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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þ
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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 September 30, 2011 | ||
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission File No.: 0-50231
Federal National Mortgage
Association
(Exact name of registrant as
specified in its charter)
Fannie Mae
| Federally chartered corporation | 52-0883107 | |
|
(State or other jurisdiction
of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
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|
3900 Wisconsin Avenue, NW
Washington, DC (Address of principal executive offices) |
20016
(Zip Code) |
|
Registrant’s telephone number, including area code:
(202) 752-7000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 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
þ
As of September 30, 2011, there were
1,158,227,237 shares of common stock of the registrant
outstanding.
TABLE OF
CONTENTS
i
Table of Contents
MD&A
TABLE REFERENCE
ii
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iii
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| 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 activity is securitizing
mortgage loans originated by lenders into Fannie Mae
mortgage-backed securities that we guarantee, which we refer to
as Fannie Mae MBS. We also purchase mortgage loans and
mortgage-related securities for our mortgage portfolio. We use
the term “acquire” in this report to refer to both our
guarantees and our purchases of mortgage loans. We obtain funds
to support our business activities by issuing a variety of debt
securities in the domestic and international capital markets.
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
In the first nine months of 2011, we continued our work to
provide liquidity and support to the mortgage market, grow the
strong new book of business we have been acquiring since
January 1, 2009, and minimize losses on loans we acquired
prior to 2009.
Providing
Liquidity and Support to the Mortgage Market
Our
Liquidity and Support Activities
We provide liquidity and support to the U.S. mortgage
market in a number of important ways:
| • | We serve as a stable source of liquidity for purchases of homes and multifamily rental housing, as well as for refinancing existing mortgages. We provided approximately $2.1 trillion in liquidity to the mortgage market from January 1, 2009 through September 30, 2011 through our purchases and guarantees of loans, including over 7.6 million single-family mortgage loans, which enabled borrowers to purchase homes or refinance their mortgages, and multifamily loans that financed nearly 967,000 units of multifamily housing. | |
| • | We are a consistent market presence as we continue to provide liquidity to the mortgage market even when other sources of capital have exited the market, as evidenced by the events of the last few years. We estimate that we, Freddie Mac and Ginnie Mae have collectively guaranteed more than 80% of the single-family mortgages originated in the United States since January 1, 2009. | |
| • | We have strengthened our underwriting and eligibility standards to support sustainable homeownership. Our support enables borrowers to have access to a variety of conforming mortgage products, including long-term, fixed-rate mortgages, such as the prepayable 30-year fixed-rate mortgage that protects homeowners from interest rate swings. | |
| • | We helped more than 960,000 homeowners struggling to pay their mortgages work out their loans from January 1, 2009 through September 30, 2011, which helped to support neighborhoods, home prices and the housing market. | |
| • | We support affordability in the multifamily rental market. Over 85% of the multifamily units we financed during 2009 and 2010 were affordable to families earning at or below the median income in their area. | |
| • | Borrowers typically pay a lower interest rate on loans eligible for purchase or guarantee by Fannie Mae, Freddie Mac or Ginnie Mae. Mortgage originators are generally able to offer borrowers lower mortgage rates on conforming loan products, including ours, in part because of the value investors place on GSE-guaranteed mortgage-related securities. | |
| • | In addition to purchasing and guaranteeing loans, we provide funds to the mortgage market through short-term financing and other activities. These activities are described in more detail in our 2010 Form 10-K in “Business—Business Segments—Capital Markets.” |
2011
Acquisitions and Market Share
In the first nine months of 2011, we purchased or guaranteed
approximately $445 billion in loans, measured by unpaid
principal balance, which includes approximately $51 billion
in delinquent loans we purchased from our single-family MBS
trusts. These activities enabled our lender customers to finance
approximately 1,826,000 single-family conventional loans and
loans for approximately 289,000 units in multifamily
properties during the first nine months of 2011.
We remained the largest single issuer of mortgage-related
securities in the secondary market during the third quarter of
2011, with an estimated market share of new single-family
mortgage-related securities issuances of 43.3%. Our estimated
market share of new single-family mortgage-related securities
issuances was 43.2% in the second quarter of 2011 and 44.5% in
the third quarter of 2010.
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We remained a constant source of liquidity in the multifamily
market. We owned or guaranteed approximately 20% of the
outstanding debt on multifamily properties as of June 30,
2011 (the latest date for which information was available).
Summary
of Our Financial Performance for the Third Quarter and First
Nine Months of 2011
Our financial results for the third quarter and the first nine
months of 2011 reflect the 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 since their peak in the third quarter of 2006.
Credit-related expenses continue to be a key driver of our net
losses for each period presented. Our credit-related expenses
vary from period to period primarily based on changes in home
prices, borrower payment behavior, the types and volumes of loss
mitigation activities completed, and actual and estimated
recoveries from our lender and mortgage insurer counterparties.
The decline in interest rates during the third quarter of 2011
had a significant impact on the company’s derivative
losses; however, these losses were mostly offset by fair value
gains in the period related to our hedged mortgage investments
for which only a portion are recorded at fair value in our
financial statements. Derivative instruments are an integral
part of how we manage interest rate risk and an inherent part of
the cost of funding and hedging our mortgage investments. We
expect high levels of
period-to-period
volatility in our results because our derivatives are recorded
at fair value in our financial statements while some of the
instruments they hedge are not recorded at fair value in our
financial statements.
Comprehensive
Loss
We recognized a total comprehensive loss of $5.3 billion in
the third quarter of 2011, consisting of a net loss of
$5.1 billion and other comprehensive loss of
$197 million. In comparison, we recognized a total
comprehensive loss of $2.9 billion in the second quarter of
2011, consisting of a net loss of $2.9 billion and other
comprehensive income of $2 million. We recognized a total
comprehensive loss of $429 million in the third quarter of
2010, consisting of a net loss of $1.3 billion and other
comprehensive income of $902 million (other comprehensive
income in the third quarter of 2010 was primarily driven by a
reduction in our unrealized losses due to significantly improved
fair value of
available-for-sale
securities).
Our total comprehensive loss for the first nine months of 2011
was $14.5 billion, consisting of a net loss of
$14.4 billion and other comprehensive loss of
$14 million. In comparison, we recognized a total
comprehensive loss of $10.1 billion in the first nine
months of 2010, consisting of a net loss of $14.1 billion
and other comprehensive income of $3.9 billion (other
comprehensive income in the first nine months of 2010 was
primarily driven by a reduction in our unrealized losses due to
significantly improved fair value of
available-for-sale
securities).
Net
Loss
Third Quarter 2011 vs. Second Quarter
2011.
The $2.2 billion increase in our net
loss was primarily due to $4.5 billion in net fair value
losses in the third quarter of 2011 primarily driven by losses
on our risk management derivatives due to a significant decline
in swap interest rates during the quarter, compared with
$1.6 billion in net fair value losses in the second quarter
of 2011 driven by losses on risk management derivatives. In
addition, we recognized foreclosed property expense of
$733 million in the third quarter of 2011 compared with
foreclosed property income of $478 million in the second
quarter of 2011 because our estimate of amounts due to us
related to outstanding repurchase requests remained relatively
flat during the third quarter compared with a substantial
increase in the second quarter of 2011. These losses and
expenses were partially offset by a $2.4 billion decrease
in our provision for credit losses primarily driven by a lower
provision on individually impaired loans as the continued lower
interest rate environment improved our expected cash flow
projections on those loans, therefore reducing our estimated
impairment.
Third Quarter 2011 vs. Third Quarter 2010.
The
$3.8 billion increase in our net loss was primarily due to
$4.5 billion in net fair value losses in the third quarter
of 2011 primarily driven by losses on our risk management
derivatives due to a significant decline in swap interest rates
during the quarter, compared with
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$525 million in net fair value gains in the third quarter
of 2010 primarily driven by gains on our trading securities.
These losses were partially offset by a $677 million
decrease in credit-related expenses which was primarily driven
by a lower provision on individually impaired loans as the
continued lower interest rate environment improved our expected
cash flow projections on those loans, therefore reducing our
estimated impairment. Additionally, there was a
$410 million increase in net interest income primarily from
lower interest expense on funding debt.
Nine Months of 2011 vs. Nine Months of
2010.
Our net loss remained flat for the first
nine months of 2011 compared with the first nine months of 2010.
The key components of our net loss in both the first nine months
of 2011 and the first nine months of 2010 were credit-related
expenses and fair value losses, which were partially offset by
net interest income.
See “Consolidated Results of Operations” for more
information on our results.
Net
Worth
Our net worth deficit of $7.8 billion as of
September 30, 2011 reflects the recognition of our total
comprehensive loss of $5.3 billion and our payment to
Treasury of $2.5 billion in senior preferred stock
dividends during the third quarter of 2011. The Acting Director
of FHFA will submit a request to Treasury on our behalf for
$7.8 billion to eliminate our net worth deficit.
In the third quarter of 2011, we received $5.1 billion in
funds from Treasury to eliminate our net worth deficit as of
June 30, 2011. Upon receipt of the additional funds
requested to eliminate our net worth deficit as of
September 30, 2011, the aggregate liquidation preference on
the senior preferred stock will be $112.6 billion, which
will require an annualized dividend payment of
$11.3 billion. The amount of this dividend payment exceeds
our reported annual net income for any year since our inception.
Through September 30, 2011, we have paid an aggregate of
$17.2 billion to Treasury in dividends on the senior
preferred stock.
Table 1 below displays our senior preferred stock dividend
payments to Treasury and Treasury draws since entering
conservatorship on September 6, 2008.
Table
1: Treasury Dividend Payments and Draw
|
2011 to date
|
Cumulative
|
|||||||||||||||||||
| 2008 | 2009 | 2010 | (first nine months) | Total | ||||||||||||||||
| (Dollars in billions) | ||||||||||||||||||||
|
Senior preferred stock
dividends
(1)
|
$ | — | $ | 2.5 | $ | 7.7 | $ | 7.0 | $ | 17.2 | ||||||||||
|
Treasury
draws
(2)(3)
|
15.2 | 60.0 | 15.0 | 21.4 | 111.6 | |||||||||||||||
|
Cumulative percentage of senior preferred stock dividends to
Treasury draws
|
0.2 | % | 3.3 | % | 11.3 | % | 15.4 | % | 15.4 | % | ||||||||||
| (1) | Represents total quarterly cash dividends paid to Treasury, during the periods presented, based on an annual rate of 10% per year on the aggregate liquidation preference of the senior preferred stock. | |
| (2) | Represents the total draws received from Treasury and / or currently requested based on our quarterly net worth deficits for the periods presented. Draw requests were funded in the quarter following each quarterly net worth deficit. | |
| (3) | Treasury draws do not include the initial $1.0 billion liquidation preference of the senior preferred stock, for which we did not receive any cash proceeds. |
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 $75.6 billion as of
September 30, 2011 from $74.8 billion as of
June 30, 2011 and increased from $66.3 billion as of
December 31, 2010. Our total loss reserve coverage to total
nonperforming loans was 37.07% as of September 30, 2011,
compared with 36.91% as of June 30, 2011 and 30.85% as of
December 31, 2010. 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 few
years. Further, the shift in our nonperforming loan balance from
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loans in our collective reserve to loans that are individually
impaired has caused our coverage ratio to increase.
Our
Strong New Book of Business and Expected Losses on Our Legacy
Book of Business
We refer to the single-family loans we have acquired since the
beginning of 2009 as our “new single-family book of
business” and the single-family loans we acquired prior to
2009 as our “legacy book of business.” In this
section, we discuss our expectations regarding the profitability
of our new single-family book of business, as well as the
performance and credit profile of these loans to date. We also
discuss our expectations regarding losses on the loans in our
legacy book of business.
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. Home prices are a key factor
affecting the amount of credit losses and profitability we
expect. As home prices decline, the
loan-to-value
ratios on our loans shift higher, and both the probability of
default and the severity of loss increase. Furthermore, the
level of regional variation in home price declines affects our
results, as we will incur greater credit losses if home prices
decline more significantly in regions where we have a greater
concentration of loans. Our future estimates of our performance,
as well as the actual amounts, may differ materially from our
current estimates and expectations as a result of the timing,
level and regional variation in home price changes, changes in
interest rates, unemployment, other macroeconomic variables,
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, 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, and 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.
Building
a Strong New Single-Family Book of Business
Expected
Profitability of Our Single-Family Acquisitions
Our new single-family book of business has a strong overall
credit profile and is performing well. 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, by which we mean our
fee income on these loans will exceed our credit losses and
administrative costs for them. Table 2 provides information
about whether we expect loans we acquired in 1991 through the
first nine months of 2011 to be profitable, and the percentage
of our single-family guaranty book of business represented by
these loans as of September 30, 2011. The expectations
reflected in Table 2 are based on the credit risk profile of the
loans we have acquired, which we discuss in more detail in
“Table 4: Credit Profile of Single-Family Conventional
Loans Acquired” and in “Table 36: 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 in “Outlook” and other
macroeconomic factors. As shown in Table 2, we expect loans we
have acquired in 2009, 2010 and the first nine months of 2011 to
be profitable over their lifetime. If future macroeconomic
conditions turn out to be more adverse than our expectations,
these loans could become unprofitable. For example, we believe
that credit losses on these loans would exceed guaranty fee
revenue if home prices declined nationally by approximately 10%
from their September 2011 levels over the next five years based
on our home price index. See “Outlook” for our
expectations regarding home price declines.
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Table
2: Expected Lifetime Profitability of Single-Family
Loans Acquired in 1991 through the First Nine Months of
2011
As Table 2 shows, the years in which we acquired single-family
loans that we expect will be unprofitable are 2004 through 2008.
A substantial majority of our realized credit losses since the
beginning of 2009 were attributable to loans we acquired in 2005
through 2008. Although the 2004 vintage has been profitable to
date, we currently believe that this vintage will not be
profitable over its lifetime. While we previously believed the
2004 vintage would perform close to break-even, in 2011 our
expectations for long-term home price changes have worsened,
which has changed our expectation of future borrower behavior
regarding these loans. We expect the 2005 through 2008 vintages
to be significantly more unprofitable than the 2004 vintage. The
loans we acquired in 2004 were originated under more
conservative acquisition policies than loans we acquired from
2005 through 2008; however, because our 2004 acquisitions were
made during a time when home prices were rapidly increasing,
their performance is expected to suffer from the significant
decline in home prices since 2006. The ultimate long-term
performance and profitability of the 2004 vintage will depend on
many factors, including changes in home prices, other economic
conditions and borrower behavior.
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Loans we have acquired since the beginning of 2009 comprised 49%
of our single-family guaranty book of business as of
September 30, 2011. Our 2005 to 2008 acquisitions are
becoming a smaller percentage of our single-family guaranty book
of business, having decreased from 39% of our single-family
guaranty book of business as of December 31, 2010 to 33% as
of September 30, 2011. Our 2004 acquisitions constituted 5%
of our single-family guaranty book of business as of
September 30, 2011.
Serious
Delinquency Rates by Year of Acquisition
In our experience, an early predictor of the ultimate
performance of a portfolio of loans is the rate at which the
loans become seriously delinquent (three or more months past due
or in the foreclosure process) 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 3 shows, for single-family loans
we acquired in each year from 2001 to 2010, the percentage that
were seriously delinquent as of the end of the third quarter
following the year of acquisition. Loans we acquired in 2011 are
not included in this table because they were originated so
recently that many of them could not yet have become seriously
delinquent. As Table 3 shows, the percentage of our 2009
acquisitions that were seriously delinquent as of the end of the
third quarter following their acquisition year was approximately
nine times lower than the average comparable serious delinquency
rate for loans acquired in 2005 through 2008. For loans
originated in 2010, this percentage was approximately ten times
lower than the average comparable rate for loans acquired in
2005 through 2008. Table 3 also shows serious delinquency rates
for each year’s acquisitions as of September 30, 2011.
Except for 2008 acquisitions, whose performance has been
affected by changes in underwriting and eligibility standards
that became effective during the course of 2008, and more recent
acquisition years, whose serious delinquency rates are likely
lower than they will be after the loans have aged, Table 3 shows
that the current serious delinquency rate generally tracks the
trend of the serious delinquency rate as of the end of the third
quarter following the year of acquisition. Below the table we
provide information about the economic environment in which the
loans were acquired, specifically home price appreciation and
unemployment levels.
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Table
3: Single-Family Serious Delinquency Rates by Year of
Acquisition
| * | For 2010, the serious delinquency rate as of September 30, 2011 is the same as the serious delinquency rate as of the end of the third quarter following the acquisition year. | |
| (1) | Based on Fannie Mae’s 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 September 2011, supplemented by preliminary data available for October 2011. Previously reported data have been revised to reflect additional available historical data. Including subsequently available data may lead to materially different results. We recently enhanced our home price estimates to identify and exclude a greater portion of foreclosed home sales. As a result, some period to period comparisons of home prices differ from those indicated by our prior estimates. | |
| (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
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below, by higher
loan-to-value
(“LTV”) ratios and lower FICO credit scores than loans
we have acquired since January 1, 2009. In addition, many
of these loans were Alt-A loans or had other higher-risk loan
attributes such as interest-only payment features. As a result
of the sharp declines in home prices, 34% of the loans that we
acquired from 2005 through 2008 had
mark-to-market
LTV ratios that were greater than 100% as of September 30,
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 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
continuing to take a number of actions to reduce our credit
losses. We discuss these actions and our strategy in
“Reducing Credit Losses on Our Legacy Book of
Business” and “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 4 shows the credit risk profile of the single-family loans
we have acquired since January 1, 2009 compared to the
loans we acquired from 2005 through 2008.
Table
4: Credit Profile of Single-Family Conventional Loans
Acquired
(1)
|
Acquisitions from 2009
|
Acquisitions from 2005
|
|||||||
| through the first nine months of 2011 | through 2008 | |||||||
|
Weighted average
loan-to-value
ratio at origination
|
68 | % | 73 | % | ||||
|
Weighted average FICO credit score at origination
|
761 | 722 | ||||||
|
Fully amortizing, fixed-rate loans
|
95 | % | 86 | % | ||||
|
Alt-A
loans
(2)
|
1 | % | 14 | % | ||||
|
Interest-only
|
1 | % | 12 | % | ||||
|
Original
loan-to-value
ratio > 90%
|
6 | % | 11 | % | ||||
|
FICO credit score < 620
|
* | 5 | % | |||||
| * | Represents 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 Alt-A 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.”
The credit risk profile of our acquisitions since the beginning
of 2009 has been influenced further by the significant
percentage of refinanced loans. Historically, refinanced loans
generally have better credit profiles than purchase money loans.
As we discuss in “Outlook” below, we expect fewer
refinancings in 2011 and 2012 than in 2010.
Since 2009, our acquisitions have included a significant number
of loans refinanced under our Refi
Plus
tm
initiative, which provides expanded refinance opportunities for
eligible Fannie Mae borrowers. Our
9
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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 approximately 536,000 loans
we acquired under Refi Plus in the first nine months of 2011
constituted approximately 27% of our total single-family
acquisitions for the period, compared with approximately 23% of
total single-family acquisitions in all of 2010. 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. While it is too early
to determine whether loans with higher risk characteristics
refinanced under the Refi Plus program will perform differently
from other refinanced loans, we expect Refi Plus loans will
perform better than the loans they replace because Refi Plus
loans reduce the borrowers’ monthly payments or otherwise
should provide more sustainability than the borrowers’ old
loans (for example, by having a fixed rate instead of an
adjustable rate). Loans refinanced through the Refi Plus
initiative in the first nine months of 2011 reduced
borrowers’ monthly mortgage payments by an average of $171.
This figure reflects all refinancings under Refi Plus, even
those that involved a reduced term, and therefore higher monthly
payments.
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 10% for
acquisitions in the first nine months of 2011. We expect our
acquisition of loans with high LTV ratios will increase in 2012
as a result of recently announced changes to HARP, which we
discuss in “Legislative and Regulatory
Developments—Changes to the Home Affordable Refinance
Program.”
Despite the increases in LTV ratios at origination associated
with Refi Plus, the overall credit profile of our 2010 and 2011
acquisitions, like that of our 2009 acquisitions, is
significantly stronger than the credit profile of our 2005
through 2008 acquisitions. Whether the loans we acquire in the
future will 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, the volume and characteristics of
loans we acquire under the recently announced changes to HARP
terms, 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 September 30, 2011, combined with the amounts
we have reserved for single-family credit losses as of
September 30, 2011, as described below, total approximately
$135 billion. A substantial 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 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, our credit-related expenses remain high as weakness in
the housing and mortgage markets continues. We also expect that
future defaults on loans in 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 15: 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
unconsolidated 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, see “Table
12: Total Loss Reserves.”
10
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The fair value losses that we consider part of our reserves are
not included in our “total loss reserves.” We recorded
the majority of these fair value losses prior to our adoption in
2010 of accounting standards on the transfers of financial
assets and the consolidation of variable interest entities.
Before we adopted these 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. The amount of these charge-offs was the amount
by which 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.
Reducing
Credit Losses on Our Legacy Book of Business
To reduce the credit losses we ultimately incur on our legacy
book of business, we have been focusing our efforts on the
following strategies:
| • | Reducing defaults by offering borrowers solutions that enable them to keep their homes (“home retention solutions”); | |
| • | Pursuing “foreclosure alternatives,” which help borrowers avoid foreclosure, to reduce the severity of the losses we incur; | |
| • | Efficiently managing timelines for home retention solutions, foreclosure alternatives, and foreclosures; | |
| • | Improving servicing standards and execution; | |
| • | Managing our REO inventory to minimize costs and maximize sales proceeds; and | |
| • | Pursuing contractual remedies from lenders, servicers and providers of credit enhancement. |
As we work to reduce credit losses, we also seek to assist
distressed borrowers, help stabilize communities, and support
the housing market. In dealing with distressed borrowers, we
first seek home retention solutions before turning to
foreclosure alternatives. When there is no viable home retention
solution or foreclosure alternative that can be applied, we seek
to move to foreclosure expeditiously. Prolonged delinquencies
can hurt local home values and destabilize communities, as these
homes often go into disrepair. As a general rule, the longer
borrowers remain delinquent, the greater our costs.
Reducing Defaults.
Home retention solutions
are a key element of our strategy to reduce defaults, and the
majority of our home retention solutions are loan modifications.
Successful modifications allow borrowers who were having
problems making their pre-modification mortgage payments to
remain in their homes. While loan modifications contribute to
higher credit-related expenses in the near term, we believe that
successful modifications (those that enable borrowers to remain
current on their loans) will ultimately reduce our credit losses
over the long term from what they otherwise would have been if
we had taken the loans to foreclosure. We completed
approximately 161,000 loan modifications in the first nine
months of 2011, bringing the total number of loan modifications
we have completed since January 2009 to over 660,000. The
substantial majority of these modifications involved deferring
or lowering borrowers’ monthly mortgage payments, which we
believe increases the likelihood borrowers will be able to
remain current on their modified loans. Whether our
modifications are ultimately successful depends heavily on
economic factors, such as unemployment rates, household wealth
and income, and home prices. See “Table 40: Statistics on
Single-Family Loan Workouts” and the accompanying
discussion for additional information on our home retention
efforts, including our modifications, as well as our foreclosure
alternatives. For a description of the impact of modifications
on our credit-related expenses, see “Consolidated Results
of Operations—Credit-Related Expenses—Provision for
Credit Losses.”
Pursuing Foreclosure Alternatives.
If we are
unable to provide a viable home retention solution for a
distressed borrower, we seek to offer a foreclosure alternative
and complete it in a timely manner. Our
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foreclosure alternatives are primarily preforeclosure sales,
which are sometimes referred to as “short sales,” as
well as
deeds-in-lieu
of foreclosure. These alternatives are intended to reduce the
severity of our loss resulting from a borrower’s default
while enabling the borrower to avoid going through a
foreclosure. We provide information about the volume of
foreclosure alternatives we completed in the first nine months
of 2011 in “Table 5: Credit Statistics, Single-Family
Guaranty Book of Business.”
Managing Timelines for Workouts and
Foreclosures.
We refer to home retention
solutions and foreclosure alternatives as “workouts.”
We believe that home retention solutions are most effective in
preventing defaults when completed at an early stage of
delinquency. Similarly, our foreclosure alternatives are more
likely to be successful in reducing our loss severity if they
are executed expeditiously. Accordingly, it is important to us
for our servicers to work with delinquent borrowers early in the
delinquency to determine whether home retention solutions or
foreclosure alternatives will be viable and, where no workout
solution is viable, to reduce delays in proceeding to
foreclosure.
Circumstances in the foreclosure environment have resulted in
foreclosures proceeding at a slow pace. As a result of the
housing market downturn that began in 2006 and significantly
worsened in 2008, the volume of foreclosures to be processed by
servicers and states significantly increased in 2009 and the
first nine months of 2010. In October 2010, a number of
single-family mortgage servicers temporarily halted some or all
of the foreclosures they were processing after discovering
deficiencies in their foreclosure processes and the processes of
their service providers. In response to the foreclosure process
deficiencies, some states changed their foreclosure processes to
require additional review and verification of the accuracy of
pending and future foreclosure filings. Some states also added
requirements to the foreclosure process, including mediation
processes and requirements to file new affidavits. Further, some
state courts have issued rulings calling into question the
validity of some existing foreclosure practices. These actions
halted or significantly delayed not only existing, but new
foreclosures. As an example, in December 2010, the New Jersey
Supreme Court halted all uncontested residential foreclosure
proceedings by six large loan servicers for a period of
approximately nine months until those servicers demonstrated
that their foreclosure processes were compliant with law. New
Jersey also imposed a new requirement that counsel certify the
accuracy of all pending and future foreclosure complaints. In
addition, in August 2011 a New Jersey appellate decision held
that defects in notices of intent to foreclose required
dismissal and restart of the pending foreclosure process rather
than simply correcting the defective notices. We had more than
22,000 loans in foreclosure in New Jersey as of the beginning of
the third quarter of 2011, but foreclosures during the quarter
led to our acquiring only 151 REO properties.
While servicers have generally ended their outright foreclosure
halts, they continue to process foreclosures at a slow pace as
they update their procedures to remediate their process
deficiencies and meet new legislative, regulatory and judicial
requirements. In addition, servicers and states are dealing with
the backlog of foreclosures resulting from these delays and from
the elevated level of foreclosures resulting from the housing
market downturn. For foreclosures completed in the third quarter
of 2011, measuring from the last monthly period for which the
borrowers fully paid their mortgages to when we added the
related properties to our REO inventory, the average number of
days it took in each state to ultimately foreclose ranged from
374 days in Missouri to 906 days in Florida. Florida
accounted for 29% of our loans that were in the foreclosure
process as of September 30, 2011.
These extended time periods to complete foreclosures increase
our costs of holding these loans. In addition, to the extent
home prices decline while foreclosure proceedings are drawn out,
the proceeds we ultimately receive from the sale of the
foreclosed properties will be lower. Slower foreclosures also
result in loans remaining seriously delinquent in our book of
business for a longer time, which has caused our serious
delinquency rate to decrease more slowly in the last year than
it would have if the pace of foreclosures had been faster. We
believe the changes in the foreclosure environment discussed
above will continue to negatively affect our single-family
serious delinquency rates, foreclosure timelines and
credit-related expenses. Moreover, we believe these conditions
will delay the recovery of the housing market because it will
take longer to clear the market’s supply of distressed
homes. Distressed homes typically sell at a discount compared to
non-distressed homes and, therefore, a lingering population of
distressed homes will continue to negatively affect overall home
prices. See “Risk Factors” for further information
about the potential impact of the foreclosure
12
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process deficiencies and resulting changes in the foreclosure
environment on our business, results of operations, financial
condition and net worth.
Improving Servicing Standards and
Execution.
The performance of our mortgage
servicers is critical to our success in reducing defaults,
completing foreclosure alternatives and managing workout and
foreclosure timelines efficiently, because servicers are the
primary point of contact with borrowers. Improving servicing
standards is therefore a key aspect of our strategy to reduce
our credit losses. We have taken a number of steps to improve
the servicing of our delinquent loans.
| • | In June 2011, we issued new standards for mortgage servicers under FHFA’s Servicing Alignment Initiative. The initiative is aimed at establishing consistency in the servicing of delinquent loans owned or guaranteed by Fannie Mae and Freddie Mac. Among other things, the new servicing standards, which became effective October 1, 2011, are designed to result in earlier, more frequent and more effective contact with borrowers and to improve servicer performance by providing servicers monetary incentives for exceeding loan workout benchmarks and by imposing fees on servicers for failing to meet loan workout benchmarks or foreclosure timelines. | |
| • | In some cases, we transfer servicing on loan populations that include loans with higher-risk characteristics to special servicers with whom we have worked to develop high-touch protocols for servicing these loans. These protocols include lowering the ratio of loans per servicer employee, prescribing borrower outreach strategies to be used at earlier stages of delinquency, and providing distressed borrowers a single point of contact to resolve issues. Transferring servicing on higher-risk loans enables the borrowers (and loans) to benefit from these high-touch protocols while increasing the original servicer’s capacity to service the remaining loans, creating an opportunity to improve service to the remaining borrowers. | |
| • | In September 2011, we issued our first ratings of servicers’ performance under our Servicer Total Achievement and Rewards (“STAR”) program. The STAR program is designed to encourage improvements in customer service and foreclosure prevention outcomes for homeowners by rating servicers on their performance in these areas. |
While we believe these steps will improve the servicing on our
loans, ultimately we are dependent on servicers’
willingness, efficiency and ability to implement our home
retention solutions and foreclosure alternatives, and to manage
timelines for workouts and foreclosures.
Managing Our REO Inventory.
Efficient
management of our REO inventory of homes acquired through
deed-in-lieu
of foreclosure or foreclosure is another critical element of our
strategy for reducing credit losses. Since January 2009, we have
strengthened our REO sales capabilities by increasing resources
in this area, as we continue to manage our REO inventory to
reduce costs and maximize sales proceeds. As Table 5 shows, in
the first nine months of 2011 we have already disposed of as
many properties as we did in all of 2010, and our dispositions
in 2010 represented a 51% increase over our dispositions in 2009.
Neighborhood stabilization is a core principle in our approach
to managing our REO inventory. In the first nine months of 2011,
we completed repairs to approximately 69,300 properties sold
from our single-family REO inventory, at an average cost of
$6,122 per property. Repairing REO properties increases sales to
owner occupants and increases financing options for REO buyers.
In addition, our “First Look” marketing period
contributes to neighborhood stabilization by encouraging
homeownership. During this “First Look” period, owner
occupants, some nonprofit organizations and public entities may
submit offers and purchase properties without competition from
investors. During the first nine months of 2011, approximately
113,900 of the single-family properties we sold were purchased
by owner-occupants, nonprofit organizations or public entities.
We currently lease properties to tenants who occupied the
properties before we acquired them into our REO inventory, which
can minimize disruption by providing additional time to find
alternate housing, help stabilize local communities, provide us
with rental income, and support our compliance with federal and
state laws protecting tenants in foreclosed properties. As of
September 30, 2011, approximately 10,000 tenants leased our
REO properties.
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The changing foreclosure environment discussed above has delayed
our acquisitions of REO properties. Given the large number of
seriously delinquent loans in our single-family guaranty book of
business and the large existing and anticipated supply of
single-family homes in the market, we expect it will take years
before our REO inventory approaches pre-2008 levels.
Pursuing Contractual Remedies.
We conduct
targeted reviews of our loans and, when we discover loans that
do not meet our underwriting or eligibility requirements, we may
make demands for lenders to repurchase these loans or compensate
us for losses sustained on the loans. We also make demands for
lenders to repurchase or compensate us for loans for which the
mortgage insurer rescinds coverage. The volume of our repurchase
requests rose in 2010 as compared with 2009 and has remained
high through the first nine months of 2011. During the first
nine months of 2011, lenders repurchased from us or reimbursed
us for losses on approximately $8.8 billion in loans,
measured by unpaid principal balance, pursuant to their
contractual obligations. In addition, as of September 30,
2011, we had outstanding requests for lenders to repurchase from
us or reimburse us for losses on $9.5 billion in loans, of
which 25.4% had been outstanding for more than 120 days.
These dollar amounts represent the unpaid principal balance of
the loans underlying the repurchase requests, not the actual
amounts we have received or requested from the lenders. When
lenders pay us for these requests, they pay us either to
repurchase the loans or else to make us whole for our losses in
cases where we have acquired and disposed of the property
underlying the loans. Make-whole payments are typically for less
than the unpaid principal balance because we have already
recovered some of the balance through the sale of the REO. As a
result, our actual cash receipts relating to these outstanding
repurchase requests are significantly lower than the unpaid
principal balance of the loans.
We are also pursuing contractual remedies from providers of
credit enhancement on our loans, including mortgage insurers. We
received proceeds under our mortgage insurance policies for
single-family loans of $4.6 billion for the first nine
months of 2011. See “Risk Management—Credit Risk
Management—Institutional Counterparty Credit Risk
Management” for a discussion of our repurchase and
reimbursement requests and outstanding receivables from mortgage
insurers, as well as the risk that one or more of these
counterparties fails to fulfill its obligations to us.
We believe the actions we have taken to stabilize the housing
market and minimize our credit losses will reduce our future
credit losses below what they otherwise would have been.
However, continuing change in broader market conditions makes it
difficult to predict how effective these actions ultimately will
be in reducing our credit losses. Moreover, it will be difficult
to measure the ultimate impact of our actions, given that
current conditions in the housing market are unprecedented.
For more information on the strategies and actions we are taking
to minimize our credit losses, see “Risk
Management—Credit Risk Management—Single-Family
Mortgage Credit Risk Management” in our 2010
Form 10-K
and in this report.
Credit
Performance
Table 5 presents information for each of the last seven quarters
about the credit performance of mortgage loans in our
single-family guaranty book of business and our workouts. The
workout information in Table 5 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.
14
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Table
5: Credit Statistics, Single-Family Guaranty Book of
Business
(1)
| 2011 | 2010 | |||||||||||||||||||||||||||||||||||
|
Q3
|
Full
|
|||||||||||||||||||||||||||||||||||
| YTD | Q3 | Q2 | Q1 | Year | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||
|
As of the end of each period:
|
||||||||||||||||||||||||||||||||||||
|
Serious delinquency
rate
(2)
|
4.00 | % | 4.00 | % | 4.08 | % | 4.27 | % | 4.48 | % | 4.48 | % | 4.56 | % | 4.99 | % | 5.47 | % | ||||||||||||||||||
|
Nonperforming
loans
(3)
|
$ | 202,522 | $ | 202,522 | $ | 200,793 | $ | 206,098 | $ | 212,858 | $ | 212,858 | $ | 212,305 | $ | 217,216 | $ | 222,892 | ||||||||||||||||||
|
Foreclosed property inventory:
|
||||||||||||||||||||||||||||||||||||
|
Number of properties
|
122,616 | 122,616 | 135,719 | 153,224 | 162,489 | 162,489 | 166,787 | 129,310 | 109,989 | |||||||||||||||||||||||||||
|
Carrying value
|
$ | 11,039 | $ | 11,039 | $ | 12,480 | $ | 14,086 | $ | 14,955 | $ | 14,955 | $ | 16,394 | $ | 13,043 | $ | 11,423 | ||||||||||||||||||
|
Combined loss
reserves
(4)
|
$ | 70,741 | $ | 70,741 | $ | 68,887 | $ | 66,240 | $ | 60,163 | $ | 60,163 | $ | 58,451 | $ | 59,087 | $ | 58,900 | ||||||||||||||||||
|
Total loss
reserves
(5)
|
$ | 73,973 | $ | 73,973 | $ | 73,116 | $ | 70,466 | $ | 64,469 | $ | 64,469 | $ | 63,105 | $ | 64,877 | $ | 66,479 | ||||||||||||||||||
|
During the period:
|
||||||||||||||||||||||||||||||||||||
|
Foreclosed property (number of properties):
|
||||||||||||||||||||||||||||||||||||
|
Acquisitions
(6)
|
152,440 | 45,194 | 53,697 | 53,549 | 262,078 | 45,962 | 85,349 | 68,838 | 61,929 | |||||||||||||||||||||||||||
|
Dispositions
|
(192,313 | ) | (58,297 | ) | (71,202 | ) | (62,814 | ) | (185,744 | ) | (50,260 | ) | (47,872 | ) | (49,517 | ) | (38,095 | ) | ||||||||||||||||||
|
Credit-related
expenses
(7)
|
$ | 21,821 | $ | 4,782 | $ | 5,933 | $ | 11,106 | $ | 26,420 | $ | 4,064 | $ | 5,559 | $ | 4,871 | $ | 11,926 | ||||||||||||||||||
|
Credit
losses
(8)
|
$ | 13,798 | $ | 4,384 | $ | 3,810 | $ | 5,604 | $ | 23,133 | $ | 3,111 | $ | 8,037 | $ | 6,923 | $ | 5,062 | ||||||||||||||||||
|
Loan workout activity (number of loans):
|
||||||||||||||||||||||||||||||||||||
|
Home retention loan
workouts
(9)
|
188,205 | 68,227 | 59,019 | 60,959 | 440,276 | 89,691 | 113,367 | 132,192 | 105,026 | |||||||||||||||||||||||||||
|
Preforeclosure sales and
deeds-in-lieu
of foreclosure
|
57,602 | 19,306 | 21,176 | 17,120 | 75,391 | 15,632 | 20,918 | 21,515 | 17,326 | |||||||||||||||||||||||||||
|
Total loan workouts
|
245,807 | 87,533 | 80,195 | 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)
|
26.58 | % | 28.39 | % | 25.71 | % | 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 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. 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. |
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| (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 40: 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. |
Our single-family serious delinquency rate has decreased each
quarter since the first quarter of 2010. This decrease is
primarily the result of home retention solutions, as well as
foreclosure alternatives and completed foreclosures. The
decrease is also attributable to our acquisition of loans with
stronger credit profiles since the beginning of 2009, as these
loans have become an increasingly larger portion of our
single-family guaranty book of business, resulting in a smaller
percentage of our loans becoming seriously delinquent.
Although our single-family serious delinquency rate has
decreased significantly since the first quarter of 2010, our
serious delinquency rate and the period of time that loans
remain seriously delinquent has been negatively affected in
recent periods by the increase in the average number of days it
is taking to complete a foreclosure. As described in
“Reducing Credit Losses on Our Legacy Book of
Business—Managing Timelines for Workouts and
Foreclosures,” high levels of foreclosures, continuing
issues in the servicer foreclosure process, changes in state
foreclosure laws, and new court rules and proceedings have
lengthened the time it takes to foreclose on a mortgage loan in
many states. We expect serious delinquency rates will continue
to be affected in the future by home price changes, changes in
other macroeconomic conditions, the length of the foreclosure
process, the volume of loan modifications, and the extent to
which borrowers with modified loans continue to make timely
payments.
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 third quarter of 2011, economic activity picked up
from the pace of the second quarter. The inflation-adjusted
U.S. gross domestic product, or GDP, rose by 2.5% on an
annualized basis during the quarter, according to the Bureau of
Economic Analysis advance estimate. The overall economy gained
an estimated 389,000 jobs in the third quarter as a result of
employment growth in the private sector. According to the
U.S. Bureau of Labor Statistics, as of October 2011, over
the past 12 months through September there has been an
increase of 1.6 million non-farm jobs. The unemployment
rate was 9.1% in September 2011, compared with 9.2% in June
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. We estimate the likelihood of a recession by the end of
next year at close to 50%.
Existing home sales remained weak during the third quarter of
2011, averaging slightly below second quarter levels. Sales of
foreclosed homes and short sales (“distressed sales”)
continued to represent an outsized portion of the market.
Distressed sales accounted for 30% of existing home sales in
September 2011, down from 35% in September 2010, according to
the National Association of
REALTORS
®
.
New home sales during the third quarter of 2011 were also below
second quarter levels, remaining at historically low levels.
The overall mortgage market serious delinquency rate has trended
down since peaking in the fourth quarter of 2009 but has
remained historically high at 7.9% as of June 30, 2011,
according to the Mortgage Bankers Association National
Delinquency Survey. While the supply of new single-family homes
as measured by the inventory/sales ratio declined to its
long-term average level in September, the inventory/sales ratio
for existing single-family homes remained above average.
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.
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We estimate that home prices on a national basis decreased by
0.2% in the third quarter of 2011 and have declined by 21.0%
from their peak in the third quarter of 2006. We recently
enhanced our method for estimating home price changes to exclude
a greater portion of foreclosed home sales, as we discuss below
in “Outlook.” If these enhancements had been in place
last quarter, instead of reporting a 21.6% decline in home
prices through the second quarter of 2011 from their peak, we
would have reported a 20.9% decline. 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 second quarter of 2011. This increases the risk that
borrowers might walk away from their mortgage obligations,
causing the loans to become delinquent and proceed to
foreclosure.
During the third quarter of 2011, national multifamily market
fundamentals, which include factors such as effective rents and
vacancy rates, continued to improve, benefiting from rental
demand. Based on preliminary third-party data, we estimate that
the national multifamily vacancy rate fell to 6.50% in the third
quarter of 2011, after having fallen to 6.75% in the second
quarter of 2011. In addition, we estimate that average asking
rents increased for the sixth quarter in a row, climbing by 1.0%
in the third quarter of 2011 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 to about -3.0% as of September 2011. The increase in
overall rental demand was also reflected in an estimated
increase of 36,000 units in the net number of occupied
rental units during the third quarter of 2011, according to
preliminary data from Reis, Inc. Although national multifamily
market fundamentals continued to improve, certain local markets
and properties continued to underperform compared to the rest of
the country due to localized underlying economic conditions.
Outlook
Overall Market Conditions.
We expect weakness
in the housing and mortgage markets to continue in the fourth
quarter of 2011. The high level of delinquent mortgage loans
will ultimately result in high levels of foreclosures, which is
likely to add to the excess housing inventory. Home sales are
unlikely to rise before the unemployment rate improves further.
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 generally 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.
