value
discount
(1)
|
$ | 231 | $ | 266 | ||||
|
Interest income on loans returned to accrual status or
subsequently modified as TDRs
|
255 | 321 | ||||||
|
Total interest income recognized on acquired credit-impaired
loans
|
$ | 486 | $ | 587 | ||||
|
Increase in “Provision for loan losses” subsequent to
the acquisition of credit-impaired loans
|
$ | 238 | $ | 564 | ||||
| (1) | Represents accretion of the fair value discount that was recorded on acquired credit-impaired loans. |
| 4. | Allowance for Loan 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. 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. The
allowance for loan losses is calculated based on our estimate of
incurred losses as of the balance sheet date. Determining the
adequacy of our allowance for loan losses is complex and
requires judgment about the effect of matters that are
inherently uncertain.
102
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)
Allowance
for Loan Losses
The following table displays changes in both single-family and
multifamily allowance for loan losses for the three months ended
March 31, 2011 and total allowance for loan losses for the
three months ended March 31, 2011 and 2010.
| For the Three Months Ended March 31, | ||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||
|
Of
|
Of
|
Of
|
Of
|
|||||||||||||||||||||
|
Fannie
|
Consolidated
|
Fannie
|
Consolidated
|
|||||||||||||||||||||
| Mae | Trusts | Total | Mae | Trusts | Total | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Single-family allowance for loan losses:
|
||||||||||||||||||||||||
|
Beginning balance
|
$ | 47,377 | $ | 12,603 | $ | 59,980 | ||||||||||||||||||
|
Provision for loan losses
|
7,243 | 3,369 | 10,612 | |||||||||||||||||||||
|
Charge-offs
(1)
|
(5,623 | ) | (448 | ) | (6,071 | ) | ||||||||||||||||||
|
Recoveries
|
530 | 952 | 1,482 | |||||||||||||||||||||
|
Transfers
(2)
|
3,162 | (3,162 | ) | — | ||||||||||||||||||||
|
Net
reclassifications
(3)
|
(18 | ) | 99 | 81 | ||||||||||||||||||||
|
Ending balance
|
$ | 52,671 | $ | 13,413 | $ | 66,084 | ||||||||||||||||||
|
Multifamily allowance for loan losses:
|
||||||||||||||||||||||||
|
Beginning balance
|
$ | 1,153 | $ | 423 | $ | 1,576 | ||||||||||||||||||
|
Provision (benefit) for loan losses
|
(84 | ) | 59 | (25 | ) | |||||||||||||||||||
|
Charge-offs
(1)
|
(82 | ) | — | (82 | ) | |||||||||||||||||||
|
Transfers
(2)
|
45 | (45 | ) | — | ||||||||||||||||||||
|
Net
reclassifications
(3)
|
5 | (1 | ) | 4 | ||||||||||||||||||||
|
Ending balance
|
$ | 1,037 | $ | 436 | $ | 1,473 | ||||||||||||||||||
|
Total allowance for loan losses:
|
||||||||||||||||||||||||
|
Beginning balance
|
$ | 48,530 | $ | 13,026 | $ | 61,556 | $ | 8,078 | $ | 1,847 | $ | 9,925 | ||||||||||||
|
Adoption of new accounting standards
|
— | — | — | — | 43,576 | 43,576 | ||||||||||||||||||
|
Total provision for loan losses
|
7,159 | 3,428 | 10,587 | 6,271 | 5,668 | 11,939 | ||||||||||||||||||
|
Charge-offs
(1)
|
(5,705 | ) | (448 | ) | (6,153 | ) | (1,705 | ) | (3,455 | ) | (5,160 | ) | ||||||||||||
|
Recoveries
|
530 | 952 | 1,482 | 97 | 277 | 374 | ||||||||||||||||||
|
Transfers
(2)
|
3,207 | (3,207 | ) | — | 13,855 | (13,855 | ) | — | ||||||||||||||||
|
Net
reclassifications
(3)
|
(13 | ) | 98 | 85 | (921 | ) | 836 | (85 | ) | |||||||||||||||
|
Ending
balance
(4)(5)
|
$ | 53,708 | $ | 13,849 | $ | 67,557 | $ | 25,675 | $ | 34,894 | $ | 60,569 | ||||||||||||
| (1) | Total charge-offs include accrued interest of $386 million and $579 million for the three months ended March 31, 2011 and 2010, respectively. Single-family charge-offs include accrued interest of $377 million for the three months ended March 31, 2011. Multifamily charge-offs include accrued interest of $9 million for the three months ended March 31, 2011. | |
| (2) | Includes transfers from trusts for delinquent loan purchases. |
103
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)
| (3) | Represents reclassification of amounts recorded in provision for loan losses and charge-offs that relate to allowance for accrued interest receivable and preforeclosure property taxes and insurance receivable from borrowers. | |
| (4) | Total allowance for loan losses includes $412 million and $903 million as of March 31, 2011 and 2010, respectively, for acquired credit-impaired loans. | |
| (5) | Total single-family allowance for loan losses was $58.8 billion as of March 31, 2010. Total multifamily allowance for loan losses was $1.8 billion as of March 31, 2010. |
As of March 31, 2011, the allowance for accrued interest
receivable for loans of Fannie Mae was $2.6 billion and for
loans of consolidated trusts was $340 million. As of
December 31, 2010, the allowance for accrued interest
receivable for loans of Fannie Mae was $3.0 billion and for
loans of consolidated trusts was $439 million.
The following table displays the allowance for loan losses and
total recorded investment in our HFI loans, excluding loans for
which we have elected the fair value option, by impairment or
reserve methodology and portfolio segment as of March 31,
2011 and December 31, 2010.
| As of | ||||||||||||||||||||||||
| March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
|
Single-
|
Single-
|
|||||||||||||||||||||||
| Family | Multifamily | Total | Family | Multifamily | Total | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Allowance for loan losses by segment:
|
||||||||||||||||||||||||
|
Individually impaired loans
|
$ | 40,957 | $ | 489 | $ | 41,446 | $ | 37,296 | $ | 549 | $ | 37,845 | ||||||||||||
|
Collectively reserved loans
|
24,720 | 979 | 25,699 | 22,306 | 1,020 | 23,326 | ||||||||||||||||||
|
Acquired credit-impaired loans
|
407 | 5 | 412 | 378 | 7 | 385 | ||||||||||||||||||
|
Total allowance for loan losses
|
$ | 66,084 | $ | 1,473 | $ | 67,557 | $ | 59,980 | $ | 1,576 | $ | 61,556 | ||||||||||||
|
Recorded investment in loans by
segment:
(1)
|
||||||||||||||||||||||||
|
Individually impaired loans
|
$ | 145,376 | $ | 2,721 | $ | 148,097 | $ | 140,062 | $ | 3,074 | $ | 143,136 | ||||||||||||
|
Collectively reserved loans
|
2,703,386 | 171,003 | 2,874,389 | 2,677,640 | 169,332 | 2,846,972 | ||||||||||||||||||
|
Acquired credit-impaired loans
|
4,368 | 77 | 4,445 | 4,798 | 108 | 4,906 | ||||||||||||||||||
|
Total recorded investment in loans
|
$ | 2,853,130 | $ | 173,801 | $ | 3,026,931 | $ | 2,822,500 | $ | 172,514 | $ | 2,995,014 | ||||||||||||
| (1) | Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments; and (c) accrued interest receivable. |
104
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. | Investments in Securities |
Trading
Securities
Trading securities are recorded at fair value with subsequent
changes in fair value recorded as “Fair value gains
(losses), net” in our condensed consolidated statements of
operations and comprehensive loss. 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, 2011 and December 31, 2010.
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Mortgage-related securities:
|
||||||||
|
Fannie Mae
|
$ | 7,131 | $ | 7,398 | ||||
|
Freddie Mac
|
1,201 | 1,326 | ||||||
|
Ginnie Mae
|
311 | 590 | ||||||
|
Alt-A private-label securities
|
1,658 | 1,683 | ||||||
|
Subprime private-label securities
|
1,547 | 1,581 | ||||||
|
CMBS
|
10,943 | 10,764 | ||||||
|
Mortgage revenue bonds
|
606 | 609 | ||||||
|
Other mortgage-related securities
|
155 | 152 | ||||||
|
Total
|
23,552 | 24,103 | ||||||
|
Non-mortgage-related securities:
|
||||||||
|
U.S. Treasury securities
|
29,383 | 27,432 | ||||||
|
Asset-backed securities
|
4,100 | 5,321 | ||||||
|
Total
|
33,483 | 32,753 | ||||||
|
Total trading securities
|
$ | 57,035 | $ | 56,856 | ||||
|
Losses in trading securities held in our portfolio, net
|
$ | 1,912 | $ | 2,149 | ||||
The following table displays information about our net trading
gains and losses for the three months ended March 31, 2011
and 2010.
|
For the Three
|
||||||||
|
Months Ended
|
||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Net trading gains (losses):
|
||||||||
|
Mortgage-related securities
|
$ | 229 | $ | 1,006 | ||||
|
Non-mortgage-related securities
|
(4 | ) | 52 | |||||
|
Total
|
$ | 225 | $ | 1,058 | ||||
|
Net trading gains (losses) recorded in the period related to
securities still held at period end:
|
||||||||
|
Mortgage-related securities
|
$ | 222 | $ | 900 | ||||
|
Non-mortgage-related securities
|
(5 | ) | 48 | |||||
|
Total
|
$ | 217 | $ | 948 | ||||
105
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)
Available-for-Sale
Securities
We measure AFS securities at fair value with unrealized gains
and losses recorded as a component of “Other comprehensive
income,” net of tax, and we record realized gains and
losses from the sale of AFS securities in “Investment
gains, net” in our condensed consolidated statements of
operations and comprehensive loss.
The following table displays the gross realized gains, losses
and proceeds on sales of AFS securities for the three months
ended March 31, 2011 and 2010.
|
For the Three
|
||||||||
|
Months Ended
|
||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Gross realized gains
|
$ | 60 | $ | 265 | ||||
|
Gross realized losses
|
6 | 120 | ||||||
|
Total
proceeds
(1)
|
390 | 4,179 | ||||||
| (1) | Excludes proceeds from the initial sale of securities from new portfolio securitizations included in “Note 2, Consolidations and Transfers of Financial Assets.” For the three months ended March 31, 2010, proceeds were reduced by $419 million from what was previously disclosed, primarily related to deconsolidated REMICs that should have been presented as proceeds from issuance of long-term debt of consolidated trusts. |
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, 2011 and
December 31, 2010.
| As of March 31, 2011 | ||||||||||||||||||||
|
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
|
$ | 19,426 | $ | 1,267 | $ | (7 | ) | $ | (43 | ) | $ | 20,643 | ||||||||
|
Freddie Mac
|
14,435 | 921 | — | — | 15,356 | |||||||||||||||
|
Ginnie Mae
|
873 | 131 | — | — | 1,004 | |||||||||||||||
|
Alt-A private-label securities
|
15,337 | 187 | (1,634 | ) | (198 | ) | 13,692 | |||||||||||||
|
Subprime private-label securities
|
11,109 | 42 | (1,102 | ) | (389 | ) | 9,660 | |||||||||||||
|
CMBS
(4)
|
15,097 | 66 | — | (239 | ) | 14,924 | ||||||||||||||
|
Mortgage revenue bonds
|
11,273 | 49 | (78 | ) | (702 | ) | 10,542 | |||||||||||||
|
Other mortgage-related securities
|
3,997 | 122 | (31 | ) | (296 | ) | 3,792 | |||||||||||||
|
Total
|
$ | 91,547 | $ | 2,785 | $ | (2,852 | ) | $ | (1,867 | ) | $ | 89,613 | ||||||||
106
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)
| As of December 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
|
$ | 21,428 | $ | 1,453 | $ | (9 | ) | $ | (44 | ) | $ | 22,828 | ||||||||
|
Freddie Mac
|
15,986 | 1,010 | — | — | 16,996 | |||||||||||||||
|
Ginnie Mae
|
909 | 130 | — | — | 1,039 | |||||||||||||||
|
Alt-A private-label securities
|
15,789 | 177 | (1,791 | ) | (285 | ) | 13,890 | |||||||||||||
|
Subprime private-label securities
|
11,323 | 54 | (997 | ) | (448 | ) | 9,932 | |||||||||||||
|
CMBS
(4)
|
15,273 | 25 | — | (454 | ) | 14,844 | ||||||||||||||
|
Mortgage revenue bonds
|
11,792 | 47 | (64 | ) | (734 | ) | 11,041 | |||||||||||||
|
Other mortgage-related securities
|
4,098 | 106 | (44 | ) | (338 | ) | 3,822 | |||||||||||||
|
Total
|
$ | 96,598 | $ | 3,002 | $ | (2,905 | ) | $ | (2,303 | ) | $ | 94,392 | ||||||||
| (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 and comprehensive loss. | |
| (2) | Represents the noncredit component of other-than-temporary impairment losses recorded in “Accumulated 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. | |
| (4) | Amortized cost includes $807 million and $848 million as of March 31, 2011 and December 31, 2010, respectively, of increase to the carrying amount from previous fair value hedge accounting. |
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, 2011 and December 31, 2010.
| As of March 31, 2011 | ||||||||||||||||
|
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
|
$ | (34 | ) | $ | 1,160 | $ | (16 | ) | $ | 199 | ||||||
|
Alt-A private-label securities
|
(97 | ) | 1,946 | (1,735 | ) | 8,256 | ||||||||||
|
Subprime private-label securities
|
(46 | ) | 704 | (1,445 | ) | 8,237 | ||||||||||
|
CMBS
|
(31 | ) | 4,124 | (208 | ) | 6,286 | ||||||||||
|
Mortgage revenue bonds
|
(195 | ) | 4,174 | (585 | ) | 3,019 | ||||||||||
|
Other mortgage-related securities
|
(8 | ) | 345 | (319 | ) | 1,871 | ||||||||||
|
Total
|
$ | (411 | ) | $ | 12,453 | $ | (4,308 | ) | $ | 27,868 | ||||||
107
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)
| As of December 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
|
$ | (35 | ) | $ | 1,461 | $ | (18 | ) | $ | 211 | ||||||
|
Alt-A private-label securities
|
(104 | ) | 1,915 | (1,972 | ) | 9,388 | ||||||||||
|
Subprime private-label securities
|
(47 | ) | 627 | (1,398 | ) | 8,493 | ||||||||||
|
CMBS
|
(15 | ) | 1,774 | (439 | ) | 10,396 | ||||||||||
|
Mortgage revenue bonds
|
(206 | ) | 5,009 | (592 | ) | 3,129 | ||||||||||
|
Other mortgage-related securities
|
(2 | ) | 262 | (380 | ) | 2,014 | ||||||||||
|
Total
|
$ | (409 | ) | $ | 11,048 | $ | (4,799 | ) | $ | 33,631 | ||||||
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 comprehensive loss and the
noncredit component in “Other comprehensive income”
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. $4.3 billion of the
$4.7 billion of gross unrealized losses on AFS securities
as of March 31, 2011 have existed for a period of 12
consecutive months or longer. Gross unrealized losses on AFS
securities as of March 31, 2011 include unrealized losses
on securities with
other-than-temporary
impairment in which a portion of the impairment remains in
“Accumulated other comprehensive loss.” The securities
with unrealized losses for 12 consecutive months or longer, on
average, had a fair value as of March 31, 2011 that was 87%
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 a
portion or the majority of 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 and comprehensive loss for
the three months ended March 31, 2011 and 2010.
|
For the Three
|
||||||||
|
Months Ended
|
||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Alt-A private-label securities
|
$ | 37 | $ | 37 | ||||
|
Subprime private-label securities
|
— | 184 | ||||||
|
Other
|
7 | 15 | ||||||
|
Net
other-than-temporary
impairments
|
$ | 44 | $ | 236 | ||||
108
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)
For the three months ended March 31, 2011, we recorded net
other-than-temporary
impairment of $44 million. The net
other-than-temporary
impairment charges recorded in the three month period ended
March 31, 2011 were primarily driven by an increase in
collateral delinquencies on certain Alt-A private-label
securities, which resulted in a decrease in the present value of
our cash flow projections on these Alt-A private-label
securities.