Although we expect the recently announced changes to HARP will
result in our acquiring more refinancings in 2012 than we would
have acquired in the absence of the changes, we expect fewer
refinancings overall in each of 2011 and 2012 than in 2010 as a
result of the high number of mortgages that have already
refinanced to low rates in recent years. As a result, we expect
the pace of our loan acquisitions for each of 2011 and for 2012
will be lower than in 2010. Our loan acquisitions also could be
negatively affected by the decrease in the fourth quarter of
2011 in the maximum size of loans we may acquire in specified
high-cost areas from $729,750 to $625,500. In addition, 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 LTV ratios, our market share
could be adversely impacted. As our acquisitions decline, 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 23%, from an estimated $1.7
trillion to an estimated $1.3 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 $905 billion. Refinancings comprised
approximately 74% of our single-family business volume in the
first nine months of 2011, compared with 78% for all of 2010.
Home Price Declines.
While the rate of decline
in home prices has moderated in recent quarters, we continue to
expect that home prices on a national basis will decline further
before stabilizing in 2012. We
17
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currently expect a
peak-to-trough
home price decline on a national basis ranging from 22% to 28%,
and that it would take the occurrence of an additional adverse
economic event to reach the high end of the range. Future home
price changes may be very different from our estimates as a
result of significant inherent uncertainty in the current market
environment, including uncertainty about 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.
Our estimates of home price declines 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. Our 22% to 28%
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) the S&P/Case-Shiller index
includes sales of foreclosed homes while our estimates attempt
to exclude foreclosed home sales, because we believe that
differing maintenance practices and the forced nature of the
sales make foreclosed home prices less representative of market
values. We believe, however, that the impact of sales of
foreclosed homes is indirectly reflected in our estimates as a
result of their impact on the pricing of non-distressed sales.
We recently enhanced our home price estimates to identify and
exclude a greater portion of foreclosed home sales. As a result,
some period to period comparisons of home prices differ from
those indicated by our prior estimates. We calculate the
S&P/Case-Shiller comparison numbers by modifying our
internal home price estimates 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.
Credit-Related Expenses and Credit Losses.
Our
credit-related expenses, which include our provision for credit
losses, reflect our recognition of losses on our loans. Through
our provision for credit losses, we recognize credit-related
expenses on loans in the period in which we determine that we
have incurred a probable loss on the loans as of the end of the
period, or in which we have granted concessions to the
borrowers. Accordingly, our credit-related expenses are affected
by changes in home prices, borrower payment behavior, the types
and volumes of loss mitigation activities we complete, and
estimated recoveries from our lender and mortgage insurer
counterparties. Our credit losses, which include our
charge-offs, net of recoveries, reflect our realization of
losses on our loans. We realize losses on loans, through our
charge-offs, when foreclosure sales are completed or when we
accept short sales or deeds in lieu of foreclosure. We expect
our credit losses in 2011 to be lower than in 2010, as delays in
foreclosures keep us from realizing credit losses until later
periods. We describe our credit loss outlook above under
“Our Strong New Book of Business and Expected Losses on our
Legacy Book of Business—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. We expect to
request additional draws under the senior preferred stock
purchase agreement in future periods, which will further
increase the dividends we owe to Treasury on the senior
preferred stock. We expect that, over time, our dividend
obligation to Treasury will
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constitute an increasing portion of our future draws under the
senior preferred stock purchase agreement. 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. See
“Legislative and Regulatory Developments” in this
report and “Legislation and GSE Reform” in our 2010
Form 10-K
for discussions of recent legislative reform of the financial
services industry and proposals for GSE reform that could affect
our business. See “Risk Factors” in this report for a
discussion of the risks to our business relating to the
uncertain future of our company.
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.
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 the remainder of 2011 and in 2012 on the
future status of Fannie Mae and Freddie Mac. Several bills have
been introduced that would place the GSEs into receivership
after a period of time and either grant federal charters to new
entities to engage in activities similar to those currently
engaged in by the GSEs or leave secondary mortgage market
activities to entities in the private sector. For example,
legislation has been introduced in both the House of
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Representatives and the Senate 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 not to
be 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 our existing and ongoing
liabilities.
In addition to bills that seek to resolve the status of the
GSEs, numerous bills have been introduced and considered in the
House of Representatives that could constrain the current
operations of the GSEs or alter the existing authority that FHFA
or Treasury have over the enterprises. The Subcommittee on
Capital Markets and Government Sponsored Enterprises of the
Financial Services Committee has approved bills that would:
| • | suspend current compensation packages and apply a government pay scale for GSE employees; | |
| • | require the GSEs to increase guaranty fees; | |
| • | subject GSE loans to the risk retention standards in the Dodd-Frank Act; | |
| • | require a quicker reduction of GSE portfolios than required under the senior preferred stock purchase agreement; | |
| • | require Treasury to pre-approve all GSE debt issuances; | |
| • | repeal the GSEs’ affordable housing goals; | |
| • | provide additional authority to FHFA’s Inspector General; | |
| • | prohibit FHFA from approving any new GSE products during conservatorship or receivership, with certain exceptions; | |
| • | prevent Treasury from amending the senior preferred stock purchase agreement to reduce the current dividend rate on our senior preferred stock; | |
| • | abolish the Affordable Housing Trust Fund that the GSEs are required to fund except when such contributions have been temporarily suspended by FHFA; | |
| • | require FHFA to identify mission critical assets of the GSEs and require the GSEs to dispose of non-mission critical assets; | |
| • | cap the maximum aggregate amount of funds Treasury or any other agency or entity of the federal government can provide to the GSEs subject to certain qualifications; | |
| • | grant FHFA the authority to revoke the enterprises’ charters following receivership under certain circumstances; and | |
| • | subject the GSEs to the Freedom of Information Act. |
We expect additional legislation relating to the GSEs to be
introduced and considered by Congress in the remainder of 2011
and in 2012. 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. See “Risk Factors” for
a discussion of the risks to our business relating to the
uncertain future of our company. Also see “Risk
Factors” in our 2010
Form 10-K
for a discussion of how the uncertain future of our company may
adversely affect our ability to retain and recruit
well-qualified employees, including senior management.
Changes
to the Home Affordable Refinance Program
On October 24, 2011, FHFA, Fannie Mae, and Freddie Mac
announced changes to HARP aimed at making refinancing under the
program easier and potentially less expensive for qualifying
homeowners and
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encouraging lenders to participate in the program. While HARP
previously limited eligibility to borrowers with mortgage loans
that had LTV ratios no greater than 125%, the new HARP
guidelines remove that ceiling when a borrower refinances into a
new fixed-rate mortgage. Other changes to HARP include:
| • | eliminating certain risk-based fees for borrowers who refinance into shorter-term loans and lowering fees for other borrowers; | |
| • | eliminating the need for a new property appraisal in many cases; | |
| • | extending the ending date for HARP from June 2012 to December 2013; and | |
| • | reducing the extent to which lenders will be liable for violations of representations and warranties in connection with refinancings under HARP. |
We are working with FHFA to finalize the fees that we will
charge for loans refinanced under HARP’s new terms. We
expect these fees to be announced in the fourth quarter of 2011.
At this time, we do not know how many eligible borrowers are
likely to refinance under the program and, therefore, how many
HARP loans we will acquire.
We may incur additional credit-related expenses as a result of
these changes to HARP. However, we believe the expanded
refinance opportunities for borrowers under HARP may help
prevent future delinquencies and defaults, because loans
refinanced under the program reduce the borrowers’ monthly
payments or otherwise should provide more sustainability than
the borrowers’ old loans (for example, by having a fixed
rate instead of an adjustable rate). The extent to which these
factors will impact our results of operations will depend on a
number of factors, including the terms, credit profile and
volume of our acquisitions under the revised program. See
“Risk Factors” for a discussion of how efforts we may
undertake in support of the housing market may affect us.
Discontinuation
of Our Retained Attorney Network
On October 18, 2011, FHFA directed us to phase out the
practice of requiring mortgage servicers to use our network of
retained attorneys to perform default- and foreclosure-related
legal services for our loans. FHFA also directed us to work with
Freddie Mac, through FHFA’s Servicing Alignment Initiative,
to develop and implement consistent requirements, policies and
processes for default- and foreclosure-related legal services.
As set forth in FHFA’s directive, we will conduct these
activities over a transitional period and will seek to minimize
disruption to pending matters. During the transitional period,
servicers will continue to be directly responsible for managing
the foreclosure process and monitoring network firm performance,
in accordance with our current requirements and contractual
arrangements. Phasing out the use of our retained attorney
network may make it more difficult for us to oversee the
performance of default- and foreclosure-related legal services
for our loans, which may adversely impact our efforts to reduce
our credit losses.
Proposed
Changes to Our Single-Family Guaranty Fee Pricing
Consistent with the recommendation in the Administration’s
report on ending the conservatorships of Fannie Mae and Freddie
Mac, we expect that single-family guaranty fees will increase in
the coming years, although we do not know the timing, form or
extent of these increases. There have been recent public
discussions of potential fee increases by the Administration,
members of Congress, and FHFA. On September 23, 2011, the
Administration submitted a legislative proposal to the Joint
Select Committee on Deficit Reduction which would, among other
matters, mandate FHFA to require Fannie Mae and Freddie Mac to
impose an additional fee, the Conservatorship Recoupment
Guarantee Fee, on all single-family mortgages guaranteed on or
after January 1, 2013. The proposal requires that the new
fee be not less than 10 basis points. The proposal also
provides discretion for FHFA to mandate the imposition of a
delivery fee in lieu of a guaranty fee increase. Certain members
of Congress have also recommended that the Joint Select
Committee on Deficit Reduction mandate that FHFA require the
GSEs to increase their guaranty fees. In addition, FHFA’s
Acting Director expressed in a public speech in September 2011
that he expects guaranty fees to increase beginning in 2012.
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Servicing
Compensation Initiative
In September 2011, FHFA issued a discussion paper to propose and
seek comments on two new possible mortgage servicing
compensation structures in connection with its joint initiative
on servicing compensation announced earlier this year. The joint
initiative, which FHFA directed Fannie Mae and Freddie Mac to
work on in coordination with FHFA and HUD, was established to
consider alternatives for future mortgage servicing structures
and servicing compensation for single-family mortgage loans. One
possible structure presented in the discussion paper, which FHFA
described as representing a modest change to the current model,
provides for a reduced minimum servicing fee accompanied by a
reserve account. The reserve account would be available to
offset unexpectedly high servicing costs resulting from
extraordinary deteriorations in industry conditions. The second
possible structure, which FHFA characterized as a fundamental
change to the current model, introduces a fee for service
structure that provides for a base servicing fee for performing
loans and incentive compensation and compensatory fees for
servicing non-performing loans, with the possibility of avoiding
capitalization of mortgage servicing rights. We provide
additional information on FHFA’s initiative on servicing
compensation in “Business—Business
Segments—Single-Family Business—Single-Family Mortgage
Servicing” in our 2010
Form 10-K.
For additional information on legislative and regulatory matters
affecting us, refer to “Business—Legislation and GSE
Reform” and “Business—Our Charter and Regulation
of Our Activities” in our 2010
Form 10-K,
“MD&A—Legislative and Regulatory
Developments—Proposed Rules Implementing the
Dodd-Frank Act” in our quarterly report for the quarter
ended March 31, 2011 (“First Quarter 2011
Form 10-Q”),
and “MD&A—Legislative and Regulatory
Developments” in our quarterly report for the quarter ended
June 30, 2011 (“Second Quarter 2011
Form 10-Q”).
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 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 September 30,
2011 as compared with December 31, 2010. We also describe
any significant changes in the judgments and assumptions we made
during the first nine months of 2011 in applying our critical
accounting policies and significant changes to critical
estimates.
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
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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 6 presents a comparison of the amount of financial assets
carried in our condensed consolidated balance sheets at fair
value on a recurring basis (“recurring assets”) that
were classified as Level 3 as of September 30, 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
6: Level 3 Recurring Financial Assets at Fair
Value
| As of | ||||||||
|
September 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Trading securities
|
$ | 4,145 | $ | 4,576 | ||||
|
Available-for-sale
securities
|
29,519 | 31,934 | ||||||
|
Mortgage loans
|
2,284 | 2,207 | ||||||
|
Other assets
|
227 | 247 | ||||||
|
Level 3 recurring assets
|
$ | 36,175 | $ | 38,964 | ||||
|
Total assets
|
$ | 3,213,877 | $ | 3,221,972 | ||||
|
Total recurring assets measured at fair value
|
$ | 161,093 | $ | 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
|
22 | % | 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 assets totaled
$62.2 billion during the nine months ended
September 30, 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 September 30,
2011 and $1.0 billion as of December 31, 2010, and
other liabilities with a fair value of $173 million as of
September 30, 2011 and $143 million as of
December 31, 2010.
Total
Loss Reserves
Our total loss reserves consist of the following components:
| • | Allowance for loan losses; | |
| • | Allowance for accrued interest receivable; | |
| • | Reserve for guaranty losses; and | |
| • | Allowance for preforeclosure property tax and insurance receivable. |
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These components can be further divided into single-family
portions, which collectively make up our single-family loss
reserves, and multifamily portions, which collectively make up
our multifamily loss reserves.
In the third quarter of 2011, we updated our allowance for loan
loss models for individually impaired loans to incorporate more
home price data at the regional level rather than at the
national level. We believe this approach is a better estimation
of possible home price paths and related default expectations;
it has resulted in a decrease to our allowance for loan losses
and a reduction of credit-related expenses of approximately
$800 million.
In the second quarter of 2011, we updated our loan loss models
to incorporate more recent data on prepayments of modified
loans, which resulted in an increase to our allowance for loan
losses and an increase to credit-related expenses of
approximately $1.5 billion. The change resulted in slower
expected prepayment speeds, which extended the expected lives of
modified loans and lowered the present value of cash flows on
those loans. Also in the second quarter of 2011, we updated our
estimate of the reserve for guaranty losses related to
private-label mortgage-related securities that we have
guaranteed to increase our focus on earlier stage delinquency,
rather than foreclosure trends, as the primary driver in
estimating incurred losses. We believe delinquencies are a
better indicator of incurred losses compared to foreclosure
trends because the recent delays in the foreclosure process have
interrupted the normal flow of delinquent mortgages into
foreclosure. This update resulted in an increase to our reserve
for guaranty losses included within “Other
liabilities” and an increase to credit related-expenses of
approximately $700 million.
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 7 summarizes our condensed consolidated results of
operations for the periods indicated.
Table
7: Summary of Condensed Consolidated Results of
Operations
|
For the Three Months Ended
|
For the Nine Months Ended
|
|||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||
| 2011 | 2010 | Variance | 2011 | 2010 | Variance | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Net interest income
|
$ | 5,186 | $ | 4,776 | $ | 410 | $ | 15,118 | $ | 11,772 | $ | 3,346 | ||||||||||||
|
Fee and other income
|
291 | 304 | (13 | ) | 793 | 831 | (38 | ) | ||||||||||||||||
|
Net revenues
|
$ | 5,477 | $ | 5,080 | $ | 397 | $ | 15,911 | $ | 12,603 | $ | 3,308 | ||||||||||||
|
Investment gains, net
|
73 | 82 | (9 | ) | 319 | 271 | 48 | |||||||||||||||||
|
Net
other-than-temporary
impairments
|
(262 | ) | (326 | ) | 64 | (362 | ) | (699 | ) | 337 | ||||||||||||||
|
Fair value (losses) gains, net
|
(4,525 | ) | 525 | (5,050 | ) | (5,870 | ) | (877 | ) | (4,993 | ) | |||||||||||||
|
Administrative expenses
|
(591 | ) | (730 | ) | 139 | (1,765 | ) | (2,005 | ) | 240 | ||||||||||||||
|
Credit-related
expenses
(1)
|
(4,884 | ) | (5,561 | ) | 677 | (21,985 | ) | (22,296 | ) | 311 | ||||||||||||||
|
Other non-interest
expenses
(2)
|
(373 | ) | (410 | ) | 37 | (787 | ) | (1,147 | ) | 360 | ||||||||||||||
|
Loss before federal income taxes
|
(5,085 | ) | (1,340 | ) | (3,745 | ) | (14,539 | ) | (14,150 | ) | (389 | ) | ||||||||||||
|
Benefit for federal income taxes
|
— | 9 | (9 | ) | 91 | 67 | 24 | |||||||||||||||||
|
Net loss
|
(5,085 | ) | (1,331 | ) | (3,754 | ) | (14,448 | ) | (14,083 | ) | (365 | ) | ||||||||||||
|
Less: Net income attributable to the noncontrolling interest
|
— | (8 | ) | 8 | (1 | ) | (4 | ) | 3 | |||||||||||||||
|
Net loss attributable to Fannie Mae
|
$ | (5,085 | ) | $ | (1,339 | ) | $ | (3,746 | ) | $ | (14,449 | ) | $ | (14,087 | ) | $ | (362 | ) | ||||||
|
Total comprehensive loss attributable to Fannie Mae
|
$ | (5,282 | ) | $ | (437 | ) | $ | (4,845 | ) | $ | (14,463 | ) | $ | (10,143 | ) | $ | (4,320 | ) | ||||||
| (1) | Consists of provision for loan losses, provision for guaranty losses, and foreclosed property expense. | |
| (2) | Consists of debt extinguishment losses, net and other expenses. |
24
Table of Contents
Net
Interest Income
Table 8 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 9 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.
Table
8: Analysis of Net Interest Income and
Yield
| For the Three Months Ended September 30, | ||||||||||||||||||||||||
| 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)
|
$ | 386,067 | $ | 3,701 | 3.83 | % | $ | 408,523 | $ | 3,859 | 3.78 | % | ||||||||||||
|
Mortgage loans of consolidated
trusts
(1)
|
2,598,264 | 30,633 | 4.72 | 2,565,431 | 32,807 | 5.12 | ||||||||||||||||||
|
Total mortgage loans
|
2,984,331 | 34,334 | 4.60 | 2,973,954 | 36,666 | 4.93 | ||||||||||||||||||
|
Mortgage-related securities
|
312,482 | 3,930 | 5.03 | 368,886 | 4,681 | 5.08 | ||||||||||||||||||
|
Elimination of Fannie Mae MBS held in portfolio
|
(199,691 | ) | (2,520 | ) | 5.05 | (236,355 | ) | (3,120 | ) | 5.28 | ||||||||||||||
|
Total mortgage-related securities, net
|
112,791 | 1,410 | 5.00 | 132,531 | 1,561 | 4.71 | ||||||||||||||||||
|
Non-mortgage
securities
(2)
|
72,333 | 24 | 0.13 | 102,103 | 62 | 0.24 | ||||||||||||||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
27,217 | 7 | 0.10 | 14,193 | 10 | 0.28 | ||||||||||||||||||
|
Advances to lenders
|
3,417 | 19 | 2.18 | 3,643 | 21 | 2.26 | ||||||||||||||||||
|
Total interest-earning assets
|
$ | 3,200,089 | $ | 35,794 | 4.47 | % | $ | 3,226,424 | $ | 38,320 | 4.75 | % | ||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Short-term
debt
(3)
|
$ | 181,495 | $ | 63 | 0.14 | % | $ | 244,823 | $ | 190 | 0.30 | % | ||||||||||||
|
Long-term debt
|
552,191 | 3,385 | 2.45 | 578,775 | 4,472 | 3.09 | ||||||||||||||||||
|
Total short-term and long-term funding debt
|
733,686 | 3,448 | 1.88 | 823,598 | 4,662 | 2.26 | ||||||||||||||||||
|
Debt securities of consolidated trusts
|
2,650,256 | 29,680 | 4.48 | 2,624,253 | 32,002 | 4.88 | ||||||||||||||||||
|
Elimination of Fannie Mae MBS held in portfolio
|
(199,691 | ) | (2,520 | ) | 5.05 | (236,355 | ) | (3,120 | ) | 5.28 | ||||||||||||||
|
Total debt securities of consolidated trusts held by third
parties
|
2,450,565 | 27,160 | 4.43 | 2,387,898 | 28,882 | 4.84 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
$ | 3,184,251 | $ | 30,608 | 3.84 | % | $ | 3,211,496 | $ | 33,544 | 4.18 | % | ||||||||||||
|
Impact of net non-interest bearing funding
|
$ | 15,838 | 0.02 | % | $ | 14,928 | 0.02 | % | ||||||||||||||||
|
Net interest income/net interest yield
|
$ | 5,186 | 0.65 | % | $ | 4,776 | 0.59 | % | ||||||||||||||||
|
Net interest income/net interest yield of consolidated
trusts
(4)
|
$ | 953 | 0.15 | % | $ | 805 | 0.13 | % | ||||||||||||||||
25
Table of Contents
| For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| 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)
|
$ | 395,686 | $ | 11,146 | 3.76 | % | $ | 348,835 | $ | 11,107 | 4.25 | % | ||||||||||||
|
Mortgage loans of consolidated
trusts
(1)
|
2,601,710 | 94,111 | 4.82 | 2,634,064 | 100,810 | 5.10 | ||||||||||||||||||
|
Total mortgage loans
|
2,997,396 | 105,257 | 4.68 | 2,982,899 | 111,917 | 5.00 | ||||||||||||||||||
|
Mortgage-related securities
|
321,979 | 12,204 | 5.05 | 399,890 | 15,271 | 5.09 | ||||||||||||||||||
|
Elimination of Fannie Mae MBS held in portfolio
|
(206,176 | ) | (7,956 | ) | 5.15 | (259,740 | ) | (10,306 | ) | 5.29 | ||||||||||||||
|
Total mortgage-related securities, net
|
115,803 | 4,248 | 4.89 | 140,150 | 4,965 | 4.72 | ||||||||||||||||||
|
Non-mortgage
securities
(2)
|
76,266 | 99 | 0.17 | 93,548 | 165 | 0.23 | ||||||||||||||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
20,980 | 20 | 0.13 | 33,849 | 54 | 0.21 | ||||||||||||||||||
|
Advances to lenders
|
3,548 | 59 | 2.19 | 2,947 | 57 | 2.55 | ||||||||||||||||||
|
Total interest-earning assets
|
$ | 3,213,993 | $ | 109,683 | 4.55 | % | $ | 3,253,393 | $ | 117,158 | 4.80 | % | ||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Short-term
debt
(3)
|
$ | 160,961 | $ | 246 | 0.20 | % | $ | 221,665 | $ | 470 | 0.28 | % | ||||||||||||
|
Long-term debt
|
591,126 | 11,383 | 2.57 | 574,280 | 14,528 | 3.37 | ||||||||||||||||||
|
Total short-term and long-term funding debt
|
752,087 | 11,629 | 2.06 | 795,945 | 14,998 | 2.51 | ||||||||||||||||||
|
Debt securities of consolidated trusts
|
2,652,057 | 90,892 | 4.57 | 2,694,986 | 100,694 | 4.98 | ||||||||||||||||||
|
Elimination of Fannie Mae MBS held in portfolio
|
(206,176 | ) | (7,956 | ) | 5.15 | (259,740 | ) | (10,306 | ) | 5.29 | ||||||||||||||
|
Total debt securities of consolidated trusts held by third
parties
|
2,445,881 | 82,936 | 4.52 | 2,435,246 | 90,388 | 4.95 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
$ | 3,197,968 | $ | 94,565 | 3.94 | % | $ | 3,231,191 | $ | 105,386 | 4.35 | % | ||||||||||||
|
Impact of net non-interest bearing funding
|
$ | 16,025 | 0.02 | % | $ | 22,202 | 0.03 | % | ||||||||||||||||
|
Net interest income/net interest yield
|
$ | 15,118 | 0.63 | % | $ | 11,772 | 0.48 | % | ||||||||||||||||
|
Net interest income/net interest yield of consolidated
trusts
(4)
|
$ | 3,219 | 0.16 | % | $ | 116 | 0.01 | % | ||||||||||||||||
| As of September 30, | ||||||||
|
Selected benchmark interest
rates
(5)
|
2011 | 2010 | ||||||
|
3-month
LIBOR
|
0.37 | % | 0.30 | % | ||||
|
2-year
swap
interest rate
|
0.58 | 0.60 | ||||||
|
5-year
swap
interest rate
|
1.26 | 1.51 | ||||||
|
30-year
Fannie Mae MBS par coupon rate
|
2.96 | 3.39 | ||||||
| (1) | Interest income includes interest income on acquired credit-impaired loans of $545 million and $466 million for the three months ended September 30, 2011 and 2010, respectively, and $1.5 billion and $1.6 billion for the nine months ended September 30, 2011 and 2010, respectively. These amounts include accretion income of $288 million and $231 million for the three months ended September 30, 2011 and 2010, respectively, and $769 million and $785 million for the nine months ended September 30, 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. |
26
Table of Contents
| (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 L.P. |
Table
9: Rate/Volume Analysis of Changes in Net Interest
Income
|
For the Three Months Ended
|
For the Nine Months Ended
|
|||||||||||||||||||||||
| September 30, 2011 vs. 2010 | September 30, 2011 vs. 2010 | |||||||||||||||||||||||
|
Total
|
Variance Due to: (1) |
Total
|
Variance Due to: (1) | |||||||||||||||||||||
| Variance | Volume | Rate | Variance | Volume | Rate | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||
|
Mortgage loans of Fannie Mae
|
$ | (158 | ) | $ | (215 | ) | $ | 57 | $ | 39 | $ | 1,399 | $ | (1,360 | ) | |||||||||
|
Mortgage loans of consolidated trusts
|
(2,174 | ) | 415 | (2,589 | ) | (6,699 | ) | (1,226 | ) | (5,473 | ) | |||||||||||||
|
Total mortgage loans
|
(2,332 | ) | 200 | (2,532 | ) | (6,660 | ) | 173 | (6,833 | ) | ||||||||||||||
|
Mortgage-related securities
|
(751 | ) | (710 | ) | (41 | ) | (3,067 | ) | (2,954 | ) | (113 | ) | ||||||||||||
|
Elimination of Fannie Mae MBS held in portfolio
|
600 | 467 | 133 | 2,350 | 2,074 | 276 | ||||||||||||||||||
|
Total mortgage-related securities, net
|
(151 | ) | (243 | ) | 92 | (717 | ) | (880 | ) | 163 | ||||||||||||||
|
Non-mortgage
securities
(2)
|
(38 | ) | (15 | ) | (23 | ) | (66 | ) | (27 | ) | (39 | ) | ||||||||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
(3 | ) | 6 | (9 | ) | (34 | ) | (17 | ) | (17 | ) | |||||||||||||
|
Advances to lenders
|
(2 | ) | (1 | ) | (1 | ) | 2 | 11 | (9 | ) | ||||||||||||||
|
Total interest income
|
(2,526 | ) | (53 | ) | (2,473 | ) | (7,475 | ) | (740 | ) | (6,735 | ) | ||||||||||||
|
Interest expense:
|
||||||||||||||||||||||||
|
Short-term debt
|
(127 | ) | (40 | ) | (87 | ) | (224 | ) | (111 | ) | (113 | ) | ||||||||||||
|
Long-term debt
|
(1,087 | ) | (198 | ) | (889 | ) | (3,145 | ) | 415 | (3,560 | ) | |||||||||||||
|
Total short-term and long-term funding debt
|
(1,214 | ) | (238 | ) | (976 | ) | (3,369 | ) | 304 | (3,673 | ) | |||||||||||||
|
Debt securities of consolidated trusts
|
(2,322 | ) | 314 | (2,636 | ) | (9,802 | ) | (1,583 | ) | (8,219 | ) | |||||||||||||
|
Elimination of Fannie Mae MBS held in portfolio
|
600 | 467 | 133 | 2,350 | 2,074 | 276 | ||||||||||||||||||
|
Total debt securities of consolidated trusts held by third
parties
|
(1,722 | ) | 781 | (2,503 | ) | (7,452 | ) | 491 | (7,943 | ) | ||||||||||||||
|
Total interest expense
|
(2,936 | ) | 543 | (3,479 | ) | (10,821 | ) | 795 | (11,616 | ) | ||||||||||||||
|
Net interest income
|
$ | 410 | $ | (596 | ) | $ | 1,006 | $ | 3,346 | $ | (1,535 | ) | $ | 4,881 | ||||||||||
| (1) | Combined rate/volume variances are allocated to both rate and volume based on the relative size of each variance. | |
| (2) | Includes cash equivalents. |
Net interest income increased in the third quarter and first
nine months of 2011, as compared with the third quarter and
first nine months 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 these changes were:
| • | a reduction in the interest expense of debt of consolidated trusts driven by a decrease in rates. The rate on debt of consolidated trusts is generally driven by mortgage rates of loans securitized in the MBS, and these mortgage rates declined in 2011. | |
| • | lower interest expense on funding debt due to lower borrowing rates which allowed us to continue to replace higher-cost debt with lower-cost debt; | |
| • | lower interest income on mortgage securities due to a decrease in the balance of our mortgage securities, as we continue to manage our portfolio requirements; and |
27
Table of Contents
| • | 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 due to 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 in our condensed consolidated balance sheets as we continue to complete a high number of loan modifications and foreclosures. |
Additionally, our net interest income and net interest yield
were higher than they would have otherwise been in both the
third quarter and first nine months of 2011 and 2010 because our
debt funding needs were lower than would otherwise have been
required as a result of funds we received from Treasury under
the senior preferred stock purchase agreement. Further,
dividends paid to Treasury are not recognized in interest
expense.
Table 10 displays the interest income not recognized for loans
on nonaccrual status and the resulting reduction in our total
yield from mortgage loans.
Table
10: Impact of Nonaccrual Loans on Net Interest
Income
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||||||
|
Interest
|
Interest
|
Interest
|
Interest
|
|||||||||||||||||||||||||||||||||
|
Income not
|
Income not
|
Income not
|
Income not
|
|||||||||||||||||||||||||||||||||
|
Recognized
|
Reduction
|
Recognized
|
Reduction
|
Recognized
|
Reduction
|
Recognized
|
Reduction
|
|||||||||||||||||||||||||||||
|
for
|
in Net
|
for
|
in Net
|
for
|
in Net
|
for
|
in Net
|
|||||||||||||||||||||||||||||
|
Nonaccrual
|
Interest
|
Nonaccrual
|
Interest
|
Nonaccrual
|
Interest
|
Nonaccrual
|
Interest
|
|||||||||||||||||||||||||||||
| Loans (1) | Yield (2) | Loans (1) | Yield (2) | Loans (1) | Yield (2) | Loans (1) | Yield (2) | |||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||
|
Mortgage loans of Fannie Mae
|
$ | (1,078 | ) | $ | (1,512 | ) | $ | (3,623 | ) | $ | (3,317 | ) | ||||||||||||||||||||||||
|
Mortgage loans of consolidated trusts
|
(212 | ) | (326 | ) | (690 | ) | (3,393 | ) | ||||||||||||||||||||||||||||
|
Total mortgage loans
|
$ | (1,290 | ) | (16 | )bp | $ | (1,838 | ) | (23 | )bp | $ | (4,313 | ) | (18 | )bp | $ | (6,710 | ) | (28 | )bp | ||||||||||||||||
| (1) | Amount includes cash received for loans on nonaccrual status. | |
| (2) | Calculated based on annualized interest income not recognized divided by total interest-earning assets, expressed in basis points. |
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.”
28
Table of Contents
Fair
Value (Losses) Gains, Net
Table 11 presents the components of our fair value gains and
losses.
Table
11: Fair Value (Losses) Gains, Net
|
For the Three Months
|
For the Nine Months
|
|||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Risk management derivatives fair value (losses) gains
attributable to:
|
||||||||||||||||
|
Net contractual interest expense accruals on interest rate swaps
|
$ | (497 | ) | $ | (673 | ) | $ | (1,790 | ) | $ | (2,264 | ) | ||||
|
Net change in fair value during the period
|
(3,570 | ) | 732 | (3,777 | ) | 342 | ||||||||||
|
Total risk management derivatives fair value (losses) gains, net
|
(4,067 | ) | 59 | (5,567 | ) | (1,922 | ) | |||||||||
|
Mortgage commitment derivatives fair value losses, net
|
(188 | ) | (183 | ) | (226 | ) | (1,361 | ) | ||||||||
|
Total derivatives fair value losses, net
|
(4,255 | ) | (124 | ) | (5,793 | ) | (3,283 | ) | ||||||||
|
Trading securities (losses) gains, net
|
(214 | ) | 889 | 146 | 2,587 | |||||||||||
|
Other, net
|
(56 | ) | (240 | ) | (223 | ) | (181 | ) | ||||||||
|
Fair value (losses) gains, net
|
$ | (4,525 | ) | $ | 525 | $ | (5,870 | ) | $ | (877 | ) | |||||
| 2011 | 2010 | |||||||||||||||
|
5-year
swap
interest rate:
|
||||||||||||||||
|
As of January 1
|
2.18 | % | 2.98 | % | ||||||||||||
|
As of March 31
|
2.47 | 2.73 | ||||||||||||||
|
As of June 30
|
2.03 | 2.06 | ||||||||||||||
|
As of September 30
|
1.26 | 1.51 | ||||||||||||||
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 losses in the
third quarter and first nine months of 2011 primarily as a
result of a decrease in the fair value of our pay-fixed
derivatives due to a significant decline in swap interest rates
during the period.
We recorded risk management derivative gains in the third
quarter of 2010 primarily due to gains on our foreign currency
swaps, which were partially offset by time decay on our
purchased options. Gains on our foreign currency swaps generally
offset the fair value losses on our foreign currency denominated
debt.
We recorded risk management derivative losses in the first nine
months of 2010 primarily as a result of: (1) time decay on
our purchased options; (2) a decrease in the fair value of
our pay-fixed derivatives during the first quarter of 2010 due
to a decline in swap interest rates during that period; and
(3) a decrease in implied interest rate volatility, which
reduced the fair value of our purchased options.
We present, by derivative instrument type, the fair value gains
and losses on our derivatives for the three and nine months
ended September 30, 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 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
29
Table of Contents
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 losses on our mortgage commitments in the third
quarter and first nine months of both 2011 and 2010 primarily
due to losses on commitments to sell mortgage-related securities
as a result of a decline in interest rates during the commitment
period.
Trading
Securities Gains (Losses), Net
Losses from our trading securities in the third quarter of 2011
were primarily driven by the widening of credit spreads on
commercial mortgage-backed securities (“CMBS”).
However, these credit spreads narrowed over the first nine
months of 2011, which primarily drove gains on trading
securities for the nine-month period.
Gains from our trading securities in the third quarter and first
nine months of 2010 were primarily driven by a decrease in
interest rates and narrowing of credit spreads on CMBS.
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 12 displays the components of our total loss reserves and
our total fair value losses previously recognized on loans
purchased out of unconsolidated MBS trusts reflected in our
condensed consolidated balance sheets. Because these fair value
losses lowered our recorded loan balances, we have fewer
inherent losses in our guaranty book of business and
consequently require lower total loss reserves. For these
reasons, we consider these fair value losses as an
“effective reserve,” apart from our total loss
reserves, to the extent that we expect to realize credit losses
on the acquired loans in the future. We estimate that
approximately two-thirds of this amount, as of
September 30, 2011, represents credit losses we expect to
realize in the future and approximately one-third will
eventually be recovered, either through net interest income for
loans that cure or through foreclosed property income for loans
where the sale of the collateral exceeds our recorded investment
in the loan. We exclude these fair value losses from our credit
loss calculation as described in “Credit Loss Performance
Metrics.”
30
Table of Contents
Table
12: Total Loss Reserves
| As of | ||||||||
| September 30, 2011 | December 31, 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Allowance for loan losses
|
$ | 71,435 | $ | 61,556 | ||||
|
Reserve for guaranty
losses
(1)
|
916 | 323 | ||||||
|
Combined loss reserves
|
72,351 | 61,879 | ||||||
|
Allowance for accrued interest receivable
|
2,179 | 3,414 | ||||||
|
Allowance for preforeclosure property taxes and insurance
receivable
(2)
|
1,111 | 958 | ||||||
|
Total loss reserves
|
75,641 | 66,251 | ||||||
|
Fair value losses previously recognized on acquired credit
impaired
loans
(3)
|
16,961 | 19,171 | ||||||
|
Total loss reserves and fair value losses previously recognized
on acquired credit-impaired loans
|
$ | 92,602 | $ | 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 unconsolidated 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 13.
31
Table of Contents
Table
13: Allowance for Loan Losses and Reserve for
Guaranty Losses (Combined Loss Reserves)
| For the Three Months Ended September 30, | ||||||||||||||||||||||||
| 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
|
$ | 55,966 | $ | 13,540 | $ | 69,506 | $ | 42,844 | $ | 17,738 | $ | 60,582 | ||||||||||||
|
Provision for loan losses
|
(196 | ) | 4,355 | 4,159 | 2,144 | 2,552 | 4,696 | |||||||||||||||||
|
Charge-offs
(1)(5)
|
(3,853 | ) | (260 | ) | (4,113 | ) | (5,946 | ) | (1,243 | ) | (7,189 | ) | ||||||||||||
|
Recoveries
|
848 | 35 | 883 | 205 | 304 | 509 | ||||||||||||||||||
|
Transfers
(2)
|
1,770 | (1,770 | ) | — | 5,131 | (5,131 | ) | — | ||||||||||||||||
|
Other
(3)
|
863 | 137 | 1,000 | 895 | 247 | 1,142 | ||||||||||||||||||
|
Ending
balance
(4)
|
$ | 55,398 | $ | 16,037 | $ | 71,435 | $ | 45,273 | $ | 14,467 | $ | 59,740 | ||||||||||||
|
Reserve for guaranty losses:
|
||||||||||||||||||||||||
|
Beginning balance
|
$ | 960 | $ | — | $ | 960 | $ | 246 | $ | — | $ | 246 | ||||||||||||
|
Provision (benefit) for guaranty losses
|
(8 | ) | — | (8 | ) | 78 | — | 78 | ||||||||||||||||
|
Charge-offs
|
(38 | ) | — | (38 | ) | (48 | ) | — | (48 | ) | ||||||||||||||
|
Recoveries
|
2 | — | 2 | — | — | — | ||||||||||||||||||
|
Ending balance
|
$ | 916 | $ | — | $ | 916 | $ | 276 | $ | — | $ | 276 | ||||||||||||
|
Combined loss reserves:
|
||||||||||||||||||||||||
|
Beginning balance
|
$ | 56,926 | $ | 13,540 | $ | 70,466 | $ | 43,090 | $ | 17,738 | $ | 60,828 | ||||||||||||
|
Total provision for credit losses
|
(204 | ) | 4,355 | 4,151 | 2,222 | 2,552 | 4,774 | |||||||||||||||||
|
Charge-offs
(1)(5)
|
(3,891 | ) | (260 | ) | (4,151 | ) | (5,994 | ) | (1,243 | ) | (7,237 | ) | ||||||||||||
|
Recoveries
|
850 | 35 | 885 | 205 | 304 | 509 | ||||||||||||||||||
|
Transfers
(2)
|
1,770 | (1,770 | ) | — | 5,131 | (5,131 | ) | — | ||||||||||||||||
|
Other
(3)
|
863 | 137 | 1,000 | 895 | 247 | 1,142 | ||||||||||||||||||
|
Ending
balance
(4)
|
$ | 56,314 | $ | 16,037 | $ | 72,351 | $ | 45,549 | $ | 14,467 | $ | 60,016 | ||||||||||||
32
Table of Contents
| For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| 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
|
10,003 | 10,545 | 20,548 | 11,008 | 9,922 | 20,930 | ||||||||||||||||||
|
Charge-offs
(1)(5)
|
(15,018 | ) | (1,466 | ) | (16,484 | ) | (12,097 | ) | (6,645 | ) | (18,742 | ) | ||||||||||||
|
Recoveries
|
3,197 | 1,537 | 4,734 | 367 | 872 | 1,239 | ||||||||||||||||||
|
Transfers
(2)
|
7,739 | (7,739 | ) | — | 41,606 | (41,606 | ) | — | ||||||||||||||||
|
Other
(3)
|
947 | 134 | 1,081 | (3,689 | ) | 6,501 | 2,812 | |||||||||||||||||
|
Ending
balance
(4)
|
$ | 55,398 | $ | 16,037 | $ | 71,435 | $ | 45,273 | $ | 14,467 | $ | 59,740 | ||||||||||||
|
Reserve for guaranty losses:
|
||||||||||||||||||||||||
|
Beginning balance
|
$ | 323 | $ | — | $ | 323 | $ | 54,430 | $ | — | $ | 54,430 | ||||||||||||
|
Adoption of new accounting standards
|
— | — | — | (54,103 | ) | — | (54,103 | ) | ||||||||||||||||
|
Provision for guaranty losses
|
694 | — | 694 | 111 | — | 111 | ||||||||||||||||||
|
Charge-offs
|
(106 | ) | — | (106 | ) | (165 | ) | — | (165 | ) | ||||||||||||||
|
Recoveries
|
5 | — | 5 | 3 | — | 3 | ||||||||||||||||||
|
Ending balance
|
$ | 916 | $ | — | $ | 916 | $ | 276 | $ | — | $ | 276 | ||||||||||||
|
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
|
10,697 | 10,545 | 21,242 | 11,119 | 9,922 | 21,041 | ||||||||||||||||||
|
Charge-offs
(1)(5)
|
(15,124 | ) | (1,466 | ) | (16,590 | ) | (12,262 | ) | (6,645 | ) | (18,907 | ) | ||||||||||||
|
Recoveries
|
3,202 | 1,537 | 4,739 | 370 | 872 | 1,242 | ||||||||||||||||||
|
Transfers
(2)
|
7,739 | (7,739 | ) | — | 41,606 | (41,606 | ) | — | ||||||||||||||||
|
Other
(3)
|
947 | 134 | 1,081 | (3,689 | ) | 6,501 | 2,812 | |||||||||||||||||
|
Ending
balance
(4)
|
$ | 56,314 | $ | 16,037 | $ | 72,351 | $ | 45,549 | $ | 14,467 | $ | 60,016 | ||||||||||||
33
Table of Contents
| As of | ||||||||
|
September 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Allocation of combined loss reserves:
|
||||||||
|
Balance at end of each period attributable to:
|
||||||||
|
Single-family
|
$ | 70,741 | $ | 60,163 | ||||
|
Multifamily
|
1,610 | 1,716 | ||||||
|
Total
|
$ | 72,351 | $ | 61,879 | ||||
|
Single-family and multifamily combined loss reserves as a
percentage of applicable guaranty book of business:
|
||||||||
|
Single-family
|
2.49 | % | 2.10 | % | ||||
|
Multifamily
|
0.83 | 0.91 | ||||||
|
Combined loss reserves as a percentage of:
|
||||||||
|
Total guaranty book of business
|
2.38 | % | 2.03 | % | ||||
|
Total nonperforming loans
|
35.46 | 28.81 | ||||||
| (1) | Includes accrued interest of $289 million and $811 million for the three months ended September 30, 2011 and 2010, respectively, and $1.1 billion and $2.0 billion for the nine months ended September 30, 2011 and 2010, respectively. | |
| (2) | Includes transfers from trusts for delinquent loan purchases. | |
| (3) | Amounts represent the net activity recorded in our allowances for accrued interest receivable and preforeclosure property taxes and insurance receivable from borrowers. The provision for credit losses, charge-offs, recoveries and transfer activity included in this table reflects all changes for both the allowance for loan losses and the valuation allowances for accrued interest and preforeclosure property taxes and insurance receivable that relate to the mortgage loans. | |
| (4) | Includes $334 million and $397 million as of September 30, 2011 and 2010, respectively, for acquired credit-impaired loans. | |
| (5) | While we purchase the substantial majority of loans that are four or more months delinquent from our MBS trusts, we do not exercise this option to purchase loans during a forbearance period. Accordingly, charge-offs of consolidated trusts generally represent loans that remained in our consolidated trusts at the time of default. |
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 few years. Our provision
for credit losses continues to be a key driver of our net losses
for each period presented. The amount of provision for credit
losses varies from period to period based on changes in home
prices, borrower payment behavior, the types and volumes of loss
mitigation activities completed, and actual and estimated
recoveries from our lender and mortgage insurer counterparties.