The following table displays activity related to the unrealized
credit component on debt securities held by us recognized in
earnings for the three months ended March 31, 2011 and
2010. A related unrealized non-credit component has been
recognized in “Accumulated other comprehensive loss.”
|
For the Three
|
||||||||
|
Months Ended
|
||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Balance January 1,
|
$ | 8,215 | $ | 8,191 | ||||
|
Additions for the credit component on debt securities for which
OTTI was not previously recognized
|
8 | 6 | ||||||
|
Additions for credit losses on debt securities for which OTTI
was previously recognized
|
36 | 230 | ||||||
|
Reductions for securities no longer in portfolio at period end
|
— | (51 | ) | |||||
|
Reductions for amortization resulting from increases in cash
flows expected to be collected over the remaining life of the
securities
|
(219 | ) | (167 | ) | ||||
|
Balance March 31,
|
$ | 8,040 | $ | 8,209 | ||||
As of March 31, 2011, those debt securities with
other-than-temporary
impairment for which we recognized in our condensed consolidated
statements of operations and comprehensive loss only the amount
of loss related to credit consisted predominantly of Alt-A and
subprime securities. We evaluate Alt-A (including option
adjustable rate mortgage (“ARM”)) and subprime
private-label securities for
other-than-temporary
impairment by discounting the projected cash flows from
econometric models to estimate the portion of loss in value
attributable to credit. Separate components of a third-party
model project regional home prices, unemployment and interest
rates. The model combines these factors with available current
information regarding attributes of loans in pools backing the
private-label mortgage-related securities to project prepayment
speeds, conditional default rates, loss severities and
delinquency rates. It incorporates detailed information on
security-level subordination levels and cash flow priority of
payments to project security level cash flows. We model
securities assuming the benefit of those external financial
guarantees that we determined are creditworthy. We have recorded
other-than-temporary
impairments for the three months ended March 31, 2011 based
on this analysis, with amounts related to credit loss recognized
in our condensed consolidated statements of operations and
comprehensive loss. For securities we determined were not
other-than-temporarily
impaired, we concluded that either the bond had no projected
credit loss or if we projected a loss, that the present value of
expected cash flows was greater than the security’s cost
basis.
109
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 the modeled attributes, including
default rates and severities, which are used to determine
whether our senior interests in certain non-agency
mortgage-related securities will experience a cash shortfall.
Assumption of voluntary prepayment rates is also an input to the
present value of expected losses.
| As of March 31, 2011 | ||||||||||||||||||||
| Alt-A | ||||||||||||||||||||
| Subprime | Option ARM | Fixed Rate | Variable Rate | Hybrid Rate | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Vintage Year
|
||||||||||||||||||||
|
2004 & Prior:
|
||||||||||||||||||||
|
Unpaid principal balance
|
$ | 2,159 | $ | 511 | $ | 3,726 | $ | 532 | $ | 2,446 | ||||||||||
|
Weighted average collateral
default
(1)
|
40.9 | % | 36.7 | % | 12.0 | % | 34.7 | % | 17.3 | % | ||||||||||
|
Weighted average collateral
severities
(2)
|
60.7 | % | 45.8 | % | 42.9 | % | 44.7 | % | 35.8 | % | ||||||||||
|
Weighted average voluntary prepayment
rates
(3)
|
4.1 | % | 6.0 | % | 8.6 | % | 8.2 | % | 11.1 | % | ||||||||||
|
Average credit
enhancement
(4)
|
51.3 | % | 18.2 | % | 12.0 | % | 21.8 | % | 10.7 | % | ||||||||||
|
2005
|
||||||||||||||||||||
|
Unpaid principal balance
|
$ | 197 | $ | 1,375 | $ | 1,261 | $ | 570 | $ | 2,516 | ||||||||||
|
Weighted average collateral
default
(1)
|
76.1 | % | 57.3 | % | 42.7 | % | 58.5 | % | 41.8 | % | ||||||||||
|
Weighted average collateral
severities
(2)
|
73.0 | % | 54.3 | % | 58.6 | % | 59.5 | % | 50.5 | % | ||||||||||
|
Weighted average voluntary prepayment
rates
(3)
|
1.7 | % | 3.9 | % | 6.6 | % | 6.9 | % | 7.8 | % | ||||||||||
|
Average credit
enhancement
(4)
|
64.3 | % | 29.2 | % | 2.0 | % | 19.3 | % | 6.5 | % | ||||||||||
|
2006
|
||||||||||||||||||||
|
Unpaid principal balance
|
$ | 12,303 | $ | 1,335 | $ | 602 | $ | 1,733 | $ | 1,866 | ||||||||||
|
Weighted average collateral
default
(1)
|
78.7 | % | 72.6 | % | 44.3 | % | 61.5 | % | 37.0 | % | ||||||||||
|
Weighted average collateral
severities
(2)
|
73.3 | % | 60.8 | % | 62.8 | % | 62.6 | % | 48.1 | % | ||||||||||
|
Weighted average voluntary prepayment
rates
(3)
|
1.7 | % | 3.2 | % | 6.1 | % | 6.9 | % | 9.3 | % | ||||||||||
|
Average credit
enhancement
(4)
|
19.7 | % | 21.5 | % | 2.4 | % | 1.6 | % | 1.8 | % | ||||||||||
|
2007 & After:
|
||||||||||||||||||||
|
Unpaid principal balance
|
$ | 639 | $ | — | $ | — | $ | — | $ | 126 | ||||||||||
|
Weighted average collateral
default
(1)
|
74.4 | % | N/A | N/A | N/A | 44.8 | % | |||||||||||||
|
Weighted average collateral
severities
(2)
|
69.9 | % | N/A | N/A | N/A | 54.3 | % | |||||||||||||
|
Weighted average voluntary prepayment
rates
(3)
|
1.6 | % | N/A | N/A | N/A | 6.7 | % | |||||||||||||
|
Average credit
enhancement
(4)
|
34.4 | % | N/A | N/A | N/A | 25.7 | % | |||||||||||||
|
Total
|
||||||||||||||||||||
|
Unpaid principal balance
|
$ | 15,298 | $ | 3,221 | $ | 5,589 | $ | 2,835 | $ | 6,954 | ||||||||||
|
Weighted average collateral
default
(1)
|
73.1 | % | 60.4 | % | 22.4 | % | 55.8 | % | 31.9 | % | ||||||||||
|
Weighted average collateral
severities
(2)
|
71.4 | % | 55.7 | % | 48.6 | % | 58.6 | % | 44.7 | % | ||||||||||
|
Weighted average voluntary prepayment
rates
(3)
|
2.1 | % | 3.9 | % | 7.9 | % | 7.1 | % | 9.4 | % | ||||||||||
|
Average credit
enhancement
(4)
|
25.3 | % | 24.3 | % | 8.7 | % | 9.0 | % | 7.0 | % | ||||||||||
| (1) | The expected remaining cumulative default rate of the collateral pool backing the securities, as a percentage of the current collateral unpaid principal balance, weighted by security unpaid principal balance. |
110
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)
| (2) | The expected remaining loss given default of the collateral pool backing the securities, calculated as the ratio of remaining cumulative loss divided by cumulative defaults, weighted by security unpaid principal balance. | |
| (3) | The average monthly voluntary prepayment rate, weighted by security unpaid principal balance. | |
| (4) | The average percent current credit enhancement provided by subordination of other securities. Excludes excess interest projections and monoline bond insurance. |
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, 2011. 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, 2011 | ||||||||||||||||||||||||||||||||||||||||
|
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
|
$ | 19,426 | $ | 20,643 | $ | — | $ | — | $ | 1 | $ | 1 | $ | 3,576 | $ | 3,774 | $ | 15,849 | $ | 16,868 | ||||||||||||||||||||
|
Freddie Mac
|
14,435 | 15,356 | 4 | 4 | 32 | 33 | 1,492 | 1,595 | 12,907 | 13,724 | ||||||||||||||||||||||||||||||
|
Ginnie Mae
|
873 | 1,004 | — | — | — | — | 5 | 6 | 868 | 998 | ||||||||||||||||||||||||||||||
|
Alt-A private-label securities
|
15,337 | 13,692 | — | — | 1 | 1 | 279 | 281 | 15,057 | 13,410 | ||||||||||||||||||||||||||||||
|
Subprime private-label securities
|
11,109 | 9,660 | — | — | — | — | — | — | 11,109 | 9,660 | ||||||||||||||||||||||||||||||
|
CMBS
|
15,097 | 14,924 | — | — | 1,990 | 1,989 | 12,472 | 12,328 | 635 | 607 | ||||||||||||||||||||||||||||||
|
Mortgage revenue bonds
|
11,273 | 10,542 | 55 | 55 | 370 | 380 | 771 | 772 | 10,077 | 9,335 | ||||||||||||||||||||||||||||||
|
Other mortgage-related securities
|
3,997 | 3,792 | — | — | — | — | — | 16 | 3,997 | 3,776 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 91,547 | $ | 89,613 | $ | 59 | $ | 59 | $ | 2,394 | $ | 2,404 | $ | 18,595 | $ | 18,772 | $ | 70,499 | $ | 68,378 | ||||||||||||||||||||
Accumulated
Other Comprehensive Loss
The following table displays our accumulated other comprehensive
loss by major categories as of March 31, 2011 and
December 31, 2010.
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Net unrealized gains on
available-for-sale
securities for which we have not recorded
other-than-temporary
impairment
|
$ | 446 | $ | 304 | ||||
|
Net unrealized gains (losses) on
available-for-sale
securities for which we have recorded
other-than-temporary
impairment
|
(1,703 | ) | (1,736 | ) | ||||
|
Other
|
(244 | ) | (250 | ) | ||||
|
Accumulated other comprehensive loss
|
$ | (1,501 | ) | $ | (1,682 | ) | ||
111
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 the activity in other comprehensive
income, net of tax, by major categories for the three months
ended March 31, 2011 and 2010.
|
For the Three
|
||||||||
|
Months Ended
|
||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Comprehensive loss:
|
||||||||
|
Net loss
|
$ | (6,471 | ) | $ | (11,529 | ) | ||
|
Other comprehensive income (loss), net of tax:
|
||||||||
|
Changes in net unrealized losses on
available-for-sale
securities (net of tax of $87 and $710, respectively)
|
161 | 1,318 | ||||||
|
Reclassification adjustment for
other-than-temporary
impairments recognized in net loss (net of tax of $13 and $81,
respectively)
|
32 | 155 | ||||||
|
Reclassification adjustment for gains included in net loss (net
of tax of $8 and $56, respectively)
|
(14 | ) | (103 | ) | ||||
|
Other
|
2 | 2 | ||||||
|
Other comprehensive income
|
181 | 1,372 | ||||||
|
Total comprehensive loss
|
$ | (6,290 | ) | $ | (10,157 | ) | ||
| 6. | Financial Guarantees |
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
$52.5 billion and $52.4 billion as of March 31,
2011 and December 31, 2010, respectively. 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 $12.4 billion and
$12.6 billion as of March 31, 2011 and
December 31, 2010, respectively. In addition, we had
exposure of $10.1 billion and $10.3 billion for other
guarantees not recognized in our condensed consolidated balance
sheets as of March 31, 2011 and December 31, 2010,
respectively. 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 $3.8 billion and $3.9 billion as of
March 31, 2011 and December 31, 2010, respectively.
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.
The fair value of our guaranty obligations associated with the
Fannie Mae MBS included in “Investments in securities”
was $1.9 billion and $2.0 billion as of March 31,
2011 and December 31, 2010, respectively.
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 mortgage loans
underlying the related securities. Management also monitors the
serious delinquency rate, which is the percentage of
single-family loans three or more months past due or in the
foreclosure process, and the percentage of multifamily loans
60 days or more past due, of loans that also have higher
risk characteristics, such as high
mark-to-market
loan-to-value
ratios and low original debt service coverage ratios. We use
this information, in conjunction with
112
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)
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 higher-risk
characteristics, and in some cases we decide to significantly
reduce our participation in riskier loan product categories.
Management also uses this data together with other credit risk
measures to identify key trends that guide the development of
our loss mitigation strategies.
The following tables display the current delinquency status and
certain higher risk characteristics of our single-family
conventional and total multifamily guaranty book of business as
of March 31, 2011 and December 31, 2010.
| As of March 31, 2011 (1) | As of December 31, 2010 (1) | |||||||||||||||||||||||
|
30 Days
|
60 Days
|
Seriously
|
30 Days
|
60 Days
|
Seriously
|
|||||||||||||||||||
| Delinquent | Delinquent | Delinquent (2) | Delinquent | Delinquent | Delinquent (2) | |||||||||||||||||||
|
Percentage of single-family conventional guaranty book of
business
(3)
|
1.83 | % | 0.73 | % | 5.05 | % | 2.19 | % | 0.89 | % | 5.37 | % | ||||||||||||
|
Percentage of single-family conventional
loans (4) |
1.93 | 0.70 | 4.27 | 2.32 | 0.87 | 4.48 | ||||||||||||||||||
| As of March 31, 2011 (1) | As of December 31, 2010 (1) | |||||||||||||||
|
Percentage of
|
Percentage of
|
|||||||||||||||
|
Single-Family
|
Single-Family
|
|||||||||||||||
|
Conventional
|
Percentage
|
Conventional
|
Percentage
|
|||||||||||||
|
Guaranty Book
|
Seriously
|
Guaranty Book
|
Seriously
|
|||||||||||||
| of Business (3) | Delinquent (2)(4) | of Business (3) | Delinquent (2)(4) | |||||||||||||
|
Estimated
mark-to-market
loan-to-value
ratio:
|
||||||||||||||||
|
Less than 100%
|
82 | % | 2.36 | % | 84 | % | 2.62 | % | ||||||||
|
100.01% to 110%
|
6 | 9.79 | 5 | 11.60 | ||||||||||||
|
110.01% to 120%
|
3 | 13.08 | 3 | 14.74 | ||||||||||||
|
120.01% to 125%
|
1 | 14.69 | 1 | 16.86 | ||||||||||||
|
Greater than 125%
|
8 | 22.45 | 7 | 24.71 | ||||||||||||
|
Geographical distribution:
|
||||||||||||||||
|
Arizona
|
2 | 5.16 | 2 | 6.23 | ||||||||||||
|
California
|
19 | 3.35 | 18 | 3.89 | ||||||||||||
|
Florida
|
7 | 12.40 | 7 | 12.31 | ||||||||||||
|
Nevada
|
1 | 9.40 | 1 | 10.66 | ||||||||||||
|
Select Midwest
states
(5)
|
10 | 4.62 | 11 | 4.80 | ||||||||||||
|
All other states
|
61 | 3.34 | 61 | 3.46 | ||||||||||||
|
Product distribution (not mutually
exclusive):
(6)
|
||||||||||||||||
|
Alt-A
|
7 | 13.45 | 8 | 13.87 | ||||||||||||
|
Subprime
|
* | 27.47 | * | 28.20 | ||||||||||||
|
Negatively amortizing adjustable rate
|
* | 8.57 | * | 9.02 | ||||||||||||
|
Interest only
|
5 | 17.10 | 6 | 17.85 | ||||||||||||
|
Investor property
|
6 | 4.67 | 6 | 4.79 | ||||||||||||
|
Condo/Coop
|
9 | 5.15 | 9 | 5.37 | ||||||||||||
|
Original
loan-to-value
ratio
>90%
(7)
|
9 | 9.40 | 10 | 10.04 | ||||||||||||
|
FICO credit score
<620
(7)
|
3 | 14.05 | 4 | 14.63 | ||||||||||||
|
Original
loan-to-value
ratio >90% and FICO credit score
<620
(7)
|
1 | 20.20 | 1 | 21.41 | ||||||||||||
113
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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, 2011 (1) | As of December 31, 2010 (1) | |||||||||||||||
|
Percentage of
|
Percentage of
|
|||||||||||||||
|
Single-Family
|
Single-Family
|
|||||||||||||||
|
Conventional
|
Percentage
|
Conventional
|
Percentage
|
|||||||||||||
|
Guaranty Book
|
Seriously
|
Guaranty Book
|
Seriously
|
|||||||||||||
| of Business (3) | Delinquent (2)(4) | of Business (3) | Delinquent (2)(4) | |||||||||||||
|
Vintages:
|
||||||||||||||||
|
2005
|
8 | 7.17 | 9 | 7.20 | ||||||||||||
|
2006
|
8 | 12.12 | 8 | 12.19 | ||||||||||||
|
2007
|
11 | 13.08 | 12 | 13.24 | ||||||||||||
|
2008
|
8 | 5.10 | 9 | 4.88 | ||||||||||||
|
All other vintages
|
65 | 1.64 | 62 | 1.73 | ||||||||||||
| * | Represents less than 0.5% of the single-family conventional guaranty book of business. | |
| (1) | Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan level information, which constituted over 99% of our total single-family conventional guaranty book of business as of both March 31, 2011 and December 31, 2010. | |
| (2) | Consists of single-family conventional loans that were three months or more past due or in foreclosure, as of the periods indicated. | |
| (3) | Calculated based on the aggregate unpaid principal balance of single-family conventional loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business. | |
| (4) | Calculated based on the number of single-family conventional loans that were delinquent divided by the total number of loans in our single-family conventional guaranty book of business. | |
| (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 ® . |
114
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)
| As of March 31, 2011 (1)(2) | As of December 31, 2010 (1)(2) | |||||||||||||||
|
30 Days
|
Seriously
|
30 Days
|
Seriously
|
|||||||||||||
| Delinquent | Delinquent (3) | Delinquent | Delinquent (3) | |||||||||||||
|
Percentage of multifamily guaranty book of business
|
0.16 | % | 0.64 | % | 0.21 | % | 0.71 | % | ||||||||
| As of March 31, 2011 (1)(2) | As of December 31, 2010 (1)(2) | |||||||||||||||
|
Percentage of
|
Percentage of
|
|||||||||||||||
|
Multifamily
|
Percentage
|
Multifamily
|
Percentage
|
|||||||||||||
|
Guaranty
|
Seriously
|
Guaranty
|
Seriously
|
|||||||||||||
| Book of Business | Delinquent (3) | Book of Business | Delinquent (3) | |||||||||||||
|
Original
loan-to-value
ratio:
|
||||||||||||||||
|
Greater than 80%
|
5 | % | 0.60 | % | 5 | % | 0.59 | % | ||||||||
|
Less than or equal to 80%
|
95 | 0.64 | 95 | 0.71 | ||||||||||||
|
Original debt service coverage ratio:
|
||||||||||||||||
|
Less than or equal to 1.10
|
9 | 0.20 | 9 | 0.27 | ||||||||||||
|
Greater than 1.10
|
91 | 0.68 | 91 | 0.75 | ||||||||||||
|
Acquisition loan size distribution:
|
||||||||||||||||
|
Less than or equal to $750,000
|
2 | 1.59 | 2 | 1.61 | ||||||||||||
|
Greater than $750,000 and less than or equal to $3 million
|
12 | 1.22 | 12 | 1.17 | ||||||||||||
|
Greater than $3 million and less than
|
||||||||||||||||
|
or equal to $5 million
|
9 | 0.84 | 9 | 0.88 | ||||||||||||
|
Greater than $5 million and less than
|
||||||||||||||||
|
or equal to $25 million
|
42 | 0.76 | 42 | 0.88 | ||||||||||||
|
Greater than $25 million
|
35 | 0.18 | 35 | 0.24 | ||||||||||||
|
Maturing dates:
|
||||||||||||||||
|
Maturing in 2011
|
3 | 1.10 | 3 | 0.68 | ||||||||||||
|
Maturing in 2012
|
7 | 0.43 | 7 | 0.42 | ||||||||||||
|
Maturing in 2013
|
10 | 0.46 | 11 | 0.54 | ||||||||||||
|
Maturing in 2014
|
8 | 0.52 | 8 | 0.67 | ||||||||||||
|
Maturing in 2015
|
9 | 0.70 | 9 | 0.57 | ||||||||||||
| (1) | Consists of the portion of our multifamily guaranty book of business for which we have detailed loan level information, which constituted 99% of our total multifamily guaranty book of business as of both March 31, 2011 and December 31, 2010, respectively, excluding loans that have been defeased. Defeasance is a pre-payment of a loan through substitution of collateral. | |
| (2) | Calculated based on the aggregate unpaid principal balance of multifamily loans for each category divided by the aggregate unpaid principal balance of loans in our multifamily guaranty book of business. | |
| (3) | Consists of multifamily loans that were 60 days or more past due as of the periods indicated. |
115
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)
| 7. | 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, 2011 and
2010.
|
For the Three Months Ended
|
For the Three Months Ended
|
|||||||||||||||||||||||
| March 31, 2011 | 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
|
$ | 18,054 | $ | (1,881 | ) | $ | 16,173 | $ | 9,716 | $ | (574 | ) | $ | 9,142 | ||||||||||
|
Additions
|
4,889 | (129 | ) | 4,760 | 6,762 | (52 | ) | 6,710 | ||||||||||||||||
|
Disposals
|
(6,015 | ) | 730 | (5,285 | ) | (3,425 | ) | 206 | (3,219 | ) | ||||||||||||||
|
Write-downs, net of recoveries
|
— | (384 | ) | (384 | ) | — | (264 | ) | (264 | ) | ||||||||||||||
|
Ending balance, March 31
|
$ | 16,928 | $ | (1,664 | ) | $ | 15,264 | $ | 13,053 | $ | (684 | ) | $ | 12,369 | ||||||||||
| (1) | Reflects activities in the valuation allowance for acquired properties held primarily by our single-family segment. |
| 8. | Short-Term Borrowings and Long-Term Debt |
Short-Term
Borrowings
The following table displays our outstanding short-term
borrowings (borrowing with an original contractual maturity of
one year or less) and weighted-average interest rates of these
borrowings as of March 31, 2011 and December 31, 2010.
| As of | ||||||||||||||||
| March 31, 2011 | December 31, 2010 | |||||||||||||||
|
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
|
$ | 25 | 0.01 | % | $ | 52 | 2.20 | % | ||||||||
|
Fixed-rate short-term debt:
|
||||||||||||||||
|
Discount notes
|
$ | 146,751 | 0.26 | % | $ | 151,500 | 0.32 | % | ||||||||
|
Foreign exchange discount notes
|
341 | 2.51 | 384 | 2.43 | ||||||||||||
|
Total short-term debt of Fannie Mae
|
147,092 | 0.27 | 151,884 | 0.32 | ||||||||||||
|
Debt of consolidated trusts
|
5,156 | 0.22 | 5,359 | 0.23 | ||||||||||||
|
Total short-term debt
|
$ | 152,248 | 0.27 | % | $ | 157,243 | 0.32 | % | ||||||||
| (1) | Includes the effects of discounts, premiums, and other cost basis adjustments. |
116
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, 2011 and December 31, 2010.
| As of | ||||||||||||||||||||
| March 31, 2011 | December 31, 2010 | |||||||||||||||||||
|
Weighted-
|
Weighted-
|
|||||||||||||||||||
|
Average
|
Average
|
|||||||||||||||||||
|
Interest
|
Interest
|
|||||||||||||||||||
| Maturities | Outstanding | Rate (1) | Maturities | Outstanding | Rate (1) | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Senior fixed:
|
||||||||||||||||||||
|
Benchmark notes and bonds
|
2011 - 2030 | $ | 291,851 | 3.14 | % | 2011 - 2030 | $ | 300,344 | 3.20 | % | ||||||||||
|
Medium-term notes
|
2011 - 2021 | 190,950 | 2.00 | 2011 - 2020 | 199,266 | 2.13 | ||||||||||||||
|
Foreign exchange notes and bonds
|
2017 - 2028 | 1,204 | 6.07 | 2017 - 2028 | 1,177 | 6.21 | ||||||||||||||
|
Other long-term
debt
(2)
|
2011 - 2040 | 47,630 | 5.64 | 2011 - 2040 | 44,893 | 5.64 | ||||||||||||||
|
Total senior fixed
|
531,635 | 2.96 | 545,680 | 3.02 | ||||||||||||||||
|
Senior floating:
|
||||||||||||||||||||
|
Medium-term notes
|
2011 - 2016 | 74,454 | 0.30 | 2011 - 2015 | 72,039 | 0.31 | ||||||||||||||
|
Other long-term
debt
(2)
|
2020 - 2037 | 389 | 5.27 | 2020 - 2037 | 386 | 4.92 | ||||||||||||||
|
Total senior floating
|
74,843 | 0.32 | 72,425 | 0.34 | ||||||||||||||||
|
Subordinated fixed:
|
||||||||||||||||||||
|
Qualifying
subordinated
(3)
|
2012 - 2014 | 4,893 | 5.08 | 2011 - 2014 | 7,392 | 5.47 | ||||||||||||||
|
Subordinated debentures
|
2019 | 2,724 | 9.91 | 2019 | 2,663 | 9.91 | ||||||||||||||
|
Total subordinated fixed
|
7,617 | 6.80 | 10,055 | 6.65 | ||||||||||||||||
|
Total long-term debt of Fannie
Mae
(4)
|
614,095 | 2.69 | 628,160 | 2.77 | ||||||||||||||||
|
Debt of consolidated
trusts
(2)
|
2011 - 2051 | 2,442,433 | 4.61 | 2011 - 2051 | 2,411,597 | 4.59 | ||||||||||||||
|
Total long-term debt
|
$ | 3,056,528 | 4.23 | % | $ | 3,039,757 | 4.22 | % | ||||||||||||
| (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 $11.4 billion and $12.4 billion as of March 31, 2011 and December 31, 2010, 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, 2011 and December 31, 2010. We had no
borrowings outstanding from these lines of credit as of
March 31, 2011.
117
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. | 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
derivatives, or they may be listed and traded on an exchange. We
typically do not settle the notional amount of our risk
management derivatives; rather, notional amounts provide the
basis for calculating actual payments or settlement amounts. The
derivatives we use for interest rate risk management purposes
consist primarily of interest rate swaps, interest rate options,
foreign currency swaps and futures.
We enter into forward purchase and sale commitments that lock in
the future delivery of mortgage loans and mortgage-related
securities at a fixed price or yield. Certain commitments to
purchase mortgage loans and purchase or sell mortgage-related
securities meet the criteria of a derivative. We typically
settle the notional amount of our mortgage commitments that are
accounted for as derivatives.
We recognize all derivatives as either assets or liabilities in
our condensed consolidated balance sheets at their fair value on
a trade date basis. Fair value amounts, which are netted to the
extent a legal right of offset exists and is enforceable by law
at the counterparty level and are inclusive of cash collateral
posted or received, are recorded in “Other assets” or
“Other liabilities” in our condensed consolidated
balance sheets. We record all derivative gains and losses,
including accrued interest, in “Fair value gains (losses),
net” in our condensed consolidated statements of operations
and comprehensive loss.