Our provision for credit losses decreased in the third quarter
of 2011 compared with the third quarter of 2010 primarily due to
a lower provision on individually impaired loans. The lower
provision was driven, in part, by accelerated expected
prepayment speeds due to the lower interest rate environment,
which reduced the expected lives of loans and increased the
present value of cash flows expected on those loans. In
addition, our provision decreased in the third quarter of 2011
compared with the third quarter of 2010 because of an increase
in estimated amounts due to us or received by us for outstanding
repurchase requests. The decrease in the provision for credit
losses in the third quarter of 2011 was partially offset by:
(1) the implementation of a new accounting standard that
increased our troubled debt restructuring (“TDR”)
population, which increased the number of loans that are
individually impaired; and (2) a decrease in the estimated
recovery amount from mortgage insurance coverage. A TDR is a
loan restructuring that grants a concession to a borrower
experiencing financial difficulties. For a detailed discussion
of our mortgage insurer counterparties and the estimated
recovery of mortgage insurance, see “Risk
Management—Credit Risk Management—Institutional
Counterparty Risk Management—Mortgage Insurers.”
Our provision for credit losses slightly increased in the first
nine months of 2011 compared with the first nine months of 2010.
In addition to the reasons described above, our provision for
credit losses in the first nine
34
Table of Contents
months of 2011 was negatively impacted by higher loss severity
rates and an increase in the average number of days loans remain
delinquent.
In addition, during the third quarter and first nine months of
2011 and 2010 our provision for credit losses and loss reserves
have been impacted by updates to our allowance for loan loss
models that we use to estimate our loss reserves. For further
information on estimates and assumptions that are used to
calculate our loan loss reserves and the impacts of specific
changes in estimates during 2010 and the first nine months of
2011, see “MD&A—Critical Accounting Policies and
Estimates” in our 2010
Form 10-K
and “Critical Accounting Policies and Estimates” in
this report.
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 nine months of 2011,
approximately two-thirds of our total loss reserves are
attributable to individual impairment rather than the collective
reserve for loan losses. Individual impairment for a 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 individual
impairment 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.
In April 2011, the Financial Accounting Standards Board
(“FASB”) issued a new accounting standard regarding
TDRs effective for the third quarter of 2011 that applies
retrospectively to January 1, 2011. In the third quarter of
2011, we recognized an incremental increase of $514 million
in our provision for credit losses due to loans that were
reassessed as TDRs upon adoption of the new TDR standard. For
additional information on the new TDR accounting standard, see
“Note 1, Summary of Significant Accounting
Policies.”
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 September 30, 2011 due to both high levels of
delinquencies and an increase in TDRs. When a TDR occurs, the
loan may return to a current status, but it 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 14, which is based on the
carrying value of both our single-family and multifamily
held-for-investment
and
held-for-sale
mortgage loans. For individually impaired loans, the amount
displayed is net of any impairment amount. For information on
the impact of TDRs and other individually impaired loans on our
allowance for loan losses, see “Note 3, Mortgage
Loans.”
35
Table of Contents
Table
14: Nonperforming Single-Family and Multifamily
Loans
| As of | ||||||||
|
September 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
On-balance sheet nonperforming loans including loans in
consolidated Fannie Mae MBS trusts:
|
||||||||
|
Nonaccrual loans
|
$ | 127,178 | $ | 152,756 | ||||
|
Troubled debt restructurings on accrual
status
(1)
|
76,729 | 61,907 | ||||||
|
Total on-balance sheet nonperforming loans
|
203,907 | 214,663 | ||||||
|
Off-balance sheet nonperforming loans in unconsolidated
|
||||||||
|
Fannie Mae MBS
trusts
(2)
|
147 | 89 | ||||||
|
Total nonperforming loans
|
$ | 204,054 | $ | 214,752 | ||||
|
Accruing on-balance sheet loans past due 90 days or
more
(3)
|
$ | 769 | $ | 896 | ||||
|
For the
|
For The
|
|||||||
|
Nine Months Ended
|
Year Ended
|
|||||||
|
September 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Interest related to on-balance sheet nonperforming loans:
|
||||||||
|
Interest income
forgone
(4)
|
$ | 6,475 | $ | 8,185 | ||||
|
Interest income recognized for the
period
(5)
|
4,760 | 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. | |
| (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 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
Foreclosed property expense is displayed in Table 15. The
decrease in foreclosed property expense in the third quarter and
first nine months of 2011 compared with the third quarter and
first nine months of 2010 was due, in part, to an increase in
estimated amounts due to or received by us for outstanding
repurchase requests. These amounts were recognized in our
provision for credit losses and foreclosed property expense. In
addition, we recorded lower valuation adjustments on our
acquired property inventory in the third quarter and first nine
months of 2011 because: (1) the rate of decline in home
prices has moderated in recent quarters; and (2) the
decrease in our REO inventory compared with the third quarter
and first nine months of 2010 resulted in fewer properties
subject to valuation adjustments. The decrease in foreclosed
property expense was partially offset by a decrease in the
estimated recovery amount from mortgage insurance coverage.
Foreclosed property expense in the first nine months of 2010
reflected the recognition of cash fees of $796 million from
the cancellation and restructuring of some of our pool mortgage
insurance coverage. The cancelled and restructured policies
covered approximately $42 billion in unpaid principal
balance. The fees represented an acceleration of, and discount
on, claims expected to be received pursuant to the coverage net
of premiums expected to be paid. These cancellations and
restructurings resulted in operational savings from
36
Table of Contents
reduced claims processing and mitigated our counterparty credit
risk given the weakened financial condition of our mortgage
insurer counterparties.
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 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 15
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.
37
Table of Contents
Table
15: Credit Loss Performance Metrics
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
| Amount | Ratio (1) | Amount | Ratio (1) | Amount | Ratio (1) | Amount | Ratio (1)(2) | |||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||
|
Charge-offs, net of recoveries
|
$ | 3,266 | 42.8 | bp | $ | 6,728 | 88.4 | bp | $ | 11,851 | 51.6 | bp | $ | 17,665 | 76.9 | bp | ||||||||||||||||
|
Foreclosed property expense
|
733 | 9.6 | 787 | 10.3 | 743 | 3.2 | 1,255 | 5.5 | ||||||||||||||||||||||||
|
Credit losses including the effect of fair value losses on
acquired credit- impaired loans
|
3,999 | 52.4 | 7,515 | 98.7 | 12,594 | 54.8 | 18,920 | 82.4 | ||||||||||||||||||||||||
|
Less: Fair value losses resulting from acquired credit-impaired
loans
|
(31 | ) | (0.4 | ) | (41 | ) | (0.5 | ) | (93 | ) | (0.4 | ) | (146 | ) | (0.6 | ) | ||||||||||||||||
|
Plus: Impact of acquired credit- impaired loans on charge-offs
and foreclosed property expense
|
492 | 6.5 | 750 | 9.9 | 1,577 | 6.9 | 1,642 | 7.1 | ||||||||||||||||||||||||
|
Credit losses and credit loss ratio
|
$ | 4,460 | 58.5 | bp | $ | 8,224 | 108.1 | bp | $ | 14,078 | 61.3 | bp | $ | 20,416 | 88.9 | bp | ||||||||||||||||
|
Credit losses attributable to:
|
||||||||||||||||||||||||||||||||
|
Single-family
|
$ | 4,384 | $ | 8,037 | $ | 13,798 | $ | 20,022 | ||||||||||||||||||||||||
|
Multifamily
|
76 | 187 | 280 | 394 | ||||||||||||||||||||||||||||
|
Total
|
$ | 4,460 | $ | 8,224 | $ | 14,078 | $ | 20,416 | ||||||||||||||||||||||||
|
Average single-family default rate
|
0.44 | % | 0.63 | % | 1.34 | % | 1.63 | % | ||||||||||||||||||||||||
|
Average single-family initial charge- off severity
rate
(3)
|
34.20 | % | 33.30 | % | 35.00 | % | 34.20 | % | ||||||||||||||||||||||||
|
Average multifamily default rate
|
0.08 | % | 0.24 | % | 0.38 | % | 0.48 | % | ||||||||||||||||||||||||
|
Average multifamily initial charge- off severity
rate
(3)
|
32.49 | % | 39.31 | % | 35.40 | % | 39.63 | % | ||||||||||||||||||||||||
| (1) | Basis points are based on the annualized amount for each line item presented divided by the average guaranty book of business during the period. | |
| (2) | Beginning in the second quarter of 2010, expenses relating to preforeclosure taxes and insurance 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 was 4.6 basis points for the nine months ended September 30, 2010. | |
| (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 decrease in our credit losses in the third quarter and first
nine months of 2011 compared with the third quarter and first
nine months of 2010 was driven by a decrease in net charge-offs
primarily due to a decrease in the number of defaults and an
increase in estimated amounts due to or received by us related
to outstanding repurchase requests. While charge-offs remain
high, charge-offs in the third quarter and first nine months of
2011 were lower than they otherwise would have been due to
delays in the foreclosure process.
Our 2009, 2010 and 2011 vintages accounted for approximately 3%
of our single-family credit losses for the third quarter of 2011
and 2% of our single-family credit losses for the first nine
months of 2011. Typically, credit losses on mortgage loans do
not peak until later years in the loan cycle 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
38
Table of Contents
credit losses from our existing single-family guaranty book of
business from an immediate 5% decline in single-family home
prices for the entire United States. Although other provisions
of the September 2005 agreement were suspended in March 2009 by
FHFA until further notice, this disclosure requirement was not
suspended. For purposes of this calculation, we assume that,
after the initial 5% shock, home price growth rates return to
the average of the possible growth rate paths used in our
internal credit pricing models. The sensitivity results
represent the difference between future expected credit losses
under our base case scenario, which is derived from our internal
home price path forecast, and a scenario that assumes an
instantaneous nationwide 5% decline in home prices.
Table 16 compares the credit loss sensitivities for the periods
indicated for first lien single-family whole loans we own or
that back Fannie Mae MBS, before and after consideration of
projected credit risk sharing proceeds, such as private mortgage
insurance claims and other credit enhancements.
Table
16: Single-Family Credit Loss
Sensitivity
(1)
| As of | ||||||||
|
September 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Gross single-family credit loss sensitivity
|
$ | 22,925 | $ | 25,937 | ||||
|
Less: Projected credit risk sharing proceeds
|
(1,907 | ) | (2,771 | ) | ||||
|
Net single-family credit loss sensitivity
|
$ | 21,018 | $ | 23,166 | ||||
|
Outstanding single-family whole loans and loans underlying
Fannie Mae MBS
|
$ | 2,764,981 | $ | 2,782,512 | ||||
|
Single-family net credit loss sensitivity as a percentage of
outstanding single-family whole loans and Fannie Mae MBS
|
0.76 | % | 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 September 30, 2011 and December 31, 2010, respectively. The mortgage loans and mortgage-related securities that are included in these estimates consist of: (a) single-family Fannie Mae MBS (whether held in our mortgage portfolio or held by third parties), excluding certain whole loan REMICs and private-label wraps; (b) single-family mortgage loans, excluding mortgages secured only by second liens, subprime mortgages, manufactured housing chattel loans and reverse mortgages; and (c) long-term standby commitments. We expect the inclusion in our estimates of the excluded products may impact the estimated sensitivities set forth in this table. |
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.
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 have
consisted mostly of limited administrative costs. However, under
recently announced changes to HARP we may incur additional
losses. See “Legislative and Regulatory Developments,”
for a discussion on the recent changes to HARP.
Home
Affordable Modification Program
We reduced our individually impaired allowance that relates to
loans that had entered a trial modification under the Home
Affordable Modification Program (“HAMP”) by
$906 million during the third quarter of 2011 compared with
impairments of $2.0 billion during the third quarter of
2010. Loans receiving a trial modification under HAMP are
accounted for as TDRs and assessed individually for impairment.
The reduction of our
39
Table of Contents
allowance on HAMP loans in the third quarter of 2011 was due to
improved cash flow projections on existing HAMP loans, which
more than offset the volume of new HAMP trial modifications
during the period. We incurred impairments related to loans that
had entered a trial modification under HAMP of $4.3 billion
during the first nine months of 2011, compared with
$11.8 billion during the first nine months 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 more detailed discussion on these impairments.
We paid or accrued HAMP incentive fees for servicers of
$86 million during the third quarter of 2011 compared with
$93 million during the third quarter of 2010. We paid or
accrued HAMP incentive fees for servicers of $254 million
during the first nine months of 2011, compared with
$276 million during the first nine months 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. See “Risk Factors” for a
discussion of how efforts we may undertake in support of the
housing market may affect us.
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. In future periods, 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 third
quarter and first nine months 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.
Single-Family
Business Results
Table 17 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 loss and administrative
expenses.
40
Table of Contents
Table
17: Single-Family Business Results
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||
| 2011 | 2010 | Variance | 2011 | 2010 | Variance | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Net interest loss
|
$ | (374 | ) | $ | (1,108 | ) | $ | 734 | $ | (1,952 | ) | $ | (4,438 | ) | $ | 2,486 | ||||||||
|
Guaranty fee
income
(1)
|
1,867 | 1,804 | 63 | 5,618 | 5,367 | 251 | ||||||||||||||||||
|
Credit-related
expenses
(2)
|
(4,782 | ) | (5,559 | ) | 777 | (21,821 | ) | (22,356 | ) | 535 | ||||||||||||||
|
Other
expenses
(3)
|
(456 | ) | (592 | ) | 136 | (1,414 | ) | (1,713 | ) | 299 | ||||||||||||||
|
Loss before federal income taxes
|
(3,745 | ) | (5,455 | ) | 1,710 | (19,569 | ) | (23,140 | ) | 3,571 | ||||||||||||||
|
(Provision) benefit for federal income taxes
|
(1 | ) | 1 | (2 | ) | 106 | 53 | 53 | ||||||||||||||||
|
Net loss attributable to Fannie Mae
|
$ | (3,746 | ) | $ | (5,454 | ) | $ | 1,708 | $ | (19,463 | ) | $ | (23,087 | ) | $ | 3,624 | ||||||||
|
Single-family effective guaranty fee rate (in basis
points)
(4)
|
26.1 | 25.2 | 26.1 | 24.9 | ||||||||||||||||||||
|
Single-family average charged guaranty fee on new acquisitions
(in basis
points)
(5)
|
31.1 | 25.3 | 29.0 | 26.4 | ||||||||||||||||||||
|
Average single-family guaranty book of
business
(6)
|
$ | 2,859,814 | $ | 2,857,917 | $ | 2,870,557 | $ | 2,875,952 | ||||||||||||||||
|
Single-family Fannie Mae MBS
issues
(7)
|
$ | 111,808 | $ | 155,940 | $ | 381,135 | $ | 391,754 | ||||||||||||||||
| (1) | Guaranty fee income is included in fee and other income in our condensed consolidated statements of operations and comprehensive loss. | |
| (2) | Consists of the provision for loan losses, provision for guaranty losses and foreclosed property expense. | |
| (3) | Consists of investment gains and losses, fair value losses, fee and other income, administrative expenses and other expenses. | |
| (4) | Calculated based on annualized Single-Family segment guaranty fee income divided by the average single-family guaranty book of business, expressed in basis points. | |
| (5) | 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. | |
| (6) | 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. | |
| (7) | Reflects unpaid principal balance of Fannie Mae MBS issued and guaranteed by the Single-Family segment during the period. Includes Housing Finance Agency (HFA) new issue bond program issuances, none of which occurred in 2011. There were HFA new issue bond program issuances of $3.1 billion in the first nine months of 2010, of which none occurred in the third quarter of 2010. |
Net
Interest Loss
Net interest loss for the Single-Family business segment
primarily consists of: (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; and (3) income from cash payments received on loans
that have been placed on nonaccrual status.
Net interest loss decreased in the third quarter and first nine
months of 2011 compared with the third quarter and first nine
months of 2010 primarily due to a significant decrease in
interest income not recognized for loans on nonaccrual status
because of a decline in the total number of loans on nonaccrual
status. This decline is due to loan workouts and foreclosures
since the third quarter of 2010.
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Table of Contents
Guaranty
Fee Income
Guaranty fee income increased in the third quarter and first
nine months of 2011 compared with the third quarter and first
nine months of 2010 due to an increase in the amortization of
risk based pricing adjustments, reflecting the impact of higher
risk based pricing associated with our more recent acquisition
vintages.
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, which is primarily due to
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 43.3% for the third quarter and
45.5% for the first nine months of 2011.
Credit-Related
Expenses
Credit-related expenses and credit losses in the Single-Family
business represent the substantial majority of our consolidated
totals. We provide a discussion of our credit-related expenses
and credit losses in “Consolidated Results of
Operations—Credit-Related Expenses.”
Multifamily
Business Results
Table 18 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.
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Table of Contents
Table
18: Multifamily Business Results
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||
| 2011 | 2010 | Variance | 2011 | 2010 | Variance | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Guaranty fee
income
(1)
|
$ | 226 | $ | 205 | $ | 21 | $ | 651 | $ | 594 | $ | 57 | ||||||||||||
|
Fee and other income
|
51 | 35 | 16 | 166 | 98 | 68 | ||||||||||||||||||
|
(Losses) gains from partnership
investments
(2)
|
(30 | ) | 39 | (69 | ) | (8 | ) | (41 | ) | 33 | ||||||||||||||
|
Credit-related (expense)
income
(3)
|
(102 | ) | (2 | ) | (100 | ) | (164 | ) | 60 | (224 | ) | |||||||||||||
|
Other
expenses
(4)
|
(73 | ) | (97 | ) | 24 | (178 | ) | (298 | ) | 120 | ||||||||||||||
|
Income before federal income taxes
|
72 | 180 | (108 | ) | 467 | 413 | 54 | |||||||||||||||||
|
Benefit (provision) for federal income taxes
|
— | 1 | (1 | ) | (61 | ) | (14 | ) | (47 | ) | ||||||||||||||
|
Net income attributable to Fannie Mae
|
$ | 72 | $ | 181 | $ | (109 | ) | $ | 406 | $ | 399 | $ | 7 | |||||||||||
|
Multifamily effective guaranty fee rate (in basis
points)
(5)
|
47.0 | 43.9 | 45.4 | 42.5 | ||||||||||||||||||||
|
Credit loss performance ratio (in basis
points)
(6)
|
15.8 | 40.1 | 19.5 | 28.2 | ||||||||||||||||||||
|
Average multifamily guaranty book of
business
(7)
|
$ | 192,357 | $ | 186,766 | $ | 191,185 | $ | 186,234 | ||||||||||||||||
|
Multifamily new business
volumes
(8)
|
6,500 | 4,540 | 16,963 | 11,411 | ||||||||||||||||||||
|
Multifamily units financed from new business
volumes
(9)
|
110,000 | 84,000 | 289,000 | 199,000 | ||||||||||||||||||||
|
Fannie Mae multifamily MBS
issuances
(10)
|
$ | 7,756 | $ | 4,437 | $ | 24,466 | $ | 11,238 | ||||||||||||||||
|
Fannie Mae multifamily structured securities issuances (issued
by Capital Markets
group)
(11)
|
1,495 | 1,122 | 4,517 | 3,715 | ||||||||||||||||||||
|
Additional net interest income earned on Fannie Mae multifamily
mortgage loans and MBS (included in Capital Markets Group’s
results)
(12)
|
210 | 206 | 662 | 608 | ||||||||||||||||||||
|
Average Fannie Mae multifamily mortgage loans and MBS in Capital
Markets Group’s
portfolio
(13)
|
109,608 | 116,096 | 112,092 | 116,744 | ||||||||||||||||||||
| As of | ||||||||
|
September 30
|
December 31
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Multifamily serious delinquency rate
|
0.57 | % | 0.71 | % | ||||
|
Percentage of guaranty book of business with credit enhancement
|
90 | 89 | ||||||
|
Fannie Mae percentage of total multifamily mortgage debt
outstanding
(14)
|
20.8 | 20.5 | ||||||
|
Fannie Mae multifamily MBS
outstanding
(15)
|
$ | 94,398 | $ | 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) gains from partnership investments is included in other expenses in our condensed consolidated statements of operations and comprehensive loss. | |
| (3) | Consists of the benefit (provision) for loan losses, benefit (provision) for guaranty losses and foreclosed property expense. | |
| (4) | Consists of net interest income or loss, 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 |
43
Table of Contents
| 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. | ||
| (8) | Reflects unpaid principal balance of multifamily Fannie Mae MBS issued (excluding portfolio securitizations) and multifamily loans purchased during the period. Includes HFA new issue bond program issuances, none of which occurred in 2011. There were HFA new issue bond program issuances of $1.0 billion in the first nine months of 2010, of which none occurred in the third quarter of 2010. | |
| (9) | Excludes HFA new issue bond program. | |
| (10) | Reflects unpaid principal balance of multifamily Fannie Mae MBS issued during the period. Includes: (a) issuances of new MBS, (b) $1.3 billion and $7.6 billion of Fannie Mae portfolio securitization transactions for the third quarter and first nine months of 2011, and (c) $69 million and $188 million of conversions of adjustable-rate loans to fixed-rate loans and DMBS securities to MBS securities for the third quarter and first nine months of 2011. There were $9 million and $265 million of new MBS issuances as a result of converting adjustable rate loans to fixed rate loans in the third quarter and first nine months of 2010. There were no Fannie Mae multifamily portfolio securitizations transactions for the third quarter or first nine months of 2010. | |
| (11) | Reflects original unpaid principal balance of out-of-portfolio multifamily 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 September 30, 2011 is through June 30, 2011 and is based on the Federal Reserve’s September 2011 mortgage debt outstanding release, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for multifamily residences. Prior period amount may have been changed to reflect revised historical data from the Federal Reserve. | |
| (15) | Includes $26.5 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 sheets, as of September 30, 2011 and December 31, 2010, respectively; and $1.4 billion of bonds issued by HFAs as of both September 30, 2011 and December 31, 2010. |
Guaranty
Fee Income
Multifamily guaranty fee income increased in the third quarter
and first nine months of 2011 compared with the third quarter
and first nine months 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 multifamily guaranty book of business.
Credit-Related
(Expense) Income
Multifamily credit-related expenses increased in the third
quarter and the first nine months of 2011 compared with 2010
primarily due to a stable allowance for loan losses in 2011
compared to a decrease in 2010. Although national multifamily
market fundamentals continued to improve in the third quarter
and first nine months of 2011, certain local markets and
properties continued to underperform compared to the rest of the
country due to localized economic conditions. In comparison,
Multifamily credit-related expense in the third quarter of 2010
and credit-related income in the first nine months of 2010 were
due to a decrease in the allowance for loan losses as credit
trends stabilized.
Multifamily credit losses, which consist of net charge-offs and
foreclosed property expense, were $76 million for the third
quarter of 2011 compared with $187 million for the third
quarter of 2010, and $280 million for the first nine months
of 2011 compared with $394 million for the first nine
months of 2010.
44
Table of Contents
(Losses)
Gains from Partnership Investments
We incurred losses from partnership investments in the third
quarter of 2011 compared with gains in the third quarter of
2010. Overall, the multifamily market has shown improvement but
certain properties continued to show stress in the third quarter
of 2011 resulting in a loss from partnership investments for the
current quarter. Losses from partnership investments were lower
in the first nine months of 2011 compared with the first nine
months of 2010 as properties experienced improved operating
performance due to stronger national multifamily market
fundamentals.
Provision
for Federal Income Taxes
In the second quarter of 2011, we reached an effective
settlement of issues with the Internal Revenue Service relating
to tax years 2007 and 2008, which reduced our total corporate
tax liability. However, the reduction in our tax liability also
reduced the low-income housing tax credits we were able to use,
resulting in a provision for federal income taxes for the
Multifamily segment in the first nine months of 2011.
Capital
Markets Group Results
Table 19 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 of the debt issued by the Capital Markets group to
fund its investment activities, see “Liquidity and Capital
Management.” For a discussion of the derivative instruments
that 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.
Table
19: Capital Markets Group Results
|
For the Three Months
|
For the Nine Months
|
|||||||||||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||||||||||
| 2011 | 2010 | Variance | 2011 | 2010 | Variance | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Net interest
income
(1)
|
$ | 3,904 | $ | 4,065 | $ | (161 | ) | $ | 11,481 | $ | 10,671 | $ | 810 | |||||||||||
|
Investment gains,
net
(2)
|
801 | 1,270 | (469 | ) | 2,589 | 2,841 | (252 | ) | ||||||||||||||||
|
Net
other-than-temporary
impairments
|
(262 | ) | (323 | ) | 61 | (361 | ) | (696 | ) | 335 | ||||||||||||||
|
Fair value (losses) gains,
net
(3)
|
(4,670 | ) | 436 | (5,106 | ) | (5,959 | ) | (119 | ) | (5,840 | ) | |||||||||||||
|
Fee and other income
|
125 | 130 | (5 | ) | 309 | 370 | (61 | ) | ||||||||||||||||
|
Other
expenses
(4)
|
(610 | ) | (755 | ) | 145 | (1,723 | ) | (1,716 | ) | (7 | ) | |||||||||||||
|
(Losses) income before federal income taxes
|
(712 | ) | 4,823 | (5,535 | ) | 6,336 | 11,351 | (5,015 | ) | |||||||||||||||
|
Benefit for federal income taxes
|
1 | 7 | (6 | ) | 46 | 28 | 18 | |||||||||||||||||
|
Net (loss) income attributable to Fannie Mae
|
$ | (711 | ) | $ | 4,830 | $ | (5,541 | ) | $ | 6,382 | $ | 11,379 | $ | (4,997 | ) | |||||||||
| (1) | Includes contractual interest income, excluding recoveries, on nonaccrual loans received from the Single-Family segment of $1.6 billion for the third quarter of 2011 compared with $2.1 billion for the third quarter of 2010. Includes contractual interest income, excluding recoveries, on nonaccrual loans received from the Single-Family segment of $5.1 billion for the first nine months of 2011 compared with $4.4 billion for the first nine months of 2010. Capital Markets net interest income is reported based on the mortgage-related assets held in the segment’s portfolio and excludes interest income on mortgage-related assets held by consolidated MBS trusts that are owned by third parties and the interest expense on the corresponding debt of such trusts. | |
| (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. |
45
Table of Contents
| (3) | Includes primarily fair value gains or losses on derivatives and trading securities that we own, regardless of whether the trust has been consolidated. | |
| (4) | Includes allocated guaranty fee expense, debt extinguishment gains 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 decreased
in the third quarter of 2011 compared with the third quarter of
2010 primarily due to a decline in interest income from our
mortgage portfolio that more than offset the decline in funding
costs as we replaced higher cost debt with lower cost debt.
Interest income from our mortgage portfolio decreased primarily
due to the reduction in our balance of mortgage-related
securities. Additionally, the interest rate earned on our
mortgage loans decreased due to the decrease in the contractual
rate of modified loans. Loan modifications subsequently led to a
decrease in reimbursements from the Single-Family business for
contractual interest income on non-accrual loans.
The Capital Markets group’s net interest income increased
in the first nine months of 2011 compared with the first nine
months of 2010 primarily due to a decline in funding costs as we
replaced higher cost debt with lower cost debt. This increase in
net interest income due to lower funding costs was partially
offset by a decline in interest income from our mortgage
portfolio. 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 nine months 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.
Our net interest income and net interest yield were higher than
they would have otherwise been in the third quarter and first
nine months of both 2011 and 2010 because our debt funding needs
were lower than would otherwise have been required as a result
of funds we received from Treasury under the senior preferred
stock purchase agreement. Further, dividends paid to Treasury
are not recognized in 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 (losses) gains, net” and is
shown in “Table 11: Fair Value (Losses) Gains, 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 $497 million
for the third quarter of 2011 compared with a decrease of
$673 million for the third quarter of 2010, and would have
decreased $1.8 billion for the first nine months of 2011
compared with a decrease of $2.3 billion for the first nine
months of 2010.
Investments
Gains, Net
Investment gains decreased in the third quarter of 2011 compared
with the third quarter of 2010 primarily due to a higher volume
of securitizations in 2010. Investment gains decreased in the
first nine months of 2011 compared with the first nine months of
2010 primarily due to decreased gains on sale of
available-for-sale
securities.
46
Table of Contents
Net
Other-Than-Temporary
Impairments
The net
other-than-temporary
impairments recognized by the Capital Markets group are
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 third quarter and first nine months
of 2011.
Fair
Value (Losses) Gains, Net
The derivative gains and losses that are reported for the
Capital Markets group are consistent with the derivative 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 (Losses) Gains, Net.”
The
Capital Markets Group’s Mortgage Portfolio
The Capital Markets group’s mortgage portfolio consists of
mortgage loans and mortgage-related securities 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. Each year on December 31, 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
September 30, 2011, we owned $722.2 billion in
mortgage assets, compared with $788.8 billion as of
December 31, 2010.
Table 20 summarizes our Capital Markets group’s mortgage
portfolio activity for the periods indicated.
Table
20: Capital Markets Group’s Mortgage Portfolio
Activity
(1)
|
For the Three Months
|
For the Nine Months
|
|||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Mortgage loans:
|
||||||||||||||||
|
Beginning balance
|
$ | 405,417 | $ | 426,185 | $ | 427,074 | $ | 281,162 | ||||||||
|
Purchases
|
36,169 | 54,136 | 102,533 | 254,725 | ||||||||||||
|
Securitizations
(2)
|
(18,420 | ) | (24,052 | ) | (64,962 | ) | (52,218 | ) | ||||||||
|
Liquidations
(3)
|
(19,361 | ) | (26,436 | ) | (60,840 | ) | (53,836 | ) | ||||||||
|
Mortgage loans, ending balance
|
403,805 | 429,833 | 403,805 | 429,833 | ||||||||||||
|
Mortgage securities:
|
||||||||||||||||
|
Beginning balance
|
$ | 326,384 | $ | 391,615 | $ | 361,697 | $ | 491,566 | ||||||||
|
Purchases
(4)
|
5,964 | 3,677 | 15,587 | 37,541 | ||||||||||||
|
Securitizations
(2)
|
18,420 | 24,052 | 64,962 | 52,218 | ||||||||||||
|
Sales
|
(17,936 | ) | (25,598 | ) | (74,997 | ) | (140,986 | ) | ||||||||
|
Liquidations
(3)
|
(14,479 | ) | (20,728 | ) | (48,896 | ) | (67,321 | ) | ||||||||
|
Mortgage securities, ending balance
|
318,353 | 373,018 | 318,353 | 373,018 | ||||||||||||
|
Total Capital Markets mortgage portfolio
|
$ | 722,158 | $ | 802,851 | $ | 722,158 | $ | 802,851 | ||||||||
| (1) | Based on unpaid principal balance. |
47
Table of Contents
| (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. |
Purchases of mortgage loans decreased in the third quarter and
first nine months of 2011 compared with both the third quarter
and first nine months of 2010 because we purchased fewer loans
that were four or more months delinquent from MBS trusts in the
third quarter and first nine months of 2011. We significantly
increased our purchases of delinquent loans in 2010 and
purchased the substantial majority of our delinquent loan
population during the first half of 2010, which included
$127 billion of loans that were four or more months
delinquent as of December 31, 2009.
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 including the limit on the mortgage
assets that we may own pursuant to the senior preferred stock
purchase agreement. We purchased approximately 293,000
delinquent loans with an unpaid principal balance of
approximately $51 billion from our single-family MBS trusts
in the first nine months of 2011. As of September 30, 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 $5.9 billion. In October 2011, we
purchased approximately 31,000 delinquent loans with an unpaid
principal balance of $5.3 billion from our single-family
MBS trusts.
Table 21 shows the composition of the Capital Markets
group’s mortgage portfolio as of September 30, 2011
and December 31, 2010.
48
Table of Contents
Table
21: Capital Markets Group’s Mortgage Portfolio
Composition
(1)
| As of | ||||||||
|
September 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Capital Markets group’s mortgage loans:
|
||||||||
|
Single-family loans
|
||||||||
|
Government insured or guaranteed
|
$ | 41,619 | $ | 51,783 | ||||
|
Conventional:
|
||||||||
|
Long-term, fixed-rate
|
245,282 | 237,096 | ||||||
|
Intermediate-term, fixed-rate
|
9,644 | 11,446 | ||||||
|
Adjustable-rate
|
25,092 | 31,526 | ||||||
|
Total single-family conventional
|
280,018 | 280,068 | ||||||
|
Total single-family loans
|
321,637 | 331,851 | ||||||
|
Multifamily loans
|
||||||||
|
Government insured or guaranteed
|
379 | 431 | ||||||
|
Conventional:
|
||||||||
|
Long-term, fixed-rate
|
3,746 | 4,413 | ||||||
|
Intermediate-term, fixed-rate
|
62,538 | 71,010 | ||||||
|
Adjustable-rate
|
15,505 | 19,369 | ||||||
|
Total multifamily conventional
|
81,789 | 94,792 | ||||||
|
Total multifamily loans
|
82,168 | 95,223 | ||||||
|
Total Capital Markets group’s mortgage loans
|
403,805 | 427,074 | ||||||
|
Capital Markets group’s mortgage-related securities:
|
||||||||
|
Fannie Mae
|
224,687 | 260,429 | ||||||
|
Freddie Mac
|
15,516 | 17,332 | ||||||
|
Ginnie Mae
|
1,087 | 1,425 | ||||||
|
Alt-A private-label securities
|
20,286 | 22,283 | ||||||
|
Subprime private-label securities
|
16,909 | 18,038 | ||||||
|
CMBS
|
24,219 | 25,052 | ||||||
|
Mortgage revenue bonds
|
11,365 | 12,525 | ||||||
|
Other mortgage-related securities
|
4,284 | 4,613 | ||||||
|
Total Capital Markets group’s mortgage-related
securities
(2)
|
318,353 | 361,697 | ||||||
|
Total Capital Markets group’s mortgage portfolio
|
$ | 722,158 | $ | 788,771 | ||||
| (1) | Based on unpaid principal balance. | |
| (2) | The fair value of these mortgage-related securities was $324.7 billion and $365.8 billion as of September 30, 2011 and December 31, 2010, respectively. |
The Capital Markets group’s mortgage portfolio decreased
from December 31, 2010 to September 30, 2011 primarily
due to liquidations and sales, partially offset by purchases of
delinquent loans from MBS trusts. The total unpaid principal
balance of nonperforming loans in the Capital Markets
group’s mortgage portfolio was $233.0 billion as of
September 30, 2011 and $228.0 billion as of
December 31, 2010. 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 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.
49
Table of Contents
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 22 displays a summary of our condensed consolidated
balance sheets as of September 30, 2011 and
December 31, 2010.
Table
22: Summary of Condensed Consolidated Balance
Sheets
| As of | ||||||||||||
|
September 30,
|
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
|
$ | 60,257 | $ | 29,048 | $ | 31,209 | ||||||
|
Restricted cash
|
55,961 | 63,678 | (7,717 | ) | ||||||||
|
Investments in
securities
(1)
|
150,859 | 151,248 | (389 | ) | ||||||||
|
Mortgage loans
|
||||||||||||
|
Of Fannie Mae
|
385,503 | 407,482 | (21,979 | ) | ||||||||
|
Of consolidated trusts
|
2,583,752 | 2,577,794 | 5,958 | |||||||||
|
Allowance for loan losses
|
(71,435 | ) | (61,556 | ) | (9,879 | ) | ||||||
|
Mortgage loans, net of allowance for loan losses
|
2,897,820 | 2,923,720 | (25,900 | ) | ||||||||
|
Other
assets
(2)
|
48,980 | 54,278 | (5,298 | ) | ||||||||
|
Total assets
|
$ | 3,213,877 | $ | 3,221,972 | $ | (8,095 | ) | |||||
|
Liabilities and stockholders’ deficit
|
||||||||||||
|
Debt
|
||||||||||||
|
Of Fannie Mae
|
$ | 744,803 | $ | 780,044 | $ | (35,241 | ) | |||||
|
Of consolidated trusts
|
2,446,973 | 2,416,956 | 30,017 | |||||||||
|
Other
liabilities
(3)
|
29,892 | 27,489 | 2,403 | |||||||||
|
Total liabilities
|
3,221,668 | 3,224,489 | (2,821 | ) | ||||||||
|
Senior preferred stock
|
104,787 | 88,600 | 16,187 | |||||||||
|
Other
deficit
(4)
|
(112,578 | ) | (91,117 | ) | (21,461 | ) | ||||||
|
Total stockholders’ deficit
|
(7,791 | ) | (2,517 | ) | (5,274 | ) | ||||||
|
Total liabilities and stockholders’ deficit
|
$ | 3,213,877 | $ | 3,221,972 | $ | (8,095 | ) | |||||
| (1) | Includes $43.2 billion as of September 30, 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 33: 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, accumulated deficit, accumulated other comprehensive loss, treasury stock, and noncontrolling interest. |
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
50
Table of Contents
Management—Liquidity Management—Cash and Other
Investments Portfolio” for additional information on our
cash and other investments portfolio.
Restricted
Cash
Restricted cash primarily includes unscheduled borrower payments
received by the servicer or consolidated trusts due to be
remitted to the MBS certificateholders in the subsequent month.
Our restricted cash decreased as of September 30, 2011
compared with the balance as of December 31, 2010 primarily
due to a decline in refinance activity, 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 (losses) gains, net” and unrealized gains
and losses on
available-for-sale
securities are included in “Other comprehensive (loss)
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 September 30, 2011. Table 23 displays the
fair value of our investments in mortgage-related securities,
including trading and
available-for-sale
securities, as of September 30, 2011 and December 31,
2010.
Table
23: Summary of Mortgage-Related Securities at Fair
Value
| As of | ||||||||
|
September 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Mortgage-related securities:
|
||||||||
|
Fannie Mae
|
$ | 26,767 | $ | 30,226 | ||||
|
Freddie Mac
|
16,615 | 18,322 | ||||||
|
Ginnie Mae
|
1,236 | 1,629 | ||||||
|
Alt-A private-label securities
|
13,741 | 15,573 | ||||||
|
Subprime private-label securities
|
9,205 | 11,513 | ||||||
|
CMBS
|
24,990 | 25,608 | ||||||
|
Mortgage revenue bonds
|
11,325 | 11,650 | ||||||
|
Other mortgage-related securities
|
3,760 | 3,974 | ||||||
|
Total
|
$ | 107,639 | $ | 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 $37.2 billion as of September 30, 2011,
of which $30.9 billion was rated below investment grade.
Table 24 displays the unpaid principal balance and the fair
value of our investments in Alt-A and subprime private-label
securities along with an analysis of the cumulative losses on
these investments as of September 30, 2011. As of
September 30, 2011, we had realized actual cumulative
principal shortfalls of approximately 5% compared
51
Table of Contents
with 2% as of December 31, 2010 of the total cumulative
credit losses reported in this table and reflected in our
condensed consolidated financial statements.
Table
24: Analysis of Losses on Alt-A and Subprime
Private-Label Mortgage-Related Securities
| As of September 30, 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
|
$ | 2,806 | $ | 1,454 | $ | (1,309 | ) | $ | (139 | ) | $ | (1,170 | ) | |||||||
|
Subprime private-label securities
|
2,630 | 1,318 | (1,312 | ) | (404 | ) | (908 | ) | ||||||||||||
|
Total
|
$ | 5,436 | $ | 2,772 | $ | (2,621 | ) | $ | (543 | ) | $ | (2,078 | ) | |||||||
|
Available-for-sale
securities:
(4)
|
||||||||||||||||||||
|
Alt-A private-label securities
|
$ | 17,480 | $ | 12,287 | $ | (5,574 | ) | $ | (2,012 | ) | $ | (3,562 | ) | |||||||
|
Subprime private-label securities
|
14,279 | 7,887 | (6,431 | ) | (2,480 | ) | (3,951 | ) | ||||||||||||
|
Total
|
$ | 31,759 | $ | 20,174 | $ | (12,005 | ) | $ | (4,492 | ) | $ | (7,513 | ) | |||||||
|
Grand Total
|
$ | 37,195 | $ | 22,946 | $ | (14,626 | ) | $ | (5,035 | ) | $ | (9,591 | ) | |||||||
| (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. |
Table 25 displays 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 September 30, 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.