Notional
and Fair Value Position of our Derivatives
The following table displays the notional amount and estimated
fair value of our asset and liability derivative instruments as
of March 31, 2011 and December 31, 2010.
| As of March 31, 2011 | As of December 31, 2010 | |||||||||||||||||||||||||||||||
| 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
|
$ | 72,172 | $ | 2,074 | $ | 198,078 | $ | (10,764 | ) | $ | 49,085 | $ | 1,812 | $ | 228,142 | $ | (14,115 | ) | ||||||||||||||
|
Receive-fixed
|
150,481 | 5,180 | 64,296 | (868 | ) | 172,174 | 6,493 | 52,003 | (578 | ) | ||||||||||||||||||||||
|
Basis
|
415 | 43 | 1,150 | (3 | ) | 435 | 29 | 50 | — | |||||||||||||||||||||||
|
Foreign currency
|
1,223 | 161 | 372 | (45 | ) | 1,274 | 164 | 286 | (51 | ) | ||||||||||||||||||||||
|
Swaptions:
|
||||||||||||||||||||||||||||||||
|
Pay-fixed
|
73,750 | 737 | 58,300 | (1,844 | ) | 66,200 | 482 | 30,950 | (1,773 | ) | ||||||||||||||||||||||
|
Receive-fixed
|
54,440 | 4,074 | 58,300 | (849 | ) | 48,340 | 4,992 | 30,275 | (673 | ) | ||||||||||||||||||||||
|
Interest rate caps
|
7,000 | 20 | — | — | 7,000 | 24 | — | — | ||||||||||||||||||||||||
|
Other
(1)
|
1,047 | 80 | 100 | (1 | ) | 909 | 75 | 25 | (1 | ) | ||||||||||||||||||||||
|
Total gross risk management derivatives
|
360,528 | 12,369 | 380,596 | (14,374 | ) | 345,417 | 14,071 | 341,731 | (17,191 | ) | ||||||||||||||||||||||
|
Accrued interest receivable (payable)
|
— | 1,221 | — | (1,981 | ) | — | 1,288 | — | (1,805 | ) | ||||||||||||||||||||||
|
Netting
adjustment
(2)
|
— | (13,478 | ) | — | 15,622 | — | (15,175 | ) | — | 18,023 | ||||||||||||||||||||||
|
Total net risk management derivatives
|
$ | 360,528 | $ | 112 | $ | 380,596 | $ | (733 | ) | $ | 345,417 | $ | 184 | $ | 341,731 | $ | (973 | ) | ||||||||||||||
118
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)
| As of March 31, 2011 | As of December 31, 2010 | |||||||||||||||||||||||||||||||
| 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) | ||||||||||||||||||||||||||||||||
|
Mortgage commitment derivatives:
|
||||||||||||||||||||||||||||||||
|
Mortgage commitments to purchase whole loans
|
$ | 2,017 | $ | 9 | $ | 1,075 | $ | (4 | ) | $ | 2,880 | $ | 19 | $ | 4,435 | $ | (105 | ) | ||||||||||||||
|
Forward contracts to purchase mortgage-related securities
|
20,310 | 111 | 12,828 | (60 | ) | 19,535 | 123 | 27,697 | (468 | ) | ||||||||||||||||||||||
|
Forward contracts to sell mortgage-related securities
|
13,149 | 47 | 25,959 | (144 | ) | 40,761 | 811 | 24,562 | (169 | ) | ||||||||||||||||||||||
|
Total mortgage commitment derivatives
|
$ | 35,476 | $ | 167 | $ | 39,862 | $ | (208 | ) | $ | 63,176 | $ | 953 | $ | 56,694 | $ | (742 | ) | ||||||||||||||
|
Derivatives at fair value
|
$ | 396,004 | $ | 279 | $ | 420,458 | $ | (941 | ) | $ | 408,593 | $ | 1,137 | $ | 398,425 | $ | (1,715 | ) | ||||||||||||||
| (1) | Includes futures, swap credit enhancements and mortgage insurance contracts that we account for as derivatives. The mortgage insurance contracts have payment provisions that are not based on a notional amount. | |
| (2) | The netting adjustment represents the effect of the legal right to offset under legally enforceable master netting agreements to settle with the same counterparty on a net basis, as well as cash collateral receivable and payable. Cash collateral receivable was $2.8 billion and $3.5 billion as of March 31, 2011 and December 31, 2010, respectively. Cash collateral payable was $704 million and $604 million as of March 31, 2011 and December 31, 2010, respectively. |
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, 2011 was $3.6 billion for which we posted
collateral of $2.8 billion in the normal course of
business. If the credit-risk-related contingency features
underlying these agreements were triggered as of March 31,
2011, we would be required to post an additional
$734 million of collateral to our counterparties.
119
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, by type of derivative instrument,
the fair value gains and losses, net on our derivatives for the
three months ended March 31, 2011 and 2010.
|
For the
|
||||||||
|
Three Months
|
||||||||
| Ended March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Risk management derivatives:
|
||||||||
|
Swaps:
|
||||||||
|
Pay-fixed
|
$ | 602 | $ | (5,879 | ) | |||
|
Receive-fixed
|
(256 | ) | 4,669 | |||||
|
Basis
|
19 | 9 | ||||||
|
Foreign currency
|
30 | (3 | ) | |||||
|
Swaptions:
|
||||||||
|
Pay-fixed
|
(55 | ) | (934 | ) | ||||
|
Receive-fixed
|
(233 | ) | 27 | |||||
|
Interest rate caps
|
(4 | ) | (56 | ) | ||||
|
Other
(1)
|
13 | 6 | ||||||
|
Total risk management derivatives fair value gains (losses), net
|
116 | (2,161 | ) | |||||
|
Mortgage commitment derivatives fair value gains (losses), net
|
23 | (601 | ) | |||||
|
Total derivatives fair value gains (losses), net
|
$ | 139 | $ | (2,762 | ) | |||
| (1) | Includes futures, swap credit enhancements and mortgage insurance contracts. |
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.
120
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 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, 2011 and
December 31, 2010.
| As of March 31, 2011 | ||||||||||||||||||||
| Credit Rating (1) | ||||||||||||||||||||
| AA+/AA/AA- | A+/A | Subtotal (2) | Other (3) | Total | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Credit loss
exposure
(4)
|
$ | 77 | $ | 651 | $ | 728 | $ | 77 | $ | 805 | ||||||||||
|
Less: Collateral
held
(5)
|
55 | 646 | 701 | — | 701 | |||||||||||||||
|
Exposure net of collateral
|
$ | 22 | $ | 5 | $ | 27 | $ | 77 | $ | 104 | ||||||||||
|
Additional information:
|
||||||||||||||||||||
|
Notional amount
|
$ | 209,395 | $ | 529,732 | $ | 739,127 | $ | 1,997 | $ | 741,124 | ||||||||||
|
Number of counterparties
|
7 | 8 | 15 | |||||||||||||||||
| As of December 31, 2010 | ||||||||||||||||||||
| Credit Rating (1) | ||||||||||||||||||||
| AA+/AA/AA- | A+/A | Subtotal (2) | Other (3) | Total | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Credit loss
exposure
(4)
|
$ | 350 | $ | 325 | $ | 675 | $ | 75 | $ | 750 | ||||||||||
|
Less: Collateral
held
(5)
|
273 | 325 | 598 | — | 598 | |||||||||||||||
|
Exposure net of collateral
|
$ | 77 | $ | — | $ | 77 | $ | 75 | $ | 152 | ||||||||||
|
Additional information:
|
||||||||||||||||||||
|
Notional amount
|
$ | 208,898 | $ | 476,766 | $ | 685,664 | $ | 1,484 | $ | 687,148 | ||||||||||
|
Number of counterparties
|
7 | 8 | 15 | |||||||||||||||||
| (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) | We had exposure to 4 and 3 interest rate and foreign currency derivative counterparties in a net gain position as of March 31, 2011 and December 31, 2010, respectively. Those interest rate and foreign currency derivatives had notional balances of $125.1 billion and $106.5 billion as of March 31, 2011 and December 31, 2010, respectively. | |
| (3) | Includes defined benefit mortgage insurance contracts and swap credit enhancements accounted for as derivatives where the right of legal offset does not exist. Also includes exchange-traded derivatives, such as futures and interest rate swaps, which are settled daily through a clearinghouse. | |
| (4) | 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. | |
| (5) | Represents both cash and non-cash collateral posted by our counterparties to us. Does not include collateral held in excess of exposure. 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 $2.8 billion and $3.4 billion related to our counterparties’ credit exposure to us as of March 31, 2011 and December 31, 2010, respectively. |
121
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. | Segment Reporting |
Our three reportable segments are: Single-Family, Multifamily,
and Capital Markets. We use these three segments to generate
revenue and manage business risk, and each segment is based on
the type of business activities it performs. We are working on
reorganizing our company by function rather than by business in
order to improve our operational efficiencies and effectiveness.
When we begin operating under a functional structure, we may
change some of our management reporting and how we report our
business segment results.
Under our segment reporting, the sum of the results for our
three business segments does not equal our condensed
consolidated statements of operations and comprehensive loss, as
we separate the activity related to our consolidated trusts from
the results generated by our three segments. 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 intracompany
guaranty fee income as a charge from the Single-Family and
Multifamily segments to Capital Markets for managing the credit
risk on mortgage loans held by the Capital Markets group. We
also include an eliminations/adjustments category to reconcile
our business segment results and the activity related to our
consolidated trusts to our condensed consolidated statements of
operations.
The following tables display our segment results for the three
months ended March 31, 2011 and 2010.
| For the Three Months Ended March 31, 2011 | ||||||||||||||||||||||||
| Business Segments | Other Activity/Reconciling Items | |||||||||||||||||||||||
|
Single-
|
Capital
|
Consolidated
|
Eliminations/
|
Total
|
||||||||||||||||||||
| Family | Multifamily | Markets | Trusts (1) | Adjustments (2) | Results | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Net interest income (expense)
|
$ | (898 | ) | $ | (9 | ) | $ | 3,710 | $ | 1,574 | $ | 583 | (3) | $ | 4,960 | |||||||||
|
Benefit (provision) for loan losses
|
(10,612 | ) | 25 | — | — | — | (10,587 | ) | ||||||||||||||||
|
Net interest income (expense) after provision for loan losses
|
(11,510 | ) | 16 | 3,710 | 1,574 | 583 | (5,627 | ) | ||||||||||||||||
|
Guaranty fee income (expense)
|
1,871 | 209 | (399 | ) | (1,110 | ) (4) | (521 | ) (4) | 50 | (4) | ||||||||||||||
|
Investment gains (losses), net
|
1 | 4 | 870 | (26 | ) | (774 | ) (5) | 75 | ||||||||||||||||
|
Net
other-than-temporary
impairments
|
— | — | (44 | ) | — | — | (44 | ) | ||||||||||||||||
|
Fair value gains (losses), net
|
— | — | 218 | (33 | ) | 104 | (6) | 289 | ||||||||||||||||
|
Debt extinguishment gains (losses), net
|
— | — | (24 | ) | 37 | — | 13 | |||||||||||||||||
|
Losses from partnership investments
|
— | (12 | ) | — | — | — | (12 | ) (7) | ||||||||||||||||
|
Fee and other income (expense)
|
147 | 58 | 75 | (92 | ) | (1 | ) | 187 | ||||||||||||||||
|
Administrative expenses
|
(416 | ) | (68 | ) | (121 | ) | — | — | (605 | ) | ||||||||||||||
|
Benefit (provision) for guaranty losses
|
(6 | ) | 39 | — | — | — | 33 | |||||||||||||||||
|
Foreclosed property expense
|
(488 | ) | — | — | — | — | (488 | ) | ||||||||||||||||
|
Other income (expenses)
|
(318 | ) | 6 | (9 | ) | — | (19 | ) | (340 | ) | ||||||||||||||
|
Income (loss) before federal income taxes
|
(10,719 | ) | 252 | 4,276 | 350 | (628 | ) | (6,469 | ) | |||||||||||||||
|
Benefit (provision) for federal income taxes
|
(2 | ) | (5 | ) | 5 | — | — | (2 | ) | |||||||||||||||
|
Net income (loss) attributable to Fannie Mae
|
$ | (10,721 | ) | $ | 247 | $ | 4,281 | $ | 350 | $ | (628 | ) | $ | (6,471 | ) | |||||||||
122
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)
| For the Three Months Ended March 31, 2010 | ||||||||||||||||||||||||
| Business Segments | Other Activity/Reconciling Items | |||||||||||||||||||||||
|
Single-
|
Capital
|
Consolidated
|
Eliminations/
|
Total
|
||||||||||||||||||||
| Family | Multifamily | Markets | Trusts (1) | Adjustments (2) | Results | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Net interest income (expense)
|
$ | (1,945 | ) | $ | 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 | (4) | ||||||||||||||
|
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 | ) (7) | ||||||||||||||||
|
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 | ) | (172 | ) | ||||||||||||||
|
Income (loss) before federal income taxes
|
(12,616 | ) | 112 | 2,108 | (224 | ) | (976 | ) | (11,596 | ) | ||||||||||||||
|
Benefit (provision) 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 | ) (8) | (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 condensed consolidated balance sheets. | |
| (2) | Represents the elimination of intercompany transactions occurring between the three business segments and our consolidated trusts, as well as other adjustments to reconcile to our condensed consolidated results. | |
| (3) | Represents the amortization expense of cost basis adjustments on securities that we own in our portfolio that on a GAAP basis are eliminated. | |
| (4) | Represents the guaranty fees paid from consolidated trusts to the Single-Family and Multifamily segments. The adjustment to guaranty fee income in the Eliminations/Adjustments column represents the elimination of the amortization of deferred cash fees related to consolidated trusts that were re-established for segment reporting. Total guaranty fee income is included in fee and other income in our condensed consolidated statements of operations and comprehensive loss. | |
| (5) | Primarily represents the removal of realized gains and losses on sales of Fannie Mae MBS classified as available-for-sale securities that are issued by consolidated trusts and retained in the Capital Markets portfolio. The adjustment also includes the removal of securitization gains (losses) recognized in the Capital Markets segment relating to portfolio securitization transactions that do not qualify for sale accounting under GAAP. | |
| (6) | Represents the removal of fair value adjustments on consolidated Fannie Mae MBS classified as trading that are retained in the Capital Markets portfolio. | |
| (7) | Losses from partnership investments are included in other expenses in our condensed consolidated statements of operations and comprehensive loss. | |
| (8) | Represents the adjustment from equity method accounting to consolidation accounting for partnership investments that are consolidated in our condensed consolidated balance sheets. |
123
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)
| 11. | Regulatory Capital Requirements |
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 submit capital
reports to FHFA during the conservatorship and FHFA monitors our
capital levels.
The following table displays our regulatory capital
classification measures as of March 31, 2011 and
December 31, 2010.
| As of | ||||||||
|
March 31,
|
December 31,
|
|||||||
| 2011 (1) | 2010 (1) | |||||||
| (Dollars in millions) | ||||||||
|
Core
capital
(2)
|
$ | (98,199 | ) | $ | (89,516 | ) | ||
|
Statutory minimum capital
requirement
(3)
|
32,530 | 33,676 | ||||||
|
Deficit of core capital over statutory minimum capital
requirement
|
$ | (130,729 | ) | $ | (123,192 | ) | ||
|
Deficit of core capital percentage over statutory minimum
capital requirement
|
(402 | )% | (366 | )% | ||||
|
|
||||||||
| (1) | Amounts as of March 31, 2011 and December 31, 2010 represent estimates that have been submitted to FHFA. | |
| (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). |
| 12. | Concentration of Credit Risk |
Mortgage Seller/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 76% of our single-family guaranty
book of business as of March 31, 2011, compared with 77% as
of December 31, 2010. Our ten largest multifamily mortgage
servicers, including their affiliates, serviced 69% of our
multifamily guaranty book of business as of March 31, 2011,
compared with 70% as of December 31, 2010.
If one of our principal mortgage seller/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
$94.8 billion on the single-family mortgage loans in our
guaranty book of business as of March 31, 2011, which
represented approximately 3% 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 represented $90.2 billion and
$4.6 billion, respectively, as of March 31, 2011,
compared with $91.2 billion and
124
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)
$4.7 billion, respectively, as of December 31, 2010.
Eight mortgage insurance companies provided over 99% of our
mortgage insurance as of both March 31, 2011 and
December 31, 2010.
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, 2011, our allowance for loan losses of
$67.6 billion, allowance for accrued interest receivable of
$2.9 billion and reserve for guaranty losses of
$257 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 collectively reserved. This amount is comprised
of the contractual recovery of approximately $17.4 billion
as of March 31, 2011 and an adjustment of approximately
$975 million which reduces the contractual recovery for our
assessment of our mortgage insurer counterparties’
inability to fully pay those claims.