52
Table of Contents
| Table 25: | Credit Statistics of Loans Underlying Alt-A and Subprime Private-Label Mortgage-Related Securities (Including Wraps) |
| As of September 30, 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
|
$ | — | $ | 487 | $ | — | 31.8 | % | 58.1 | % | 16.3 | % | $ | — | ||||||||||||||
|
2005
|
— | 1,324 | — | 44.9 | 60.9 | 39.0 | 257 | |||||||||||||||||||||
|
2006
|
— | 1,241 | — | 46.7 | 62.2 | 26.4 | 117 | |||||||||||||||||||||
|
2007
|
1,949 | — | — | 45.4 | 70.4 | 55.8 | 684 | |||||||||||||||||||||
|
Other Alt-A mortgage loans:
|
||||||||||||||||||||||||||||
|
2004 and prior
|
— | 6,309 | — | 10.5 | 51.6 | 12.4 | 12 | |||||||||||||||||||||
|
2005
|
85 | 4,131 | 119 | 23.3 | 61.0 | 5.6 | — | |||||||||||||||||||||
|
2006
|
65 | 3,868 | — | 28.3 | 61.6 | 0.6 | — | |||||||||||||||||||||
|
2007
|
707 | — | 177 | 43.3 | 70.8 | 27.6 | 286 | |||||||||||||||||||||
|
2008
(8)
|
— | 120 | — | — | — | — | — | |||||||||||||||||||||
|
Total Alt-A mortgage loans:
|
2,806 | 17,480 | 296 | 1,356 | ||||||||||||||||||||||||
|
Subprime mortgage loans:
|
||||||||||||||||||||||||||||
|
2004 and prior
|
— | 1,699 | 975 | 24.2 | 78.2 | 60.7 | 645 | |||||||||||||||||||||
|
2005
(8)
|
— | 179 | 1,327 | 42.0 | 77.1 | 58.2 | 226 | |||||||||||||||||||||
|
2006
|
— | 11,792 | — | 47.6 | 78.7 | 17.8 | 52 | |||||||||||||||||||||
|
2007
|
2,630 | 609 | 5,516 | 47.8 | 77.4 | 22.2 | 177 | |||||||||||||||||||||
|
Total subprime mortgage loans:
|
2,630 | 14,279 | 7,818 | 1,100 | ||||||||||||||||||||||||
|
Total Alt-A and subprime mortgage loans:
|
$ | 5,436 | $ | 31,759 | $ | 8,114 | $ | 2,456 | ||||||||||||||||||||
| (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 September 2011 remittances for August 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 September 2011 remittances for August 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 |
53
Table of Contents
| total unpaid principal balance of all of the tranches of collateral pools from which credit support is drawn for the security that we own or guarantee. | ||
| (6) | Reflects amount of unpaid principal balance supported by financial guarantees from monoline financial guarantors. | |
| (7) | Vintages are based on series date and not loan origination date. | |
| (8) | The unpaid principal balance includes private-label REMIC securities that have been resecuritized totaling $120 million for the 2008 vintage of other Alt-A loans and $17 million for the 2005 vintage of subprime loans. These securities are excluded from the delinquency, severity and credit enhancement statistics reported in this table. |
Mortgage
Loans
The decrease in mortgage loans, net of an allowance for loan
losses, in the first nine months of 2011 was primarily driven by
lower acquisition volumes. For additional information on our
mortgage loans, see “Note 3, Mortgage Loans.” For
additional information on the mortgage loan purchase and sale
activities reported by our Capital Markets group, see
“Business Segment Results—Capital Markets Group
Results.”
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 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 nine
months of 2011 was primarily driven by the sale of Fannie Mae
MBS, which are accounted for as reissuances of debt of
consolidated trusts in our condensed consolidated balance
sheets, since the MBS certificate ownership is transferred from
us to a third party.
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
September 30, 2011 and December 31, 2010 in
“Note 9, Derivative Instruments.” Table 26
provides an analysis of the factors driving the change from
December 31, 2010 to September 30, 2011 in the
estimated fair value of our net derivative liability related to
our risk management derivatives recorded in our condensed
consolidated balance sheets.
54
Table of Contents
Table
26: Changes in Risk Management Derivative Assets
(Liabilities) at Fair Value, Net
|
For the Nine
|
||||
|
Months Ended
|
||||
| September 30, 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)
|
51 | |||
|
Fair value at date of termination of contracts settled during
the
period
(2)
|
1,214 | |||
|
Net collateral received
|
(17 | ) | ||
|
Periodic net cash contractual interest
payments
(3)
|
1,755 | |||
|
Total cash payments
|
3,003 | |||
|
Statement of operations impact of recognized amounts:
|
||||
|
Net contractual interest expense accruals on interest rate swaps
|
(1,790 | ) | ||
|
Net change in fair value during the period
|
(3,777 | ) | ||
|
Risk management derivatives fair value losses, net
|
(5,567 | ) | ||
|
Net risk management derivative liability as of
September 30, 2011
|
$ | (3,353 | ) | |
| (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 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
(Losses) Gains, Net,” “Risk Management—Market
Risk Management, Including Interest Rate Risk Management”
and “Note 9, Derivative Instruments.”
Stockholders’
Deficit
Our net deficit increased as of September 30, 2011 compared
with December 31, 2010. See Table 27 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 27 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 nine months ended
September 30, 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.”
55
Table of Contents
| Table 27: | Comparative Measures—GAAP Change in Stockholders’ Deficit and Non-GAAP Change in Fair Value of Net Assets (Net of Tax Effect) |
|
For the
|
||||
|
Nine Months Ended
|
||||
| September 30, 2011 | ||||
| (Dollars in millions) | ||||
|
GAAP consolidated balance sheets:
|
||||
|
Fannie Mae stockholders’ deficit as of December 31,
2010
(1)
|
$ | (2,599 | ) | |
|
Total comprehensive loss
|
(14,462 | ) | ||
|
Capital
transactions:
(2)
|
||||
|
Funds received from Treasury under the senior preferred stock
purchase agreement
|
16,187 | |||
|
Senior preferred stock dividends
|
(6,992 | ) | ||
|
Capital transactions, net
|
9,195 | |||
|
Other
|
13 | |||
|
Fannie Mae stockholders’ deficit as of September 30,
2011
(1)
|
$ | (7,853 | ) | |
|
Non-GAAP consolidated fair value balance sheets
:
|
||||
|
Estimated fair value of net assets as of December 31, 2010
|
$ | (120,294 | ) | |
|
Capital transactions, net
|
9,195 | |||
|
Change in estimated fair value of net assets, excluding capital
transactions
|
(2,270 | ) | ||
|
Increase in estimated fair value of net assets, net
|
6,925 | |||
|
Estimated fair value of net assets as of September 30, 2011
|
$ | (113,369 | ) | |
| (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’ deficit” and “Noncontrolling interests” reported in our condensed consolidated balance sheets. | |
| (2) | Represents capital transactions, which are reported in our condensed consolidated financial statements. |
During the first nine months of 2011, the fair value of our net
assets, excluding capital transactions, decreased
$2.3 billion which was attributable to a net decrease in
the fair value of the net portfolio principally related to
widening of the option-adjusted spread levels, which were
partially offset by an increase in fair value attributable to
the positive impact of the spread between mortgage assets and
associated debt and derivatives.
Fair value decreases during the first half of 2011 were
primarily attributable to credit-related items, principally
related to declining actual and expected home prices. These fair
value decreases have been reduced in the third quarter primarily
by a decline in interest rates, which decreased the probability
of default due to a higher expectation of prepayments.
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.
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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 28
below.
57
Table of Contents
Table
28: Supplemental Non-GAAP Consolidated Fair
Value Balance Sheets
| As of September 30, 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
|
$ | 80,268 | $ | — | $ | 80,268 | $ | 80,975 | $ | — | $ | 80,975 | ||||||||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
35,950 | — | 35,950 | 11,751 | — | 11,751 | ||||||||||||||||||
|
Trading securities
|
68,149 | — | 68,149 | 56,856 | — | 56,856 | ||||||||||||||||||
|
Available-for-sale
securities
|
82,710 | — | 82,710 | 94,392 | — | 94,392 | ||||||||||||||||||
|
Mortgage loans:
|
||||||||||||||||||||||||
|
Mortgage loans held for sale
|
309 | — | 309 | 915 | — | 915 | ||||||||||||||||||
|
Mortgage loans held for investment, net of allowance for loan
losses:
|
||||||||||||||||||||||||
|
Of Fannie Mae
|
329,848 | (25,895 | ) | 303,953 | 358,698 | (39,331 | ) | 319,367 | ||||||||||||||||
|
Of consolidated trusts
|
2,567,663 | 95,780 | (2) | 2,663,443 | (3) | 2,564,107 | 46,038 | (2) | 2,610,145 | (3) | ||||||||||||||
|
Total mortgage loans
|
2,897,820 | 69,885 | 2,967,705 | (4) | 2,923,720 | 6,707 | 2,930,427 | (4) | ||||||||||||||||
|
Advances to lenders
|
5,145 | (116 | ) | 5,029 | (5)(6) | 7,215 | (225 | ) | 6,990 | (5)(6) | ||||||||||||||
|
Derivative assets at fair value
|
723 | — | 723 | (5)(6) | 1,137 | — | 1,137 | (5)(6) | ||||||||||||||||
|
Guaranty assets and
buy-ups,
net
|
480 | 378 | 858 | (5)(6) | 458 | 356 | 814 | (5)(6) | ||||||||||||||||
|
Total financial assets
|
3,171,245 | 70,147 | 3,241,392 | (7) | 3,176,504 | 6,838 | 3,183,342 | (7) | ||||||||||||||||
|
Credit enhancements
|
469 | 2,502 | 2,971 | (5)(6) | 479 | 3,286 | 3,765 | (5)(6) | ||||||||||||||||
|
Other assets
|
42,163 | (281 | ) | 41,882 | (5)(6) | 44,989 | (261 | ) | 44,728 | (5)(6) | ||||||||||||||
|
Total assets
|
$ | 3,213,877 | $ | 72,368 | $ | 3,286,245 | $ | 3,221,972 | $ | 9,863 | $ | 3,231,835 | ||||||||||||
|
Liabilities:
|
||||||||||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
$ | — | $ | — | $ | — | $ | 52 | $ | (1 | ) | $ | 51 | |||||||||||
|
Short-term debt:
|
||||||||||||||||||||||||
|
Of Fannie Mae
|
193,718 | 41 | 193,759 | 151,884 | 90 | 151,974 | ||||||||||||||||||
|
Of consolidated trusts
|
5,004 | — | 5,004 | 5,359 | — | 5,359 | ||||||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||
|
Of Fannie Mae
|
551,085 | (8) | 29,153 | 580,238 | 628,160 | (8) | 21,524 | 649,684 | ||||||||||||||||
|
Of consolidated trusts
|
2,441,969 | (8) | 146,581 | (2) | 2,588,550 | 2,411,597 | (8) | 103,332 | (2) | 2,514,929 | ||||||||||||||
|
Derivative liabilities at fair value
|
4,273 | — | 4,273 | (9)(10) | 1,715 | — | 1,715 | (9)(10) | ||||||||||||||||
|
Guaranty obligations
|
765 | 3,155 | 3,920 | (9)(10) | 769 | 3,085 | 3,854 | (9)(10) | ||||||||||||||||
|
Total financial liabilities
|
3,196,814 | 178,930 | 3,375,744 | (7) | 3,199,536 | 128,030 | 3,327,566 | (7) | ||||||||||||||||
|
Other liabilities
|
24,854 | (1,046 | ) | 23,808 | (9)(10) | 24,953 | (472 | ) | 24,481 | (9)(10) | ||||||||||||||
|
Total liabilities
|
3,221,668 | 177,884 | 3,399,552 | 3,224,489 | 127,558 | 3,352,047 | ||||||||||||||||||
|
Equity (deficit):
|
||||||||||||||||||||||||
|
Fannie Mae stockholders’ equity (deficit):
|
||||||||||||||||||||||||
|
Senior
preferred
(11)
|
104,787 | — | 104,787 | 88,600 | — | 88,600 | ||||||||||||||||||
|
Preferred
|
19,130 | (17,784 | ) | 1,346 | 20,204 | (19,829 | ) | 375 | ||||||||||||||||
|
Common
|
(131,770 | ) | (87,732 | ) | (219,502 | ) | (111,403 | ) | (97,866 | ) | (209,269 | ) | ||||||||||||
|
Total Fannie Mae stockholders’ deficit/non-GAAP fair
value of net assets
|
$ | (7,853 | ) | $ | (105,516 | ) | $ | (113,369 | ) | $ | (2,599 | ) | $ | (117,695 | ) | $ | (120,294 | ) | ||||||
|
Noncontrolling interests
|
62 | — | 62 | 82 | — | 82 | ||||||||||||||||||
|
Total deficit
|
(7,791 | ) | (105,516 | ) | (113,307 | ) | (2,517 | ) | (117,695 | ) | (120,212 | ) | ||||||||||||
|
Total liabilities and equity (deficit)
|
$ | 3,213,877 | $ | 72,368 | $ | 3,286,245 | $ | 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 |
58
Table of Contents
| consolidation of variable interest entities (“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. | ||
| (3) | Includes certain mortgage loans that we elected to report at fair value in our GAAP condensed consolidated balance sheets of $3.4 billion and $3.0 billion as of September 30, 2011 and December 31, 2010, respectively. | |
| (4) | Performing loans had a fair value of $2.8 trillion and an unpaid principal balance of $2.7 trillion as of both September 30, 2011 and December 31, 2010. Nonperforming loans, which include loans that are delinquent by one or more payments, had a fair value of $133.8 billion and an unpaid principal balance of $232.1 billion as of September 30, 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 $23.1 billion and $27.5 billion as of September 30, 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 $6.8 billion and $9.3 billion as of September 30, 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 $4.7 billion and $3.2 billion as of September 30, 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 Accrued interest payable in our GAAP condensed consolidated balance sheets. The carrying value of this item in our GAAP condensed consolidated balance sheets totaled $12.9 billion and $13.8 billion as of September 30, 2011 and December 31, 2010, respectively. 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 $5.0 billion and $2.5 billion as of September 30, 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, maintaining
sufficient capacity to meet our needs based on our ongoing
assessment of financial market liquidity and adhering to our
regulatory requirements.
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 support arrangements, we
believe that our liquidity contingency plan may be difficult or
impossible to execute for a company of our size in our
circumstances. See “Liquidity and Capital
Management—Liquidity Management—Liquidity Risk
Management Practices and Contingency Planning” in our 2010
Form 10-K
for a discussion of our liquidity contingency plans. Also see
“Risk Factors” in this report for a description of the
risks associated with our liquidity contingency planning.
59
Table of Contents
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; a U.S. government payment
default on its debt obligations; a downgrade in the credit
ratings of our senior unsecured debt or the
U.S. government’s debt from any of the major ratings
organizations; a systemic event leading to the withdrawal of
liquidity from the market; an extreme market-wide widening of
credit spreads; public statements by key policy makers; a
significant 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 29 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
29: Activity in Debt of Fannie Mae
|
For the Three Months
|
For the Nine Months
|
|||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Issued during the period:
|
||||||||||||||||
|
Short-term:
|
||||||||||||||||
|
Amount
|
$ | 134,500 | $ | 102,778 | $ | 362,752 | $ | 389,709 | ||||||||
|
Weighted-average interest rate
|
0.12 | % | 0.25 | % | 0.12 | % | 0.25 | % | ||||||||
|
Long-term:
|
||||||||||||||||
|
Amount
|
$ | 81,284 | $ | 138,672 | $ | 162,708 | $ | 341,526 | ||||||||
|
Weighted-average interest rate
|
1.39 | % | 1.62 | % | 1.81 | % | 2.04 | % | ||||||||
|
Total issued:
|
||||||||||||||||
|
Amount
|
$ | 215,784 | $ | 241,450 | $ | 525,460 | $ | 731,235 | ||||||||
|
Weighted-average interest rate
|
0.60 | % | 1.03 | % | 0.65 | % | 1.08 | % | ||||||||
|
Paid off during the period:
(1)
|
||||||||||||||||
|
Short-term:
|
||||||||||||||||
|
Amount
|
$ | 102,760 | $ | 139,706 | $ | 320,962 | $ | 370,713 | ||||||||
|
Weighted-average interest rate
|
0.16 | % | 0.23 | % | 0.21 | % | 0.23 | % | ||||||||
|
Long-term:
|
||||||||||||||||
|
Amount
|
$ | 93,274 | $ | 132,407 | $ | 242,852 | $ | 316,009 | ||||||||
|
Weighted-average interest rate
|
1.96 | % | 2.91 | % | 2.49 | % | 3.15 | % | ||||||||
|
Total paid off:
|
||||||||||||||||
|
Amount
|
$ | 196,034 | $ | 272,113 | $ | 563,814 | $ | 686,722 | ||||||||
|
Weighted-average interest rate
|
1.01 | % | 1.54 | % | 1.19 | % | 1.57 | % | ||||||||
| (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. |
Debt funding activity in the third quarter and first nine months
of 2011 decreased compared with the third quarter and first nine
months of 2010 primarily due to lower funding needs as a result
of (1) a reduction in the size of our mortgage portfolio
pursuant to the requirements of the senior preferred stock
purchase agreement, (2) a decrease in our redemption of
debt with higher interest rates, which we replaced with
issuances of debt with lower interest rates, and (3) a
decrease in our purchases of delinquent loans from MBS trusts.
Additionally, our debt funding needs were lower than would
otherwise have been required as a result of funds we received
from Treasury under the senior preferred stock purchase
agreement.
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, due to our reliance on the
U.S. government’s support, our access to debt funding
or the cost of our debt funding also could be materially
adversely affected by a change or perceived change in the
creditworthiness of the U.S. government. A downgrade in our
credit ratings could reduce demand for our debt securities and
increase our borrowing costs. Standard & Poor’s
Ratings Services’ (“S&P”) downgrade of our
credit rating on August 8, 2011, which was a result of a
similar action on the U.S. government’s sovereign
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Table of Contents
credit rating, has not adversely affected our access to debt
funding or the cost of our debt funding. See our discussion of
credit ratings in “Risk Factors” for information about
factors that may lead to the U.S. government’s
long-term debt rating being lowered, and “Credit
Ratings” below for further discussion of our dependence on
our credit ratings.
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” for a discussion of the risks we face relating to
(1) the uncertain future of our 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 includes federal funds
purchased and securities sold under agreements to repurchase and
short-term and long-term debt, excluding debt of consolidated
trusts.
As of September 30, 2011, our outstanding short-term debt,
based on its original contractual maturity, as a percentage of
our total outstanding debt increased to 26% from 19% as of
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
2.58% as of September 30, 2011 from 2.77% as of
December 31, 2010.
Pursuant to the terms of the senior preferred stock purchase
agreement, our outstanding debt limit is 120% of the amount of
mortgage assets we were allowed to own on December 31 of the
immediately preceding calendar year. Our debt limit under the
senior preferred stock purchase agreement was reduced to
$972 billion in 2011. As of September 30, 2011, our
aggregate indebtedness totaled $755.2 billion, which was
$216.8 billion below our debt limit. The calculation of our
indebtedness for purposes of complying with our debt limit
reflects the unpaid principal balance and excludes debt basis
adjustments and debt of consolidated trusts. Because of our debt
limit, we may be restricted in the amount of debt we issue to
fund our operations.
Table 30 displays information as of September 30, 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
30: Outstanding Short-Term Borrowings and Long-Term
Debt
(1)
| As of | ||||||||||||||||||||
| September 30, 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
|
— | $ | — | — | % | — | $ | 52 | 2.20 | % | ||||||||||
|
Short-term debt:
|
||||||||||||||||||||
|
Fixed-rate:
|
||||||||||||||||||||
|
Discount notes
|
— | $ | 193,385 | 0.13 | % | — | $ | 151,500 | 0.32 | % | ||||||||||
|
Foreign exchange discount notes
|
— | 333 | 2.01 | — | 384 | 2.43 | ||||||||||||||
|
Total short-term debt of Fannie
Mae
(2)
|
193,718 | 0.14 | 151,884 | 0.32 | ||||||||||||||||
|
Debt of consolidated trusts
|
— | 5,004 | 0.19 | — | 5,359 | 0.23 | ||||||||||||||
|
Total short-term debt
|
$ | 198,722 | 0.14 | % | $ | 157,243 | 0.32 | % | ||||||||||||
|
Long-term debt:
|
||||||||||||||||||||
|
Senior fixed:
|
||||||||||||||||||||
|
Benchmark notes and bonds
|
2011 - 2030 | $ | 281,876 | 2.90 | % | 2011 - 2030 | $ | 300,344 | 3.20 | % | ||||||||||
|
Medium-term notes
|
2011 - 2021 | 153,166 | 1.81 | 2011 - 2020 | 199,266 | 2.13 | ||||||||||||||
|
Foreign exchange notes and bonds
|
2021 - 2028 | 667 | 5.22 | 2017 - 2028 | 1,177 | 6.21 | ||||||||||||||
|
Other
(3)
|
2011 - 2040 | 44,241 | 5.59 | 2011 - 2040 | 44,893 | 5.64 | ||||||||||||||
|
Total senior fixed
|
479,950 | 2.80 | 545,680 | 3.02 | ||||||||||||||||
|
Senior floating:
|
||||||||||||||||||||
|
Medium-term notes
|
2011 - 2016 | 62,970 | 0.30 | 2011 - 2015 | 72,039 | 0.31 | ||||||||||||||
|
Other
(3)
|
2020 - 2037 | 421 | 6.61 | 2020 - 2037 | 386 | 4.92 | ||||||||||||||
|
Total senior floating
|
63,391 | 0.33 | 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 | 2,851 | 9.91 | 2019 | 2,663 | 9.91 | ||||||||||||||
|
Total subordinated fixed-rate
|
7,744 | 6.86 | 10,055 | 6.65 | ||||||||||||||||
|
Total long-term debt of Fannie
Mae
(5)
|
551,085 | 2.58 | 628,160 | 2.77 | ||||||||||||||||
|
Debt of consolidated
trusts
(3)
|
2011 - 2051 | 2,441,969 | 4.40 | 2011 - 2051 | 2,411,597 | 4.59 | ||||||||||||||
|
Total long-term debt
|
$ | 2,993,054 | 4.06 | % | $ | 3,039,757 | 4.22 | % | ||||||||||||
|
Outstanding callable debt of Fannie
Mae
(6)
|
$ | 158,150 | 2.40 | % | $ | 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 $754.2 billion and $792.6 billion as of September 30, 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 $77 million and $128 million as of September 30, 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 $99.9 billion and $95.4 billion as of September 30, 2011 and December 31, 2010, respectively. Reported amounts also include |
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Table of Contents
| unamortized discounts, premiums and other cost basis adjustments of $9.5 billion and $12.4 billion as of September 30, 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 $560.4 billion and $640.5 billion as of September 30, 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 31 presents the maturity profile, as of September 30,
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, increased 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 39% as of September 30, 2011,
compared with 32% as of December 31, 2010. The
weighted-average maturity of our outstanding debt that is
maturing within one year was 139 days as of
September 30, 2011, compared with 116 days as of
December 31, 2010.
Table
31: Maturity Profile of Outstanding Debt of Fannie
Mae Maturing Within One
Year
(1)
| (1) | Includes unamortized discounts, premiums and other cost basis adjustments of $212 million as of September 30, 2011. Excludes debt of consolidated trusts maturing within one year of $8.0 billion as of September 30, 2011. |
Table 32 presents the maturity profile, as of September 30,
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 57 months as of September 30, 2011
compared with approximately 58 months as of
December 31, 2010.
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Table
32: 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 $9.3 billion as of September 30, 2011. Excludes debt of consolidated trusts of $2.4 trillion as of September 30, 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 33 provides information on the composition of our cash and
other investments portfolio for the periods indicated.
Table
33: Cash and Other Investments Portfolio
| As of | ||||||||
|
September 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Cash and cash equivalents
|
$ | 24,307 | $ | 17,297 | ||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
35,950 | 11,751 | ||||||
|
Non-mortgage-related securities:
|
||||||||
|
U.S. Treasury
securities
(1)
|
40,755 | 27,432 | ||||||
|
Asset-backed
securities
(2)
|
2,465 | 5,321 | ||||||
|
Total non-mortgage-related securities
|
43,220 | 32,753 | ||||||
|
Total cash and other investments
|
$ | 103,477 | $ | 61,801 | ||||
| (1) | Excludes $1.1 billion and $4.0 billion of U.S. Treasury securities which are a component of cash equivalents as of September 30, 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 September 30, 2011. We have
increased the amount of cash and highly liquid non-mortgage
securities held in our portfolio to further bolster our
liquidity position.
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Table of Contents
Credit
Ratings
Our credit ratings from the major credit ratings organizations,
as well as the credit ratings of the U.S. government, are
primary factors that could affect our ability to access the
capital markets and our cost of funds. In addition, our credit
ratings are important when we seek to engage in certain
long-term transactions, such as derivative transactions.
On August 5, 2011, S&P lowered the long-term sovereign
credit rating on the U.S. to “AA+.” As a result
of this action, and because we directly rely on the
U.S. government for capital support, on August 8,
2011, S&P lowered our long-term senior debt rating to
“AA+” with a negative outlook. Previously, our
long-term senior debt had been rated by S&P as
“AAA” and had been on CreditWatch Negative. S&P
affirmed our short-term senior debt rating of
“A-1+”
and removed it from CreditWatch Negative. If S&P further
lowers the U.S. government’s sovereign credit rating,
we expect that it would lower our long-term debt rating
correspondingly.
Fitch Ratings (“Fitch”) affirmed its rating and stable
outlook of our long-term debt and Moody’s Investors Service
(“Moody’s”) confirmed the
U.S. government’s rating and our long-term debt
ratings. Moody’s also removed the designation that these
ratings were under review for possible downgrade and revised the
rating outlook for both the U.S. government’s rating
and our long-term debt ratings to negative.
S&P, Moody’s and Fitch have all indicated that, if
they were to lower the sovereign credit ratings on the U.S, they
would likely lower their ratings on the debt of Fannie Mae and
certain other government-related entities. We cannot predict
whether one or more of these ratings agencies will lower our
debt ratings in the future. See “Risk Factors” for a
discussion of the possibility of further downgrades and the
risks to our business relating to a decrease in our credit
ratings, which could include an increase in our borrowing costs,
limits on our ability to issue debt, and additional collateral
requirements under our derivatives contracts and other borrowing
arrangements.
Table 34 displays the credit ratings issued by the three major
credit rating agencies as of November 3, 2011.
Table
34: Fannie Mae Credit Ratings
| As of November 3, 2011 | ||||||
| S&P | Moody’s | Fitch | ||||
|
Long-term senior debt
|
AA+ | 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
(for Long Term Senior Debt and Qualifying Subordinated Debt) |
Negative
(for Long Term Senior Debt and Qualifying Subordinated Debt) |
Stable
(for AAA rated Long Term Issuer Default Rating) |
|||
Cash
Flows
Nine Months Ended September 30,
2011
. Cash and cash equivalents increased
from December 31, 2010 by $7.0 billion to
$24.3 billion as of September 30, 2011. Net cash
generated from investing activities totaled $327.8 billion,
resulting primarily from proceeds received from repayments of
loans held for investment. These net cash inflows were offset by
net cash used in operating activities of $6.7 billion and
net cash used in financing activities of $314.1 billion
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.
Nine Months Ended September 30,
2010
. Cash and cash equivalents increased
from December 31, 2009 by $4.6 billion to
$11.4 billion as of September 30, 2010. Net cash
generated from investing activities totaled
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Table of Contents
$381.4 billion, resulting primarily from proceeds received
from repayments of loans held for investment. These net cash
inflows were partially offset by net cash used in operating
activities of $42.4 billion resulting primarily from
purchases of trading securities. The net cash used in financing
activities of $334.4 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-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, Treasury’s ownership of the warrant to
purchase up to 79.9% of the total shares of our common stock
outstanding and the uncertainty regarding our future, we
effectively no longer have access to equity funding except
through draws under the senior preferred stock purchase
agreement.
Under the senior preferred stock purchase agreement, Treasury
made a commitment to provide funding, under certain conditions,
to eliminate deficits in our net worth. We have received a total
of $103.8 billion from Treasury pursuant to the senior
preferred stock purchase agreement as of September 30,
2011. The Acting Director of FHFA will submit a request for
$7.8 billion from Treasury under the senior preferred stock
purchase agreement to eliminate our net worth deficit as of
September 30, 2011, and request the receipt of those funds
on or prior to December 31, 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
$112.6 billion.
We 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.
The senior preferred stock purchase agreement provides that the
$200 billion maximum amount of the commitment from Treasury
will increase as necessary to accommodate any net worth
deficiencies attributable to periods during 2010, 2011 and 2012.
If we do not have a positive net worth as of December 31,
2012, then the amount of funding available under the senior
preferred stock purchase agreement after 2012 will be
$124.8 billion ($200 billion less $75.2 billion
in cumulative draws for net worth deficiencies through
December 31, 2009).
In the event we have a positive net worth as of
December 31, 2012, then the amount of funding available
after 2012 under the senior preferred stock purchase agreement
will depend on the size of that positive net worth relative to
the cumulative draws for net worth deficiencies attributable to
periods during 2010, 2011 and 2012, as follows:
| • | If our positive net worth as of December 31, 2012 is less than the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011 and 2012, then the amount of available funding will be $124.8 billion less our positive net worth as of December 31, 2012. | |
| • | If our positive net worth as of December 31, 2012 is greater than the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011 and 2012, then the amount of available funding will be $124.8 billion less the cumulative draws attributable to periods during 2010, 2011 and 2012. |
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As of November 7, 2011, the amount of the quarterly
commitment fee payable by us to Treasury under the senior
preferred stock purchase agreement had not been established;
however, Treasury has waived the quarterly commitment fee under
the senior preferred stock purchase agreement for each quarter
of 2011 due to the continued fragility of the U.S. mortgage
market and Treasury’s belief that imposing the commitment
fee would not generate increased compensation for taxpayers.
Treasury stated that it will reevaluate the situation during the
next calendar quarter to determine whether to set the quarterly
commitment fee for the first quarter of 2012.
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 third quarter dividend of $2.5 billion was declared by
the conservator and paid by us on September 30, 2011. Upon
receipt of the additional funds from Treasury in December 2011
that FHFA will request on our behalf, the annualized dividend on
the senior preferred stock will be $11.3 billion based on
the 10% dividend rate. The level of dividends on the senior
preferred stock will increase in future periods if, as we
expect, the conservator requests additional funds on our behalf
from Treasury under the senior preferred stock purchase
agreement.
OFF-BALANCE
SHEET ARRANGEMENTS
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 $58.9 billion as of September 30, 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
$3.3 billion as of September 30, 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
$17.4 billion as of September 30, 2011 and
$17.8 billion as of December 31, 2010. As of both
September 30, 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
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Table of Contents
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
and in this report.
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 macroeconomic 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 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 35 displays the composition of our entire mortgage credit
book of business as of the dates indicated. Our total
single-family mortgage credit book of business accounted for 93%
of our total mortgage credit book of business as of both
September 30, 2011 and December 31, 2010.
Table
35: Composition of Mortgage Credit Book of
Business
(1)
| As of September 30, 2011 | As of December 31, 2010 | |||||||||||||||||||||||
| Single-Family | Multifamily | Total | Single-Family | Multifamily | Total | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Mortgage loans and Fannie Mae
MBS
(2)
|
$ | 2,803,667 | $ | 174,779 | $ | 2,978,446 | $ | 2,826,994 | $ | 170,552 | $ | 2,997,546 | ||||||||||||
|
Unconsolidated Fannie Mae MBS, held by third
parties
(3)
|
17,899 | 1,754 | 19,653 | 19,468 | 1,855 | 21,323 | ||||||||||||||||||
|
Other credit
guarantees
(4)
|
22,556 | 16,726 | 39,282 | 18,625 | 16,994 | 35,619 | ||||||||||||||||||
|
Guaranty book of business
|
$ | 2,844,122 | $ | 193,259 | $ | 3,037,381 | $ | 2,865,087 | $ | 189,401 | $ | 3,054,488 | ||||||||||||
|
Agency mortgage-related
securities
(5)
|
16,574 | 33 | 16,607 | 18,797 | 24 | 18,821 | ||||||||||||||||||
|
Other mortgage-related securities
|
44,330 | 32,732 | 77,062 | 48,678 | 34,205 | 82,883 | ||||||||||||||||||
|
Mortgage credit book of business
|
$ | 2,905,026 | $ | 226,024 | $ | 3,131,050 | $ | 2,932,562 | $ | 223,630 | $ | 3,156,192 | ||||||||||||
|
Guaranty Book of Business Detail:
|
||||||||||||||||||||||||
|
Conventional Guaranty Book of
Business
(6)
|
$ | 2,771,191 | $ | 190,760 | $ | 2,961,951 | $ | 2,790,590 | $ | 186,712 | $ | 2,977,302 | ||||||||||||
|
Government Guaranty Book of
Business
(7)
|
$ | 72,931 | $ | 2,499 | $ | 75,430 | $ | 74,497 | $ | 2,689 | $ | 77,186 | ||||||||||||
69
Table of Contents
| (1) | Based on unpaid principal balance. Prior period amounts have been reclassified to conform to the current period presentation. | |
| (2) | Consists of mortgage loans and Fannie Mae MBS recognized in our condensed consolidated balance sheets. The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount. | |
| (3) | Reflects unpaid principal balance of unconsolidated Fannie Mae MBS, held by third-party investors. The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount. | |
| (4) | Includes single-family and multifamily credit enhancements that we have provided and that are not otherwise reflected in the table. | |
| (5) | Consists of mortgage-related securities issued by Freddie Mac and Ginnie Mae. | |
| (6) | Refers to mortgage loans and mortgage-related securities that are not guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies. | |
| (7) | Refers to mortgage loans and mortgage-related securities guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies. |
In the following sections, we discuss the mortgage credit risk
of the single-family and multifamily loans in our guaranty book
of business. The credit statistics reported below, unless
otherwise noted, pertain generally to the portion of our
guaranty book of business for which we have access to detailed
loan-level information, which constituted approximately 99% of
both our single-family conventional guaranty book of business
and our multifamily guaranty book of business, excluding
defeased loans, as of September 30, 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 and we rely on
lender representations regarding the accuracy of the
characteristics of loans in our guaranty book of business. See
“Risk Factors” in our 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.
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 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.
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.”
70
Table of Contents
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
update our underwriting standards and eligibility guidelines to
take into consideration changing market conditions.
Our mortgage servicers are the primary points of contact for
borrowers and perform a vital role in our efforts to reduce
defaults and pursue foreclosure alternatives. In the second
quarter of 2011, we issued new standards for mortgage servicers
regarding the management of delinquent loans, default prevention
and foreclosure time frames under FHFA’s directive to align
GSE policies for servicing delinquent mortgages. The new
standards, reinforced by new incentives and compensatory fees,
require servicers to take a more consistent approach for
homeowner communications, loan modifications and other workouts,
and, when necessary, foreclosures. The new standards are
designed to: (1) achieve effective contact with the
borrower, including creating a uniform standard for
communicating with the homeowner, determining reasons for
delinquency and assessing their ability to pay, and educating
homeowners on the availability of foreclosure prevention
options; (2) set clear timelines and establish clear and
consistent policies in the foreclosure process; and
(3) provide incentives to servicers to complete loan
workouts earlier in the homeowner’s delinquency and charge
servicers compensatory fees when they fail to have the proper
contact with the borrower. We believe these standards, which
became effective October 1, 2011, will bring greater
consistency, clarity, fairness and efficiency to the process,
help improve servicer performance, and hold servicers
accountable for their effectiveness in assisting homeowners.
In addition to these new standards, we have taken other steps to
improve the servicing of our delinquent loans including:
(1) updating our Servicing Guide, which should improve our
servicers’ ability to understand and comply with our
requirements and allow them to complete workouts earlier in the
delinquency process, thereby avoiding foreclosure;
(2) implementing our STAR program, a servicer performance
management system designed to encourage improvements in customer
service and foreclosure prevention outcomes for homeowners by
rating servicers on their performance in these areas; and
(3) transferring servicing on loan populations that include
loans with higher-risk characteristics to special servicers with
whom we have worked to develop high-touch protocols for
servicing these loans. For example, in the third quarter of
2011, we agreed to purchase from Bank of America, N.A. the
mortgage servicing rights associated with up to $74 billion
in unpaid principal balance of mortgage loans in our
single-family guaranty book of business, which represented
approximately 11% of our servicing portfolio with Bank of
America as of September 30, 2011. We believe retaining
special servicers to service these loans using high-touch
protocols will reduce our future credit losses on the
transferred loan portfolio, while enabling Bank of America to
better focus on our remaining portfolio with them.
For 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 September 30, 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.
71
Table of Contents
Table 36 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
36: Risk Characteristics of Single-Family
Conventional Business Volume and Guaranty Book of
Business
(1)
|
Percent of Single-Family
|
||||||||||||||||||||||||
| Conventional Business Volume (2) | ||||||||||||||||||||||||
|
For the
|
For the
|
Percent of Single-Family
|
||||||||||||||||||||||
|
Three Months
|
Nine Months
|
Conventional Guaranty
|
||||||||||||||||||||||
|
Ended
|
Ended
|
Book of
Business
(3)(4)
|
||||||||||||||||||||||
| September 30, | September 30, | As of | ||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | September 30, 2011 | December 31, 2010 | |||||||||||||||||||
|
Original LTV
ratio:
(5)
|
||||||||||||||||||||||||
|
<= 60%
|
26 | % | 30 | % | 28 | % | 30 | % | 24 | % | 24 | % | ||||||||||||
|
60.01% to 70%
|
14 | 16 | 15 | 15 | 16 | 16 | ||||||||||||||||||
|
70.01% to 80%
|
38 | 40 | 38 | 39 | 40 | 41 | ||||||||||||||||||
|
80.01% to
90%
(6)
|
10 | 8 | 9 | 9 | 10 | 9 | ||||||||||||||||||
|
90.01% to
100%
(6)
|
9 | 5 | 7 | 5 | 9 | 9 | ||||||||||||||||||
|
Greater than
100%
(6)
|
3 | 1 | 3 | 2 | 1 | 1 | ||||||||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
|
Weighted average
|
71 | % | 68 | % | 70 | % | 69 | % | 71 | % | 71 | % | ||||||||||||
|
Average loan amount
|
$ | 202,476 | $ | 218,328 | $ | 205,186 | $ | 219,551 | $ | 155,769 | $ | 155,531 | ||||||||||||
|
Estimated
mark-to-market
LTV
ratio:
(7)
|
||||||||||||||||||||||||
|
<= 60%
|
28 | % | 28 | % | ||||||||||||||||||||
|
60.01% to 70%
|
13 | 13 | ||||||||||||||||||||||
|
70.01% to 80%
|
19 | 19 | ||||||||||||||||||||||
|
80.01% to 90%
|
15 | 15 | ||||||||||||||||||||||
|
90.01% to 100%
|
9 | 9 | ||||||||||||||||||||||
|
Greater than 100%
|
16 | 16 | ||||||||||||||||||||||
|
Total
|
100 | % | 100 | % | ||||||||||||||||||||
|
Weighted average
|
78 | % | 77 | % | ||||||||||||||||||||
|
Product type:
|
||||||||||||||||||||||||
|
Fixed-rate:
(8)
|
||||||||||||||||||||||||
|
Long-term
|
67 | % | 72 | % | 69 | % | 72 | % | 72 | % | 74 | % | ||||||||||||
|
Intermediate-term
|
25 | 22 | 24 | 21 | 15 | 14 | ||||||||||||||||||
|
Interest-only
|
* | * | * | * | 2 | 2 | ||||||||||||||||||
|
Total fixed-rate
|
92 | 94 | 93 | 93 | 89 | 90 | ||||||||||||||||||
|
Adjustable-rate:
|
||||||||||||||||||||||||
|
Interest-only
|
1 | 1 | 1 | 2 | 3 | 4 | ||||||||||||||||||
|
Other ARMs
|
7 | 5 | 6 | 5 | 8 | 6 | ||||||||||||||||||
|
Total adjustable-rate
|
8 | 6 | 7 | 7 | 11 | 10 | ||||||||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
72
Table of Contents
|
Percent of Single-Family
|
||||||||||||||||||||||||
| Conventional Business Volume (2) | ||||||||||||||||||||||||
|
For the
|
For the
|
Percent of Single-Family
|
||||||||||||||||||||||
|
Three Months
|
Nine Months
|
Conventional Guaranty
|
||||||||||||||||||||||
|
Ended
|
Ended
|
Book of
Business
(3)(4)
|
||||||||||||||||||||||
| September 30, | September 30, | As of | ||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | September 30, 2011 | December 31, 2010 | |||||||||||||||||||
|
Number of property units:
|
||||||||||||||||||||||||
|
1 unit
|
97 | % | 98 | % | 97 | % | 98 | % | 97 | % | 97 | % | ||||||||||||
|
2-4 units
|
3 | 2 | 3 | 2 | 3 | 3 | ||||||||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
|
Property type:
|
||||||||||||||||||||||||
|
Single-family homes
|
91 | % | 92 | % | 91 | % | 91 | % | 91 | % | 91 | % | ||||||||||||
|
Condo/Co-op
|
9 | 8 | 9 | 9 | 9 | 9 | ||||||||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
|
Occupancy type:
|
||||||||||||||||||||||||
|
Primary residence
|
88 | % | 92 | % | 88 | % | 91 | % | 89 | % | 90 | % | ||||||||||||
|
Second/vacation home
|
5 | 4 | 5 | 4 | 5 | 4 | ||||||||||||||||||
|
Investor
|
7 | 4 | 7 | 5 | 6 | 6 | ||||||||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
|
FICO credit score at origination:
|
||||||||||||||||||||||||
|
< 620
|
1 | % | *% | 1 | % | 1 | % | 3 | % | 4 | % | |||||||||||||
|
620 to < 660
|
2 | 2 | 2 | 2 | 7 | 7 | ||||||||||||||||||
|
660 to < 700
|
8 | 6 | 8 | 7 | 14 | 15 | ||||||||||||||||||
|
700 to < 740
|
17 | 16 | 17 | 17 | 21 | 21 | ||||||||||||||||||
|
>= 740
|
72 | 76 | 72 | 73 | 55 | 53 | ||||||||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
|
Weighted average
|
759 | 764 | 760 | 760 | 737 | 735 | ||||||||||||||||||
|
Loan purpose:
|
||||||||||||||||||||||||
|
Purchase
|
32 | % | 27 | % | 26 | % | 26 | % | 32 | % | 33 | % | ||||||||||||
|
Cash-out refinance
|
15 | 19 | 17 | 20 | 28 | 29 | ||||||||||||||||||
|
Other refinance
|
53 | 54 | 57 | 54 | 40 | 38 | ||||||||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
|
Geographic
concentration:
(9)
|
||||||||||||||||||||||||
|
Midwest
|
15 | % | 16 | % | 15 | % | 15 | % | 15 | % | 15 | % | ||||||||||||
|
Northeast
|
19 | 19 | 20 | 20 | 19 | 19 | ||||||||||||||||||
|
Southeast
|
19 | 18 | 20 | 18 | 24 | 24 | ||||||||||||||||||
|
Southwest
|
16 | 15 | 16 | 15 | 15 | 15 | ||||||||||||||||||
|
West
|
31 | 32 | 29 | 32 | 27 | 27 | ||||||||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
|
Origination year:
|
||||||||||||||||||||||||
|
<= 2001
|
2 | % | 2 | % | ||||||||||||||||||||
|
2002
|
3 | 3 | ||||||||||||||||||||||
|
2003
|
9 | 11 | ||||||||||||||||||||||
|
2004
|
6 | 7 | ||||||||||||||||||||||
|
2005
|
7 | 9 | ||||||||||||||||||||||
|
2006
|
7 | 8 | ||||||||||||||||||||||
|
2007
|
10 | 12 | ||||||||||||||||||||||
|
2008
|
8 | 9 | ||||||||||||||||||||||
|
2009
|
18 | 21 | ||||||||||||||||||||||
|
2010
|
20 | 18 | ||||||||||||||||||||||
|
2011
|
10 | — | ||||||||||||||||||||||
|
Total
|
100 | % | 100 | % | ||||||||||||||||||||
73
Table of Contents
| * | 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 September 30, 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. | |
| (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 guarantee. | |
| (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 4.6% of our single-family conventional guaranty book of business as of September 30, 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 and “Risk Management—Credit Risk Management—Single Family Mortgage Credit Risk Management—Credit Profile Summary” in this report 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
nine months of 2011 have a strong credit profile with a weighted
average original LTV ratio of 70%, a weighted average FICO
credit score of 760, 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 loans), the LTV ratios at origination
for our 2011 acquisitions to date are higher than for our 2009
and 2010 acquisitions.
Whether our future acquisitions 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. 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 nine months
of 2011 was further influenced by our acquisitions of refinanced
loans. Refinanced loans, which include Refi Plus loans,
comprised 74% of our single-family acquisitions in the first
nine months of 2011. Refinanced loans generally have a strong
credit profile because refinancing indicates borrowers’
ability to make their mortgage payment and desire to maintain
homeownership, but Refi Plus loans, which may have original LTV
ratios as high as 125% and in some cases lower FICO credit
scores than we generally require, may not ultimately perform as
well as traditional refinanced loans. However, it is too early
to determine whether the performance of loans with higher risk
characteristics refinanced under the Refi Plus program will
perform differently from other refinanced loans. Refi Plus
offers expanded refinance opportunities for eligible Fannie Mae
borrowers that may help prevent
74
Table of Contents
future delinquencies and defaults. 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 19% of our total single-family conventional
business volume for the first nine months of 2011 consisted of
loans with LTV ratios higher than 80% at the time of purchase
compared with 16% for the first nine months of 2010.
On October 24, 2011, FHFA, Fannie Mae, and Freddie Mac
announced changes to HARP. While HARP previously limited
eligibility to borrowers with mortgage loans that had LTV ratios
no greater than 125 percent, the new HARP guidelines remove
that ceiling when the refinancing is into a new fixed-rate
mortgage. See “Legislative and Regulatory
Developments” for a discussion on the changes to HARP.
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 78% as of September 30, 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 16% as of September 30,
2011 and 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.
Alt-A and
Subprime Loans
Our exposure to Alt-A and subprime loans included in our
single-family conventional guaranty book of business, as defined
in this section, 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 $188.4 billion as
of September 30, 2011, represented approximately 6.8% 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
$6.0 billion as of September 30, 2011, represented
approximately 0.2% of our single-family conventional guaranty
book of business. See “Table 36: Risk Characteristics of
Single-Family Conventional Business Volume and Guaranty Book of
Business” for additional information on our single-family
book of business.
Jumbo-Conforming
and High-Balance Loans
The outstanding unpaid principal balance of our jumbo-conforming
and high-balance loans was $125.8 billion, or 4.6% of our
single-family conventional guaranty book of business, as of
September 30, 2011 and $109.7 billion, or 3.9% of our
single-family conventional guaranty book of business, as of
December 31, 2010. The standard conforming loan limit for a
one-unit
property was $417,000 in 2011 and 2010. Our loan limits
75
Table of Contents
were higher in specified high-cost areas, reaching as high as
$729,750 for
one-unit
properties; however, our loan limits for loans originated after
September 30, 2011 decreased in specified high-cost areas
to an amount not to exceed $625,500 for
one-unit
properties. Unlike FHA, which is not subject to current loan
limits for refinancing its existing loans above current limits,
our current loan limits apply to all new acquisitions.
Therefore, we expect refinances of our existing loans above
current limits to be significantly reduced. 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.
Reverse
Mortgages
The outstanding unpaid principal balance of reverse mortgage
whole loans and Fannie Mae MBS backed by reverse mortgage loans
in our guaranty book of business was $50.9 billion as of
September 30, 2011 and $50.8 billion as of
December 31, 2010. The balance of our reverse mortgage
loans 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.
Problem
Loan Management
Our problem loan management strategies are primarily focused on
reducing defaults to avoid losses that would otherwise occur and
pursuing foreclosure alternatives to attempt to minimize the
severity of the losses we incur. If a borrower does not make
required payments, or is in jeopardy of not making payments, we
work with the servicers of our loans to offer workout solutions
to minimize the likelihood of foreclosure as well as the
severity of loss. Our loan workouts reflect our various types of
home retention strategies, including loan modifications,
repayment plans and forbearances, and foreclosure alternatives,
including preforeclosure sales and
deeds-in-lieu
of foreclosure. When appropriate, we seek to move to foreclosure
expeditiously. For additional discussion on our efforts to
reduce defaults and credit losses, see “Executive
Summary—Reducing Credit Losses on Our Legacy Book of
Business.”
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.
76
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 dates indicated.
Table
37: Delinquency Status of Single-Family Conventional
Loans
| As of | ||||||||||||
|
September 30,
|
December 31,
|
September 30,
|
||||||||||
| 2011 | 2010 | 2010 | ||||||||||
|
As of period end:
|
||||||||||||
|
Delinquency status:
|
||||||||||||
|
30 to 59 days delinquent
|
2.16 | % | 2.32 | % | 2.40 | % | ||||||
|
60 to 89 days delinquent
|
0.75 | 0.87 | 0.91 | |||||||||
|
Seriously delinquent
|
4.00 | 4.48 | 4.56 | |||||||||
|
Percentage of seriously delinquent loans that have been
delinquent for more than 180 days
|
71 | % | 67 | % | 66 | % | ||||||
The number of loans at risk of becoming seriously delinquent has
diminished in 2011 as early stage delinquencies have decreased.
As of September 30, 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 quarter since the first quarter of 2010. The
decrease in our serious delinquency rate in 2010 and the first
nine months of 2011 was primarily the result of home retention
solutions, as well as foreclosure alternatives and completed
foreclosures. The decrease is also attributable to our
acquisition of loans with stronger credit profiles since the
beginning of 2009, as these loans have become an increasingly
larger portion of our single-family guaranty book of business,
resulting in a smaller percentage of our loans becoming
seriously delinquent.
Although our single-family serious delinquency rate has
decreased since the first quarter of 2010, our serious
delinquency rate and the period of time that loans remain
seriously delinquent have been negatively affected in recent
periods by the increase in the average number of days it is
taking to complete a foreclosure. Continuing issues in the
servicer foreclosure process, changes in state foreclosure laws,
and new court rules and proceedings have lengthened the time it
takes to foreclose on a mortgage loan in many states. In
addition, servicers and states are dealing with the backlog of
foreclosures resulting from these delays and from the elevated
level of foreclosures resulting from the housing market
downturn. For more information on the delays in the foreclosure
process, see “Executive Summary—Reducing Credit Losses
on Our Legacy Book of Business.” We expect serious
delinquency rates will continue to be affected in the future by
home price changes, changes in other macroeconomic conditions,
the length of the foreclosure process, and the extent to which
borrowers with modified loans continue to make timely payments.
Table 38 provides a comparison, by geographic region and by
loans with and without credit enhancement, of the serious
delinquency rates as of the dates indicated for single-family
conventional loans in our single-family guaranty book of
business.
77
Table of Contents
Table
38: Single-Family Serious Delinquency Rates
| As of | ||||||||||||||||||||||||
| September 30, 2011 | December 31, 2010 | September 30, 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 | % | 3.89 | % | 15 | % | 4.16 | % | 16 | % | 4.16 | % | ||||||||||||
|
Northeast
|
19 | 4.36 | 19 | 4.38 | 19 | 4.27 | ||||||||||||||||||
|
Southeast
|
24 | 5.78 | 24 | 6.15 | 24 | 6.19 | ||||||||||||||||||
|
Southwest
|
15 | 2.34 | 15 | 3.05 | 15 | 3.19 | ||||||||||||||||||
|
West
|
27 | 3.04 | 27 | 4.06 | 26 | 4.35 | ||||||||||||||||||
|
Total single-family conventional loans
|
100 | % | 4.00 | % | 100 | % | 4.48 | % | 100 | % | 4.56 | % | ||||||||||||
|
Single-family conventional loans:
|
||||||||||||||||||||||||
|
Credit enhanced
|
14 | % | 9.43 | % | 15 | % | 10.60 | % | 15 | % | 10.66 | % | ||||||||||||
|
Non-credit enhanced
|
86 | 3.10 | 85 | 3.40 | 85 | 3.45 | ||||||||||||||||||
|
Total single-family conventional loans
|
100 | % | 4.00 | % | 100 | % | 4.48 | % | 100 | % | 4.56 | % | ||||||||||||
| (1) | See footnote 9 to “Table 36: 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. Some
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.
Table 39 presents the serious delinquency rates and other
financial information for our single-family conventional loans
with some of these higher-risk characteristics as of the periods
indicated. The reported categories are not mutually exclusive.
78
Table of Contents
Table
39: Single-Family Conventional Serious Delinquency
Rate Concentration Analysis
| As of | ||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2011 | December 31, 2010 | September 30, 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
|
$ | 67,562 | 2 | % | 3.78 | % | 110 | % | $ | 71,052 | 2 | % | 6.23 | % | 105 | % | $ | 71,636 | 2 | % | 6.39 | % | 104 | % | ||||||||||||||||||||||||
|
California
|
510,199 | 19 | 2.70 | 79 | 507,598 | 18 | 3.89 | 76 | 498,462 | 18 | 4.28 | 75 | ||||||||||||||||||||||||||||||||||||
|
Florida
|
178,036 | 6 | 11.90 | 107 | 184,101 | 7 | 12.31 | 107 | 186,010 | 7 | 12.10 | 104 | ||||||||||||||||||||||||||||||||||||
|
Nevada
|
29,200 | 1 | 7.53 | 135 | 31,661 | 1 | 10.66 | 128 | 32,195 | 1 | 11.24 | 127 | ||||||||||||||||||||||||||||||||||||
|
Select Midwest
states (2) |
286,389 | 10 | 4.55 | 82 | 292,734 | 11 | 4.80 | 80 | 294,174 | 11 | 4.78 | 78 | ||||||||||||||||||||||||||||||||||||
|
All other states
|
1,691,570 | 62 | 3.20 | 71 | 1,695,615 | 61 | 3.46 | 71 | 1,684,827 | 61 | 3.51 | 69 | ||||||||||||||||||||||||||||||||||||
|
Product type:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Alt-A
|
188,385 | 7 | 12.71 | 99 | 211,770 | 8 | 13.87 | 96 | 219,968 | 8 | 13.79 | 93 | ||||||||||||||||||||||||||||||||||||
|
Subprime
|
5,968 | * | 23.91 | 108 | 6,499 | * | 28.20 | 103 | 6,665 | * | 28.50 | 100 | ||||||||||||||||||||||||||||||||||||
|
Vintages:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
2006
|
196,843 | 7 | 11.81 | 108 | 232,009 | 8 | 12.19 | 104 | 246,502 | 9 | 11.84 | 101 | ||||||||||||||||||||||||||||||||||||
|
2007
|
283,866 | 10 | 12.63 | 109 | 334,110 | 12 | 13.24 | 104 | 356,063 | 13 | 13.04 | 100 | ||||||||||||||||||||||||||||||||||||
|
All other vintages
|
2,282,247 | 83 | 2.41 | 71 | 2,216,642 | 80 | 2.62 | 70 | 2,164,739 | 78 | 2.64 | 68 | ||||||||||||||||||||||||||||||||||||
|
Estimated
mark-to-market
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
LTV ratio:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Greater than
100%
(1)
|
463,241 | 16 | 14.53 | 131 | 435,991 | 16 | 17.70 | 130 | 400,998 | 15 | 18.57 | 130 | ||||||||||||||||||||||||||||||||||||
|
Select combined risk characteristics:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Original LTV ratio > 90% and FICO score < 620
|
19,587 | 1 | 18.99 | 112 | 21,205 | 1 | 21.41 | 109 | 21,806 | 1 | 21.80 | 107 | ||||||||||||||||||||||||||||||||||||
| * | 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. Partnering with our servicers, civic and community
leaders and housing industry partners, we have launched a series
of Mortgage Help Centers nationwide to accelerate the response
time for struggling borrowers with loans owned by us. As of
September 30, 2011, we have established 11 Mortgage Help
Centers which completed nearly 4,100 home retention solutions in
the first nine months of 2011. Additionally, we currently offer
up to twelve months forbearance for those homeowners who are
unemployed as an additional tool to help homeowners avoid
foreclosure.
Our approach to workouts continues to focus on the large number
of borrowers facing financial hardships. Accordingly, the vast
majority of loan modifications we completed during the first
nine months of 2011 were, as in recent periods, concentrated on
deferring or lowering the borrowers’ monthly mortgage
payments to allow borrowers to work through their hardships.
79
Table of Contents
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 across the
nation, we developed the Short Sale 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.
Table 40 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
40: Statistics on Single-Family Loan
Workouts
|
For the
|
For the
|
For the
|
||||||||||||||||||||||
|
Nine Months Ended
|
Year Ended
|
Nine Months Ended
|
||||||||||||||||||||||
| September 30, 2011 | December 31, 2010 | September 30, 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
|
$ | 32,658 | 161,404 | $ | 82,826 | 403,506 | $ | 66,206 | 321,814 | |||||||||||||||
|
Repayment plans and forbearances completed
|
3,769 | 26,801 | 4,385 | 31,579 | 3,258 | 23,606 | ||||||||||||||||||
|
HomeSaver Advance first-lien loans
|
— | — | 688 | 5,191 | 661 | 5,165 | ||||||||||||||||||
| 36,427 | 188,205 | 87,899 | 440,276 | 70,125 | 350,585 | |||||||||||||||||||
|
Foreclosure alternatives:
|
||||||||||||||||||||||||
|
Preforeclosure sales
|
11,231 | 50,966 | 15,899 | 69,634 | 12,775 | 55,788 | ||||||||||||||||||
|
Deeds-in-lieu
of foreclosure
|
1,179 | 6,636 | 1,053 | 5,757 | 732 | 3,971 | ||||||||||||||||||
| 12,410 | 57,602 | 16,952 | 75,391 | 13,507 | 59,759 | |||||||||||||||||||
|
Total loan workouts
|
$ | 48,837 | 245,807 | $ | 104,851 | 515,667 | $ | 83,632 | 410,344 | |||||||||||||||
|
Loan workouts as a percentage of single-family guaranty book of
business
(1)
|
2.29 | % | 1.84 | % | 3.66 | % | 2.87 | % | 3.91 | % | 3.05 | % | ||||||||||||
| (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 nine months of
2011 decreased compared with the first nine months of 2010,
primarily because we began to require that non-HAMP
modifications go through a trial period, which initially lowers
the number of modifications that can become permanent in any
particular period. The number of foreclosure alternatives we
agreed to during the first nine months of 2011 remains high as
these are favorable solutions for a large number of borrowers.
We expect the volume of our foreclosure alternatives to remain
high throughout the remainder of 2011.
During the first nine months of 2011, we initiated approximately
165,000 trial modifications, including HAMP and non-HAMP,
compared with approximately 135,000 trial modifications during
the first nine months of 2010. We also initiated other types of
workouts, such as repayment plans and forbearances. It is
difficult to predict how many of these trial modifications and
initiated plans will be completed.
Table 41 displays the profile of loan modifications (HAMP and
non-HAMP) provided to borrowers for the periods indicated.
80
Table of Contents
Table
41: Single-Family Loan Modification Profile
| 2011 |
Full Year
|
|||||||||||||||||||
| YTD | Q3 | Q2 | Q1 | 2010 | ||||||||||||||||
|
Term extension, interest rate reduction, or combination of
both
(1)
|
98 | % | 100 | % | 99 | % | 96 | % | 93 | % | ||||||||||
|
Initial reduction in monthly
payment
(2)
|
96 | 97 | 97 | 94 | 91 | |||||||||||||||
|
Estimated
mark-to-market
LTV ratio > 100%
|
62 | 61 | 62 | 64 | 53 | |||||||||||||||
|
Troubled debt
restructurings
(3)
|
100 | 100 | 98 | 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. | |
| (3) | Percentage for the nine months ended September 30, 2011 reflects the impact of the new TDR accounting standard which was retrospectively adopted beginning January 1, 2011. Prior periods have not been revised. |
The majority of our modifications in 2010 and the first nine
months of 2011 were made 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 September 30, 2011,
the serious delinquency rate for loans with a
mark-to-market
LTV ratio greater than 100% was 15%, compared with our overall
average single-family serious delinquency rate of 4.00%.
Approximately 69% of loans modified during the first nine months
of 2010 were current or had paid off as of one year following
the loan modification date. In comparison, 44% of loans modified
during the first nine months 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 and we believe the
performance of our workouts will be highly dependent on economic
factors, such as unemployment rates, household wealth and
income, and home prices. Modifications, even those with reduced
monthly payments, may also not be sufficient to help borrowers
with second liens and other significant non-mortgage debt
obligations. FHFA, other agencies of the U.S. government or
Congress may ask us to undertake new initiatives to support the
housing and mortgage markets should our current modification
efforts ultimately not perform in a manner that results in the
stabilization of these markets. See “Risk Factors” for
a discussion of efforts we may be required or asked to undertake
and their potential affect on us.
REO
Management
Foreclosure and REO activity affect the level of credit losses.
Table 42 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.
81
Table of Contents
Table
42: Single-Family Foreclosed Properties
|
For the Nine Months
|
||||||||
| Ended September 30, | ||||||||
| 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
|
32,074 | 48,930 | ||||||
|
Northeast
|
7,091 | 12,022 | ||||||
|
Southeast
|
36,433 | 66,313 | ||||||
|
Southwest
|
36,324 | 44,378 | ||||||
|
West
|
40,518 | 44,473 | ||||||
|
Total properties acquired through
foreclosure
(1)
|
152,440 | 216,116 | ||||||
|
Dispositions of REO
|
(192,313 | ) | (135,484 | ) | ||||
|
End of period inventory of single-family foreclosed properties
(REO)
(1)
|
122,616 | 166,787 | ||||||
|
Carrying value of single-family foreclosed properties (dollars
in
millions)
(3)
|
$ | 11,039 | $ | 16,394 | ||||
|
Single-family foreclosure
rate
(4)
|
1.15 | % | 1.61 | % | ||||
| (1) | Includes acquisitions through deeds-in-lieu of foreclosure. | |
| (2) | See footnote 9 to “Table 36: 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 or deeds-in-lieu of 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,
continues to result in a high level of mortgage loans that
transition from delinquent to REO status, either through
foreclosure or
deed-in-lieu
of foreclosure. Our foreclosure rates remain high; however,
foreclosure levels were lower than what they otherwise would
have been during the first nine months of 2011 due to delays in
the processing of foreclosures caused by continuing foreclosure
process issues encountered by our servicers, changes in state
foreclosure laws, and new court rules and proceedings.
Additionally, foreclosure levels 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 delay in potential
foreclosures, as well as an increase in the number of
dispositions of REO properties, has resulted in a decrease in
the ending inventory of foreclosed properties since
December 31, 2010.
The percentage of our single-family foreclosed properties that
we determined were unable to market for sale was 46% as of
September 30, 2011 compared with 41% as of
December 31, 2010. The two largest concentrations of the
unable to market for sale inventory are: (1) properties
that are still occupied by the person or personal property, and
the eviction process is not yet complete (“occupied
status”); and (2) properties that are within the
period during which state law allows the former mortgagor and
second lien holders to redeem the property (“redemption
status”). Being in occupied status lengthens the time a
property remains in our REO inventory by an average of one to
three months, and occupied status properties represented
approximately 32% of our unable to market for sale inventory as
of September 30, 2011 compared with approximately 40% as of
December 31, 2010. Being in redemption status lengthens the
time a property remains in our REO inventory by an average of
two to six months, and redemption status properties represented
approximately 26% of our unable to market for sale inventory as
of September 30, 2011 compared with approximately 27% as of
December 31, 2010. As we are unable to market a higher
portion of our
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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.
As shown in Table 43 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
43: Single-Family Acquired Property Concentration
Analysis
| For the Nine Months Ended | ||||||||||||||||
| As of | September 30, 2011 | September 30, 2010 | ||||||||||||||
| September 30, 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
|
28 | % | 28 | % | 35 | % | 36 | % | ||||||||
|
Illinois, Indiana, Michigan, and Ohio
|
10 | 11 | 16 | 18 | ||||||||||||
| (1) | Calculated based on the unpaid principal balance of loans, where we have detailed loan-level information, for each category divided by the unpaid principal balance of our single-family conventional guaranty book of business. | |
| (2) | Calculated based on the number of properties acquired through foreclosure during the period divided by the total number of properties acquired through foreclosure. |
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.
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, or
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 85% of our multifamily guaranty book of business as
of September 30, 2011 compared with 84% as of
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.
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Table of Contents
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 non-DUS lenders typically share or absorb credit
losses based on a negotiated percentage of the loan or the pool
balance.
For our purchase or guarantee of multifamily mortgage loans, we
and our lender partners rely significantly on sound underwriting
standards, which often include third party appraisals and actual
cash flow analysis. Our standards for multifamily loans specify
maximum original LTV ratio and minimum debt service coverage
ratio (“DSCR”) that vary based on the loan
characteristics. Original LTV reflects the borrower equity in
the transaction. Similarly, original DSCR reflects the
anticipated cash flow on the transaction at underwriting, with
additional measures taken to address higher risk loans. Original
LTV and DSCR values have proven to be reliable indicators of
future credit performance.
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 arrangement 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 September 30, 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 September 30, 2011 and
December 31, 2010. We present the current risk profile of
our multifamily guaranty book of business in “Note 6,
Financial Guarantees.”
We and our lender partners 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 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, in addition to capitalization rates. 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 these lenders’ and our other third
party service providers’ performance for compliance with
our asset management criteria.
As a part of our ongoing credit risk management process, we have
worked with our lender partners over the last two years to
collect limited quarterly property operating measures from
borrowers, in addition to more complete annual financial
updates, for those loans where we are entitled contractually to
receive such information. As part of our asset management
process, we focus on loans with an estimated current DSCR below
1.0, as that is an indicator of heightened default risk. The
percentage of loans in our multifamily guaranty book of business
with a current debt service coverage ratio less than 1.0 was
approximately 8% as of September 30, 2011 and approximately
10% as of December 31, 2010. Our estimates of current DSCRs
are based on the latest available income information for these
properties and our assessments of market conditions. Although we
use the most recently available results of our multifamily
borrowers, there is a significant lag in reporting as they
prepare their results in the normal course of business.
Problem
Loan Management and Foreclosure Prevention
The number of multifamily loans at risk of becoming seriously
delinquent has decreased in 2011, as early-stage delinquencies
have decreased. Since delinquency rates are a lagging indicator,
we expect to continue to incur additional credit losses. We
periodically refine our underwriting standards in response to
market
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Table of Contents
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.
Problem
Loan Statistics
Table 44 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
44: Multifamily Serious Delinquency Rates
| As of | ||||||||||||||||||||||||
| September 30, 2011 | December 31, 2010 | September 30, 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 | % | 0.54 | % | 89 | % | 0.67 | % | 89 | % | 0.60 | % | ||||||||||||
|
Non-credit enhanced
|
10 | 0.86 | 11 | 1.01 | 11 | 1.06 | ||||||||||||||||||
|
Total multifamily loans
|
100 | % | 0.57 | % | 100 | % | 0.71 | % | 100 | % | 0.65 | % | ||||||||||||
The multifamily serious delinquency rate decreased as of
September 30, 2011 compared with both December 31,
2010 and September 30, 2010 as national multifamily market
fundamentals continued to improve. Table 45 provides a
comparison of our multifamily serious delinquency rates for
loans acquired through DUS lenders and loans acquired through
non-DUS lenders.
Table
45: Multifamily Concentration Analysis
|
Percentage
|
||||||||||||||||||||||||||||||||
|
of
|
||||||||||||||||||||||||||||||||
|
Multifamily
|
||||||||||||||||||||||||||||||||
|
Credit
|
||||||||||||||||||||||||||||||||
|
Losses
|
||||||||||||||||||||||||||||||||
| As of |
For the Nine
|
|||||||||||||||||||||||||||||||
| September 30, 2011 | December 31, 2010 | September 30, 2010 |
Months
|
|||||||||||||||||||||||||||||
|
Percentage
|
Serious
|
Percentage
|
Serious
|
Percentage
|
Serious
|
Ended
|
||||||||||||||||||||||||||
|
of Book
|
Delinquency
|
of Book
|
Delinquency
|
of Book
|
Delinquency
|
September 30, | ||||||||||||||||||||||||||
| Outstanding | Rate | Outstanding | Rate | Outstanding | Rate | 2011 | 2010 | |||||||||||||||||||||||||
|
DUS small balance
loans
(1)
|
8 | % | 0.64 | % | 8 | % | 0.55 | % | 8 | % | 0.57 | % | 7 | % | 7 | % | ||||||||||||||||
|
DUS non small balance
loans
(2)
|
72 | 0.46 | 70 | 0.56 | 69 | 0.46 | 72 | 63 | ||||||||||||||||||||||||
|
Non-DUS small balance
loans
(1)
|
9 | 1.27 | 10 | 1.47 | 11 | 1.58 | 14 | 6 | ||||||||||||||||||||||||
|
Non-DUS non small balance
loans
(2)
|
11 | 0.67 | 12 | 0.97 | 12 | 0.95 | 7 | 24 | ||||||||||||||||||||||||
| (1) | Loans with original unpaid principal balances less than or equal to $3 million as well as loans in high cost markets with original unpaid principal balances less than or equal to $5 million. | |
| (2) | Loans with original unpaid principal balances greater than $3 million as well as loans in high cost markets 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, Florida, Michigan, Nevada 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
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Table of Contents
in certain areas of these states. These states accounted for 45%
of multifamily serious delinquencies but only 9% of the
multifamily guaranty book of business as of September 30,
2011.
REO
Management
Foreclosure and REO activity affect the level of credit losses.
Table 46 compares our held for sale multifamily REO balances for
the periods indicated.
Table
46: Multifamily Foreclosed Properties
|
For the Nine
|
||||||||
|
Months Ended
|
||||||||
| September 30, | ||||||||
| 2011 | 2010 | |||||||
|
Multifamily foreclosed properties (number of properties):
|
||||||||
|
Beginning of period inventory of multifamily foreclosed
properties (REO)
|
222 | 73 | ||||||
|
Total properties acquired through foreclosure
|
190 | 160 | ||||||
|
Disposition of REO
|
(138 | ) | (49 | ) | ||||
|
End of period inventory of multifamily foreclosed properties
(REO)
|
274 | 184 | ||||||
|
Carrying value of multifamily foreclosed properties (dollars in
millions)
|
$ | 561 | $ | 523 | ||||
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 have continued to improve 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 75% of our single-family guaranty
book of business as of September 30, 2011, compared to 77%
as of December 31, 2010. Our largest mortgage servicer is
Bank of America, N.A. which, together with its affiliates,
serviced approximately 24% of our single-family guaranty book of
business as of September 30, 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 September 30,
2011. In addition, Wells Fargo Bank serviced over 10% of our
multifamily guaranty book of business as of both
September 30, 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 nine months of 2011, our
primary mortgage servicers have generally continued to meet
their financial obligations to us. However, many of our largest
servicer counterparties continue to reevaluate the effectiveness
of their process controls. Many servicers are
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Table of Contents
subject to consent orders by their regulators that require the
servicers to correct foreclosure process deficiencies and
improve their servicing and foreclosure practices. This has
resulted in extended foreclosure timelines and therefore,
additional holding costs for us, such as property taxes and
insurance, repairs and maintenance, and valuation adjustments
due to home price changes.
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.” The number of our repurchase
requests remained high during the first nine months of 2011. The
aggregate unpaid principal balance of loans repurchased by our
seller/servicers pursuant to their contractual obligations was
approximately $8.8 billion in the first nine months of
2011, compared with $4.7 billion during the first nine
months of 2010. In addition, as of September 30, 2011, we
had $9.5 billion in outstanding repurchase requests related
to loans that had been reviewed for potential breaches of
contractual obligations, compared with $5.0 billion as of
December 31, 2010. As of September 30, 2011,
approximately 45% of our total outstanding repurchase requests
had been made to one of our seller/servicers, compared with 41%
as of December 31, 2010. As of September 30, 2011, 25%
of our outstanding repurchase requests had been outstanding for
more than 120 days from either the original repurchase
request date or, for lenders remitting after the REO is
disposed, the date of our final loss determination, compared
with 30% as of December 31, 2010. As of September 30,
2011, approximately 48% of our repurchase requests outstanding
for more than 120 days had been made to one of our
seller/servicers, compared with 37% 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 the unpaid
principal balance of the loan. 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.
In June 2011, we issued an announcement that (1) reminded
lenders of their existing obligations with respect to mortgage
insurance; (2) required lenders to report to us mortgage
insurance rescissions, mortgage insurer-initiated cancellations,
and claim denials; (3) confirmed our repurchase policies
with respect to these actions; (4) temporarily extended
from 30 to 90 days our timeframe within which lenders must
repurchase loans and provided an appeal process;
(5) required that all outstanding mortgage
insurance-related repurchase demands as of April 30, 2011
be satisfactorily resolved by September 30, 2011;
(6) reiterated our process for the redelivery of certain
repurchased loans; and (7) reiterated our remedies if a
lender fails to meet our repurchase requirements.
Not all outstanding mortgage insurance related repurchase
demands as of April 30, 2011 were resolved by
September 30, 2011. We entered into “tolling
agreements” with three of our major lenders that required
these lenders to post collateral based on their maximum exposure
in exchange for an extension until June 2012 to resolve their
outstanding mortgage insurance related repurchase demands. In
addition, we provided some of our lenders that did not have a
substantial amount of unresolved mortgage insurance related
demands, an extension until December 2011. One of our mortgage
seller/servicers has disputed these demands and accounts for
nearly half of these unresolved mortgage insurance related
requests.
We continue to aggressively pursue our contractual rights
associated with these repurchase requests. If we are unable to
resolve these matters to our satisfaction, we may seek
additional remedies. Failure by a seller/servicer to repurchase
a loan or to otherwise make us whole for our losses, may result
in the imposition of certain sanctions including, but not
limited to:
| • | requiring the posting of collateral, | |
| • | denying transfer of servicing requests or denying pledged servicing requests, | |
| • | imposing limits on trading desk transactions, |
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Table of Contents
| • | imposing compensatory fees, | |
| • | modifying or suspending any contract or agreement with a lender, or | |
| • | suspending or terminating a lender or imposing some other formal sanction on a lender. |
If we are unable to resolve our repurchase requests, either
through collection or additional remedies, we will not recover
the losses we have recognized from the associated loans.
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. We expect that the amount of our outstanding
repurchase requests will remain high.
If a significant seller/servicer counterparty, or a number of
seller/servicers, 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 estimate our allowance
for loan losses assuming the benefit of repurchase demands only
from those counterparties we determine have the financial
capacity to fulfill this obligation. Accordingly, as of
September 30, 2011, we do not believe that we have any
exposure to seller/servicers that lacked the financial capacity
to honor their contractual obligations as we assumed no benefit
from repurchase demands due to us from these counterparties in
estimating our allowance for loan loss.
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
Table 47 presents our maximum potential loss recovery for the
primary and pool mortgage insurance coverage on single-family
loans in our guaranty book of business and our unpaid principal
balance covered by insurance for our mortgage insurer
counterparties as of September 30, 2011 and
December 31, 2010. The table includes our top eight
mortgage insurer counterparties, which provided over 99% of our
total mortgage insurance coverage on single-family loans in our
guaranty book of business as of both September 30, 2011 and
December 31, 2010.
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Table of Contents
Table
47: Mortgage Insurance Coverage
|
Unpaid Principal Balance
|
||||||||||||||||||||||||
| Maximum Coverage (1) | Covered By Insurance (2) | |||||||||||||||||||||||
|
As of September 30,
|
As of
|
As of
|
As of
|
|||||||||||||||||||||
| 2011 |
December 31,
|
September 30,
|
December 31,
|
|||||||||||||||||||||
|
Counterparty:
(3)
|
Primary | Pool | Total | 2010 | 2011 | 2010 | ||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Mortgage Guaranty Insurance Corporation
|
$ | 20,322 | $ | 1,681 | $ | 22,003 | $ | 23,277 | $ | 94,620 | $ | 101,823 | ||||||||||||
|
Radian Guaranty, Inc.
|
14,683 | 449 | 15,132 | 15,370 | 62,060 | 64,042 | ||||||||||||||||||
|
United Guaranty Residential Insurance Company
|
13,913 | 202 | 14,115 | 14,044 | 58,345 | 58,416 | ||||||||||||||||||
|
Genworth Mortgage Insurance Corporation
|
13,655 | 66 | 13,721 | 14,331 | 55,161 | 57,845 | ||||||||||||||||||
|
PMI Mortgage Insurance Co.
|
11,387 | 265 | 11,652 | 12,359 | 50,132 | 53,768 | ||||||||||||||||||
|
Republic Mortgage Insurance Company
|
8,736 | 925 | 9,661 | 10,566 | 41,218 | 46,660 | ||||||||||||||||||
|
Triad Guaranty Insurance Corporation
|
2,612 | 892 | 3,504 | 3,809 | 14,620 | 16,974 | ||||||||||||||||||
|
CMG Mortgage Insurance
Company
(4)
|
1,936 | — | 1,936 | 1,938 | 8,166 | 8,174 | ||||||||||||||||||
|
Others
|
434 | — | 434 | 209 | 2,143 | 1,140 | ||||||||||||||||||
|
Total
|
$ | 87,678 | $ | 4,480 | $ | 92,158 | $ | 95,903 | $ | 386,465 | $ | 408,842 | ||||||||||||
|
Total as a percentage of single-family guaranty book of business
|
3 | % | 3 | % | 14 | % | 14 | % | ||||||||||||||||
| (1) | 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. | |
| (2) | Represents the unpaid principal balance of single-family loans in our guaranty book of business covered under the applicable mortgage insurance policies ( i.e. , “insurance in force”). | |
| (3) | Insurance coverage amounts provided for each counterparty may include coverage provided by consolidated affiliates and subsidiaries of the counterparty. | |
| (4) | CMG Mortgage Insurance Company is a joint venture owned by PMI Mortgage Insurance Co. and CUNA Mutual Insurance Society. |
See “Risk Management—Credit Risk
Management—Institutional Counterparty Risk
Management—Mortgage Insurers” in our 2010
Form 10-K
for a discussion on the credit ratings of our mortgage insurers.
We evaluate our mortgage insurer counterparties individually to
determine whether or under what conditions they will remain
eligible to insure new mortgages sold to us. Following issuance
by the Arizona Department of Insurance of a supervisory order
directing PMI Mortgage Insurance Co. (“PMI”) and its
subsidiary PMI Insurance Co. (“PIC”) to cease offering
new commitments for insurance after August 19, 2011 and to
cease issuing certificates after September 16, 2011, we
notified PMI on August 22, 2011 that, effective
immediately, PMI and its subsidiaries, PIC and PMI Mortgage
Assurance Co. (“PMAC”), were suspended nationwide as
approved mortgage insurers. We simultaneously notified our
mortgage sellers and servicers that we would not accept any
mortgage loan insured by PMI, PIC or PMAC that is delivered
after December 30, 2011, except for refinanced Fannie Mae
loans where continuation of the coverage is effected through
modification of an existing mortgage insurance certificate.
As reported by PMI, on October 20, 2011, PMI received from
its regulator an order under which the regulator now has full
possession, management and control of PMI. The regulator is also
seeking to place PMI into receivership. Pursuant to the order,
effective October 24, 2011, the regulator instituted a
partial claim payment plan whereby all valid claims under PMI
mortgage guaranty insurance policies will be paid 50% in cash
and 50% deferred as a policyholder claim. It is uncertain when,
and if, PMI’s regulator will allow PMI to begin paying its
deferred policyholder claims
and/or
increase the amount of cash PMI pays on claims.
On July 29, 2011, we notified Republic Mortgage Insurance
Company (“RMIC”) that, effective immediately, both
RMIC and its affiliate, Republic Mortgage Insurance Company of
North Carolina (“RMIC-NC”), were suspended nationwide
as approved mortgage insurers. We also notified our mortgage
sellers and servicers that
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we would not accept any mortgage loan insured by RMIC or RMIC-NC
that is delivered after November 30, 2011, except for
refinanced Fannie Mae loans where continuation of the coverage
is effected through modification of an existing mortgage
insurance certificate. On October 12, 2011, RMIC and
RMIC-NC each voluntarily entered into an agreement with their
regulator to discontinue writing or assuming any new mortgage
guaranty insurance business in all states. RMIC’s parent
company has indicated that it is more likely than not that the
capital contributed to RMIC by its parent company will
“continue on a path toward full depletion in relatively
short order.”
The already weak financial condition of many of our mortgage
insurer counterparties deteriorated at an accelerated pace
during the third quarter of 2011, which increased the
significant risk that these counterparties will fail to fulfill
their obligations to reimburse us for claims under insurance
policies. In addition to PMI and its subsidiaries, the claims
obligations of Triad Guaranty Insurance Corporation
(“Triad”) have been partially deferred since June 2009
pursuant to an order from its regulator. The state regulator for
RMIC and RMIC-NC could take additional corrective action
following their orders to cease writing new business, which may
include issuing an order to defer partial payment of claims
and/or
placing the entities into receivership. While our remaining
mortgage insurers have continued to pay claims owed to us, there
can be no assurance that they will continue do so given their
current financial condition.
As of November 7, 2011, four of our mortgage insurers
(Triad, RMIC, PMI and Genworth Mortgage Insurance Corporation)
have publicly disclosed that they are either in run-off or,
absent a waiver, estimate they would not meet state regulatory
capital requirements for their main writing entity as of
September 30, 2011. An additional two of our mortgage
insurers (Mortgage Guaranty Insurance Corporation and Radian
Guaranty, Inc.) have disclosed that, in the absence of
additional capital contributions to their writing entity, their
capital might fall below state regulatory capital requirements
in the future. These six mortgage insurers provided a combined
$75.7 billion, or 82%, of our risk in force mortgage
insurance coverage of our single-family guaranty book of
business as of September 30, 2011. If mortgage insurers are
not able to raise capital and they exceed their
risk-to-capital
limits, they will likely be forced into run-off or receivership
unless they can secure and maintain a waiver from their state
regulator. In 2010, the parent companies of several of our
largest mortgage insurer counterparties raised capital or made
contributions in various forms to their respective mortgage
insurance subsidiaries. While these actions improved the
insurers’ ability to meet state-imposed
risk-to-capital
limits and their ability to continue paying our claims in full
as they came due to the extent of the capital raised or
contributions made by the parent companies, our mortgage insurer
counterparties’ current financial condition is weak. We are
unable to determine how long certain of our mortgage insurer
counterparties will remain below their state-imposed
risk-to-capital
limits.
Our mortgage insurer counterparties have increased the number of
mortgage loans for which they have rescinded coverage. In those
cases where 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.
As a result, 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 expect 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.
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We evaluate the financial condition of our mortgage insurer
counterparties to assess whether we have incurred probable
losses in connection with our coverage. As of September 30,
2011, our allowance for loan losses of $71.4 billion,
allowance for accrued interest receivable of $2.2 billion
and reserve for guaranty losses of $916 million
incorporated an estimated recovery amount of approximately
$12.7 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 $15.1 billion as of
September 30, 2011 and an adjustment of approximately
$2.4 billion 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. Our valuation allowance for
these receivables increased significantly from December 31,
2010 to September 30, 2011 as a result of our determination
that our mortgage insurer counterparties’ financial
condition has deteriorated.
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 $3.7 billion as of September 30, 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 $494 million as of September 30,
2011 and $648 million as of December 31, 2010 was due
from our mortgage seller/servicers. We assessed the total
outstanding receivables for collectibility, and they were
recorded net of a valuation allowance of $589 million as of
September 30, 2011 and $317 million as of
December 31, 2010 in “Other assets.” These
mortgage insurance receivables are short-term in nature, having
an average duration of approximately 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 $1.4 billion for the third quarter
of 2011, $4.6 billion for the first nine months of 2011 and
$6.4 billion for the year ended December 31, 2010.
Financial
Guarantors
We are the beneficiary of financial guarantees on non-agency
securities held in our investment portfolio and on non-agency
securities that have been resecuritized to include a Fannie Mae
guaranty and sold to third parties. Table 48 displays the total
unpaid principal balance of guaranteed non-agency securities in
our portfolio as of September 30, 2011, and
December 31, 2010.