We had outstanding receivables of $4.1 billion in
“Other assets” in our condensed consolidated balance
sheet as of March 31, 2011 and $4.4 billion as of
December 31, 2010 related to amounts claimed on insured,
defaulted loans that we have not yet received, of which
$650 million as of March 31, 2011 and
$648 million as of December 31, 2010 was due from our
mortgage seller/servicers. We assessed the receivables for
collectibility, and they are recorded net of a valuation
allowance of $271 million as of March 31, 2011 and
$317 million as of December 31, 2010 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, 2011 and December 31, 2010.
We received proceeds under our primary and pool mortgage
insurance policies for single-family loans of $1.6 billion
for the three months ended March 31, 2011 and
$6.4 billion for the year ended December 31, 2010. We
negotiated the cancellation and restructurings of some of our
mortgage insurance coverage in exchange for a fee. The cash fees
received of $796 million for the year ended
December 31, 2010 are included in our total insurance
proceeds amount; there were no such cash fees received in the
three months ended March 31, 2011. These fees represented
an acceleration of, and discount on, claims to be paid pursuant
to the coverage in order to reduce future exposure to our
mortgage insurers and were recorded as a reduction to our
“Foreclosed property expense (income).”
Financial Guarantors.
We were the beneficiary
of financial guarantees totaling $8.6 billion and
$8.8 billion as of March 31, 2011 and
December 31, 2010, 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. In addition, we are the beneficiary of
financial guarantees totaling $23.9 billion and
$25.7 billion as of March 31, 2011 and
December 31, 2010, 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
125
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)
and net worth. We model the fair value of our securities
assuming the benefit of those external financial guarantees that
we determine are creditworthy.
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
$14.8 billion as of March 31, 2011 and
$15.6 billion as of December 31, 2010. As of
March 31, 2011, 55% of our maximum potential loss recovery
on single-family loans was from three lenders. As of
December 31, 2010, 56% of our maximum potential loss
recovery on single-family loans was from three lenders. Our
maximum potential loss recovery from lenders under these risk
sharing agreements on multifamily loans was $30.7 billion
as of March 31, 2011 and $30.3 billion as of
December 31, 2010. As of both March 31, 2011 and
December 31, 2010, 41% of our maximum potential loss
recovery on multifamily loans was from three lenders.
| 13. | 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. The next
highest priority, Level 2, is given to measurements of
assets and liabilities based on limited observable inputs or
observable inputs for similar assets and liabilities. The lowest
priority, Level 3, is given to measurements based on
unobservable inputs.
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)
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, 2011 and December 31, 2010. Specifically,
total assets measured at fair value on a recurring basis and
classified as Level 3 were $38.2 billion, or 1% of
“Total assets,” and $39.0 billion, or 1% of
“Total assets,” in our condensed consolidated balance
sheets as of March 31, 2011 and December 31, 2010,
respectively.
| Fair Value Measurements as of March 31, 2011 | ||||||||||||||||||||
|
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
(2)
|
$ | 3,150 | $ | 2,950 | $ | — | $ | — | $ | 6,100 | ||||||||||
|
Trading securities:
|
||||||||||||||||||||
|
Mortgage-related securities:
|
||||||||||||||||||||
|
Fannie Mae
|
— | 5,480 | 1,651 | — | 7,131 | |||||||||||||||
|
Freddie Mac
|
— | 1,201 | — | — | 1,201 | |||||||||||||||
|
Ginnie Mae
|
— | 311 | — | — | 311 | |||||||||||||||
|
Alt-A private-label securities
|
— | 1,638 | 20 | — | 1,658 | |||||||||||||||
|
Subprime private-label securities
|
— | — | 1,547 | — | 1,547 | |||||||||||||||
|
CMBS
|
— | 10,943 | — | — | 10,943 | |||||||||||||||
|
Mortgage revenue bonds
|
— | — | 606 | — | 606 | |||||||||||||||
|
Other
|
— | — | 155 | — | 155 | |||||||||||||||
|
Non-mortgage-related securities:
|
||||||||||||||||||||
|
U.S. Treasury securities
|
29,383 | — | — | — | 29,383 | |||||||||||||||
|
Asset-backed securities
|
— | 4,098 | 2 | — | 4,100 | |||||||||||||||
|
Total trading securities
|
29,383 | 23,671 | 3,981 | — | 57,035 | |||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||
|
Mortgage-related securities:
|
||||||||||||||||||||
|
Fannie Mae
|
— | 20,097 | 546 | — | 20,643 | |||||||||||||||
|
Freddie Mac
|
— | 15,344 | 12 | — | 15,356 | |||||||||||||||
|
Ginnie Mae
|
— | 1,004 | — | — | 1,004 | |||||||||||||||
|
Alt-A private-label securities
|
— | 6,456 | 7,236 | — | 13,692 | |||||||||||||||
|
Subprime private-label securities
|
— | — | 9,660 | — | 9,660 | |||||||||||||||
|
CMBS
|
— | 14,924 | — | — | 14,924 | |||||||||||||||
|
Mortgage revenue bonds
|
— | 10 | 10,532 | — | 10,542 | |||||||||||||||
|
Other
|
— | 16 | 3,776 | — | 3,792 | |||||||||||||||
|
Total
available-for-sale
securities
|
— | 57,851 | 31,762 | — | 89,613 | |||||||||||||||
|
Mortgage loans of consolidated trusts
|
— | 748 | 2,221 | — | 2,969 | |||||||||||||||
|
Other assets:
|
||||||||||||||||||||
|
Risk management derivatives:
|
||||||||||||||||||||
|
Swaps
|
— | 8,523 | 156 | — | 8,679 | |||||||||||||||
|
Swaptions
|
— | 4,811 | — | — | 4,811 | |||||||||||||||
|
Interest rate caps
|
— | 20 | — | — | 20 | |||||||||||||||
|
Other
|
3 | — | 77 | — | 80 | |||||||||||||||
|
Netting adjustment
|
— | — | — | (13,478 | ) | (13,478 | ) | |||||||||||||
|
Mortgage commitment derivatives
|
— | 161 | 6 | — | 167 | |||||||||||||||
|
Total other assets
|
3 | 13,515 | 239 | (13,478 | ) | 279 | ||||||||||||||
|
Total assets at fair value
|
$ | 32,536 | $ | 98,735 | $ | 38,203 | $ | (13,478 | ) | $ | 155,996 | |||||||||
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)
| Fair Value Measurements as of March 31, 2011 | ||||||||||||||||||||
|
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
|
$ | — | $ | 461 | $ | — | $ | — | $ | 461 | ||||||||||
|
Senior floating
|
— | — | 423 | — | 423 | |||||||||||||||
|
Total of Fannie Mae
|
— | 461 | 423 | — | 884 | |||||||||||||||
|
Of consolidated trusts
|
— | 1,526 | 667 | — | 2,193 | |||||||||||||||
|
Total long-term debt
|
— | 1,987 | 1,090 | — | 3,077 | |||||||||||||||
|
Other liabilities:
|
||||||||||||||||||||
|
Risk management derivatives:
|
||||||||||||||||||||
|
Swaps
|
— | 13,560 | 101 | — | 13,661 | |||||||||||||||
|
Swaptions
|
— | 2,693 | — | — | 2,693 | |||||||||||||||
|
Other
|
1 | — | — | — | 1 | |||||||||||||||
|
Netting adjustment
|
— | — | — | (15,622 | ) | (15,622 | ) | |||||||||||||
|
Mortgage commitment derivatives
|
— | 188 | 20 | — | 208 | |||||||||||||||
|
Total other liabilities
|
1 | 16,441 | 121 | (15,622 | ) | 941 | ||||||||||||||
|
Total liabilities at fair value
|
$ | 1 | $ | 18,428 | $ | 1,211 | $ | (15,622 | ) | $ | 4,018 | |||||||||
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)
| Fair Value Measurements as of December 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
(2)
|
$ | 4,049 | $ | 2,300 | $ | — | $ | — | $ | 6,349 | ||||||||||
|
Trading securities:
|
||||||||||||||||||||
|
Mortgage-related securities:
|
||||||||||||||||||||
|
Fannie Mae
|
— | 5,196 | 2,202 | — | 7,398 | |||||||||||||||
|
Freddie Mac
|
— | 1,326 | — | — | 1,326 | |||||||||||||||
|
Ginnie Mae
|
— | 590 | — | — | 590 | |||||||||||||||
|
Alt-A private-label securities
|
— | 1,663 | 20 | — | 1,683 | |||||||||||||||
|
Subprime private-label securities
|
— | — | 1,581 | — | 1,581 | |||||||||||||||
|
CMBS
|
— | 10,764 | — | — | 10,764 | |||||||||||||||
|
Mortgage revenue bonds
|
— | — | 609 | — | 609 | |||||||||||||||
|
Other
|
— | — | 152 | — | 152 | |||||||||||||||
|
Non-mortgage-related securities:
|
||||||||||||||||||||
|
U.S. Treasury securities
|
27,432 | — | — | — | 27,432 | |||||||||||||||
|
Asset-backed securities
|
— | 5,309 | 12 | — | 5,321 | |||||||||||||||
|
Total trading securities
|
27,432 | 24,848 | 4,576 | — | 56,856 | |||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||
|
Mortgage-related securities:
|
||||||||||||||||||||
|
Fannie Mae
|
— | 22,714 | 114 | — | 22,828 | |||||||||||||||
|
Freddie Mac
|
— | 16,993 | 3 | — | 16,996 | |||||||||||||||
|
Ginnie Mae
|
— | 1,039 | — | — | 1,039 | |||||||||||||||
|
Alt-A private-label securities
|
— | 6,841 | 7,049 | — | 13,890 | |||||||||||||||
|
Subprime private-label securities
|
— | — | 9,932 | — | 9,932 | |||||||||||||||
|
CMBS
|
— | 14,844 | — | — | 14,844 | |||||||||||||||
|
Mortgage revenue bonds
|
— | 11 | 11,030 | — | 11,041 | |||||||||||||||
|
Other
|
— | 16 | 3,806 | — | 3,822 | |||||||||||||||
|
Total
available-for-sale
securities
|
— | 62,458 | 31,934 | — | 94,392 | |||||||||||||||
|
Mortgage loans of consolidated trusts
|
— | 755 | 2,207 | — | 2,962 | |||||||||||||||
|
Other assets:
|
||||||||||||||||||||
|
Risk management derivatives:
|
||||||||||||||||||||
|
Swaps
|
— | 9,623 | 163 | — | 9,786 | |||||||||||||||
|
Swaptions
|
— | 5,474 | — | — | 5,474 | |||||||||||||||
|
Interest rate caps
|
— | 24 | — | — | 24 | |||||||||||||||
|
Other
|
3 | — | 72 | — | 75 | |||||||||||||||
|
Netting adjustment
|
— | — | — | (15,175 | ) | (15,175 | ) | |||||||||||||
|
Mortgage commitment derivatives
|
— | 941 | 12 | — | 953 | |||||||||||||||
|
Total other assets
|
3 | 16,062 | 247 | (15,175 | ) | 1,137 | ||||||||||||||
|
Total assets at fair value
|
$ | 31,484 | $ | 106,423 | $ | 38,964 | $ | (15,175 | ) | $ | 161,696 | |||||||||
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)
| Fair Value Measurements as of December 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
|
$ | — | $ | 472 | $ | — | $ | — | $ | 472 | ||||||||||
|
Senior floating
|
— | — | 421 | — | 421 | |||||||||||||||
|
Total of Fannie Mae
|
— | 472 | 421 | — | 893 | |||||||||||||||
|
Of consolidated trusts
|
— | 1,644 | 627 | — | 2,271 | |||||||||||||||
|
Total long-term debt
|
— | 2,116 | 1,048 | — | 3,164 | |||||||||||||||
|
Other liabilities:
|
||||||||||||||||||||
|
Risk management derivatives:
|
||||||||||||||||||||
|
Swaps
|
— | 16,436 | 113 | — | 16,549 | |||||||||||||||
|
Swaptions
|
— | 2,446 | — | — | 2,446 | |||||||||||||||
|
Other
|
1 | — | — | — | 1 | |||||||||||||||
|
Netting adjustment
|
— | — | — | (18,023 | ) | (18,023 | ) | |||||||||||||
|
Mortgage commitment derivatives
|
— | 712 | 30 | — | 742 | |||||||||||||||
|
Total other liabilities
|
1 | 19,594 | 143 | (18,023 | ) | 1,715 | ||||||||||||||
|
Total liabilities at fair value
|
$ | 1 | $ | 21,710 | $ | 1,191 | $ | (18,023 | ) | $ | 4,879 | |||||||||
| (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. | |
| (2) | Cash equivalents is comprised of U.S. Treasuries that are classified as Level 1 and money market funds that are classified as Level 2. |
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 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, 2011 and 2010. The tables also
display gains and losses due to changes in fair value, including
both realized and unrealized gains and losses, recognized in our
condensed consolidated statements of operations and
comprehensive loss for Level 3 assets and liabilities for
the three months ended March 31, 2011 and 2010. When assets
and liabilities are transferred between levels, we recognize the
transfer as of the end of the period.