Table
48: Unpaid Principal Balance of Financial
Guarantees
| As of | ||||||||
| September 30, 2011 | December 31, 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Alt-A private-label securities
|
$ | 1,356 | $ | 1,544 | ||||
|
Subprime private-label securities
|
1,425 | 1,487 | ||||||
|
Mortgage revenue bonds
|
5,003 | 5,264 | ||||||
|
Other mortgage-related securities
|
324 | 347 | ||||||
|
Non mortgage-related securities
|
58 | 172 | ||||||
|
Total
|
$ | 8,166 | $ | 8,814 | ||||
With the exception of Ambac Assurance Corporation
(“Ambac”), none of our financial guarantor
counterparties has failed to repay us for claims under guaranty
contracts. Ambac provided coverage on
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$3.4 billion, or 41%, of our total guarantees, as of
September 30, 2011. Based on the stressed financial
condition of our financial guarantor counterparties, we believe
that all but one of our other financial guarantor counterparties
may not be able to fully meet their obligations to us in the
future. We model our securities without assuming the benefit of
financial guarantees. We then adjust results for those external
financial guarantees from guarantors that we determine are
creditworthy, although we continue to seek collection of any
amounts due to us from all counterparties. As of
September 30, 2011, when modeling our securities for
impairments we did not assume the benefit of external financial
guarantees from any counterparty.
We are also the beneficiary of financial guarantees included in
securities issued by Freddie Mac, the federal government and its
agencies that totaled $32.6 billion as of
September 30, 2011 and $25.7 billion as of
December 31, 2010.
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 $13.3 billion as of
September 30, 2011 and $15.6 billion as of
December 31, 2010. As of September 30, 2011, 58% of
our maximum potential loss recovery on single-family loans was
from three lenders and 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 DUS and non-DUS
multifamily loans was $31.6 billion as of
September 30, 2011 and $30.3 billion as of
December 31, 2010. As of September 30, 2011, 40% of
our maximum potential loss recovery on multifamily loans was
from three DUS lenders. As of December 31, 2010, 41% of our
maximum potential loss recovery on multifamily loans was from
three DUS 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 S&P,
Moody’s and Fitch ratings) was 47% as of September 30,
2011 and 46% as of December 31, 2010. The percentage of
these recourse obligations to lender counterparties rated below
investment grade was 24% as of September 30, 2011 and 23%
as of December 31, 2010. The remaining percentage of these
recourse obligations were to lender counterparties that were not
rated by rating agencies, which was 29% as of September 30,
2011 and 31% as of 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 September 30, 2011,
approximately 53% of the unpaid principal balance of loans in
our multifamily guaranty book of business serviced by our DUS
lenders were from 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. We actively monitor the financial condition of
these lenders to help ensure the level of risk remains within
our standards.
Custodial
Depository Institutions
A total of $52.1 billion in deposits for single-family
payments were received and held by 286 institutions in the month
of September 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 September 30, 2011 and 92% as of
December 31, 2010 were held by institutions rated as
investment grade by S&P, Moody’s and Fitch. Our ten
largest custodial depository institutions held 93% of these
deposits as of both September 30, 2011 and
December 31, 2010.
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If a custodial depository institution were to fail while holding
remittances of borrower payments of principal and interest due
to us in our custodial account, we would be an unsecured
creditor of the depository for balances in excess of the deposit
insurance protection and might not be able to recover all of the
principal and interest payments being held by the depository on
our behalf, or there might be a substantial delay in receiving
these amounts. If this were to occur, we would be required to
replace these amounts with our own funds to make payments that
are due to Fannie Mae MBS certificate holders. Accordingly, the
insolvency of one of our principal custodial depository
counterparties could result in significant financial losses to
us. In the month of September 2011, approximately
$3.6 billion or 7% of our total deposits for single-family
payments received and held by these institutions was in excess
of the deposit insurance protection limit compared with
approximately $6.2 billion or 8% in the month of December
2010. These amounts can vary as they are calculated based on
individual payments of mortgage borrowers and we must estimate
which borrowers are paying their regular principal and interest
payments and other types of payments, such as prepayments from
refinancing or sales.
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 asset-backed securities. Our
cash and other investment counterparties are primarily financial
institutions and the Federal Reserve Bank. See “Liquidity
and Capital Management—Liquidity Management—Cash and
Other Investments Portfolio” for more detailed information
on our cash and other investments portfolio.
Our cash and other investments portfolio, which totaled
$103.5 billion as of September 30, 2011, included
$41.9 billion of U.S. Treasury securities and
$5.0 billion of unsecured positions. 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. As of both September 30, 2011 and
December 31, 2010, 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. The
fair value of derivatives in a gain position is included in our
condensed consolidated balance sheets in “Other
assets.” Typically, we seek to manage credit exposure by
contracting with experienced counterparties that are rated A-
(or its equivalent) or better by the major ratings
organizations. 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.
Our net credit exposure on derivatives contracts increased to
$164 million as of September 30, 2011, from
$152 million as of December 31, 2010. We had
outstanding interest rate and foreign currency derivative
transactions with 15 counterparties as of both
September 30, 2011 and December 31, 2010. Derivatives
transactions with nine of our counterparties accounted for
approximately 90% of our total outstanding notional amount as of
September 30, 2011, with each of these counterparties
accounting for between approximately 6% and 16% of the total
outstanding notional amount. In addition to the 15
counterparties with whom we had outstanding notional amounts and
master netting agreements as of September 30, 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.
We expect that, under the Dodd-Frank Act, we will be required in
the future to submit certain interest rate swaps for clearing to
a derivatives clearing organization. In anticipation of those
requirements, we have cleared a small number of new interest
rate swap transactions with the Chicago Mercantile Exchange,
Inc.
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(“CME”), a derivatives clearing organization. As a
result, we are exposed to the institutional credit risk of CME
and its members that execute and submit our transactions for
clearing. Our institutional credit risk exposure to the CME or
other comparable exchanges or trading facilities, as well as
their members, is likely to increase 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
September 30, 2011 and December 31, 2010, as well as a
discussion of our collateral requirements under our derivatives
contracts. See “Risk Factors” for a discussion of the
impact of decreases in our credit ratings on our collateral
obligations under our derivatives contracts. Also 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 concentration of our institutional 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 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.
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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 49, 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 49 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 September 30, 2011 and 2010.
Table
49: Interest Rate Sensitivity of Net Portfolio to
Changes in Interest Rate Level and Slope of Yield
Curve
(1)
| As of | ||||||||
| September 30, 2011 | December 31, 2010 | |||||||
| (Dollars in billions) | ||||||||
|
Rate level shock:
|
||||||||
|
-100 basis points
|
$ | 0.1 | $ | (0.8 | ) | |||
|
-50 basis points
|
— | (0.2 | ) | |||||
|
+50 basis points
|
— | (0.2 | ) | |||||
|
+100 basis points
|
— | (0.5 | ) | |||||
|
Rate slope shock:
|
||||||||
|
-25 basis points (flattening)
|
— | (0.1 | ) | |||||
|
+25 basis points (steepening)
|
— | 0.1 | ||||||
| For the Three Months Ended September 30, 2011 | ||||||||||||
|
Duration
|
Rate Slope Shock
|
Rate Level Shock
|
||||||||||
| Gap | 25 Bps | 50 Bps | ||||||||||
| Exposure | ||||||||||||
| (Dollars in billions) | ||||||||||||
| (In months) | ||||||||||||
|
Average
|
0.1 | $ | 0.1 | $ | 0.2 | |||||||
|
Minimum
|
(0.7 | ) | — | — | ||||||||
|
Maximum
|
0.8 | 0.2 | 0.3 | |||||||||
|
Standard deviation
|
0.3 | 0.1 | 0.1 | |||||||||
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| For the Three Months Ended September 30, 2010 | ||||||||||||
|
Duration
|
Rate Slope Shock
|
Rate Level Shock
|
||||||||||
| Gap | 25 Bps | 50 Bps | ||||||||||
| Exposure | ||||||||||||
| (Dollars in billions) | ||||||||||||
| (In months) | ||||||||||||
|
Average
|
0.2 | $ | — | $ | 0.2 | |||||||
|
Minimum
|
(0.6 | ) | — | — | ||||||||
|
Maximum
|
0.7 | 0.1 | 0.4 | |||||||||
|
Standard deviation
|
0.3 | — | 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 50 shows an example
of how derivatives impacted the net market value exposure for a
50 basis point parallel interest rate shock.
Table
50: Derivative Impact on Interest Rate Risk (50 Basis
Points)
|
Before
|
After
|
Effect of
|
||||||||||
| Derivatives | Derivatives | Derivatives | ||||||||||
| (Dollars in billions) | ||||||||||||
|
As of September 30, 2011
|
$ | (1.4 | ) | $ | — | $ | 1.4 | |||||
|
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
September 30, 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 September 30, 2011 and
December 31, 2010 can be found in “Note 13, Fair
Value.”
Liquidity
Risk Management
See “Liquidity and Capital Management—Liquidity
Management” for a discussion on how we manage liquidity
risk.
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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 belief that credit losses on loans we have acquired since 2009 would exceed guaranty fee revenue if home prices declined nationally by approximately 10% from their September 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; | |
| • | Our expectations regarding the performance and profitability of loans we acquired in 2004 and the factors that will impact the performance and profitability of these loans; | |
| • | Our expectation that our 2005 through 2008 vintages will be significantly more unprofitable than our 2004 vintage; | |
| • | Our expectation that our acquisitions of loans with high LTV ratios will increase in 2012 as a result of recently announced changes to HARP; | |
| • | Our expectations regarding the credit profile of loans we acquire in the future, and the factors that will influence their credit profile; | |
| • | Our estimate that, while single-family loans that we acquired from 2005 through 2008 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 have reserved for the substantial majority of the remaining losses on these loans; | |
| • | Our expectation that future defaults on loans in our legacy book of business 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 eventually recover the remaining one-third, either through net interest income for loans that cure or through foreclosed property income for loans where the sale of the collateral exceeds our recorded investment in the loan; | |
| • | Our belief that successful modifications will ultimately reduce our credit losses over the long term from what they otherwise would have been if we had taken the loans to foreclosure; | |
| • | Our expectation that serious delinquency rates will continue to be affected in the future by home price changes, changes in other macroeconomic conditions, the length of the foreclosure process, the volume of loan modifications and the extent to which borrowers with modified loans continue to make timely payments; |
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| • | Our belief that foreclosure delays resulting from changes in the foreclosure environment will continue to negatively impact our foreclosure timelines, credit-related expenses and single-family serious delinquency rates, and will delay the recovery of the housing market; | |
| • | 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 the fourth quarter of 2011; | |
| • | Our expectation that home sales are unlikely to increase until the unemployment rate improves further; | |
| • | Our estimate that the likelihood of a recession by the end of next year is close to 50%; | |
| • | 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 generally commensurate with 2010 levels as certain local markets and properties continue to exhibit weak fundamentals; | |
| • | Our expectations that the recently announced changes to HARP will result in our acquiring more refinancings in 2012 than we would have acquired in the absence of the changes, but that we will acquire fewer refinancings overall in each of 2011 and 2012 than in 2010 as a result of the high number of mortgages that have already refinanced to low rates in recent years; | |
| • | Our expectation that the pace of our loan acquisitions overall for each of 2011 and 2012 will be lower than in 2010; | |
| • | Our belief that our loan acquisitions could be negatively affected by the decrease in our maximum loan limit in the fourth quarter of 2011; | |
| • | 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; | |
| • | Our expectation that our future revenues will be negatively impacted to the extent our acquisitions decline; | |
| • | Our estimation that total originations in the U.S. single-family mortgage market in 2011 will decrease from 2010 levels by approximately 23%, from an estimated $1.7 trillion to an estimated $1.3 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 $905 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 2012; | |
| • | Our expectations regarding regional variations in home price declines and stabilization; | |
| • | Our expectation of a peak-to-trough home price decline on a national basis ranging from 22% to 28%, and our expectation that it would take the occurrence of an additional adverse economic event to reach the high end of the range; | |
| • | Our expectation that our credit losses will be lower 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 the Acting Director of FHFA will submit a request to Treasury on our behalf for $7.8 billion to eliminate our net worth deficit as of September 30, 2011; |
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| • | Our expectation that we will request additional draws under the senior preferred stock purchase agreement in future periods, which will further increase the dividends we owe to Treasury on the senior preferred stock; | |
| • | Our expectation that over time our dividend obligation to Treasury will constitute an increasing portion of our future draws under the senior preferred stock purchase agreement; | |
| • | Our expectation that uncertainty regarding the future of our company will continue; | |
| • | Our expectation that Congress will continue to hold hearings and consider legislation in the remainder of 2011 and in 2012 on the future status of Fannie Mae and Freddie Mac; | |
| • | Our belief 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 our existing and ongoing liabilities; | |
| • | Our expectations regarding when fees for loans refinanced under HARP’s revised terms will be announced; | |
| • | Our expectation that our single-family guaranty fees will increase in the coming years; | |
| • | Our expectations regarding a transitional period as we phase out the practice of requiring mortgage servicers to use our network of retained attorneys to perform default- and foreclosure-related legal services for our loans; | |
| • | 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, economic benefit, servicer capacity, and other factors, 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 requirement of the senior preferred stock purchase agreement; | |
| • | Our intention to repay our short-term and long-term debt obligations as they become due primarily through proceeds from the issuance of additional debt securities; | |
| • | Our intention 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; | |
| • | Our expectations regarding our credit ratings and their impact on us; | |
| • | 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; | |
| • | 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 income, and home prices; |
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| • | Our expectation that the amount of our outstanding repurchase requests to seller/servicers will remain high, and that we may be unable to recover on all outstanding loan repurchase obligations resulting from seller/servicers’ breaches of contractual obligations; | |
| • | Our expectations regarding recoveries from our lenders under risk sharing arrangements, and the possibility that we may require a lender to pledge collateral to secure its recourse obligations; | |
| • | 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 be required to submit certain interest rate swaps for clearing to a derivatives clearing organization in the future and that our institutional credit risk exposure to the Chicago Mercantile Exchange or other comparable exchanges or trading facilities and their members is likely to increase 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; and | |
| • | 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. |
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; a
decrease in our credit ratings; 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 foreclosure processes and
the consequences of those deficiencies; guidance by the 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—Our Strong New Book of Business and Expected Losses
on our Legacy Book of Business—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 | ||||||||
|
September 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents (includes $3 and $348, respectively,
related to consolidated trusts)
|
$ | 24,307 | $ | 17,297 | ||||
|
Restricted cash (includes $51,774 and $59,619, respectively,
related to consolidated trusts)
|
55,961 | 63,678 | ||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
35,950 | 11,751 | ||||||
|
Investments in securities:
|
||||||||
|
Trading, at fair value (includes $20 and $21, respectively,
related to consolidated trusts)
|
68,149 | 56,856 | ||||||
|
Available-for-sale,
at fair value (includes $1,429 and $1,055, respectively, related
to consolidated trusts)
|
82,710 | 94,392 | ||||||
|
Total investments in securities
|
150,859 | 151,248 | ||||||
|
Mortgage loans:
|
||||||||
|
Loans held for sale, at lower of cost or fair value (includes
$53 and $661, respectively, related to consolidated trusts)
|
309 | 915 | ||||||
|
Loans held for investment, at amortized cost:
|
||||||||
|
Of Fannie Mae
|
385,247 | 407,228 | ||||||
|
Of consolidated trusts (includes $3,361 and $2,962,
respectively, at fair value and loans pledged as collateral that
may be sold or repledged of $6,993 and $2,522, respectively)
|
2,583,699 | 2,577,133 | ||||||
|
Total loans held for investment
|
2,968,946 | 2,984,361 | ||||||
|
Allowance for loan losses
|
(71,435 | ) | (61,556 | ) | ||||
|
Total loans held for investment, net of allowance
|
2,897,511 | 2,922,805 | ||||||
|
Total mortgage loans
|
2,897,820 | 2,923,720 | ||||||
|
Accrued interest receivable, net (includes $8,451 and $8,910,
respectively, related to consolidated trusts)
|
10,862 | 11,279 | ||||||
|
Acquired property, net
|
12,195 | 16,173 | ||||||
|
Other assets
|
25,923 | 26,826 | ||||||
|
Total assets
|
$ | 3,213,877 | $ | 3,221,972 | ||||
| LIABILITIES AND DEFICIT | ||||||||
|
Liabilities:
|
||||||||
|
Accrued interest payable (includes $9,449 and $9,712,
respectively, related to consolidated trusts)
|
$ | 12,928 | $ | 13,764 | ||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
— | 52 | ||||||
|
Debt:
|
||||||||
|
Of Fannie Mae (includes $845 and $893, respectively, at fair
value)
|
744,803 | 780,044 | ||||||
|
Of consolidated trusts (includes $3,840 and $2,271,
respectively, at fair value)
|
2,446,973 | 2,416,956 | ||||||
|
Other liabilities (includes $674 and $893, respectively, related
to consolidated trusts)
|
16,964 | 13,673 | ||||||
|
Total liabilities
|
3,221,668 | 3,224,489 | ||||||
|
Commitments and contingencies (Note 14)
|
— | — | ||||||
|
Fannie Mae stockholders’ equity (deficit):
|
||||||||
|
Senior preferred stock, 1,000,000 shares issued and
outstanding
|
104,787 | 88,600 | ||||||
|
Preferred stock, 700,000,000 shares are
authorized—555,374,922 and 576,868,139 shares issued
and outstanding, respectively
|
19,130 | 20,204 | ||||||
|
Common stock, no par value, no maximum
authorization—1,308,762,703 and 1,270,092,708 shares
issued, respectively; 1,157,757,042 and
1,118,504,194 shares outstanding, respectively
|
687 | 667 | ||||||
|
Accumulated deficit
|
(123,359 | ) | (102,986 | ) | ||||
|
Accumulated other comprehensive loss
|
(1,696 | ) | (1,682 | ) | ||||
|
Treasury stock, at cost, 151,005,661 and
151,588,514 shares, respectively
|
(7,402 | ) | (7,402 | ) | ||||
|
Total Fannie Mae stockholders’ deficit
|
(7,853 | ) | (2,599 | ) | ||||
|
Noncontrolling interest
|
62 | 82 | ||||||
|
Total deficit
|
(7,791 | ) | (2,517 | ) | ||||
|
Total liabilities and deficit
|
$ | 3,213,877 | $ | 3,221,972 | ||||
See Notes to Condensed Consolidated Financial Statements
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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
|
For the Nine
|
|||||||||||||||
|
Months Ended
|
Months Ended
|
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Interest income:
|
||||||||||||||||
|
Trading securities
|
$ | 274 | $ | 310 | $ | 822 | $ | 955 | ||||||||
|
Available-for-sale
securities
|
1,160 | 1,313 | 3,525 | 4,175 | ||||||||||||
|
Mortgage loans (includes $30,633 and $32,807, respectively, for
the three months ended and $94,111 and $100,810, respectively,
for the nine months ended related to consolidated trusts)
|
34,334 | 36,666 | 105,257 | 111,917 | ||||||||||||
|
Other
|
26 | 31 | 79 | 111 | ||||||||||||
|
Total interest income
|
35,794 | 38,320 | 109,683 | 117,158 | ||||||||||||
|
Interest expense:
|
||||||||||||||||
|
Short-term debt (includes $3 and $4, respectively, for the three
months ended and $8 and $9, respectively, for the nine months
ended related to consolidated trusts)
|
66 | 194 | 254 | 479 | ||||||||||||
|
Long-term debt (includes $27,157 and $28,878, respectively, for
the three months ended and $82,928 and $90,379, respectively,
for the nine months ended related to consolidated trusts)
|
30,542 | 33,350 | 94,311 | 104,907 | ||||||||||||
|
Total interest expense
|
30,608 | 33,544 | 94,565 | 105,386 | ||||||||||||
|
Net interest income
|
5,186 | 4,776 | 15,118 | 11,772 | ||||||||||||
|
Provision for loan losses
|
(4,159 | ) | (4,696 | ) | (20,548 | ) | (20,930 | ) | ||||||||
|
Net interest income (loss) after provision for loan losses
|
1,027 | 80 | (5,430 | ) | (9,158 | ) | ||||||||||
|
Investment gains, net
|
73 | 82 | 319 | 271 | ||||||||||||
|
Other-than-temporary
impairments
|
(232 | ) | (366 | ) | (317 | ) | (600 | ) | ||||||||
|
Noncredit portion of
other-than-temporary
impairments recognized in other comprehensive income
|
(30 | ) | 40 | (45 | ) | (99 | ) | |||||||||
|
Net
other-than-temporary
impairments
|
(262 | ) | (326 | ) | (362 | ) | (699 | ) | ||||||||
|
Fair value (losses) gains, net
|
(4,525 | ) | 525 | (5,870 | ) | (877 | ) | |||||||||
|
Debt extinguishment losses, net
|
(119 | ) | (214 | ) | (149 | ) | (497 | ) | ||||||||
|
Fee and other income
|
291 | 304 | 793 | 831 | ||||||||||||
|
Non-interest (loss) income
|
(4,542 | ) | 371 | (5,269 | ) | (971 | ) | |||||||||
|
Administrative expenses:
|
||||||||||||||||
|
Salaries and employee benefits
|
323 | 325 | 953 | 973 | ||||||||||||
|
Professional services
|
173 | 305 | 531 | 759 | ||||||||||||
|
Occupancy expenses
|
46 | 43 | 131 | 124 | ||||||||||||
|
Other administrative expenses
|
49 | 57 | 150 | 149 | ||||||||||||
|
Total administrative expenses
|
591 | 730 | 1,765 | 2,005 | ||||||||||||
|
(Benefit) provision for guaranty losses
|
(8 | ) | 78 | 694 | 111 | |||||||||||
|
Foreclosed property expense
|
733 | 787 | 743 | 1,255 | ||||||||||||
|
Other expenses
|
254 | 196 | 638 | 650 | ||||||||||||
|
Total expenses
|
1,570 | 1,791 | 3,840 | 4,021 | ||||||||||||
|
Loss before federal income taxes
|
(5,085 | ) | (1,340 | ) | (14,539 | ) | (14,150 | ) | ||||||||
|
Benefit for federal income taxes
|
— | 9 | 91 | 67 | ||||||||||||
|
Net loss
|
(5,085 | ) | (1,331 | ) | (14,448 | ) | (14,083 | ) | ||||||||
|
Other comprehensive (loss) income:
|
||||||||||||||||
|
Changes in unrealized losses on
available-for-sale
securities, net of reclassification adjustments and taxes
|
(198 | ) | 901 | (20 | ) | 3,938 | ||||||||||
|
Other
|
1 | 1 | 6 | 6 | ||||||||||||
|
Total other comprehensive (loss) income
|
(197 | ) | 902 | (14 | ) | 3,944 | ||||||||||
|
Total comprehensive loss
|
(5,282 | ) | (429 | ) | (14,462 | ) | (10,139 | ) | ||||||||
|
Less: Comprehensive income attributable to the noncontrolling
interest
|
— | (8 | ) | (1 | ) | (4 | ) | |||||||||
|
Total comprehensive loss attributable to Fannie Mae
|
$ | (5,282 | ) | $ | (437 | ) | $ | (14,463 | ) | $ | (10,143 | ) | ||||
|
Net loss
|
$ | (5,085 | ) | $ | (1,331 | ) | $ | (14,448 | ) | $ | (14,083 | ) | ||||
|
Less: Net income attributable to the noncontrolling interest
|
— | (8 | ) | (1 | ) | (4 | ) | |||||||||
|
Net loss attributable to Fannie Mae
|
(5,085 | ) | (1,339 | ) | (14,449 | ) | (14,087 | ) | ||||||||
|
Preferred stock dividends
|
(2,494 | ) | (2,116 | ) | (6,992 | ) | (5,550 | ) | ||||||||
|
Net loss attributable to common stockholders
|
$ | (7,579 | ) | $ | (3,455 | ) | $ | (21,441 | ) | $ | (19,637 | ) | ||||
|
Loss per share—Basic and Diluted
|
$ | (1.32 | ) | $ | (0.61 | ) | $ | (3.74 | ) | $ | (3.45 | ) | ||||
|
Weighted-average common shares outstanding—Basic and Diluted
|
5,760 | 5,695 | 5,730 | 5,694 | ||||||||||||
See Notes to Condensed Consolidated Financial Statements
102
Table of Contents
(In conservatorship)
Condensed Consolidated Statements of Cash Flows— (Unaudited)
(Dollars in millions)
|
For the Nine Months
|
||||||||
| Ended September 30, | ||||||||
| 2011 | 2010 | |||||||
|
Net cash used in operating activities
|
$ | (6,714 | ) | $ | (42,447 | ) | ||
|
Cash flows provided by investing activities:
|
||||||||
|
Purchases of trading securities held for investment
|
(2,483 | ) | (7,984 | ) | ||||
|
Proceeds from maturities and paydowns of trading securities held
for investment
|
1,672 | 1,997 | ||||||
|
Proceeds from sales of trading securities held for investment
|
837 | 21,488 | ||||||
|
Purchases of
available-for-sale
securities
|
(44 | ) | (262 | ) | ||||
|
Proceeds from maturities and paydowns of
available-for-sale
securities
|
9,995 | 12,927 | ||||||
|
Proceeds from sales of
available-for-sale
securities
|
2,590 | 7,096 | ||||||
|
Purchases of loans held for investment
|
(44,276 | ) | (52,048 | ) | ||||
|
Proceeds from repayments of loans held for investment of Fannie
Mae
|
18,467 | 14,749 | ||||||
|
Proceeds from repayments of loans held for investment of
consolidated trusts
|
364,500 | 378,662 | ||||||
|
Net change in restricted cash
|
7,717 | (11,111 | ) | |||||
|
Advances to lenders
|
(43,363 | ) | (44,951 | ) | ||||
|
Proceeds from disposition of acquired property and
preforeclosure sales
|
36,280 | 28,079 | ||||||
|
Net change in federal funds sold and securities purchased under
agreements to resell or similar agreements
|
(24,199 | ) | 33,219 | |||||
|
Other, net
|
137 | (476 | ) | |||||
|
Net cash provided by investing activities
|
327,830 | 381,385 | ||||||
|
Cash flows used in financing activities:
|
||||||||
|
Proceeds from issuance of debt of Fannie Mae
|
572,828 | 890,570 | ||||||
|
Payments to redeem debt of Fannie Mae
|
(609,399 | ) | (848,438 | ) | ||||
|
Proceeds from issuance of debt of consolidated trusts
|
157,280 | 191,665 | ||||||
|
Payments to redeem debt of consolidated trusts
|
(444,160 | ) | (587,963 | ) | ||||
|
Payments of cash dividends on senior preferred stock to Treasury
|
(6,992 | ) | (5,554 | ) | ||||
|
Proceeds from senior preferred stock purchase agreement with
Treasury
|
16,187 | 25,200 | ||||||
|
Net change in federal funds purchased and securities sold under
agreements to repurchase
|
— | 185 | ||||||
|
Other, net
|
150 | (33 | ) | |||||
|
Net cash used in financing activities
|
(314,106 | ) | (334,368 | ) | ||||
|
Net increase in cash and cash equivalents
|
7,010 | 4,570 | ||||||
|
Cash and cash equivalents at beginning of period
|
17,297 | 6,812 | ||||||
|
Cash and cash equivalents at end of period
|
$ | 24,307 | $ | 11,382 | ||||
|
Cash paid during the period for interest
|
$ | 97,592 | $ | 107,537 | ||||
See Notes to Condensed Consolidated Financial Statements
103
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.
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 mortgage-backed securities
(“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
November 8, 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.
On June 20, 2011, FHFA issued a final rule establishing a
framework for conservatorship and receivership operations for
the GSEs. The final rule, which became effective on
July 20, 2011, establishes procedures for conservatorship
and receivership, and priorities of claims for contract parties
and other claimants. The final rule is part of FHFA’s
implementation of the powers provided by the Federal Housing
Finance Regulatory Reform Act of 2008, and does not seek to
anticipate or predict future conservatorships or receiverships.
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 market, what form we will have, and
what ownership interest, if any, our current common and
preferred
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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)
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 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 $103.8 billion as of September 30,
2011 under Treasury’s funding commitment and the Acting
Director of FHFA will submit a request for an additional
$7.8 billion from Treasury to eliminate our net worth
deficit as of September 30, 2011. The aggregate liquidation
preference of the senior preferred stock was $104.8 billion
as of September 30, 2011 and will increase to
$112.6 billion as a result of FHFA’s request on our
behalf for funds to eliminate our net worth deficit as of
September 30, 2011.
The amended senior preferred stock purchase agreement provides
that the $200 billion maximum amount of the commitment from
Treasury will increase as necessary to accommodate any net worth
deficiencies attributable to periods during 2010, 2011, and
2012. If we do not have a positive net worth as of
December 31, 2012, then the amount of funding available
under the amended senior preferred stock purchase agreement
after 2012 will be $124.8 billion ($200 billion less
$75.2 billion in cumulative draws for net worth
deficiencies through December 31, 2009).
In the event we have a positive net worth as of
December 31, 2012, then the amount of funding available
after 2012 under the amended senior preferred stock purchase
agreement will depend on the size of that positive net worth
relative to the cumulative draws for net worth deficiencies
attributable to periods during 2010, 2011, and 2012, as follows:
| • | If our positive net worth as of December 31, 2012 is less than the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011, and 2012, then the amount of available funding will be $124.8 billion less our positive net worth as of December 31, 2012. | |
| • | If our positive net worth as of December 31, 2012 is greater than the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011, and 2012, then the amount of available funding will be $124.8 billion less the cumulative draws attributable to periods during 2010, 2011, and 2012. |
As of November 7, 2011, the amount of the quarterly
commitment fee payable by us to Treasury under the senior
preferred stock purchase agreement had not been established;
however, Treasury has waived the quarterly commitment fee under
the senior preferred stock purchase agreement for each quarter
of 2011 due to the continued fragility of the U.S. mortgage
market and Treasury’s belief that imposing the commitment
fee
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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)
would not generate increased compensation for taxpayers.
Treasury stated that it will reevaluate the situation during the
next calendar quarter to determine whether to set the quarterly
commitment fee for the first quarter of 2012.
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.
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, due to our reliance on the
U.S. government’s support, our access to debt funding
or the cost of debt funding also could be materially adversely
affected by a change or perceived change in the creditworthiness
of the U.S. government. A downgrade in our credit ratings
could reduce demand for our debt securities and increase our
borrowing costs. Standard & Poor’s Ratings
Services’ (“S&P”) downgrade of our credit
rating on August 8, 2011, which was a result of a similar
action on the U.S. government’s sovereign credit
rating, has not adversely affected our access to debt funding or
the cost of our debt funding. 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. Intercompany accounts and
transactions have been eliminated. Results for the three and
nine months ended September 30, 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 and for the three and
nine months ended September 30, 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.
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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)
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 September 30,
2011, Treasury held an investment in our senior preferred stock
with an aggregate liquidation preference of $104.8 billion.
Our administrative expenses were reduced by $30 million and
$90 million for the three and nine months ended
September 30, 2011, respectively, due to 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 nine months ended September 30, 2011, we
received a refund of $1.1 billion from the Internal Revenue
Service (“IRS”), a bureau of Treasury, related to the
carryback of our 2009 operating loss to the 2008 and 2007 tax
years. In addition, in June 2011, we effectively settled our
2007 and 2008 tax years with the IRS and as a result, we have
recognized an income tax benefit of $90 million in our
condensed consolidated statements of operations and
comprehensive loss for the nine months ended September 30,
2011.
Under a temporary credit and liquidity facilities
(“TCLF”) program, we had $3.3 billion and
$3.7 billion outstanding, which include principal and
interest, of three-year standby credit and liquidity support as
of September 30, 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 $7.5 billion
and $7.6 billion outstanding of pass-through securities
backed by single-family and multifamily housing bonds issued by
housing finance agencies (“HFAs”) as of
September 30, 2011 and December 31, 2010,
respectively. Treasury bears the initial loss of principal under
the TCLF program and the NIB program up to 35% of the total
principal on a combined program-wide basis.
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 September 30, 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
$76 million and $93 million, respectively. We
recognized interest income on Freddie Mac mortgage-related
securities held by us of $174 million and $239 million
for the three months ended September 30, 2011 and 2010,
respectively, and $534 million and $851 million for
the nine months ended September 30, 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.
In the three months ended September 30, 2011, we updated
our allowance for loan loss models for individually impaired
loans to incorporate more home price data at the regional level
rather than at the national level. We believe this approach is a
better estimation of possible home price paths and related
default
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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)
expectations; it has resulted in a decrease to our allowance for
loan losses and a reduction in our provision for loan losses of
approximately $800 million.
In the three months ended June 30, 2011, we updated our
loan loss models to incorporate more recent data on prepayments
of modified loans which contributed to an increase to our
allowance of loan losses of approximately $1.5 billion. The
change resulted in slower expected prepayment speeds, which
extended the expected lives of modified loans and lowered the
present value of cash flows on those loans. Also in the three
months ended June 30, 2011, we updated our estimate of the
reserve for guaranty losses related to private-label
mortgage-related securities that we have guaranteed to increase
our focus on earlier stage delinquency, rather than foreclosure
trends, as the primary driver in estimating incurred losses. We
believe delinquencies are a better indicator of incurred losses
compared to foreclosure trends because the recent delays in the
foreclosure process have interrupted the normal flow of
delinquent mortgages into foreclosure. This update resulted in
an increase to our reserve for guaranty losses included within
“Other liabilities” of approximately $700 million.
In addition, in the three months ended June 30, 2011, we
revised our estimate for amounts due to us related to
outstanding repurchase requests to incorporate additional
loan-level attributes which resulted in a decrease in our
provision for loan losses and foreclosed property expense of
$1.5 billion.
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 nine
months ended September 30, 2010. We evaluated the effects
of these misstatements, both quantitatively and qualitatively,
on our previously reported condensed consolidated statements of
cash flows for the nine months ended September 30, 2010 and
concluded that this previously reported prior period was not
materially misstated. We also reclassified amounts in our
condensed consolidated statements of cash flows for the nine
months ended September 30, 2010. The following table
displays the line item adjustments and reclassifications in our
condensed consolidated statement of cash flows for the nine
months ended September 30, 2010. As a result of the
adjustments, our condensed consolidated statement of cash flows
for the nine months ended September 30, 2010 includes a
$6.6 billion adjustment to increase net cash used in
operating activities, a $7.0 billion adjustment to increase
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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)
net cash provided by investing activities, and a
$357 million adjustment to increase net cash used in
financing activities.
| For the Nine Months Ended September 30, 2010 | ||||||||||||||||
|
As Previously
|
||||||||||||||||
| Reported | Adjustments | Reclassifications | As Adjusted | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Reclassified and adjusted line items:
|
||||||||||||||||
|
Cash flows used in operating activities:
|
||||||||||||||||
|
Other, net
|
$ | (6,222 | ) | $ | (6,601 | ) | $ | — | $ | (12,823 | ) | |||||
|
Cash flows provided by investing activities:
|
||||||||||||||||
|
Proceeds from sales of
available-for-sale
securities
|
6,680 | 416 | — | 7,096 | ||||||||||||
|
Purchases of loans held for investment
|
(59,145 | ) | 7,097 | — | (52,048 | ) | ||||||||||
|
Proceeds from repayments of loans held for investment of Fannie
Mae
|
15,025 | (276 | ) | — | 14,749 | |||||||||||
|
Proceeds from repayments of loans held for investment of
consolidated trusts
|
378,941 | (279 | ) | — | 378,662 | |||||||||||
|
Cash flows used in financing activities:
|
||||||||||||||||
|
Proceeds from issuance of short-term debt of Fannie Mae
|
555,422 | — | (555,422 | ) | — | |||||||||||
|
Proceeds from issuance of long-term debt of Fannie Mae
|
335,115 | — | (335,148 | ) | — | |||||||||||
|
Proceeds from issuance of debt of Fannie Mae
|
— | — | 890,570 | 890,570 | ||||||||||||
|
Payments to redeem short-term debt of Fannie Mae
|
(537,181 | ) | — | 537,181 | — | |||||||||||
|
Payments to redeem long-term debt of Fannie Mae
|
(311,257 | ) | — | 311,257 | — | |||||||||||
|
Payments to redeem debt of Fannie Mae
|
— | — | (848,438 | ) | (848,438 | ) | ||||||||||
|
Proceeds from issuance of short-term debt of consolidated trusts
|
10,067 | — | (10,067 | ) | — | |||||||||||
|
Proceeds from issuance of long-term debt of consolidated trusts
|
182,014 | (416 | ) | (181,598 | ) | — | ||||||||||
|
Proceeds from issuance of debt of consolidated trusts
|
— | — | 191,665 | 191,665 | ||||||||||||
|
Payments to redeem short-term debt of consolidated trusts
|
(27,852 | ) | — | 27,852 | — | |||||||||||
|
Payments to redeem long-term debt of consolidated trusts
|
(560,170 | ) | 59 | 560,111 | — | |||||||||||
|
Payments to redeem debt of consolidated trusts
|
— | — | (587,963 | ) | (587,963 | ) | ||||||||||
|
Other, net
|
— | — | (33 | ) | (33 | ) | ||||||||||
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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)
Collateral
Cash
Collateral
The following table displays cash collateral accepted and
pledged as of September 30, 2011 and December 31, 2010.
| As of | ||||||||
| September 30, 2011 | December 31, 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Cash collateral
accepted
(1)
|
$ | 3,360 | $ | 3,101 | ||||
|
Cash collateral pledged
|
$ | 6,199 | $ | 5,884 | ||||
|
Cash collateral pledged related to derivatives activities
|
3,486 | 3,453 | ||||||
|
Total cash collateral pledged
|
$ | 9,685 | $ | 9,337 | ||||
| (1) | Includes restricted cash of $2.7 billion and $2.5 billion as of September 30, 2011 and December 31, 2010, respectively. |
Non-Cash
Collateral
The following table displays non-cash collateral pledged and
accepted as of September 30, 2011 and December 31,
2010.
| As of | ||||||||||||
| September 30, 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
|
$ | 6,993 | $ | 2,522 | ||||||||
|
Non-cash collateral accepted with the right to sell or
repledge
(1)
|
$ | 20,050 | $ | 7,500 | ||||||||
|
Non-cash collateral accepted without the right to sell or
repledge
|
$ | 28,256 | $ | 6,744 | ||||||||
| (1) | None of this collateral was sold or repledged as of September 30, 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
$5.1 billion as of September 30, 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 September 30, 2011 and $49 million
in repurchase agreements outstanding as of December 31,
2010.
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Mortgage
Loans
Nonaccrual
Loans
We discontinue accruing interest on loans when we believe
collectability of principal or interest is not reasonably
assured, which for single-family loans we have determined, based
on our historical experience, to be when the loan becomes two
months or more past due according to its contractual terms. We
place multifamily loans on nonaccrual status when the loan is
deemed to be individually impaired, unless the loan is well
secured such that collectability of principal and accrued
interest is reasonably assured.
When a loan is placed on nonaccrual status, interest previously
accrued but not collected becomes part of our recorded
investment in the loan and is collectively reviewed for
impairment. For single-family loans, we recognize interest
income for loans on non-accrual status when cash is received.
For multifamily loans that are individually impaired, we apply
any payment received on a cost recovery basis to reduce
principal on the mortgage loan unless the loan is determined to
be well secured.
We return a single-family loan to accrual status at the point
that the borrower has made sufficient payments to reduce their
delinquency below our nonaccrual threshold. For modified
single-family loans, the loan is not returned to accrual status
until the borrower successfully makes all required payments
during the trial period (generally three to four months) and the
modification is made permanent. We return a multifamily loan to
accrual status when the borrower cures the delinquency of the
loan or we otherwise determine that the loan is well secured
such that collectability is reasonably assured.
Restructured
Loans
A modification to the contractual terms of a loan that results
in granting a concession to a borrower experiencing financial
difficulties is considered a troubled debt restructuring
(“TDR”). Our loss mitigation programs primarily
include modifications that result in the capitalization of past
due amounts in combination with interest rate reductions below
market
and/or
the
extension of the loan’s maturity date. Such restructurings
are granted to borrowers in financial difficulty on either a
permanent or contingent basis, as in the case of modifications
with a trial period. We consider these types of loan
restructurings to be TDRs.
We do not currently include principal or past due interest
forgiveness as part of our loss mitigation programs, and as a
result, we do not charge off any outstanding principal or
accrued interest amounts at the time of loan modification. We
believe that the loan underwriting activities we perform as a
part of our loan modification process coupled with the
borrower’s successful performance during any required trial
period provide us reasonable assurance regarding the
collectability of the principal and interest due in accordance
with the loan’s modified terms, which include any past due
interest amounts that are capitalized at the time of
modification. As such, the loan is returned to accrual status
when the loan modification is completed (
i.e
., at the end
of the trial period), and we accrue interest thereafter in
accordance with our interest accrual policy. If the loan was on
nonaccrual status prior to entering the trial period, it remains
on nonaccrual status until the borrower demonstrates performance
via the trial period and the modification is finalized.
In addition to these loan modifications, we also engage in other
loss mitigation activities with troubled borrowers, which
include repayment plans, forbearance arrangements, and the
capitalization only of past due amounts. Repayment plans and
forbearance arrangements are informal agreements with the
borrower that do not result in the legal modification of the
loan. For all of these activities, we consider the deferral or
capitalization of three or fewer missed payments to represent
only an insignificant delay, and thus not a TDR. If we defer or
capitalize more than three missed payments, the delay is no
longer considered insignificant, and the restructuring is
accounted for as a TDR.
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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)
We measure impairment of a loan restructured in a TDR
individually based on the excess of the recorded investment in
the loan over the present value of the expected future cash
inflows discounted at the loan’s original effective
interest rate. Costs incurred to complete a TDR are expensed as
incurred.
In April 2011, the Financial Accounting Standards Board
(“FASB”) issued a new standard effective for the three
months ended September 30, 2011 that applies
retrospectively to the beginning of the annual period of
adoption. The new guidance clarifies 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 primary impact to us of adopting
this new guidance was the refinement of how we define an
insignificant delay. As a result, we lowered our threshold for
an insignificant delay from approximately nine missed payments
to three missed payments and thus this type of additional loss
mitigation activity that had previously been excluded is now
considered a TDR. This refinement was necessary in order to
conform our policy to the new guidance on insignificant delay
provided by the FASB.
As a result of adopting the new TDR accounting standard, we
identified approximately 22,000 loan restructurings for the nine
months ended September 30, 2011 that had not defaulted as
of September 30, 2011 and were not previously considered
TDRs. The impact of this was an increase in our provision for
loan losses of $514 million in our condensed consolidated
statements of operations and comprehensive loss for the three
months ended September 30, 2011. This amount includes the
net increase in our allowance for loan losses due to identifying
these restructurings as TDRs and measuring their impairment on
an individual basis offset by the elimination of our allowance
for loan loss measured on a collective basis related to these
loans.
Fair
Value (Losses) Gains, Net
The following table displays the composition of “Fair value
(losses) gains, net” for the three and nine months ended
September 30, 2011 and 2010.
|
For the Three
|
For the Nine
|
|||||||||||||||
|
Months Ended
|
Months Ended
|
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Derivatives fair value losses, net
|
$ | (4,255 | ) | $ | (124 | ) | $ | (5,793 | ) | $ | (3,283 | ) | ||||
|
Trading securities (losses) gains, net
|
(214 | ) | 889 | 146 | 2,587 | |||||||||||
|
Other, net
|
(56 | ) | (240 | ) | (223 | ) | (181 | ) | ||||||||
|
Fair value (losses) gains, net
|
$ | (4,525 | ) | $ | 525 | $ | (5,870 | ) | $ | (877 | ) | |||||
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)
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 | |||||||
|
Servicer and MBS trust payable
|
2,950 | |||||||
|
Other liabilities
|
10,400 | 13,673 | ||||||
113
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 represents the line items that we
reclassified and condensed in our condensed consolidated
statements of operations and comprehensive loss for the three
and nine months ended September 30, 2010.
|
For the Three Months Ended
|
For the Nine Months Ended
|
|||||||||||||||
| September 30, 2010 | September 30, 2010 | |||||||||||||||
|
Before
|
After
|
Before
|
After
|
|||||||||||||
| Reclassification | Reclassification | Reclassification | Reclassification | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Reclassified lines to:
|
||||||||||||||||
|
Interest income:
|
||||||||||||||||
|
Mortgage loans:
|
||||||||||||||||
|
Of Fannie Mae
|
$ | 3,859 | $ | $ | 11,107 | $ | ||||||||||
|
Of consolidated trusts
|
32,807 | 100,810 | ||||||||||||||
|
Mortgage loans (includes $32,807 and $100,810, respectively,
related to consolidated trusts)
|
36,666 | 111,917 | ||||||||||||||
|
Interest expense:
|
||||||||||||||||
|
Short-term debt:
|
||||||||||||||||
|
Of Fannie Mae
|
190 | 470 | ||||||||||||||
|
Of consolidated trusts
|
4 | 9 | ||||||||||||||
|
Long-term debt:
|
||||||||||||||||
|
Of Fannie Mae
|
4,472 | 14,528 | ||||||||||||||
|
Of consolidated trusts
|
28,878 | 90,379 | ||||||||||||||
|
Short-term debt (includes $4 and $9, respectively, related to
consolidated trusts)
|
194 | 479 | ||||||||||||||
|
Long-term debt (includes $28,878 and $90,379, respectively,
related to consolidated trusts)
|
33,350 | 104,907 | ||||||||||||||
|
Guaranty fee income
|
51 | 157 | ||||||||||||||
|
Fee and other income
|
253 | 304 | 674 | 831 | ||||||||||||
|
Income (losses) from partnership investments
|
47 | (37 | ) | |||||||||||||
|
Other expenses
|
243 | 196 | 613 | 650 | ||||||||||||
New
Accounting Pronouncements
In May 2011, the FASB issued amendments to the guidance
pertaining to fair value measurement and disclosure. The
amendments create a common definition of fair value for GAAP and
International Financial Reporting Standards (“IFRS”)
and align the measurement and disclosure requirements. These
amendments provide further guidance on some of the principles
for measuring fair value and expand the disclosure requirements
specifically for Level 3 fair value measurements. The new
requirements are effective for us on January 1, 2012 and
will be applied prospectively. We do not expect that the
adoption of these amendments will have a material impact on our
consolidated financial statements.
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)
| 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 September 30, 2011, we consolidated certain Fannie
Mae securities 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 securities, which had combined total assets
of $2.9 billion in unpaid principal balance as of
September 30, 2011, we derecognized our investment in these
trusts and recognized the assets and liabilities of the
consolidated trusts at their fair value.
As of September 30, 2011, we deconsolidated VIEs that were
consolidated as of December 31, 2010. These VIEs were
Fannie Mae securitization trusts and were deconsolidated because
we no longer hold in our portfolio a substantial portion of the
certificates. As a result of deconsolidating these trusts, which
had combined total assets of $446 million in unpaid
principal balance as of December 31, 2010, we derecognized
the assets and liabilities of the trusts and recognized at fair
value our retained interests as securities in our condensed
consolidated balance sheet.
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
September 30, 2011 and December 31, 2010, as well as
our maximum exposure to loss and the total assets of those
unconsolidated VIEs.
| As of September 30, 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)
|
$ | 73,814 | $ | — | $ | — | ||||||
|
Trading
securities
(1)
|
24,862 | 2,465 | — | |||||||||
|
Other assets
|
270 | — | 131 | |||||||||
|
Other liabilities
|
1,257 | — | 150 | |||||||||
|
Net carrying amount
|
$ | 97,689 | $ | 2,465 | $ | (19 | ) | |||||
|
Maximum exposure to
loss
(1)
|
$ | 104,477 | $ | 2,465 | $ | 117 | ||||||
|
Total assets of unconsolidated
VIEs
(1)
|
$ | 674,599 | $ | 323,035 | $ | 13,119 | ||||||
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)
| 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
September 30, 2011 and 2010, the unpaid principal balance
of portfolio securitizations was $22.0 billion and
$35.1 billion, respectively. For the nine months ended
September 30, 2011 and 2010, the unpaid principal balance
of portfolio securitizations was $78.7 billion and
$68.0 billion, respectively.
The following table displays some key characteristics of the
securities retained in unconsolidated portfolio securitization
trusts.
|
Fannie Mae
|
||||||||
|
Single-class
|
||||||||
|
MBS & Fannie
|
REMICS &
|
|||||||
| Mae Megas | SMBS | |||||||
| (Dollars in millions) | ||||||||
|
As of September 30, 2011
|
||||||||
|
Unpaid principal balance
|
$ | 618 | $ | 14,008 | ||||
|
Fair value
|
683 | 15,320 | ||||||
|
Weighted-average coupon
|
6.21 | % | 5.96 | % | ||||
|
Weighted-average loan age
|
5.1 years | 4.5 years | ||||||
|
Weighted-average maturity
|
23.8 years | 19.5 years | ||||||
|
As of December 31, 2010
|
||||||||
|
Unpaid principal balance
|
$ | 63 | $ | 15,771 | ||||
|
Fair value
|
68 | 16,745 | ||||||
|
Weighted-average coupon
|
6.58 | % | 6.28 | % | ||||
|
Weighted-average loan age
|
4.2 years | 4.4 years | ||||||
|
Weighted-average maturity
|
25.6 years | 22.0 years | ||||||
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)
For the three months ended September 30, 2011 and 2010, the
principal and interest received on retained interests was
$777 million and $855 million, respectively. For the
nine months ended September 30, 2011 and 2010, the
principal and interest received on retained interests was
$2.2 billion and $2.6 billion, 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
September 30, 2011 and December 31, 2010.
| As of | ||||||||||||||||
| September 30, 2011 | December 31, 2010 | |||||||||||||||
|
Unpaid Principal
|
Principal Amount of
|
Unpaid Principal
|
Principal Amount of
|
|||||||||||||
| Balance | Delinquent Loans (1) | Balance | Delinquent Loans (1) | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Loans held for investment
|
||||||||||||||||
|
Of Fannie Mae
|
$ | 401,610 | $ | 124,595 | $ | 423,686 | $ | 141,342 | ||||||||
|
Of consolidated trusts
|
2,567,502 | 25,808 | 2,565,347 | 34,080 | ||||||||||||
|
Loans held for sale
|
335 | 60 | 964 | 127 | ||||||||||||
|
Securitized loans
|
2,219 | 66 | 2,147 | 78 | ||||||||||||
|
Total loans managed
|
$ | 2,971,666 | $ | 150,529 | $ | 2,992,144 | $ | 175,627 | ||||||||
| (1) | Represents the unpaid principal balance of loans held for investment, loans held for sale and securitized loans 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
The majority of our portfolio securitization transactions do not
qualify for sale treatment. 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. Our continuing involvement in the
form of guaranty assets and guaranty liabilities with assets
that were transferred into unconsolidated trusts is not material.
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
$143 million and $169 million for the three months
ended September 30, 2011 and 2010, respectively. Proceeds
from the initial sale of securities from portfolio
securitizations were $764 million and $544 million for
the nine months ended September 30, 2011 and 2010,
respectively.
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)
| 3. | Mortgage Loans |
The following table displays our mortgage loans as of
September 30, 2011 and December 31, 2010.
| As of | ||||||||||||||||||||||||
| September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
|
Of
|
Of
|
Of
|
Of
|
|||||||||||||||||||||
|
Fannie
|
Consolidated
|
Fannie
|
Consolidated
|
|||||||||||||||||||||
| Mae | Trusts | Total | Mae | Trusts | Total | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Single-family
|
$ | 319,756 | $ | 2,474,912 | $ | 2,794,668 | $ | 328,824 | $ | 2,490,623 | $ | 2,819,447 | ||||||||||||
|
Multifamily
|
82,136 | 92,643 | 174,779 | 95,157 | 75,393 | 170,550 | ||||||||||||||||||
|
Total unpaid principal balance of mortgage loans
|
401,892 | 2,567,555 | 2,969,447 | 423,981 | 2,566,016 | 2,989,997 | ||||||||||||||||||
|
Cost basis and fair value adjustments, net
|
(16,389 | ) | 16,197 | (192 | ) | (16,498 | ) | 11,777 | (4,721 | ) | ||||||||||||||
|
Allowance for loan losses for
|
||||||||||||||||||||||||
|
loans held for investment
|
(55,398 | ) | (16,037 | ) | (71,435 | ) | (48,530 | ) | (13,026 | ) | (61,556 | ) | ||||||||||||
|
Total mortgage loans
|
$ | 330,105 | $ | 2,567,715 | $ | 2,897,820 | $ | 358,953 | $ | 2,564,767 | $ | 2,923,720 | ||||||||||||
During the three months ended September 30, 2011, we did
not redesignate any loans from held for investment
(“HFI”) to held for sale (“HFS”). During the
nine months ended September 30, 2011, we redesignated loans
with a carrying value of $561 million from HFI to 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 September 30, 2011 and
December 31, 2010.
| As of September 30, 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)
|
$ | 43,721 | $ | 15,523 | $ | 82,808 | $ | 142,052 | $ | 2,330,328 | $ | 2,472,380 | $ | 122 | $ | 98,154 | ||||||||||||||||
|
Government
(4)
|
105 | 46 | 312 | 463 | 51,458 | 51,921 | 312 | — | ||||||||||||||||||||||||
|
Alt-A
|
7,445 | 3,261 | 30,126 | 40,832 | 143,126 | 183,958 | 15 | 33,366 | ||||||||||||||||||||||||
|
Other
(5)
|
3,586 | 1,556 | 11,940 | 17,082 | 75,753 | 92,835 | 101 | 13,305 | ||||||||||||||||||||||||
|
Total single-family
|
54,857 | 20,386 | 125,186 | 200,429 | 2,600,665 | 2,801,094 | 550 | 144,825 | ||||||||||||||||||||||||
|
Multifamily
(6)
|
519 | NA | 753 | 1,272 | 175,761 | 177,033 | — | 698 | ||||||||||||||||||||||||
|
Total
|
$ | 55,376 | $ | 20,386 | $ | 125,939 | $ | 201,701 | $ | 2,776,426 | $ | 2,978,127 | $ | 550 | $ | 145,523 | ||||||||||||||||
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 December 31, 2010 (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)
|
$ | 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 are 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 single-family HFI loans, excluding loans for which we have
elected the fair value option, by class and credit quality
indicator as of September 30, 2011 and December 31,
2010. The single-family credit quality indicator is updated
quarterly.
| As of | ||||||||||||||||||||||||
| September 30, 2011 (1)(2) | December 31, 2010 (1)(2) | |||||||||||||||||||||||
| Primary (3) | Alt-A | Other (4) | Primary (3) | Alt-A | Other (4) | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Estimated
mark-to-market
LTV
ratio:
(5)
|
||||||||||||||||||||||||
|
Less than or equal to 80%
|
$ | 1,543,118 | $ | 68,340 | $ | 26,170 | $ | 1,561,202 | $ | 79,305 | $ | 29,854 | ||||||||||||
|
80.01% to 90%
|
377,448 | 23,146 | 10,371 | 376,414 | 27,472 | 13,394 | ||||||||||||||||||
|
90.01% to 100%
|
223,477 | 20,355 | 10,111 | 217,193 | 24,392 | 12,935 | ||||||||||||||||||
|
100.01% to 110%
|
117,339 | 16,051 | 9,275 | 112,376 | 18,022 | 11,400 | ||||||||||||||||||
|
110.01% to 120%
|
66,747 | 11,974 | 7,980 | 62,283 | 12,718 | 8,967 | ||||||||||||||||||
|
120.01% to 125%
|
23,692 | 4,878 | 3,368 | 21,729 | 5,083 | 3,733 | ||||||||||||||||||
|
Greater than 125%
|
120,559 | 39,214 | 25,560 | 106,288 | 40,160 | 25,096 | ||||||||||||||||||
|
Total
|
$ | 2,472,380 | $ | 183,958 | $ | 92,835 | $ | 2,457,485 | $ | 207,152 | $ | 105,379 | ||||||||||||
| (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 $51.9 billion and $52.5 billion as of September 30, 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 |
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)
| 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. |
The following table displays the total recorded investment in
our multifamily HFI loans, excluding loans for which we have
elected the fair value option, by credit quality indicator as of
September 30, 2011 and December 31, 2010. We stratify
multifamily loans into different internal risk rating categories
based on the credit risk inherent in each individual loan. We
categorize loan credit risk based on relevant observable data
about a borrower’s ability to pay, including multifamily
market economic fundamentals, review of available current
borrower financial information (e.g. current debt service
coverage ratios), operating statements on the underlying
collateral, historical payment experience, estimates of the
current collateral values and other related credit
documentation. As a result of this analysis, multifamily loans
are categorized based on management’s judgment into the
following categories: (1) Green (loan with acceptable
risk); (2) Yellow (loan with signs of potential weakness);
(3) Orange (loan with a well defined weakness that may
jeopardize the timely full repayment); and (4) Red (loan
with a weakness that makes timely collection or liquidation in
full highly questionable based on existing conditions and
values). We evaluate loans in the orange and red risk rating
categories to determine which ones are individually impaired.
The multifamily credit quality indicator is updated quarterly.
| As of | ||||||||
| September 30, 2011 (1) | December 31, 2010 (1) | |||||||
| (Dollars in millions) | ||||||||
|
Credit risk profile by internally assigned grade:
|
||||||||
|
Green
|
$ | 127,551 | $ | 117,388 | ||||
|
Yellow
(2)
|
29,567 | 34,651 | ||||||
|
Orange
|
17,924 | 18,075 | ||||||
|
Red
|
1,991 | 2,400 | ||||||
|
Total
|
$ | 177,033 | $ | 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) | Includes approximately $9.1 billion and $9.7 billion of unpaid principal balance as of September 30, 2011 and December 31, 2010, respectively, classified solely due to past due financial information. |
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)
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,
and related allowance as of September 30, 2011 and
December 31, 2010 and interest income recognized and
average recorded investment for the three and nine months ended
September 30, 2011 for individually impaired loans.
| As of September 30, 2011 | For the Three Months Ended September 30, 2011 | For the Nine Months Ended September 30, 2011 | ||||||||||||||||||||||||||||||||||||||
|
Related
|
||||||||||||||||||||||||||||||||||||||||
|
Allowance for
|
Interest
|
|||||||||||||||||||||||||||||||||||||||
|
Unpaid
|
Total
|
Related
|
Accrued
|
Average
|
Total Interest
|
Income
|
Average
|
Total Interest
|
Interest Income
|
|||||||||||||||||||||||||||||||
|
Principal
|
Recorded
|
Allowance for
|
Interest
|
Recorded
|
Income
|
Recognized on
|
Recorded
|
Income
|
Recognized on a
|
|||||||||||||||||||||||||||||||
| Balance | Investment (1) | Loan Losses | Receivable | Investment | Recognized (2) | a Cash Basis | Investment | Recognized (2) | Cash Basis | |||||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
|
Individually impaired loans:
|
||||||||||||||||||||||||||||||||||||||||
|
With related allowance recorded:
|
||||||||||||||||||||||||||||||||||||||||
|
Single-family:
|
||||||||||||||||||||||||||||||||||||||||
|
Primary
(3)
|
$ | 115,961 | $ | 108,489 | $ | 28,709 | $ | 639 | $ | 102,555 | $ | 949 | $ | 183 | $ | 99,495 | $ | 2,764 | $ | 550 | ||||||||||||||||||||
|
Government
(4)
|
247 | 247 | 58 | 7 | 280 | 3 | — | 270 | 9 | — | ||||||||||||||||||||||||||||||
|
Alt-A
|
34,034 | 31,159 | 10,865 | 277 | 29,755 | 247 | 45 | 29,459 | 728 | 143 | ||||||||||||||||||||||||||||||
|
Other
(5)
|
16,088 | 15,237 | 5,175 | 101 | 14,630 | 111 | 22 | 14,295 | 323 | 69 | ||||||||||||||||||||||||||||||
|
Total single-family
|
166,330 | 155,132 | 44,807 | 1,024 | 147,220 | 1,310 | 250 | 143,519 | 3,824 | 762 | ||||||||||||||||||||||||||||||
|
Multifamily
|
2,877 | 2,896 | 704 | 27 | 2,485 | 26 | 2 | 2,324 | 74 | 5 | ||||||||||||||||||||||||||||||
|
Total individually impaired loans with related allowance recorded
|
169,207 | 158,028 | 45,511 | 1,051 | 149,705 | 1,336 | 252 | 145,843 | 3,898 | 767 | ||||||||||||||||||||||||||||||
|
With no related allowance
recorded:
(6)
|
||||||||||||||||||||||||||||||||||||||||
|
Single-family:
|
||||||||||||||||||||||||||||||||||||||||
|
Primary
(3)
|
8,284 | 5,624 | — | — | 7,118 | 175 | 58 | 6,019 | 427 | 146 | ||||||||||||||||||||||||||||||
|
Government
(4)
|
19 | 12 | — | — | 21 | 2 | — | 14 | 6 | — | ||||||||||||||||||||||||||||||
|
Alt-A
|
2,962 | 1,467 | — | — | 1,832 | 68 | 21 | 1,443 | 154 | 47 | ||||||||||||||||||||||||||||||
|
Other
(5)
|
638 | 342 | — | — | 483 | 18 | 6 | 403 | 39 | 13 | ||||||||||||||||||||||||||||||
|
Total single-family
|
11,903 | 7,445 | — | — | 9,454 | 263 | 85 | 7,879 | 626 | 206 | ||||||||||||||||||||||||||||||
|
Multifamily
|
908 | 914 | — | — | 836 | 12 | 2 | 799 | 37 | 7 | ||||||||||||||||||||||||||||||
|
Total individually impaired loans with no related allowance
recorded
|
12,811 | 8,359 | — | — | 10,290 | 275 | 87 | 8,678 | 663 | 213 | ||||||||||||||||||||||||||||||
|
Total individually impaired
loans
(7)
|
$ | 182,018 | $ | 166,387 | $ | 45,511 | $ | 1,051 | $ | 159,995 | $ | 1,611 | $ | 339 | $ | 154,521 | $ | 4,561 | $ | 980 | ||||||||||||||||||||
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)
|
For the Year
|
||||||||||||||||||||
|
Ended
|
||||||||||||||||||||
| As of December 31, 2010 | December 31, 2010 | |||||||||||||||||||
|
Related
|
||||||||||||||||||||
|
Unpaid
|
Related
|
Allowance for
|
Average
|
|||||||||||||||||
|
Principal
|
Total Recorded
|
Allowance for
|
Accrued
|
Recorded
|
||||||||||||||||
| Balance | Investment (1) | Loan Losses | Interest Receivable | Investment | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Individually impaired loans:
|
||||||||||||||||||||
|
With related allowance recorded:
|
||||||||||||||||||||
|
Single-family:
|
||||||||||||||||||||
|
Primary
(3)
|
$ | 99,838 | $ | 93,024 | $ | 23,565 | $ | 772 | $ | 81,258 | ||||||||||
|
Government
(4)
|
240 | 248 | 38 | 7 | 141 | |||||||||||||||
|
Alt-A
|
30,932 | 28,253 | 9,592 | 368 | 25,361 | |||||||||||||||
|
Other
(5)
|
14,429 | 13,689 | 4,479 | 137 | 12,094 | |||||||||||||||
|
Total single-family
|
145,439 | 135,214 | 37,674 | 1,284 | 118,854 | |||||||||||||||
|
Multifamily
|
2,372 | 2,371 | 556 | 23 | 1,496 | |||||||||||||||
|
Total individually impaired loans with related allowance recorded
|
147,811 | 137,585 | 38,230 | 1,307 | 120,350 | |||||||||||||||
|
With no related allowance
recorded:
(6)
|
||||||||||||||||||||
|
Single-family:
|
||||||||||||||||||||
|
Primary
(3)
|
10,586 | 7,237 | — | — | 7,860 | |||||||||||||||
|
Government
(4)
|
19 | 13 | — | — | 11 | |||||||||||||||
|
Alt-A
|
3,600 | 1,884 | — | — | 2,091 | |||||||||||||||
|
Other
(5)
|
879 | 512 | — | — | 589 | |||||||||||||||
|
Total single-family
|
15,084 | 9,646 | — | — | 10,551 | |||||||||||||||
|
Multifamily
|
789 | 811 | — | — | 642 | |||||||||||||||
|
Total individually impaired loans with no related allowance
recorded
|
15,873 | 10,457 | — | — | 11,193 | |||||||||||||||
|
Total individually impaired
loans
(7)
|
$ | 163,684 | $ | 148,042 | $ | 38,230 | $ | 1,307 | $ | 131,543 | ||||||||||
| (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 $1.6 billion for the three months ended September 30, 2011 consists of $1.1 billion of contractual interest and $427 million of effective yield adjustments. Total single-family interest income recognized of $4.5 billion for the nine months ended September 30, 2011 consists of $3.3 billion of contractual interest and $1.2 billion of effective yield adjustments. | |
| (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. |
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)
| (7) | Includes single-family loans restructured in a TDR with a recorded investment of $159.0 billion and $140.1 billion as of September 30, 2011 and December 31, 2010, respectively. Includes multifamily loans restructured in a TDR with a recorded investment of $1.0 billion and $939 million as of September 30, 2011 and December 31, 2010, respectively. |
Interest income recognized on impaired loans was
$1.4 billion for the three months ended September 30,
2010 and $4.1 billion for the nine months ended
September 30, 2010. Interest income recognized on a cash
basis on impaired loans was $511 million for the three
months ended September 30, 2010 and $1.4 billion for
the nine months ended September 30, 2010.
Troubled
Debt Restructurings
A modification to the contractual terms of a loan that results
in granting a concession to a borrower experiencing financial
difficulties is considered a TDR. In addition to formal loan
modifications, we also engage in other loss mitigation
activities with troubled borrowers, which include repayment
plans and forbearance arrangements, both of which represent
informal agreements with the borrower that do not result in the
legal modification of the loan’s contractual terms. As
described in our “Summary of Significant Accounting
Policies,” we account for these informal restructurings as
a TDR if we defer more than three missed payments. The
substantial majority of the loan modifications we complete
result in term extensions, interest rate reductions or a
combination of both. During the three and nine months ended
September 30, 2011, the average term extension of a
modified loan was 103 and 82 months, respectively, and the
average interest rate reduction of a modified loan was 2.63 and
3.14 percentage points, respectively.
Upon adoption of the new TDR standard, we reassessed all
modifications, forbearance arrangements, and repayment plans
that occurred on or after January 1, 2011 through
June 30, 2011 that were not previously considered TDRs and
for which the allowance for loan losses was measured on a
collective basis (“the transition population”). As of
September 30, 2011, the recorded investment related to
restructurings in the transition population that were not
previously considered TDRs was $2.3 billion and the
individually impaired allowance for loan losses on this
population was $605 million.
The following table displays the number of loans and recorded
investment in our loans restructured in a TDR during the three
and nine months ended September 30, 2011.
|
For the Three
|
For the Nine
|
|||||||||||||||
|
Months Ended
|
Months Ended
|
|||||||||||||||
| September 30, 2011 (5) | September 30, 2011 | |||||||||||||||
|
Number of
|
Recorded
|
Number of
|
Recorded
|
|||||||||||||
| Loans | Investment (1) | Loans | Investment (1) | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Single-family
|
||||||||||||||||
|
Primary
(2)
|
60,725 | $ | 10,594 | 132,682 | $ | 23,783 | ||||||||||
|
Government
(3)
|
201 | 24 | 497 | 86 | ||||||||||||
|
Alt-A
|
12,932 | 2,691 | 27,722 | 5,958 | ||||||||||||
|
Other
(4)
|
5,429 | 1,324 | 12,424 | 3,095 | ||||||||||||
|
Total Single-family
|
79,287 | 14,633 | 173,325 | 32,922 | ||||||||||||
|
Multifamily
|
13 | 39 | 42 | 214 | ||||||||||||
|
Total troubled debt restructurings
|
79,300 | $ | 14,672 | 173,367 | $ | 33,136 | ||||||||||
| (1) | Consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments and fair value adjustments; and (c) accrued interest receivable on HFI loans. Based on the nature of our modification programs, which do not include principal or interest forgiveness, there is not a material difference |
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)
| between the recorded investment in our loans pre- and post- modification, therefore amounts represent recorded investment post-modification. | ||
| (2) | Consists of mortgage loans that are not included in other loan classes. | |
| (3) | 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. | |
| (4) | Includes loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans that are neither government nor Alt-A. | |
| (5) | Includes recorded investment related to transition population. |
The following table displays the number of loans and recorded
investment of TDRs that had a payment default during the three
and nine months ended September 30, 2011 and were modified
in a TDR in the twelve months prior to the payment default. For
purposes of this disclosure, we define loans that had a payment
default as single-family and multifamily loans with completed
TDRs that liquidated during the period, either through
foreclosure,
deed-in-lieu
of foreclosure or a preforeclosure sale, single-family loans
with completed modifications that are two or more months
delinquent during the period or multifamily loans with completed
modifications that are one or more months delinquent during the
period.
| For the Three Months Ended September 30, 2011 | For the Nine Months Ended September 30, 2011 | |||||||||||||||
|
Number of
|
Recorded
|
Number of
|
Recorded
|
|||||||||||||
| Loans | Investment (1) | Loans | Investment (1) | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Single-family
|
||||||||||||||||
|
Primary
(2)
|
14,545 | $ | 2,531 | 52,532 | $ | 9,227 | ||||||||||
|
Government
(3)
|
70 | 17 | 252 | 68 | ||||||||||||
|
Alt-A
|
2,929 | 620 | 11,625 | 2,499 | ||||||||||||
|
Other
(4)
|
1,519 | 378 | 5,384 | 1,315 | ||||||||||||
|
Total single-family
|
19,063 | 3,546 | 69,793 | 13,109 | ||||||||||||
|
Multifamily
|
— | — | 8 | 49 | ||||||||||||
|
Total TDRs that subsequently defaulted
|
19,063 | $ | 3,546 | 69,801 | $ | 13,158 | ||||||||||
| (1) | Consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments; and (c) fair value adjustments and accrued interest receivable on HFI loans. Represents our recorded investment in the loan at time of payment default. | |
| (2) | Consists of mortgage loans that are not included in other loan classes. | |
| (3) | 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. | |
| (4) | Includes loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans that are neither government nor Alt-A. |
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 $67 million
for the three months ended September 30, 2011 and 2010,
respectively, and $144 million and $227 million for
the nine months ended September 30, 2011 and 2010,
respectively. The following table displays the outstanding
unpaid principal balance and accrued interest receivable,
carrying amount by accrual status and accretable yield of
acquired
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)
credit-impaired loans as of September 30, 2011 and
December 31, 2010, excluding loans that were modified as
TDRs subsequent to their acquisition from MBS trusts.
| As of | ||||||||
|
September 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Outstanding contractual balance
|
$ | 5,563 | $ | 8,519 | ||||
|
Carrying amount:
|
||||||||
|
Loans on accrual status
|
$ | 1,758 | $ | 2,029 | ||||
|
Loans on nonaccrual status
|
1,392 | 2,449 | ||||||
|
Total carrying amount of loans
|
$ | 3,150 | $ | 4,478 | ||||
|
Accretable yield
|
$ | 1,584 | $ | 2,412 | ||||
The following table displays interest income recognized and the
impact to the “Provision for loan losses” related to
loans that are still being accounted for as acquired
credit-impaired loans, as well as loans that have been
subsequently modified as a TDR, for the three and nine months
ended September 30, 2011 and 2010.
|
For the Three
|
||||||||||||||||
|
Months Ended
|
For the Nine
|
|||||||||||||||
| September 30, | Months Ended September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Accretion of fair value
discount
(1)
|
$ | 288 | $ | 231 | $ | 769 | $ | 785 | ||||||||
|
Interest income on loans returned to accrual status or
subsequently modified as TDRs
|
257 | 235 | 777 | 854 | ||||||||||||
|
Total interest income recognized on acquired credit-impaired
loans
|
$ | 545 | $ | 466 | $ | 1,546 | $ | 1,639 | ||||||||
|
(Decrease) increase in “Provision for loan losses”
subsequent to the acquisition of credit-impaired loans
|
$ | (275 | ) | $ | (125 | ) | $ | 684 | $ | 319 | ||||||
| (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 HFI loans in our
mortgage portfolio and loans backing Fannie Mae MBS issued from
consolidated trusts. When calculating our allowance for loan
losses, we consider only our net recorded investment in the loan
at the balance sheet date, which includes 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.
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)
Allowance
for Loan Losses
The following table displays changes in both single-family and
multifamily allowance for loan losses for the three and nine
months ended September 30, 2011 and total allowance for
loan losses for the three and nine months ended
September 30, 2011 and 2010.
| For the Three Months Ended September 30, | ||||||||||||||||||||||||||||
| 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
|
$ | 54,949 | $ | 13,078 | $ | 68,027 | ||||||||||||||||||||||
|
Provision for loan losses
|
(235 | ) | 4,318 | 4,083 | ||||||||||||||||||||||||
|
Charge-offs
(1)(6)
|
(3,802 | ) | (260 | ) | (4,062 | ) | ||||||||||||||||||||||
|
Recoveries
|
848 | 35 | 883 | |||||||||||||||||||||||||
|
Transfers
(2)
|
1,764 | (1,764 | ) | — | ||||||||||||||||||||||||
|
Other
(3)
|
860 | 137 | 997 | |||||||||||||||||||||||||
|
Ending balance
|
$ | 54,384 | $ | 15,544 | $ | 69,928 | ||||||||||||||||||||||
|
Multifamily allowance for loan losses:
|
||||||||||||||||||||||||||||
|
Beginning balance
|
$ | 1,017 | $ | 462 | $ | 1,479 | ||||||||||||||||||||||
|
Provision for loan losses
|
39 | 37 | 76 | |||||||||||||||||||||||||
|
Charge-offs
(1)
|
(51 | ) | — | (51 | ) | |||||||||||||||||||||||
|
Transfers
(2)
|
6 | (6 | ) | — | ||||||||||||||||||||||||
|
Other
(3)
|
3 | — | 3 | |||||||||||||||||||||||||
|
Ending balance
|
$ | 1,014 | $ | 493 | $ | 1,507 | ||||||||||||||||||||||
|
Total allowance for loan losses:
|
||||||||||||||||||||||||||||
|
Beginning balance
|
$ | 55,966 | $ | 13,540 | $ | 69,506 | $ | 42,844 | $ | 17,738 | $ | 60,582 | ||||||||||||||||
|
Total provision for loan losses
|
(196 | ) | 4,355 | 4,159 | 2,144 | 2,552 | 4,696 | |||||||||||||||||||||
|
Charge-offs
(1)(6)
|
(3,853 | ) | (260 | ) | (4,113 | ) | (5,946 | ) | (1,243 | ) | (7,189 | ) | ||||||||||||||||
|
Recoveries
|
848 | 35 | 883 | 205 | 304 | 509 | ||||||||||||||||||||||
|
Transfers
(2)
|
1,770 | (1,770 | ) | — | 5,131 | (5,131 | ) | — | ||||||||||||||||||||
|
Other
(3)
|
863 | 137 | 1,000 | 895 | 247 | 1,142 | ||||||||||||||||||||||
|
Ending
balance
(4)(5)
|
$ | 55,398 | $ | 16,037 | $ | 71,435 | $ | 45,273 | $ | 14,467 | $ | 59,740 | ||||||||||||||||
126
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 Nine Months Ended September 30, | ||||||||||||||||||||||||
| 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
|
9,962 | 10,410 | 20,372 | |||||||||||||||||||||
|
Charge-offs
(1)(6)
|
(14,766 | ) | (1,466 | ) | (16,232 | ) | ||||||||||||||||||
|
Recoveries
|
3,197 | 1,537 | 4,734 | |||||||||||||||||||||
|
Transfers
(2)
|
7,676 | (7,676 | ) | — | ||||||||||||||||||||
|
Other
(3)
|
938 | 136 | 1,074 | |||||||||||||||||||||
|
Ending balance
|
$ | 54,384 | $ | 15,544 | $ | 69,928 | ||||||||||||||||||
|
Multifamily allowance for loan losses:
|
||||||||||||||||||||||||
|
Beginning balance
|
$ | 1,153 | $ | 423 | $ | 1,576 | ||||||||||||||||||
|
Provision for loan losses
|
41 | 135 | 176 | |||||||||||||||||||||
|
Charge-offs
(1)
|
(252 | ) | — | (252 | ) | |||||||||||||||||||
|
Transfers
(2)
|
63 | (63 | ) | — | ||||||||||||||||||||
|
Other
(3)
|
9 | (2 | ) | 7 | ||||||||||||||||||||
|
Ending balance
|
$ | 1,014 | $ | 493 | $ | 1,507 | ||||||||||||||||||
|
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
|
10,003 | 10,545 | 20,548 | 11,008 | 9,922 | 20,930 | ||||||||||||||||||
|
Charge-offs
(1)(6)
|
(15,018 | ) | (1,466 | ) | (16,484 | ) | (12,097 | ) | (6,645 | ) | (18,742 | ) | ||||||||||||
|
Recoveries
|
3,197 | 1,537 | 4,734 | 367 | 872 | 1,239 | ||||||||||||||||||
|
Transfers
(2)
|
7,739 | (7,739 | ) | — | 41,606 | (41,606 | ) | — | ||||||||||||||||
|
Other
(3)
|
947 | 134 | 1,081 | (3,689 | ) | 6,501 | 2,812 | |||||||||||||||||
|
Ending
balance
(4)(5)
|
$ | 55,398 | $ | 16,037 | $ | 71,435 | $ | 45,273 | $ | 14,467 | $ | 59,740 | ||||||||||||
| (1) | Total charge-offs include accrued interest of $289 million and $811 million for the three months ended September 30, 2011 and 2010, respectively and $1.1 billion and $2.0 billion for the nine months ended September 30, 2011 and 2010, respectively. Single-family charge-offs include accrued interest of $279 million and $1.1 billion for the three and nine months ended September 30, 2011, respectively. Multifamily charge-offs include accrued interest of $10 million and $34 million for the three and nine months ended September 30, 2011, respectively. | |
| (2) | Includes transfers from trusts for delinquent loan purchases. | |
| (3) | Amounts represent the net activity recorded in our allowances for accrued interest receivable and preforeclosure property taxes and insurance receivable from borrowers. The provision for credit losses, charge-offs, recoveries and transfer activity included in this table reflects all changes for both the allowance for loan losses and the valuation allowances for accrued interest and preforeclosure property taxes and insurance receivable that relate to the mortgage loans. |
127
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) | Includes $334 million and $397 million as of September 30, 2011 and 2010, respectively, for acquired credit-impaired loans. | |
| (5) | Total single-family allowance for loan losses was $58.3 billion as of September 30, 2010. Total multifamily allowance for loan losses was $1.4 billion as of September 30, 2010. | |
| (6) | While we purchase the substantial majority of loans that are four or more months delinquent from our MBS trusts, we do not exercise this option to purchase loans during a forbearance period. Accordingly, charge-offs of consolidated trusts generally represent loans that remained in our consolidated trusts at the time of default. |
As of September 30, 2011, the allowance for accrued
interest receivable for loans of Fannie Mae was
$1.9 billion and for loans of consolidated trusts was
$304 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.
In the three month period ended June 30, 2010, we
identified that for a portion of our delinquent loans we had not
estimated and recorded our obligation to reimburse servicers for
advances they made on our behalf for preforeclosure property
taxes and insurance. We previously recognized these expenses
when we reimbursed servicers. We also did not record a
receivable from borrowers for these payments or assess the
collectibility of the receivable. The nine month period ended
September 30, 2010 includes an
out-of-period
adjustment of $1.1 billion to our condensed consolidated
statements of operations reflecting our assessment of the
collectibility of the receivable from borrowers.
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
September 30, 2011 and December 31, 2010.
| As of | ||||||||||||||||||||||||
| September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
|
Single-
|
Single-
|
|||||||||||||||||||||||
| Family | Multifamily | Total | Family | Multifamily | Total | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Allowance for loan losses by segment:
|
||||||||||||||||||||||||
|
Individually impaired loans
|
$ | 44,475 | $ | 702 | $ | 45,177 | $ | 37,296 | $ | 549 | $ | 37,845 | ||||||||||||
|
Collectively reserved loans
|
25,121 | 803 | 25,924 | 22,306 | 1,020 | 23,326 | ||||||||||||||||||
|
Acquired credit-impaired loans
|
332 | 2 | 334 | 378 | 7 | 385 | ||||||||||||||||||
|
Total allowance for loan losses
|
$ | 69,928 | $ | 1,507 | $ | 71,435 | $ | 59,980 | $ | 1,576 | $ | 61,556 | ||||||||||||
|
Recorded investment in loans by
segment:
(1)
|
||||||||||||||||||||||||
|
Individually impaired loans
|
$ | 159,031 | $ | 3,760 | $ | 162,791 | $ | 140,062 | $ | 3,074 | $ | 143,136 | ||||||||||||
|
Collectively reserved loans
|
2,638,517 | 173,223 | 2,811,740 | 2,677,640 | 169,332 | 2,846,972 | ||||||||||||||||||
|
Acquired credit-impaired loans
|
3,546 | 50 | 3,596 | 4,798 | 108 | 4,906 | ||||||||||||||||||
|
Total recorded investment in loans
|
$ | 2,801,094 | $ | 177,033 | $ | 2,978,127 | $ | 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. |
128
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 (losses)
gains, 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
September 30, 2011 and December 31, 2010.
| As of | ||||||||
|
September 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Mortgage-related securities:
|
||||||||
|
Fannie Mae
|
$ | 7,529 | $ | 7,398 | ||||
|
Freddie Mac
|
2,866 | 1,326 | ||||||
|
Ginnie Mae
|
297 | 590 | ||||||
|
Alt-A private-label securities
|
1,454 | 1,683 | ||||||
|
Subprime private-label securities
|
1,318 | 1,581 | ||||||
|
CMBS
|
10,600 | 10,764 | ||||||
|
Mortgage revenue bonds
|
718 | 609 | ||||||
|
Other mortgage-related securities
|
147 | 152 | ||||||
|
Total
|
24,929 | 24,103 | ||||||
|
Non-mortgage-related securities:
|
||||||||
|
U.S. Treasury securities
|
40,755 | 27,432 | ||||||
|
Asset-backed securities
|
2,465 | 5,321 | ||||||
|
Total
|
43,220 | 32,753 | ||||||
|
Total trading securities
|
$ | 68,149 | $ | 56,856 | ||||
|
Losses in trading securities held in our portfolio, net
|
$ | 1,986 | $ | 2,149 | ||||
The following table displays information about our net trading
gains and losses for the three and nine months ended
September 30, 2011 and 2010.
|
For the Three
|
For the Nine
|
|||||||||||||||
|
Months Ended
|
Months Ended
|
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Net trading (losses) gains:
|
||||||||||||||||
|
Mortgage-related securities
|
$ | (209 | ) | $ | 879 | $ | 151 | $ | 2,497 | |||||||
|
Non-mortgage-related securities
|
(5 | ) | 10 | (5 | ) | 90 | ||||||||||
|
Total
|
$ | (214 | ) | $ | 889 | $ | 146 | $ | 2,587 | |||||||
|
Net trading (losses) gains recorded in the period related to
|
||||||||||||||||
|
securities still held at period end:
|
||||||||||||||||
|
Mortgage-related securities
|
$ | (206 | ) | $ | 872 | $ | 145 | $ | 2,368 | |||||||
|
Non-mortgage-related securities
|
— | 7 | 2 | 71 | ||||||||||||
|
Total
|
$ | (206 | ) | $ | 879 | $ | 147 | $ | 2,439 | |||||||
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)
Available-for-Sale
Securities
We measure AFS securities at fair value with unrealized gains
and losses recorded as a component of “Other comprehensive
(loss) 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 and nine
months ended September 30, 2011 and 2010.
|
For the Three
|
For the Nine
|
|||||||||||||||
|
Months Ended
|
Months Ended
|
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Gross realized gains
|
$ | 15 | $ | 170 | $ | 148 | $ | 515 | ||||||||
|
Gross realized losses
|
22 | 101 | 75 | 280 | ||||||||||||
|
Total
proceeds
(1)
|
597 | 978 | 1,826 | 6,552 | ||||||||||||
| (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 nine months ended September 30, 2010, proceeds were increased by $416 million, from what was previously disclosed, related to deconsolidated REMICs that were previously 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 September 30, 2011
and December 31, 2010.
| As of September 30, 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
|
$ | 17,698 | $ | 1,559 | $ | (4 | ) | $ | (15 | ) | $ | 19,238 | ||||||||
|
Freddie Mac
|
12,781 | 968 | — | — | 13,749 | |||||||||||||||
|
Ginnie Mae
|
807 | 132 | — | — | 939 | |||||||||||||||
|
Alt-A private-label securities
|
14,299 | 215 | (1,989 | ) | (238 | ) | 12,287 | |||||||||||||
|
Subprime private-label securities
|
10,367 | 3 | (2,040 | ) | (443 | ) | 7,887 | |||||||||||||
|
CMBS
(4)
|
14,598 | 62 | — | (270 | ) | 14,390 | ||||||||||||||
|
Mortgage revenue bonds
|
10,635 | 180 | (25 | ) | (183 | ) | 10,607 | |||||||||||||
|
Other mortgage-related securities
|
3,771 | 144 | (21 | ) | (281 | ) | 3,613 | |||||||||||||
|
Total
|
$ | 84,956 | $ | 3,263 | $ | (4,079 | ) | $ | (1,430 | ) | $ | 82,710 | ||||||||
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)
| 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 (OTTI) 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 $725 million and $848 million as of September 30, 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 September 30, 2011 and December 31, 2010.
| As of September 30, 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
|
$ | (6 | ) | $ | 758 | $ | (13 | ) | $ | 186 | ||||||
|
Alt-A private-label securities
|
(157 | ) | 1,544 | (2,070 | ) | 7,072 | ||||||||||
|
Subprime private-label securities
|
(206 | ) | 992 | (2,277 | ) | 6,843 | ||||||||||
|
CMBS
|
(110 | ) | 7,572 | (160 | ) | 2,982 | ||||||||||
|
Mortgage revenue bonds
|
(9 | ) | 311 | (199 | ) | 2,718 | ||||||||||
|
Other mortgage-related securities
|
(12 | ) | 264 | (290 | ) | 1,508 | ||||||||||
|
Total
|
$ | (500 | ) | $ | 11,441 | $ | (5,009 | ) | $ | 21,309 | ||||||
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)
| 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 (loss)
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. $5.0 billion of the
$5.5 billion of gross unrealized losses on AFS securities
as of September 30, 2011 have existed for a period of 12
consecutive months or longer. Gross unrealized losses on AFS
securities as of September 30, 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 September 30, 2011 that was 81% 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 and nine months ended September 30, 2011 and 2010.
|
For the Three
|
For the Nine
|
|||||||||||||||
|
Months Ended
|
Months Ended
|
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2011 | 2010 (1) | 2011 | 2010 (1) | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Alt-A private-label securities
|
$ | 238 | $ | 153 | $ | 329 | $ | 310 | ||||||||
|
Subprime private-label securities
|
2 | 171 | 2 | 365 | ||||||||||||
|
Other
|
22 | 2 | 31 | 24 | ||||||||||||
|
Net
other-than-temporary
impairments
|
$ | 262 | $ | 326 | $ | 362 | $ | 699 | ||||||||
| (1) | Certain prior period amounts have been reclassified to conform to the current period presentation. |
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)
For the three and nine months ended September 30, 2011, we
recorded net
other-than-temporary
impairment of $262 million and $362 million,
respectively. The net
other-than-temporary
impairment charges recorded in the three month period ended
September 30, 2011 were primarily driven by an increase in
collateral losses 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 and recognized in
earnings for the three and nine months ended September 30,
2011 and 2010. A related unrealized non-credit component has
been recognized in “Accumulated other comprehensive
loss.”
|
For the Three
|
For the Nine
|
|||||||||||||||
| Months Ended September 30, | Months Ended September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Balance, beginning of period
|
$ | 7,876 | $ | 8,181 | $ | 8,215 | $ | 8,191 | ||||||||
|
Additions for the credit component on debt securities for which
OTTI
|
||||||||||||||||
|
was not previously recognized
|
— | 6 | 8 | 21 | ||||||||||||
|
Additions for credit losses on debt securities for which OTTI was
|
||||||||||||||||
|
previously recognized
|
262 | 320 | 354 | 678 | ||||||||||||
|
Reductions for securities no longer in portfolio at period end
|
(5 | ) | (102 | ) | (5 | ) | (154 | ) | ||||||||
|
Reductions for amortization resulting from increases in cash
flows
|
||||||||||||||||
|
expected to be collected over the remaining life of the
securities
|
(253 | ) | (137 | ) | (692 | ) | (468 | ) | ||||||||
|
Balance, end of period
|
$ | 7,880 | $ | 8,268 | $ | 7,880 | $ | 8,268 | ||||||||
As of September 30, 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 and nine months ended
September 30, 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.