|
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
|
||||||||||||||||||||||||||||||||||||||||
| For the Three Months Ended March 31, 2011 | ||||||||||||||||||||||||||||||||||||||||
|
Net Unrealized
|
||||||||||||||||||||||||||||||||||||||||
|
Gains (Losses)
|
||||||||||||||||||||||||||||||||||||||||
|
Included
|
||||||||||||||||||||||||||||||||||||||||
|
in Net Loss
|
||||||||||||||||||||||||||||||||||||||||
|
Total Gains or (Losses)
|
Related to
|
|||||||||||||||||||||||||||||||||||||||
| (Realized/Unrealized) |
Assets and
|
|||||||||||||||||||||||||||||||||||||||
|
Included
|
Liabilities Still
|
|||||||||||||||||||||||||||||||||||||||
|
Balance,
|
Included
|
in Other
|
Transfers
|
Transfers
|
Balance,
|
Held as of
|
||||||||||||||||||||||||||||||||||
|
December 31,
|
in Net
|
Comprehensive
|
Out of
|
into
|
March 31,
|
March 31,
|
||||||||||||||||||||||||||||||||||
| 2010 | Loss | Income | Purchases (3) | Sales (3) | Settlements (4) | Level 3 (1) | Level 3 (1) | 2011 | 2011 (2) | |||||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
|
Trading securities:
|
||||||||||||||||||||||||||||||||||||||||
|
Mortgage-related:
|
||||||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$ | 2,202 | $ | (13 | ) | $ | — | $ | — | $ | (15 | ) | $ | (132 | ) | $ | (391 | ) | $ | — | $ | 1,651 | $ | (10 | ) | |||||||||||||||
|
Alt-A private-label securities
|
20 | — | — | — | — | — | — | — | 20 | — | ||||||||||||||||||||||||||||||
|
Subprime private-label securities
|
1,581 | 11 | — | — | — | (45 | ) | — | — | 1,547 | 11 | |||||||||||||||||||||||||||||
|
Mortgage revenue bonds
|
609 | — | — | — | — | (3 | ) | — | — | 606 | 3 | |||||||||||||||||||||||||||||
|
Other
|
152 | 4 | — | — | — | (1 | ) | — | — | 155 | 4 | |||||||||||||||||||||||||||||
|
Non-mortgage-related:
|
||||||||||||||||||||||||||||||||||||||||
|
Asset-backed securities
|
12 | — | — | — | — | (3 | ) | (9 | ) | 2 | 2 | — | ||||||||||||||||||||||||||||
|
Total trading securities
|
4,576 | 2 | — | — | (15 | ) | (184 | ) | (400 | ) | 2 | 3,981 | 8 | |||||||||||||||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||||||||||||||||||||||
|
Mortgage-related:
|
||||||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
114 | — | 4 | 416 | (15 | ) | (2 | ) | (101 | ) | 130 | 546 | — | |||||||||||||||||||||||||||
|
Freddie Mac
|
3 | — | — | — | — | — | — | 9 | 12 | — | ||||||||||||||||||||||||||||||
|
Alt-A private-label securities
|
7,049 | (2 | ) | 104 | — | — | (258 | ) | (317 | ) | 660 | 7,236 | — | |||||||||||||||||||||||||||
|
Subprime private-label securities
|
9,932 | 130 | (58 | ) | — | — | (344 | ) | — | — | 9,660 | — | ||||||||||||||||||||||||||||
|
Mortgage revenue bonds
|
11,030 | (2 | ) | 21 | — | (42 | ) | (475 | ) | — | — | 10,532 | — | |||||||||||||||||||||||||||
|
Other
|
3,806 | 1 | 71 | — | — | (102 | ) | — | — | 3,776 | — | |||||||||||||||||||||||||||||
|
Total
available-for-sale
securities
|
31,934 | 127 | 142 | 416 | (57 | ) | (1,181 | ) | (418 | ) | 799 | 31,762 | — | |||||||||||||||||||||||||||
|
Mortgage loans of consolidated trusts
|
2,207 | 11 | — | 15 | — | (79 | ) | (6 | ) | 73 | 2,221 | 11 | ||||||||||||||||||||||||||||
|
Net derivatives
|
104 | 14 | — | — | — | — | — | — | 118 | 5 | ||||||||||||||||||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||||||||||||||||||
|
Of Fannie Mae:
|
||||||||||||||||||||||||||||||||||||||||
|
Senior floating
|
(421 | ) | (22 | ) | — | — | — | 20 | — | — | (423 | ) | (22 | ) | ||||||||||||||||||||||||||
|
Of consolidated trusts
|
(627 | ) | (35 | ) | — | — | — | 22 | 22 | (49 | ) | (667 | ) | (35 | ) | |||||||||||||||||||||||||
|
Total long-term debt
|
$ | (1,048 | ) | $ | (57 | ) | $ | — | $ | — | $ | — | $ | 42 | $ | 22 | $ | (49 | ) | $ | (1,090 | ) | $ | (57 | ) | |||||||||||||||
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)
|
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
|
||||||||||||||||||||||||||||||||||||
| For the Three Months Ended March 31, 2010 | ||||||||||||||||||||||||||||||||||||
|
Net Unrealized
|
||||||||||||||||||||||||||||||||||||
|
Total Gains or (Losses)
|
Gains (Losses)
|
|||||||||||||||||||||||||||||||||||
| (Realized/Unrealized) |
Included in Net
|
|||||||||||||||||||||||||||||||||||
|
Purchases,
|
Loss Related to
|
|||||||||||||||||||||||||||||||||||
|
Sales,
|
Assets and
|
|||||||||||||||||||||||||||||||||||
|
Impact of
|
Included
|
Issuances,
|
Liabilities Still
|
|||||||||||||||||||||||||||||||||
|
Balance,
|
New
|
Included
|
in Other
|
and
|
Transfers
|
Transfers
|
Balance,
|
Held as of
|
||||||||||||||||||||||||||||
|
December 31,
|
Accounting
|
in Net
|
Comprehensive
|
Settlements,
|
Out of
|
into
|
March 31,
|
March 31,
|
||||||||||||||||||||||||||||
| 2009 | Standards | Loss | Income | Net | Level 3 (1) | Level 3 (1) | 2010 | 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 | — | ||||||||||||||||||||||||
|
Guaranty assets and
buy-ups
|
2,577 | (2,568 | ) | — | — | 2 | — | — | 11 | 1 | ||||||||||||||||||||||||||
|
Net derivatives
|
123 | — | 35 | — | (18 | ) | — | — | 140 | (2 | ) | |||||||||||||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||||||||||||||
|
Of Fannie Mae:
|
||||||||||||||||||||||||||||||||||||
|
Senior floating
|
(601 | ) | — | 14 | — | 5 | — | — | (582 | ) | 15 | |||||||||||||||||||||||||
|
Of consolidated trusts
|
— | (77 | ) | (1 | ) | — | — | 9 | (2 | ) | (71 | ) | — | |||||||||||||||||||||||
|
Total long-term debt
|
$ | (601 | ) | $ | (77 | ) | $ | 13 | $ | — | $ | 5 | $ | 9 | $ | (2 | ) | $ | (653 | ) | $ | 15 | ||||||||||||||
| (1) | 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 as well as Fannie Mae guaranteed mortgage-related securities. 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. | |
| (3) | Purchases and sales include activity related to the consolidation and deconsolidation of assets of securitized trusts. | |
| (4) | Issuances and settlements include activity related to the consolidation and deconsolidation of liabilities of securitized trusts. |
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 following tables display realized and unrealized gains and
losses included in our condensed consolidated statements of
operations and comprehensive loss for the three months ended
March 31, 2011 and 2010, 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, 2011 | ||||||||||||||||||||
|
Net
|
||||||||||||||||||||
|
Fair Value
|
Other-than-
|
|||||||||||||||||||
|
Interest
|
Gains
|
Temporary
|
||||||||||||||||||
| Income | (Losses), net | Impairments | Other | Total | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Total realized and unrealized gains (losses) included in net loss
|
$ | 135 | $ | (24 | ) | $ | (17 | ) | $ | 3 | $ | 97 | ||||||||
|
Net unrealized losses related to Level 3 assets and
liabilities still held as of March 31, 2011
|
$ | — | $ | (33 | ) | $ | — | $ | — | $ | (33 | ) | ||||||||
| For the Three Months Ended March 31, 2010 | ||||||||||||||||||||
|
Net
|
||||||||||||||||||||
|
Fair Value
|
Other-than-
|
|||||||||||||||||||
|
Interest
|
Gains
|
Temporary
|
||||||||||||||||||
| Income | (Losses), net | Impairments | Other | Total | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Total realized and unrealized gains (losses) included in net loss
|
$ | 111 | $ | 133 | $ | (212 | ) | $ | 5 | $ | 37 | |||||||||
|
Net unrealized gains related to Level 3 assets and
liabilities still held as of March 31, 2010
|
$ | — | $ | 83 | $ | — | $ | 1 | $ | 84 | ||||||||||
We use valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs. The
following is a description of the valuation techniques we use
for assets and liabilities measured at fair value on a recurring
basis, as well as our basis for classifying these assets and
liabilities as Level 1, Level 2 or Level 3. These
valuation techniques are also used to estimate the fair value of
financial instruments not carried at fair value but disclosed as
part of the fair value of financial instruments.
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 securities, and assets valued in this manner are
classified as Level 2. In the absence of prices provided by
third-party pricing services supported by observable market
data, fair values are estimated using quoted prices of
securities with similar characteristics or discounted cash flow
models that use inputs such as spread, prepayment speed, yield,
and loss severity based on market assumptions where available.
Such instruments are generally classified as Level 2. Where
there is limited activity or less transparency around inputs to
the valuation, securities are classified as Level 3.
Mortgage Loans Held for Investment
“HFI”
—The majority of 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. We elected the fair value option
for certain loans containing embedded derivatives that would
otherwise require bifurcation and consolidated loans of
senior-subordinate trust structures, which are recorded in our
condensed consolidated balance sheets at fair value on a
recurring basis.
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)
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. We classify these valuations
primarily within Level 2 of the valuation hierarchy given
that the market values of our Fannie Mae MBS are calibrated to
the quoted market prices in active markets for similar
securities. To the extent that significant inputs are not
observable or determined by extrapolation of observable points,
the loans are classified within Level 3. Certain loans that
do not qualify for Fannie Mae MBS securitization are valued
using market-based data including, for example, credit spreads,
severities and prepayment speeds for similar loans, through
third-party pricing services or through a model approach
incorporating both interest rate and credit risk simulating a
loan sale via a synthetic structure.
Fair value of single-family nonperforming loans represents an
estimate of the prices we would receive if we were to sell these
loans in the nonperforming whole-loan market. We calculate the
fair value of nonperforming loans based on assumptions about key
factors, including loan performance, collateral value,
foreclosure related expenses, disposition timeline, and mortgage
insurance repayment. Using these assumptions, along with
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 for loans that are four or more months
delinquent, in an open modification period, or in a closed
modification and that have performed for nine or fewer months,
is estimated directly from a model calibrated to these
indicative bids. Fair value for loans that are one to three
months delinquent is estimated by an interpolation method using
three inputs: (1) the fair value estimate as a performing
loan; (2) the fair value estimate as a nonperforming loan;
and (3) the delinquency transition rate corresponding to
the loan’s current delinquency status.
Fair value of a portion of our single-family nonperforming loans
is measured using the value of the underlying collateral. These
valuations leverage our proprietary distressed home price model.
The model assigns a value using comparable transaction data. In
determining what comparables to use in the calculations, the
model measures three key characteristics relative to the target
property: (1) distance from target property, (2) time
of the transaction and (3) comparability of the
nondistressed value. A portion of the nonperforming loans that
are impaired is 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.
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.
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. Exchange-traded futures are valued using market
quoted prices, resulting in Level 1 classification. 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
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)
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. This discount
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.
Debt
—The majority of debt of Fannie Mae is recorded
in our condensed consolidated balance sheets at the principal
amount outstanding, net of cost basis adjustments. We elected
the fair value option for certain structured 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 that debt as Level 2.
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.
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
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)
with embedded derivatives is recorded in our condensed
consolidated balance sheets at fair value on a recurring basis.
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 impairment), and the gains or losses recognized for
these assets and liabilities for the three months ended
March 31, 2011 and 2010 as a result of fair value
measurements.
|
For the Three
|
||||||||||||||||||||
|
Fair Value Measurements
|
Months Ended
|
|||||||||||||||||||
| For the Three Months Ended March 31, 2011 | March 31, 2011 | |||||||||||||||||||
|
Quoted
|
||||||||||||||||||||
|
Prices in
|
||||||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
Estimated
|
|||||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
Fair
|
Total
|
||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Value | Losses | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Mortgage loans held for sale, at lower of cost or fair value
|
$ | — | $ | 89 | $ | 131 | $ | 220 | $ | (5 | ) | |||||||||
|
Single-family mortgage loans held for investment, at amortized
cost:
|
||||||||||||||||||||
|
Of Fannie Mae
|
— | — | 27,265 | 27,265 | (3) | (1,014 | ) | |||||||||||||
|
Of consolidated trusts
|
— | — | 633 | 633 | (3) | (80 | ) | |||||||||||||
|
Multifamily mortgage loans held for investment, at amortized
cost:
|
||||||||||||||||||||
|
Of Fannie Mae
|
— | — | 1,028 | 1,028 | (3) | (80 | ) | |||||||||||||
|
Acquired property, net:
|
||||||||||||||||||||
|
Single-family
|
— | — | 12,114 | 12,114 | (4) | (811 | ) | |||||||||||||
|
Multifamily
|
— | — | 93 | 93 | (4) | (16 | ) | |||||||||||||
|
Other assets
|
— | — | 1,402 | 1,402 | (30 | ) | ||||||||||||||
|
Total assets at fair value
|
$ | — | $ | 89 | $ | 42,666 | $ | 42,755 | $ | (2,036 | ) | |||||||||
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)
|
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)(2) | $ | (69 | ) (2) | ||||||||
|
Single-family mortgage loans held for investment, at amortized
cost:
|
||||||||||||||||||||
|
Of Fannie Mae
|
— | — | 3,621 | 3,621 | (3) | 109 | ||||||||||||||
|
Multifamily mortgage loans held for investment, at amortized
cost:
|
||||||||||||||||||||
|
Of Fannie Mae
|
— | — | 1,089 | 1,089 | (3) | (91 | ) | |||||||||||||
|
Acquired property, net:
|
||||||||||||||||||||
|
Single-family
|
— | — | 5,827 | 5,827 | (4) | (332 | ) | |||||||||||||
|
Multifamily
|
— | — | 73 | 73 | (4) | (15 | ) | |||||||||||||
|
Other Assets:
|
||||||||||||||||||||
|
Guaranty assets
|
— | — | 18 | 18 | (3 | ) | ||||||||||||||
|
Partnership investments
|
— | — | 69 | 69 | (63 | ) | ||||||||||||||
|
Total assets at fair value
|
$ | — | $ | 6,690 | $ | 11,170 | $ | 17,860 | $ | (464 | ) | |||||||||
| (1) | Includes $7.1 billion 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. | |
| (2) | Includes $7.1 billion of estimated fair value and $68 million in losses due to the adoption of the new accounting standards. | |
| (3) | Includes $1.3 billion and $161 million of mortgage loans held for investment that were liquidated or transferred to foreclosed properties as of March 31, 2011 and 2010, respectively. | |
| (4) | Includes $4.1 billion and $1.6 billion of acquired properties that were sold or transferred as of March 31, 2011 and 2010, respectively. |
The following is a description of the fair valuation techniques
we use for assets and liabilities measured at fair value on a
nonrecurring basis under the accounting standard for fair value
measurements as well as our basis for classifying these assets
and liabilities as Level 1, Level 2 or Level 3.
We also use these valuation techniques to estimate the fair
value of financial instruments not carried at fair value but
disclosed as part of the fair value of financial instruments.
Mortgage Loans Held for Sale “HFS”
—HFS
loans are reported at the lower of cost or fair value in our
condensed consolidated balance sheets. The valuation methodology
and inputs used in estimating the fair value of HFS loans are
described under “Mortgage Loans Held for Investment”
and these loans are classified as Level 2 to the extent
that significant inputs are observable. To the extent that
significant inputs are unobservable or determined by
extrapolation of observable points, the loans are classified
within Level 3.
Acquired Property, Net and Other Assets
—Acquired
property, net mainly represents foreclosed property received in
full satisfaction of a loan net of a valuation allowance.
Acquired property is initially recorded in
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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 condensed consolidated balance sheets at its fair value less
its estimated cost to sell. The initial fair value of foreclosed
properties is determined using a hierarchy based on the
reliability of available information. The fair value estimate is
based on the best information available at the time of
valuation. The hierarchy includes offers accepted, third-party
interior appraisals, independent broker opinions, proprietary
home price model values and exterior broker price opinions.
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 costs to sell. Foreclosed
properties classified as held for use, included in other assets,
are depreciated and are impaired when circumstances indicate
that the carrying amount of the property is no longer
recoverable. Acquired property held for use is included in other
assets in our condensed consolidated balance sheets. The fair
value of our single-family foreclosed properties on an ongoing
basis is determined using the same information hierarchy used at
the point of initial fair value. 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 as Level 3 of the valuation
hierarchy because significant inputs are unobservable.
Fair
Value of Financial Instruments
The following table displays the carrying value and estimated
fair value of our financial instruments as of March 31,
2011 and December 31, 2010. The fair value of financial
instruments we disclose, includes commitments to purchase
multifamily and single-family mortgage loans, which are
off-balance sheet financial instruments that we do not record in
our condensed consolidated balance sheets. The fair values of
these commitments are included as “Mortgage loans held for
investment, net of allowance for loan losses.” The
disclosure excludes certain financial instruments, such as plan
obligations for pension and postretirement health care benefits,
employee stock option and stock purchase plans, and also
excludes all non-financial
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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)
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, 2011 | December 31, 2010 | |||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
| Value | Fair Value | Value | Fair Value | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Financial assets:
|
||||||||||||||||
|
Cash and cash
equivalents
(1)
|
$ | 56,561 | $ | 56,561 | $ | 80,975 | $ | 80,975 | ||||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
26,250 | 26,250 | 11,751 | 11,751 | ||||||||||||
|
Trading securities
|
57,035 | 57,035 | 56,856 | 56,856 | ||||||||||||
|
Available-for-sale
securities
|
89,613 | 89,613 | 94,392 | 94,392 | ||||||||||||
|
Mortgage loans held for sale
|
1,414 | 1,458 | 915 | 915 | ||||||||||||
|
Mortgage loans held for investment, net of allowance for loan
losses:
|
||||||||||||||||
|
Of Fannie Mae
|
348,644 | 313,172 | 358,698 | 319,367 | ||||||||||||
|
Of consolidated trusts
|
2,599,999 | 2,618,736 | 2,564,107 | 2,610,145 | ||||||||||||
|
Mortgage loans held for investment
|
2,948,643 | 2,931,908 | 2,922,805 | 2,929,512 | ||||||||||||
|
Advances to lenders
|
3,091 | 2,940 | 7,215 | 6,990 | ||||||||||||
|
Derivative assets at fair value
|
279 | 279 | 1,137 | 1,137 | ||||||||||||
|
Guaranty assets and
buy-ups
|
459 | 899 | 458 | 814 | ||||||||||||
|
Total financial assets
|
$ | 3,183,345 | $ | 3,166,943 | $ | 3,176,504 | $ | 3,183,342 | ||||||||
|
Financial liabilities:
|
||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
$ | 25 | $ | 25 | $ | 52 | $ | 51 | ||||||||
|
Short-term debt:
|
||||||||||||||||
|
Of Fannie Mae
|
147,092 | 147,133 | 151,884 | 151,974 | ||||||||||||
|
Of consolidated trusts
|
5,156 | 5,156 | 5,359 | 5,359 | ||||||||||||
|
Long-term debt:
|
||||||||||||||||
|
Of Fannie Mae
|
614,095 | 633,150 | 628,160 | 649,684 | ||||||||||||
|
Of consolidated trusts
|
2,442,433 | 2,530,474 | 2,411,597 | 2,514,929 | ||||||||||||
|
Derivative liabilities at fair value
|
941 | 941 | 1,715 | 1,715 | ||||||||||||
|
Guaranty obligations
|
760 | 3,427 | 769 | 3,854 | ||||||||||||
|
Total financial liabilities
|
$ | 3,210,502 | $ | 3,320,306 | $ | 3,199,536 | $ | 3,327,566 | ||||||||
| (1) | Includes restricted cash of $36.7 billion and $63.7 billion as of March 31, 2011 and December 31, 2010, respectively. |
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
because they are only measured at fair value at inception.
Financial Instruments for which fair value approximates
carrying value—
We hold certain financial instruments
that are not carried at fair value but for which the carrying
value approximates fair value due to the short-term nature and
negligible credit risk inherent in them. These financial
instruments include cash and cash equivalents, 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 our advances to lenders approximates the fair value
due to the short-term nature of the specific instruments. Other
instruments include loans for which 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)
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 current
mark-to-market
LTV ratios, future house prices, 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 accounting standard on guarantor’s accounting and
disclosure requirements for guarantees.
Fair
Value Option
We elected the fair value option for certain consolidated loans
and 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 respective loan or debt instrument.
We elected the fair value option for all long-term structured
debt instruments that are issued in response to specific
investor demand and have interest rates that are based on a
calculated index or formula and are economically hedged with
derivatives at the time of issuance. By electing the fair value
option for these instruments, we are able to eliminate the
volatility in our results of operations that would otherwise
result from the accounting asymmetry created by recording these
structured debt instruments at cost while recording the related
derivatives at fair value.
We elected the fair value option for the financial assets and
liabilities of the consolidated senior-subordinate trust
structures. By electing the fair value option for these
instruments, we are able to eliminate the volatility in our
results of operations that would otherwise result from different
accounting treatment between loans at cost and debt at cost.
Interest income for the mortgage loans is recorded in
“Mortgage loans interest income” and interest expense
for the debt instruments is recorded in “Long-term debt
interest expense” in our condensed consolidated statements
of operations and comprehensive loss.
The following table displays the fair value and unpaid principal
balance of the financial instruments for which we have made fair
value elections as of March 31, 2011 and December 31,
2010.
| As of | ||||||||||||||||||||||||||||
| March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||
|
Long-Term
|
Long-Term
|
|||||||||||||||||||||||||||
|
Loans of
|
Long-Term
|
Debt of
|
Loans of
|
Long-Term
|
Debt of
|
|||||||||||||||||||||||
|
Consolidated
|
Debt of
|
Consolidated
|
Consolidated
|
Debt of
|
Consolidated
|
|||||||||||||||||||||||
| Trusts (1) | Fannie Mae | Trusts (2) | Trusts (1) | Fannie Mae | Trusts (2) | |||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
|
Fair value
|
$ | 2,969 | $ | 884 | $ | 2,193 | $ | 2,962 | $ | 893 | $ | 2,271 | ||||||||||||||||
|
Unpaid principal balance
|
3,472 | 809 | 2,506 | 3,456 | 829 | 2,572 | ||||||||||||||||||||||
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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)
| (1) | Includes nonaccrual loans with a fair value of $242 million and $219 million as of March 31, 2011 and December 31, 2010, respectively. The difference between unpaid principal balance and the fair value of these nonaccrual loans as of March 31, 2011 is $216 million. Includes loans that are 90 days past due with a fair value of $365 million and $369 million as of March 31, 2011 and December 31, 2010, respectively. The difference between unpaid principal balance and the fair value of these 90 or more days past due loans as of March 31, 2011 is $253 million. | |
| (2) | Includes interest-only debt instruments with no unpaid principal balance and a fair value of $140 million and $151 million as of March 31, 2011 and December 31, 2010, respectively. |
Changes
in Fair Value under the Fair Value Option Election
The following table displays fair value gains and losses, net,
including changes attributable to instrument-specific credit
risk, for loans and debt for which the fair value election was
made. Amounts are recorded as a component of “Fair value
gains (losses), net” in our condensed consolidated
statements of operations and comprehensive loss for the periods
ended March 31, 2011 and 2010.
| For the Three Months Ended March 31, | ||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||
|
Long-
|
Total
|
Long-
|
||||||||||||||||||
|
Term
|
Gains
|
Term
|
||||||||||||||||||
| Loans | Debt | (Losses) | Debt | |||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Changes in instrument-specific credit risk
|
$ | (217 | ) | $ | (4 | ) | $ | (221 | ) | $ | 3 | |||||||||
|
Other changes in fair value
|
65 | 33 | 98 | (27 | ) | |||||||||||||||
|
Fair value gains (losses), net
|
$ | (152 | ) | $ | 29 | $ | (123 | ) | $ | (24 | ) | |||||||||
In determining the changes in the instrument-specific credit
risk for loans, the changes in the associated credit-related
components of these loans, primarily the guaranty obligation,
were taken into consideration with the overall change in the
fair value of the loans for which we elected the fair value
option for financial instruments. In determining the changes in
the instrument-specific credit risk for debt, the changes in
Fannie Mae debt spreads to LIBOR that occurred during the period
were taken into consideration with the overall change in the
fair value of the debt for which we elected the fair value
option for financial instruments. Specifically, cash flows are
evaluated taking into consideration any derivatives through
which Fannie Mae has swapped out of the structured features of
the notes and thus created a floating-rate LIBOR-based debt
instrument. The change in value of these LIBOR-based cash flows
based on the Fannie Mae yield curve at the beginning and end of
the period represents the instrument-specific risk.
| 14. | 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.
For certain legal actions and proceedings we have established a
reserve for probable losses where we can reasonably estimate
such losses or ranges of losses. Based on our current knowledge
and after consultation with counsel, we do not believe that such
losses or ranges of losses will have a material adverse effect
on our financial condition. We note, however, that in light of
the uncertainties involved in such actions and proceedings,
there is no assurance that the ultimate resolution of these
matters will not significantly exceed the reserves we have
currently accrued. For certain other legal actions or
proceedings, we cannot reasonably estimate such losses or ranges
of losses, particularly for proceedings that are in their early
stages of
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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)
development, where plaintiffs seek substantial or indeterminate
damages, or where there may be novel or unsettled legal
questions relevant to the proceedings. For these matters, we
have not established a reserve. Given the uncertainties involved
in any action or proceeding, regardless of whether we have
established a reserve, the ultimate resolution of certain of
these matters may be material to our operating results for a
particular period, depending on, among other factors, the size
of the loss or liability imposed and the level of our net income
or loss for that period. 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 or financial
condition. We have advanced fees and expenses of certain current
and former officers and directors in connection with various
legal proceedings pursuant to indemnification agreements.
In re
Fannie Mae Securities Litigation
Fannie Mae is a defendant in a consolidated class action lawsuit
initially filed in 2004 and currently pending in the
U.S. District Court for the District of Columbia. In the
consolidated complaint filed on March 4, 2005, lead
plaintiffs Ohio Public Employees Retirement System and the State
Teachers Retirement System of Ohio 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. Plaintiffs contend that Fannie
Mae’s accounting statements were inconsistent with GAAP
requirements relating to hedge accounting and the amortization
of premiums and discounts, 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 October 17, 2008, FHFA, as conservator for Fannie Mae,
intervened in this case.
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
In
re Fannie Mae 2008 Securities Litigation
.
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 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.
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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)
On November 24, 2009, the Court granted the
defendants’ motion to dismiss the Securities Act claims as
to all defendants. On September 30, 2010, the Court granted
in part and denied in part the defendants’ motions to
dismiss the Securities Exchange Act claims. As a result of the
partial denial, some of the Securities Exchange Act claims
remain pending against us and certain of our former officers. On
October 14, 2010, we and certain other defendants filed
motions for reconsideration of those portions of the
Court’s September 30, 2010 order denying in part the
defendants’ motions to dismiss. Fannie Mae filed its answer
to the consolidated complaint on December 31, 2010.
Defendants’ motions for reconsideration were denied on
April 11, 2011.
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 Employee Stock Ownership Plan
(“ESOP”), breached their duties to ESOP participants
and beneficiaries by investing ESOP funds in Fannie Mae common
stock when it was no longer prudent to continue to do so.
Plaintiffs 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
$2.0 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, this case was
transferred to the Southern District of New York for
coordination with
In re Fannie Mae 2008 Securities Litigation
and
In re 2008 Fannie Mae ERISA Litigation
.
Smith
v. Fannie Mae, et al.
This action was originally filed on February 25, 2010, by
plaintiff Edward Smith against Fannie Mae and certain of its
former officers as well as several underwriters and is pending
in the Southern District of New York where it is coordinated
with
In re Fannie Mae 2008 Securities Litigation
and
In re 2008 Fannie Mae ERISA Litigation
. Plaintiff filed
an amended complaint on April 19, 2011, which alleges, in
connection with Fannie Mae’s December 2007
$7.0 billion offering of 7.75%
fixed-to-floating
rate non-cumulative preferred Series S stock, violations of
§ 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5
promulgated thereunder; violations of § 20(a) of the
Securities Exchange Act of 1934; common law fraud and negligence
claims; and California state law claims for misrepresentation.
Plaintiff seeks relief in the form of rescission, actual damages
(including interest), and exemplary and punitive damages.
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)
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.
144
Table of Contents
| 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 Securities and Exchange Commission
(“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 Deputy 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 Deputy Chief
Financial Officer, the effectiveness of our disclosure controls
and procedures as in effect as of March 31, 2011, the end
of the period covered by this report. As a result of
management’s evaluation, our Chief Executive Officer and
Deputy Chief Financial Officer concluded that our disclosure
controls and procedures were not effective at a reasonable
assurance level as of March 31, 2011 or as of the date of
filing this report.
Our disclosure controls and procedures were not effective as of
March 31, 2011 or as of the date of filing this report
because they did not adequately ensure the accumulation and
communication to management of information known to FHFA that is
needed to meet our disclosure obligations under the federal
securities laws. As a result, we were not able to rely upon the
disclosure controls and procedures that were in place as of
March 31, 2011 or as of the date of this filing, and we
continue to have a material weakness in our internal control
over financial reporting. This material weakness is described in
more detail below under “Description of Material
Weakness.” Based on discussions with FHFA and the
structural nature of the weakness in our disclosure controls and
procedures, it is likely that we will not remediate this
material weakness while we are under conservatorship.
Description
of Material Weakness
The Public Company Accounting Oversight Board’s Auditing
Standard No. 5 defines a material weakness as a deficiency
or a combination of deficiencies in internal control over
financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or
interim financial statements will not be prevented or detected
on a timely basis.
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Management has determined that we continued to have the
following material weakness as of March 31, 2011 and as of
the date of filing this report:
| • | Disclosure Controls and Procedures. We have been under the conservatorship of FHFA since September 6, 2008. Under the 2008 Reform Act, FHFA is an independent agency that currently functions as both our conservator and our regulator with respect to our safety, soundness and mission. Because of the nature of the conservatorship under the 2008 Reform Act, which places us under the “control” of FHFA (as that term is defined by securities laws), some of the information that we may need to meet our disclosure obligations may be solely within the knowledge of FHFA. As our conservator, FHFA has the power to take actions without our knowledge that could be material to our shareholders and other stakeholders, and could significantly affect our financial performance or our continued existence as an ongoing business. Although we and FHFA attempted to design and implement disclosure policies and procedures that would account for the conservatorship and accomplish the same objectives as a disclosure controls and procedures policy of a typical reporting company, there are inherent structural limitations on our ability to design, implement, test or operate effective disclosure controls and procedures. As both our regulator and our conservator under the 2008 Reform Act, FHFA is limited in its ability to design and implement a complete set of disclosure controls and procedures relating to Fannie Mae, particularly with respect to current reporting pursuant to Form 8-K. Similarly, as a regulated entity, we are limited in our ability to design, implement, operate and test the controls and procedures for which FHFA is responsible. |
Due to these circumstances, we have not been able to update our
disclosure controls and procedures in a manner that adequately
ensures the accumulation and communication to management of
information known to FHFA that is needed to meet our disclosure
obligations under the federal securities laws, including
disclosures affecting our condensed consolidated financial
statements. As a result, we did not maintain effective controls
and procedures designed to ensure complete and accurate
disclosure as required by GAAP as of March 31, 2011 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.
Mitigating
Actions Relating to Material Weakness
As described above under “Description of Material
Weakness,” we continue to have a material weakness in our
internal control over financial reporting relating to our
disclosure controls and procedures. However, we and FHFA have
engaged in the following practices intended to permit
accumulation and communication to management of information
needed to meet our disclosure obligations under the federal
securities laws:
| • | FHFA has established the 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, 2011 (“First Quarter 2011 Form 10-Q”), and engaged in discussions regarding issues associated with the information contained in those filings. Prior to filing our First Quarter 2011 Form 10-Q, FHFA provided Fannie Mae management with a written acknowledgement that it had reviewed the First Quarter 2011 Form 10-Q, and it was not aware of any material misstatements or omissions in the First Quarter 2011 Form 10-Q and had no objection to our filing the First Quarter 2011 Form 10-Q. | |
| • | The Acting Director of FHFA and our Chief Executive Officer have been in frequent communication, typically meeting on at least a bi-weekly basis. |
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| • | 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. |
Changes
in Internal Control over Financial Reporting
Management is required to evaluate, with the participation of
our Chief Executive Officer and Deputy Chief Financial Officer,
whether any changes in our internal control over financial
reporting that occurred during our last fiscal quarter have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. There
have been no changes in our internal control over financial
reporting since December 31, 2010 that management believes
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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| Item 1. | Legal Proceedings |
The information in this item supplements information regarding
certain legal proceedings set forth in “Legal
Proceedings” in our 2010
Form 10-K.
We also provide information regarding material legal proceedings
in “Note 14, 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 2010
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.
| Item 1A. | Risk Factors |
In addition to the information in this report, you should
carefully consider the risks relating to our business that we
identify in “Risk Factors” in our 2010
Form 10-K.
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 our 2010
Form 10-K
for more detailed descriptions of the primary risks to our
business and how we seek to manage those risks.
The risks we face could materially adversely affect our
business, results of operations, financial condition, liquidity
and net worth, and could cause our actual results to differ
materially from our past results or the results contemplated by
forward-looking statements contained in this report. However,
these are not the only risks we face. In addition to the risks
we discuss below, we face risks and uncertainties not currently
known to us or that we currently believe are immaterial. 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 the
forward-looking statements contained in this report.
The
future of our company is uncertain.
There is significant uncertainty regarding the future of our
company, including how long we will continue to be in existence,
the extent of our role in the market, what form we will have,
and what ownership interest, if any, our current common and
preferred stockholders will hold in us after the conservatorship
is terminated.
On February 11, 2011, Treasury and HUD released a report to
Congress on ending the conservatorships of the GSEs and
reforming America’s housing finance market. The report
provides that the Administration will work with FHFA to
determine the best way to responsibly reduce Fannie Mae’s
and Freddie Mac’s role in the market and ultimately wind
down both institutions. The report also addresses three options
for a reformed housing finance system. The report does not state
whether or how the existing infrastructure or human capital of
Fannie Mae may be used in the establishment of such a reformed
system. The report emphasizes the
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importance of proceeding with a careful transition plan and
providing the necessary financial support to Fannie Mae and
Freddie Mac during the transition period.
In April 2011, in the House of Representatives, the Subcommittee
on Capital Markets and Government Sponsored Enterprises of the
Financial Services Committee approved several bills relating to
GSE operations. We expect that Congress will continue to hold
hearings and consider legislation in 2011 on the future status
of Fannie Mae and Freddie Mac, including proposals that would
result in a substantial change to our business structure, our
operations, or that involve Fannie Mae’s liquidation or
dissolution. We cannot predict the prospects for the enactment,
timing or content of legislative proposals regarding the future
status of the GSEs. See “MD&A—Legislative and
Regulatory Developments—GSE Reform” for more
information about the Treasury report and Congressional
proposals regarding reform of the GSEs.
Our
regulator is authorized or required to place us into
receivership under specified conditions, which would result in
the liquidation of our assets. Amounts recovered from the
liquidation may be insufficient to cover our obligations or
aggregate liquidation preference on our preferred stock, or
provide any proceeds to common shareholders.
FHFA has an obligation to place us into receivership if the
Director of FHFA makes a written determination that our assets
are less than our obligations for a period of 60 days after
the filing deadline for our
Form 10-K
or
Form 10-Q
with the SEC. Because of the credit-related expenses we expect
to incur on our legacy book of business and our dividend
obligation to Treasury, we will continue to need funding from
Treasury to avoid triggering FHFA’s obligation. Although
Treasury committed to providing us funds in accordance with the
terms of the senior preferred stock purchase agreement, Treasury
may not be able to make funds available to us within the
required 60 days if providing the funds would cause the
government to exceed its authorized debt ceiling. In addition,
we could be put into receivership at the discretion of the
Director of FHFA at any time for other reasons, including
conditions that FHFA has already asserted existed at the time
the former Director of FHFA placed us into conservatorship.
A receivership would terminate the conservatorship. In addition
to the powers FHFA has as our conservator, the appointment of
FHFA as our receiver would terminate all rights and claims that
our shareholders and creditors may have against our assets or
under our charter arising from their status as shareholders or
creditors, except for their right to payment, resolution or
other satisfaction of their claims as permitted under the
Federal Housing Enterprises Financial Safety and Soundness Act
of 1992, as amended by the 2008 Reform Act (together, the
“GSE Act”). Unlike a conservatorship, the purpose of
which is to conserve our assets and return us to a sound and
solvent condition, the purpose of a receivership is to liquidate
our assets and resolve claims against us.
To the extent we are placed into receivership and do not or
cannot fulfill our guaranty to the holders of our Fannie Mae
MBS, the MBS holders could become unsecured creditors of ours
with respect to claims made under our guaranty.
In the event of a liquidation of our assets, only after payment
of the secured and unsecured claims against the company
(including repaying all outstanding debt obligations), the
administrative expenses of the receiver and the liquidation
preference of the senior preferred stock, would any liquidation
proceeds be available to repay the liquidation preference on any
other series of preferred stock. Finally, only after the
liquidation preference on all series of preferred stock is
repaid would any liquidation proceeds be available for
distribution to the holders of our common stock. It is unlikely
that there would be sufficient proceeds to repay the liquidation
preference of any series of our preferred stock or to make any
distribution to the holders of our common stock.
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A
decrease in the credit ratings on our senior unsecured debt
would likely have an adverse effect on our ability to issue debt
on reasonable terms and trigger additional collateral
requirements.
Our borrowing costs and our access to the debt capital markets
depend in large part on the high credit ratings on our senior
unsecured debt. Credit ratings on our debt are subject to
revision or withdrawal at any time by the rating agencies.
Actions by governmental entities impacting the support we
receive from Treasury could adversely affect the credit ratings
on our senior unsecured debt. While there have been no changes
in our credit ratings from December 31, 2010 to May 2,
2011, on April 20, 2011, Standard & Poor’s
revised its outlook on the debt issues of Fannie Mae to negative
from stable. This action followed Standard &
Poor’s revision to the outlook of the
U.S. government’s long-term credit rating to negative
from stable. Standard & Poor’s noted that the
ratings on Fannie Mae and other government-related entities are
constrained by the long-term sovereign rating on the
U.S. government and noted that it will not raise the
outlooks or ratings on these entities above the
U.S. government as long as the ratings and outlook on the
U.S. remain unchanged. Standard & Poor’s
also stated that if it were to lower its ratings on the
U.S. government, it would likely lower the ratings on the
debt of Fannie Mae and other government-related entities. A
reduction in our credit ratings would likely increase our
borrowing costs, limit our access to the capital markets and
trigger additional collateral requirements under our derivatives
contracts and other borrowing arrangements. It may also reduce
our earnings and materially adversely affect our liquidity, our
ability to conduct our normal business operations, our financial
condition and results of operations. Our credit ratings and
ratings outlook are included in “MD&A—Liquidity
and Capital Management—Liquidity Management—Credit
Ratings.”
Deficiencies
in servicer and law firm foreclosure processes and the resulting
foreclosure pause may cause higher credit losses and
credit-related expenses.
A number of our single-family mortgage servicers temporarily
halted foreclosures in the fall of 2010 in some or all states
after discovering deficiencies in their processes and the
processes of their lawyers and other service providers relating
to the execution of affidavits in connection with the
foreclosure process. This foreclosure pause could expand to
additional servicers and states, and possibly to all or
substantially all of our loans in the foreclosure process. Some
servicers have lifted the foreclosure pause in some
jurisdictions, while continuing the pause in others.
Although we cannot predict the ultimate impact of this
foreclosure pause on our business at this time, we believe the
pause has resulted in longer foreclosure timelines and higher
credit-related expenses and will likely continue to do so. The
foreclosure pause could negatively affect housing market
conditions and delay the recovery of the housing market. This
foreclosure pause may also negatively affect the value of the
private-label securities we hold and result in additional
impairments on these securities.
The foreclosure process deficiencies have generated significant
concern and are currently being reviewed by various government
agencies and the attorneys general of all fifty states.
Foreclosure process deficiencies could lead to expensive or
time-consuming new regulation, such as new rules applicable to
the foreclosure process recently issued by courts in some
states. On April 13, 2011, federal banking regulators
announced enforcement actions against fourteen mortgage
servicers and their parent bank holding companies to address
deficiencies and weaknesses identified in the regulators’
review of the servicers’ foreclosure processing. The
enforcement actions require the servicers to correct
deficiencies and make improvements in their servicing and
foreclosure practices. The actions also require each servicer to
hire an independent firm to conduct a comprehensive review of
foreclosure actions pending during 2009 and 2010 to identify and
provide remediation to borrowers who suffered financial injury
as a result of wrongful foreclosures or other foreclosure
process deficiencies.
The failure of our servicers or a law firm to apply prudent and
effective process controls and to comply with legal and other
requirements in the foreclosure process poses operational,
reputational and legal risks for us. Depending on the duration
and extent of the foreclosure pause and the foreclosure process
deficiencies, and the responses to them, these matters could
have a material adverse effect on our business.
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Challenges
to the
MERS
®
System could pose counterparty, operational, reputational and
legal risks for us.
MERSCORP, Inc. is a privately held company that maintains an
electronic registry (the “MERS System”) that tracks
servicing rights and ownership of loans in the United States.
Mortgage Electronic Registration Systems, Inc.
(“MERS”), a wholly owned subsidiary of MERSCORP, Inc.,
can serve as a nominee for the owner of a mortgage loan and, in
that role, become the mortgagee of record for the loan in local
land records. Fannie Mae seller/servicers may choose to use MERS
as a nominee; however, we have prohibited servicers from
initiating foreclosures on Fannie Mae loans in MERS’s name.
Approximately half of the loans we own or guarantee are
registered in MERS’s name and the related servicing rights
are tracked in the MERS System. The MERS System is widely used
by participants in the mortgage finance industry. Along with a
number of other organizations in the mortgage finance industry,
we are a shareholder of MERSCORP, Inc.
Several legal challenges have been made disputing MERS’s
legal standing to initiate foreclosures
and/or
act
as nominee in local land records. These challenges have focused
public attention on MERS and on how loans are recorded in local
land records. As a result, these challenges could negatively
affect MERS’s ability to serve as the mortgagee of record
in some jurisdictions. In addition, where MERS is the mortgagee
of record, it must execute assignments of mortgages, affidavits
and other legal documents in connection with foreclosure
proceedings. As a result, investigations by governmental
authorities and others into the servicer foreclosure process
deficiencies discussed above may impact MERS. On April 13,
2011, federal banking regulators and FHFA announced that they
were taking enforcement action against MERS to address
significant weaknesses in, among other things, oversight,
management supervision and corporate governance at MERS that
were uncovered as part of the regulators’ review of
mortgage servicers’ foreclosure processing. Failures by
MERS to apply prudent and effective process controls and to
comply with legal and other requirements could pose
counterparty, operational, reputational and legal risks for us.
If investigations or new regulation or legislation restricts
servicers’ use of MERS, our counterparties may be required
to record all mortgage transfers in land records, incurring
additional costs and time in the recordation process. At this
time, we cannot predict the ultimate outcome of these legal
challenges to MERS or the impact on our business, results of
operations and financial condition.
| 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, 2011, 73,094 restricted stock units vested, as a
result of which 48,419 shares of common stock were issued,
and 24,675 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 our
entering into conservatorship. 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.
During the quarter ended March 31, 2011, 154 shares of
common stock were issued upon conversion of 100 shares of
8.75% Non-Cumulative Mandatory Convertible Preferred Stock,
Series 2008-1,
at the option of
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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 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 of 1933 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.
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 2011.
|
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 (2) | ||||||||||||
| (Shares in thousands) | ||||||||||||||||
|
2011
|
||||||||||||||||
|
January 1-31
|
294 | $ | 0.52 | — | — | |||||||||||
|
February 1-28
|
23 | 0.59 | — | — | ||||||||||||
|
March 1-31
|
1 | 0.55 | — | — | ||||||||||||
|
Total
|
318 | |||||||||||||||
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| (1) | Consists of shares of common stock reacquired from employees to pay an aggregate of $167,443 in withholding taxes due upon the vesting of previously issued restricted stock. Does not include 100 shares of 8.75% Non-Cumulative Mandatory Convertible Series 2008-1 Preferred Stock received from holders upon conversion of those shares into 154 shares of common stock. | |
| (2) | We no longer have any publicly announced share repurchase programs under which we could purchase our common stock. |
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 Qualifying 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.
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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 6, 2011
| By: |
/s/ David
C. Hisey
|
David C. Hisey
Executive Vice President and
Deputy Chief Financial Officer
Date: May 6, 2011
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INDEX TO
EXHIBITS
|
Item
|
Description
|
|||
| 3 | .1 | Fannie Mae Charter Act (12 U.S.C. § 1716 et seq.) as amended through July 30, 2008 (Incorporated by reference to Exhibit 3.1 to Fannie Mae’s Annual Report on Form 10-K, filed February 24, 2011.) | ||
| 3 | .2 | Fannie Mae Bylaws, as amended through January 30, 2009 (Incorporated by reference to Exhibit 3.2 to Fannie Mae’s Annual Report on Form 10-K 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.) | ||
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Description
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| 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 (Incorporated by reference to Exhibit 4.3 to Fannie Mae’s Current Report on Form 8-K, filed September 11, 2008.) | ||
| 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 Deputy 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 Deputy Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | ||
| 101 | . INS | XBRL Instance Document* | ||
| 101 | . SCH | XBRL Taxonomy Extension Schema* | ||
| 101 | . CAL | XBRL Taxonomy Extension Calculation* | ||
| 101 | . 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. |
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Table of Contents
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TABLE OF CONTENTS
Part I Financial InformationItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 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