133
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
The following table displays 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 September 30, 2011 | ||||||||||||||||||||
| Alt-A | ||||||||||||||||||||
| Subprime | Option ARM | Fixed Rate | Variable Rate | Hybrid Rate | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Vintage Year
|
||||||||||||||||||||
|
2004 & Prior:
|
||||||||||||||||||||
|
Unpaid principal balance
|
$ | 1,699 | $ | 487 | $ | 3,497 | $ | 501 | $ | 2,311 | ||||||||||
|
Weighted average collateral
default
(1)
|
36.6 | % | 36.6 | % | 10.5 | % | 31.4 | % | 16.0 | % | ||||||||||
|
Weighted average collateral
severities
(2)
|
59.8 | 51.9 | 47.0 | 41.1 | 38.6 | |||||||||||||||
|
Weighted average voluntary prepayment
rates
(3)
|
6.9 | 11.6 | 12.7 | 9.2 | 12.5 | |||||||||||||||
|
Average credit
enhancement
(4)
|
51.1 | 16.3 | 12.1 | 22.3 | 10.5 | |||||||||||||||
|
2005
|
||||||||||||||||||||
|
Unpaid principal balance
|
$ | 179 | $ | 1,324 | $ | 1,202 | $ | 540 | $ | 2,389 | ||||||||||
|
Weighted average collateral
default
(1)
|
71.2 | % | 56.3 | % | 38.3 | % | 53.5 | % | 37.8 | % | ||||||||||
|
Weighted average collateral
severities
(2)
|
72.1 | 59.8 | 62.1 | 57.0 | 46.8 | |||||||||||||||
|
Weighted average voluntary prepayment
rates
(3)
|
2.5 | 6.4 | 9.3 | 7.4 | 9.1 | |||||||||||||||
|
Average credit
enhancement
(4)
|
65.3 | 24.8 | 1.4 | 17.9 | 5.1 | |||||||||||||||
|
2006
|
||||||||||||||||||||
|
Unpaid principal balance
|
$ | 11,792 | $ | 1,241 | $ | 533 | $ | 1,619 | $ | 1,716 | ||||||||||
|
Weighted average collateral
default
(1)
|
76.3 | % | 70.9 | % | 38.6 | % | 58.3 | % | 31.0 | % | ||||||||||
|
Weighted average collateral
severities
(2)
|
72.2 | 62.6 | 64.6 | 57.8 | 49.8 | |||||||||||||||
|
Weighted average voluntary prepayment
rates
(3)
|
2.5 | 3.4 | 8.4 | 6.5 | 9.8 | |||||||||||||||
|
Average credit
enhancement
(4)
|
17.5 | 17.0 | 2.3 | 0.2 | 0.6 | |||||||||||||||
|
2007 & After:
|
||||||||||||||||||||
|
Unpaid principal balance
|
$ | 609 | $ | — | $ | — | $ | — | $ | 120 | ||||||||||
|
Weighted average collateral
default
(1)
|
78.8 | % | N/A | N/A | N/A | 40.9 | % | |||||||||||||
|
Weighted average collateral
severities
(2)
|
68.7 | N/A | N/A | N/A | 57.7 | |||||||||||||||
|
Weighted average voluntary prepayment
rates
(3)
|
2.0 | N/A | N/A | N/A | 9.0 | |||||||||||||||
|
Average credit
enhancement
(4)
|
33.7 | N/A | N/A | N/A | 26.1 | |||||||||||||||
|
Total
|
||||||||||||||||||||
|
Unpaid principal balance
|
$ | 14,279 | $ | 3,052 | $ | 5,232 | $ | 2,660 | $ | 6,536 | ||||||||||
|
Weighted average collateral
default
(1)
|
71.6 | % | 59.1 | % | 19.7 | % | 52.2 | % | 28.4 | % | ||||||||||
|
Weighted average collateral
severities
(2)
|
70.6 | 59.7 | 52.3 | 54.5 | 44.9 | |||||||||||||||
|
Weighted average voluntary prepayment
rates
(3)
|
3.0 | 6.0 | 11.5 | 7.2 | 10.5 | |||||||||||||||
|
Average credit
enhancement
(4)
|
22.8 | 20.3 | 8.6 | 7.9 | 6.2 | |||||||||||||||
| (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. |
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)
| (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
September 30, 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 September 30, 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
|
$ | 17,698 | $ | 19,238 | $ | — | $ | — | $ | 6 | $ | 6 | $ | 2,645 | $ | 2,832 | $ | 15,047 | $ | 16,400 | ||||||||||||||||||||
|
Freddie Mac
|
12,781 | 13,749 | 1 | 1 | 46 | 48 | 1,331 | 1,439 | 11,403 | 12,261 | ||||||||||||||||||||||||||||||
|
Ginnie Mae
|
807 | 939 | — | — | — | — | 5 | 6 | 802 | 933 | ||||||||||||||||||||||||||||||
|
Alt-A private-label securities
|
14,299 | 12,287 | — | — | 1 | 1 | 249 | 252 | 14,049 | 12,034 | ||||||||||||||||||||||||||||||
|
Subprime private-label securities
|
10,367 | 7,887 | — | — | — | — | — | — | 10,367 | 7,887 | ||||||||||||||||||||||||||||||
|
CMBS
|
14,598 | 14,390 | 62 | 63 | 5,255 | 5,244 | 8,678 | 8,500 | 603 | 583 | ||||||||||||||||||||||||||||||
|
Mortgage revenue bonds
|
10,635 | 10,607 | 59 | 59 | 366 | 377 | 743 | 756 | 9,467 | 9,415 | ||||||||||||||||||||||||||||||
|
Other mortgage-related securities
|
3,771 | 3,613 | — | — | — | — | — | 14 | 3,771 | 3,599 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 84,956 | $ | 82,710 | $ | 122 | $ | 123 | $ | 5,674 | $ | 5,676 | $ | 13,651 | $ | 13,799 | $ | 65,509 | $ | 63,112 | ||||||||||||||||||||
Accumulated
Other Comprehensive Loss
The following table displays our accumulated other comprehensive
loss by major categories as of September 30, 2011 and
December 31, 2010.
| As of | ||||||||
|
September 30,
|
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, net of tax
|
$ | 1,049 | $ | 304 | ||||
|
Net unrealized losses on
available-for-sale
securities for which we have recorded
other-than-temporary
impairment, net of tax
|
(2,509 | ) | (1,736 | ) | ||||
|
Other losses
|
(236 | ) | (250 | ) | ||||
|
Accumulated other comprehensive loss
|
$ | (1,696 | ) | $ | (1,682 | ) | ||
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)
The following table displays the activity in other comprehensive
(loss) income, net of tax, by major categories for the three and
nine months ended September 30, 2011 and 2010.
|
For the Three
|
For the Nine
|
|||||||||||||||
|
Months Ended
|
Months Ended
|
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Comprehensive loss:
|
||||||||||||||||
|
Net loss
|
$ | (5,085 | ) | $ | (1,331 | ) | $ | (14,448 | ) | $ | (14,083 | ) | ||||
|
Other comprehensive (loss) income, net of tax:
|
||||||||||||||||
|
Changes in net unrealized losses on
available-for-sale
securities (net of tax benefit of $210 and tax of $380,
respectively, for the three months ended and net of tax benefit
of $142 and tax of $1,889, respectively, for the nine months
ended)
|
(391 | ) | 705 | (264 | ) | 3,507 | ||||||||||
|
Reclassification adjustment for
other-than-temporary
impairments recognized in net loss (net of tax of $92 and $113,
respectively, for the three months ended and net of tax of $120
and $239, respectively, for the nine months ended)
|
170 | 213 | 242 | 460 | ||||||||||||
|
Reclassification adjustment for losses (gains) included in net
loss (net of tax benefit of $10 and tax of $10, respectively,
for the three months ended and net of tax of $1 and $16,
respectively, for the nine months ended)
|
23 | (17 | ) | 2 | (29 | ) | ||||||||||
|
Other
|
1 | 1 | 6 | 6 | ||||||||||||
|
Other comprehensive (loss) income
|
(197 | ) | 902 | (14 | ) | 3,944 | ||||||||||
|
Total comprehensive loss
|
$ | (5,282 | ) | $ | (429 | ) | $ | (14,462 | ) | $ | (10,139 | ) | ||||
| 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
$56.5 billion and $52.4 billion as of
September 30, 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 $14.0 billion and $12.6 billion as of
September 30, 2011 and December 31, 2010,
respectively. In addition, we had exposure of $9.5 billion
and $10.3 billion for other guarantees not recognized in
our condensed consolidated balance sheets as of
September 30, 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 $4.1 billion and $3.9 billion as of
September 30, 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 $2.2 billion and $2.0 billion as of
September 30, 2011 and December 31, 2010, respectively.
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)
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 on single-family loans and low original debt service
coverage ratios on multifamily loans. We use this information,
in conjunction with housing market and economic conditions, to
structure our pricing and our eligibility and underwriting
criteria to reflect the current risk of loans with these
higher-risk characteristics, and in some cases we decide to
significantly reduce our participation in riskier loan product
categories. Management also uses this data together with other
credit risk measures to identify key trends that guide the
development of our loss mitigation strategies.
The following tables display the current delinquency status and
certain higher risk characteristics of our single-family
conventional and total multifamily guaranty book of business as
of September 30, 2011 and December 31, 2010.
| As of September 30, 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)
|
2.00 | % | 0.75 | % | 4.64 | % | 2.19 | % | 0.89 | % | 5.37 | % | ||||||||||||
|
Percentage of single-family conventional
loans
(4)
|
2.16 | 0.75 | 4.00 | 2.32 | 0.87 | 4.48 | ||||||||||||||||||
137
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| As of September 30, 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%
|
84 | % | 2.35 | % | 84 | % | 2.62 | % | ||||||||
|
100.01% to 110%
|
5 | 9.50 | 5 | 11.60 | ||||||||||||
|
110.01% to 120%
|
3 | 12.16 | 3 | 14.74 | ||||||||||||
|
120.01% to 125%
|
1 | 13.64 | 1 | 16.86 | ||||||||||||
|
Greater than 125%
|
7 | 19.83 | 7 | 24.71 | ||||||||||||
|
Geographical distribution:
|
||||||||||||||||
|
Arizona
|
2 | 3.78 | 2 | 6.23 | ||||||||||||
|
California
|
19 | 2.70 | 18 | 3.89 | ||||||||||||
|
Florida
|
6 | 11.90 | 7 | 12.31 | ||||||||||||
|
Nevada
|
1 | 7.53 | 1 | 10.66 | ||||||||||||
|
Select Midwest
states
(5)
|
10 | 4.55 | 11 | 4.80 | ||||||||||||
|
All other states
|
62 | 3.20 | 61 | 3.46 | ||||||||||||
|
Product distribution (not mutually exclusive):
(6)
|
||||||||||||||||
|
Alt-A
|
7 | 12.71 | 8 | 13.87 | ||||||||||||
|
Subprime
|
* | 23.91 | * | 28.20 | ||||||||||||
|
Negatively amortizing adjustable rate
|
* | 7.79 | * | 9.02 | ||||||||||||
|
Interest only
|
5 | 15.70 | 6 | 17.85 | ||||||||||||
|
Investor property
|
6 | 4.34 | 6 | 4.79 | ||||||||||||
|
Condo/Coop
|
9 | 4.74 | 9 | 5.37 | ||||||||||||
|
Original
loan-to-value
ratio
>90%
(7)
|
10 | 8.42 | 10 | 10.04 | ||||||||||||
|
FICO credit score
<620
(7)
|
3 | 13.56 | 4 | 14.63 | ||||||||||||
|
Original
loan-to-value
ratio >90% and FICO credit score
<620
(7)
|
1 | 18.99 | 1 | 21.41 | ||||||||||||
|
Vintages:
|
||||||||||||||||
|
2005
|
7 | 7.13 | 9 | 7.20 | ||||||||||||
|
2006
|
7 | 11.81 | 8 | 12.19 | ||||||||||||
|
2007
|
10 | 12.63 | 12 | 13.24 | ||||||||||||
|
2008
|
8 | 5.34 | 9 | 4.88 | ||||||||||||
|
All other vintages
|
68 | 1.60 | 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 approximately 99% of our total single-family conventional guaranty book of business as of both September 30, 2011 and December 31, 2010. | |
| (2) | Consists of single-family conventional loans that were three months or more past due or in the foreclosure process, as of the periods indicated. |
138
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| (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 ® . |
| As of September 30, 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
|
0.20 | % | 0.57 | % | 0.21 | % | 0.71 | % | ||||||||
| As of September 30, 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 | % | 1.52 | % | 5 | % | 0.59 | % | ||||||||
|
Less than or equal to 80%
|
95 | 0.53 | 95 | 0.71 | ||||||||||||
|
Original debt service coverage ratio:
|
||||||||||||||||
|
Less than or equal to 1.10
|
8 | 0.17 | 9 | 0.27 | ||||||||||||
|
Greater than 1.10
|
92 | 0.61 | 91 | 0.75 | ||||||||||||
|
Acquisition loan size distribution:
|
||||||||||||||||
|
Less than or equal to $750,000
|
2 | 1.37 | 2 | 1.61 | ||||||||||||
|
Greater than $750,000 and less than or equal to $3 million
|
11 | 1.11 | 12 | 1.17 | ||||||||||||
|
Greater than $3 million and less than or equal to
$5 million
|
9 | 0.80 | 9 | 0.88 | ||||||||||||
|
Greater than $5 million and less than or equal to
$25 million
|
42 | 0.63 | 42 | 0.88 | ||||||||||||
|
Greater than $25 million
|
36 | 0.23 | 35 | 0.24 | ||||||||||||
|
Maturing dates:
|
||||||||||||||||
|
Maturing in 2011
|
1 | 3.68 | 3 | 0.68 | ||||||||||||
|
Maturing in 2012
|
6 | 0.41 | 7 | 0.42 | ||||||||||||
|
Maturing in 2013
|
10 | 0.45 | 11 | 0.54 | ||||||||||||
|
Maturing in 2014
|
8 | 0.56 | 8 | 0.67 | ||||||||||||
|
Maturing in 2015
|
9 | 0.45 | 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 September 30, 2011 and December 31, 2010 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. |
139
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 and nine months ended September 30, 2011 and 2010.
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
| September 30, 2011 | September 30, 2011 | |||||||||||||||||||||||
|
Acquired
|
Valuation
|
Acquired
|
Acquired
|
Valuation
|
Acquired
|
|||||||||||||||||||
| Property | Allowance (1) | Property, Net | Property | Allowance (1) | Property, Net | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Balance as of beginning of period
|
$ | 14,915 | $ | (1,323 | ) | $ | 13,592 | $ | 18,054 | $ | (1,881 | ) | $ | 16,173 | ||||||||||
|
Additions
|
4,066 | (144 | ) | 3,922 | 13,953 | (422 | ) | 13,531 | ||||||||||||||||
|
Disposals
|
(5,606 | ) | 601 | (5,005 | ) | (18,632 | ) | 2,119 | (16,513 | ) | ||||||||||||||
|
Write-downs, net of recoveries
|
— | (314 | ) | (314 | ) | — | (996 | ) | (996 | ) | ||||||||||||||
|
Balance as of end of period
|
$ | 13,375 | $ | (1,180 | ) | $ | 12,195 | $ | 13,375 | $ | (1,180 | ) | $ | 12,195 | ||||||||||
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
| September 30, 2010 | September 30, 2010 | |||||||||||||||||||||||
|
Acquired
|
Valuation
|
Acquired
|
Acquired
|
Valuation
|
Acquired
|
|||||||||||||||||||
| Property | Allowance (1) | Property, Net | Property | Allowance (1) | Property, Net | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Balance as of beginning of period
|
$ | 15,141 | $ | (1,120 | ) | $ | 14,021 | $ | 9,716 | $ | (574 | ) | $ | 9,142 | ||||||||||
|
Additions
|
8,586 | (339 | ) | 8,247 | 22,176 | (629 | ) | 21,547 | ||||||||||||||||
|
Disposals
|
(4,618 | ) | 390 | (4,228 | ) | (12,783 | ) | 915 | (11,868 | ) | ||||||||||||||
|
Write-downs, net of recoveries
|
— | (450 | ) | (450 | ) | — | (1,231 | ) | (1,231 | ) | ||||||||||||||
|
Balance as of end of period
|
$ | 19,109 | $ | (1,519 | ) | $ | 17,590 | $ | 19,109 | $ | (1,519 | ) | $ | 17,590 | ||||||||||
| (1) | Reflects activities in the valuation allowance for acquired properties held primarily by our Single-Family segment. |
140
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)
| 8. |
|
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 September 30, 2011 and December 31,
2010.
| As of | ||||||||||||||||
| September 30, 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
|
$ | — | — | % | $ | 52 | 2.20 | % | ||||||||
|
Fixed-rate short-term debt:
|
||||||||||||||||
|
Discount notes
|
$ | 193,385 | 0.13 | % | $ | 151,500 | 0.32 | % | ||||||||
|
Foreign exchange discount notes
|
333 | 2.01 | 384 | 2.43 | ||||||||||||
|
Total short-term debt of Fannie Mae
|
193,718 | 0.14 | 151,884 | 0.32 | ||||||||||||
|
Debt of consolidated trusts
|
5,004 | 0.19 | 5,359 | 0.23 | ||||||||||||
|
Total short-term debt
|
$ | 198,722 | 0.14 | % | $ | 157,243 | 0.32 | % | ||||||||
| (1) | Includes the effects of discounts, premiums, and other cost basis adjustments. |
141
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
September 30, 2011 and December 31, 2010.
| As of | ||||||||||||||||||||
| September 30, 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 | $ | 281,876 | 2.90 | % | 2011-2030 | $ | 300,344 | 3.20 | % | ||||||||||
|
Medium-term notes
|
2011-2021 | 153,166 | 1.81 | 2011-2020 | 199,266 | 2.13 | ||||||||||||||
|
Foreign exchange notes and bonds
|
2021-2028 | 667 | 5.22 | 2017-2028 | 1,177 | 6.21 | ||||||||||||||
|
Other
(2)
|
2011-2040 | 44,241 | 5.59 | 2011-2040 | 44,893 | 5.64 | ||||||||||||||
|
Total senior fixed
|
479,950 | 2.80 | 545,680 | 3.02 | ||||||||||||||||
|
Senior floating:
|
||||||||||||||||||||
|
Medium-term notes
|
2011-2016 | 62,970 | 0.30 | 2011-2015 | 72,039 | 0.31 | ||||||||||||||
|
Other
(2)
|
2020-2037 | 421 | 6.61 | 2020-2037 | 386 | 4.92 | ||||||||||||||
|
Total senior floating
|
63,391 | 0.33 | 72,425 | 0.34 | ||||||||||||||||
|
Subordinated fixed:
|
||||||||||||||||||||
|
Qualifying
subordinated
(3)
|
2012-2014 | 4,893 | 5.08 | 2011-2014 | 7,392 | 5.47 | ||||||||||||||
|
Subordinated debentures
|
2019 | 2,851 | 9.91 | 2019 | 2,663 | 9.91 | ||||||||||||||
|
Total subordinated fixed
|
7,744 | 6.86 | 10,055 | 6.65 | ||||||||||||||||
|
Total long-term debt of Fannie
Mae
(4)
|
551,085 | 2.58 | 628,160 | 2.77 | ||||||||||||||||
|
Debt of consolidated
trusts
(2)
|
2011-2051 | 2,441,969 | 4.40 | 2011-2051 | 2,411,597 | 4.59 | ||||||||||||||
|
Total long-term debt
|
$ | 2,993,054 | 4.06 | % | $ | 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 $9.5 billion and $12.4 billion as of September 30, 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
September 30, 2011 and December 31, 2010. We had no
borrowings outstanding from these lines of credit as of
September 30, 2011 and December 31, 2010.
142
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 the right or
obligation associated with the cash collateral posted or
received, are recorded in “Other assets” or
“Other liabilities” in our condensed consolidated
balance sheets. We record all derivative gains and losses,
including accrued interest, in “Fair value (losses) gains,
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 September 30, 2011 and December 31, 2010.
| As of September 30, 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
|
$ | 36,990 | $ | 46 | $ | 156,892 | $ | (17,154 | ) | $ | 49,085 | $ | 1,812 | $ | 228,142 | $ | (14,115 | ) | ||||||||||||||
|
Receive-fixed
|
144,603 | 7,740 | 35,205 | (63 | ) | 172,174 | 6,493 | 52,003 | (578 | ) | ||||||||||||||||||||||
|
Basis
|
332 | 122 | 6,665 | (18 | ) | 435 | 29 | 50 | — | |||||||||||||||||||||||
|
Foreign currency
|
457 | 135 | 542 | (82 | ) | 1,274 | 164 | 286 | (51 | ) | ||||||||||||||||||||||
|
Swaptions:
|
||||||||||||||||||||||||||||||||
|
Pay-fixed
|
64,150 | 191 | 48,500 | (275 | ) | 66,200 | 482 | 30,950 | (1,773 | ) | ||||||||||||||||||||||
|
Receive-fixed
|
38,845 | 6,707 | 48,500 | (3,036 | ) | 48,340 | 4,992 | 30,275 | (673 | ) | ||||||||||||||||||||||
|
Interest rate caps
|
7,000 | 2 | — | — | 7,000 | 24 | — | — | ||||||||||||||||||||||||
|
Other
(1)
|
639 | 52 | 150 | (4 | ) | 909 | 75 | 25 | (1 | ) | ||||||||||||||||||||||
|
Total gross risk management derivatives
|
293,016 | 14,995 | 296,454 | (20,632 | ) | 345,417 | 14,071 | 341,731 | (17,191 | ) | ||||||||||||||||||||||
|
Accrued interest receivable (payable)
|
— | 770 | — | (1,319 | ) | — | 1,288 | — | (1,805 | ) | ||||||||||||||||||||||
|
Netting
adjustment
(2)
|
— | (15,539 | ) | — | 18,372 | — | (15,175 | ) | — | 18,023 | ||||||||||||||||||||||
|
Total net risk management derivatives
|
$ | 293,016 | $ | 226 | $ | 296,454 | $ | (3,579 | ) | $ | 345,417 | $ | 184 | $ | 341,731 | $ | (973 | ) | ||||||||||||||
143
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 September 30, 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
|
$ | 9,434 | $ | 84 | $ | 2,991 | $ | (12 | ) | $ | 2,880 | $ | 19 | $ | 4,435 | $ | (105 | ) | ||||||||||||||
|
Forward contracts to purchase mortgage-related securities
|
30,447 | 365 | 18,370 | (86 | ) | 19,535 | 123 | 27,697 | (468 | ) | ||||||||||||||||||||||
|
Forward contracts to sell mortgage-related securities
|
15,077 | 48 | 50,896 | (596 | ) | 40,761 | 811 | 24,562 | (169 | ) | ||||||||||||||||||||||
|
Total mortgage commitment derivatives
|
$ | 54,958 | $ | 497 | $ | 72,257 | $ | (694 | ) | $ | 63,176 | $ | 953 | $ | 56,694 | $ | (742 | ) | ||||||||||||||
|
Derivatives at fair value
|
$ | 347,974 | $ | 723 | $ | 368,711 | $ | (4,273 | ) | $ | 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 $3.5 billion as of September 30, 2011 and December 31, 2010. Cash collateral payable was $653 million and $604 million as of September 30, 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 S&P, Moody’s or Fitch. 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 September 30, 2011 was
$7.0 billion, for which we posted collateral of
$6.9 billion in the normal course of business. Had all of
the credit-risk-related contingency features underlying these
agreements been triggered, an additional $182 million of
collateral would have been required to be posted as collateral
or to immediately settle our positions based on the individual
agreements and our fair value position at September 30,
2011.
The aggregate fair value of all derivatives with credit
risk-related contingent features that were in a net liability
position as of December 31, 2010 was $4.4 billion, for
which we posted collateral of $3.5 billion in the normal
course of business. Had all of the credit risk-related
contingency features underlying these agreements been triggered,
an additional $891 million would have been required to be
posted as collateral or to immediately settle our positions
based on the individual agreements and our fair value position
at December 31, 2010.
144
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 and nine months ended September 30, 2011 and 2010.
|
For the
|
For the
|
|||||||||||||||
|
Three Months
|
Nine Months
|
|||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Risk management derivatives:
|
||||||||||||||||
|
Swaps:
|
||||||||||||||||
|
Pay-fixed
|
$ | (11,334 | ) | $ | (8,034 | ) | $ | (16,206 | ) | $ | (24,811 | ) | ||||
|
Receive-fixed
|
4,577 | 6,126 | 7,105 | 18,642 | ||||||||||||
|
Basis
|
75 | 43 | 104 | 73 | ||||||||||||
|
Foreign currency
|
31 | 149 | 114 | 138 | ||||||||||||
|
Swaptions:
|
||||||||||||||||
|
Pay-fixed
|
533 | 17 | 805 | (1,342 | ) | |||||||||||
|
Receive-fixed
|
2,091 | 1,778 | 2,591 | 5,460 | ||||||||||||
|
Interest rate caps
|
(4 | ) | (16 | ) | (22 | ) | (115 | ) | ||||||||
|
Other
(1)
|
(36 | ) | (4 | ) | (58 | ) | 33 | |||||||||
|
Total risk management derivatives fair value (losses) gains, net
|
(4,067 | ) | 59 | (5,567 | ) | (1,922 | ) | |||||||||
|
Mortgage commitment derivatives fair value losses, net
|
(188 | ) | (183 | ) | (226 | ) | (1,361 | ) | ||||||||
|
Total derivatives fair value losses, net
|
$ | (4,255 | ) | $ | (124 | ) | $ | (5,793 | ) | $ | (3,283 | ) | ||||
| (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. 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. Typically, we seek to manage credit
exposure by contracting with experienced counterparties that are
rated A- (or its equivalent) or better by S&P, Moody’s
or Fitch. 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.
145
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
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 September 30, 2011 and
December 31, 2010.
| As of September 30, 2011 | ||||||||||||||||||||
| Credit Rating (1) | ||||||||||||||||||||
| AA+/AA/AA- | A+/A | Subtotal (2) | Other (3) | Total | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Credit loss
exposure
(4)
|
$ | 587 | $ | 232 | $ | 819 | $ | 49 | $ | 868 | ||||||||||
|
Less: Collateral
held
(5)
|
515 | 189 | 704 | — | 704 | |||||||||||||||
|
Exposure net of collateral
|
$ | 72 | $ | 43 | $ | 115 | $ | 49 | $ | 164 | ||||||||||
|
Additional information:
|
||||||||||||||||||||
|
Notional amount
|
$ | 152,829 | $ | 434,712 | $ | 587,541 | $ | 1,929 | $ | 589,470 | ||||||||||
|
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 S&P and Moody’s. The credit rating reflects the equivalent S&P’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 September 30, 2011 and December 31, 2010, respectively. Those interest rate and foreign currency derivatives had notional balances of $135.1 billion and $106.5 billion as of September 30, 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. |
| 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.
In future periods, we may change some of our management
reporting and how we report our business segment results.
146
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
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 net loss in our condensed consolidated
statements of operations and comprehensive loss.
The following tables display our segment results for the three
and nine months ended September 30, 2011 and 2010.
| For the Three Months Ended September 30, 2011 | ||||||||||||||||||||||||
|
Other Activity/
|
||||||||||||||||||||||||
| Business Segments | Reconciling Items | |||||||||||||||||||||||
|
Single-
|
Capital
|
Consolidated
|
Eliminations/
|
Total
|
||||||||||||||||||||
| Family | Multifamily | Markets | Trusts (1) | Adjustments (2) | Results | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Net interest (loss) income
|
$ | (374 | ) | $ | (7 | ) | $ | 3,904 | $ | 1,210 | $ | 453 | (3) | $ | 5,186 | |||||||||
|
Provision for loan losses
|
(4,083 | ) | (76 | ) | — | — | — | (4,159 | ) | |||||||||||||||
|
Net interest (loss) income after provision for loan losses
|
(4,457 | ) | (83 | ) | 3,904 | 1,210 | 453 | 1,027 | ||||||||||||||||
|
Guaranty fee income (expense)
|
1,867 | 226 | (369 | ) | (1,124 | ) (4) | (551 | ) (4) | 49 | (4) | ||||||||||||||
|
Investment gains (losses), net
|
3 | 5 | 801 | (89 | ) | (647 | ) (5) | 73 | ||||||||||||||||
|
Net
other-than-temporary
impairments
|
— | — | (262 | ) | — | — | (262 | ) | ||||||||||||||||
|
Fair value losses, net
|
(2 | ) | — | (4,670 | ) | (17 | ) | 164 | (6) | (4,525 | ) | |||||||||||||
|
Debt extinguishment losses, net
|
— | — | (107 | ) | (12 | ) | — | (119 | ) | |||||||||||||||
|
Losses from partnership investments
|
— | (30 | ) | — | — | — | (30 | ) (7) | ||||||||||||||||
|
Fee and other income (expenses)
|
136 | 51 | 125 | (67 | ) | (3 | ) | 242 | ||||||||||||||||
|
Administrative expenses
|
(409 | ) | (62 | ) | (120 | ) | — | — | (591 | ) | ||||||||||||||
|
Benefit (provision) for guaranty losses
|
11 | (3 | ) | — | — | — | 8 | |||||||||||||||||
|
Foreclosed property expense
|
(710 | ) | (23 | ) | — | — | — | (733 | ) | |||||||||||||||
|
Other expenses
|
(184 | ) | (9 | ) | (14 | ) | — | (17 | ) | (224 | ) | |||||||||||||
|
(Loss) income before federal income taxes
|
(3,745 | ) | 72 | (712 | ) | (99 | ) | (601 | ) | (5,085 | ) | |||||||||||||
|
(Provision) benefit for federal income taxes
|
(1 | ) | — | 1 | — | — | — | |||||||||||||||||
|
Net (loss) income attributable to Fannie Mae
|
$ | (3,746 | ) | $ | 72 | $ | (711 | ) | $ | (99 | ) | $ | (601 | ) | $ | (5,085 | ) | |||||||
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| For the Nine Months Ended September 30, 2011 | ||||||||||||||||||||||||
|
Other Activity/
|
||||||||||||||||||||||||
| Business Segments | Reconciling Items | |||||||||||||||||||||||
|
Single-
|
Capital
|
Consolidated
|
Eliminations/
|
Total
|
||||||||||||||||||||
| Family | Multifamily | Markets | Trusts (1) | Adjustments (2) | Results | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Net interest (loss) income
|
$ | (1,952 | ) | $ | (27 | ) | $ | 11,481 | $ | 4,098 | $ | 1,518 | (3) | $ | 15,118 | |||||||||
|
Provision for loan losses
|
(20,372 | ) | (176 | ) | — | — | — | (20,548 | ) | |||||||||||||||
|
Net interest (loss) income after provision for loan losses
|
(22,324 | ) | (203 | ) | 11,481 | 4,098 | 1,518 | (5,430 | ) | |||||||||||||||
|
Guaranty fee income (expense)
|
5,618 | 651 | (1,159 | ) | (3,350 | ) (4) | (1,611 | ) (4) | 149 | (4) | ||||||||||||||
|
Investment (losses) gains, net
|
(2 | ) | 10 | 2,589 | (258 | ) | (2,020 | ) (5) | 319 | |||||||||||||||
|
Net
other-than-temporary
impairments
|
— | — | (361 | ) | (1 | ) | — | (362 | ) | |||||||||||||||
|
Fair value losses, net
|
(5 | ) | — | (5,959 | ) | (122 | ) | 216 | (6) | (5,870 | ) | |||||||||||||
|
Debt extinguishment (losses) gains, net
|
— | — | (186 | ) | 37 | — | (149 | ) | ||||||||||||||||
|
Losses from partnership investments
|
— | (8 | ) | — | — | 1 | (7 | ) (7) | ||||||||||||||||
|
Fee and other income (expense)
|
397 | 166 | 309 | (222 | ) | (6 | ) | 644 | ||||||||||||||||
|
Administrative expenses
|
(1,225 | ) | (194 | ) | (346 | ) | — | — | (1,765 | ) | ||||||||||||||
|
(Provision) benefit for guaranty losses
|
(732 | ) | 38 | — | — | — | (694 | ) | ||||||||||||||||
|
Foreclosed property expense
|
(717 | ) | (26 | ) | — | — | — | (743 | ) | |||||||||||||||
|
Other (expenses) income
|
(579 | ) | 33 | (32 | ) | — | (53 | ) | (631 | ) | ||||||||||||||
|
(Loss) income before federal income taxes
|
(19,569 | ) | 467 | 6,336 | 182 | (1,955 | ) | (14,539 | ) | |||||||||||||||
|
Benefit (provision) for federal income taxes
|
106 | (61 | ) | 46 | — | — | 91 | |||||||||||||||||
|
Net (loss) income
|
(19,463 | ) | 406 | 6,382 | 182 | (1,955 | ) | (14,448 | ) | |||||||||||||||
|
Less: Net income attributable to noncontrolling interest
|
— | — | — | — | (1 | ) (8) | (1 | ) | ||||||||||||||||
|
Net (loss) income attributable to Fannie Mae
|
$ | (19,463 | ) | $ | 406 | $ | 6,382 | $ | 182 | $ | (1,956 | ) | $ | (14,449 | ) | |||||||||
148
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| For the Three Months Ended September 30, 2010 | ||||||||||||||||||||||||
|
Other Activity/
|
||||||||||||||||||||||||
| Business Segments | Reconciling Items | |||||||||||||||||||||||
|
Single-
|
Capital
|
Consolidated
|
Eliminations/
|
Total
|
||||||||||||||||||||
| Family | Multifamily | Markets | Trusts (1) | Adjustments (2) | Results | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Net interest (loss) income
|
$ | (1,108 | ) | $ | — | $ | 4,065 | $ | 1,246 | $ | 573 | (3) | $ | 4,776 | ||||||||||
|
(Provision) benefit for loan losses
|
(4,702 | ) | 6 | — | — | — | (4,696 | ) | ||||||||||||||||
|
Net interest (loss) income after provision for loan losses
|
(5,810 | ) | 6 | 4,065 | 1,246 | 573 | 80 | |||||||||||||||||
|
Guaranty fee income (expense)
|
1,804 | 205 | (402 | ) | (1,095 | ) (4) | (461 | ) (4) | 51 | (4) | ||||||||||||||
|
Investment gains (losses), net
|
3 | 4 | 1,270 | (165 | ) | (1,030 | ) (5) | 82 | ||||||||||||||||
|
Net
other-than-temporary
impairments
|
— | — | (323 | ) | (3 | ) | — | (326 | ) | |||||||||||||||
|
Fair value gains (losses), net
|
— | — | 436 | (89 | ) | 178 | (6) | 525 | ||||||||||||||||
|
Debt extinguishment losses, net
|
— | — | (185 | ) | (29 | ) | — | (214 | ) | |||||||||||||||
|
Gains from partnership investments
|
— | 39 | — | — | 8 | 47 | (7) | |||||||||||||||||
|
Fee and other income (expense)
|
93 | 35 | 130 | (4 | ) | (1 | ) | 253 | ||||||||||||||||
|
Administrative expenses
|
(471 | ) | (94 | ) | (165 | ) | — | — | (730 | ) | ||||||||||||||
|
(Provision) benefit for guaranty losses
|
(79 | ) | 1 | — | — | — | (78 | ) | ||||||||||||||||
|
Foreclosed property expense
|
(778 | ) | (9 | ) | — | — | — | (787 | ) | |||||||||||||||
|
Other expense
|
(217 | ) | (7 | ) | (3 | ) | — | (16 | ) | (243 | ) | |||||||||||||
|
(Loss) income before federal income taxes
|
(5,455 | ) | 180 | 4,823 | (139 | ) | (749 | ) | (1,340 | ) | ||||||||||||||
|
Benefit for federal income taxes
|
1 | 1 | 7 | — | — | 9 | ||||||||||||||||||
|
Net (loss) income
|
(5,454 | ) | 181 | 4,830 | (139 | ) | (749 | ) | (1,331 | ) | ||||||||||||||
|
Less: Net income attributable to noncontrolling interests
|
— | — | — | — | (8 | ) (8) | (8 | ) | ||||||||||||||||
|
Net (loss) income attributable to Fannie Mae
|
$ | (5,454 | ) | $ | 181 | $ | 4,830 | $ | (139 | ) | $ | (757 | ) | $ | (1,339 | ) | ||||||||
149
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| For the Nine Months Ended September 30, 2010 | ||||||||||||||||||||||||
|
Other Activity/
|
||||||||||||||||||||||||
| Business Segments | Reconciling Items | |||||||||||||||||||||||
|
Single-
|
Capital
|
Consolidated
|
Eliminations/
|
Total
|
||||||||||||||||||||
| Family | Multifamily | Markets | Trusts (1) | Adjustments (2) | Results | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Net interest (loss) income
|
$ | (4,438 | ) | $ | 9 | $ | 10,671 | $ | 3,767 | $ | 1,763 | (3) | $ | 11,772 | ||||||||||
|
(Provision) benefit for loan losses
|
(20,966 | ) | 36 | — | — | — | (20,930 | ) | ||||||||||||||||
|
Net interest (loss) income after provision for loan losses
|
(25,404 | ) | 45 | 10,671 | 3,767 | 1,763 | (9,158 | ) | ||||||||||||||||
|
Guaranty fee income (expense)
|
5,367 | 594 | (1,041 | ) | (3,422 | ) (4) | (1,341 | ) (4) | 157 | (4) | ||||||||||||||
|
Investment gains (losses), net
|
7 | 3 | 2,841 | (348 | ) | (2,232 | ) (5) | 271 | ||||||||||||||||
|
Net
other-than-temporary
impairments
|
— | — | (696 | ) | (3 | ) | — | (699 | ) | |||||||||||||||
|
Fair value losses, net
|
— | — | (119 | ) | (113 | ) | (645 | ) (6) | (877 | ) | ||||||||||||||
|
Debt extinguishment losses, net
|
— | — | (368 | ) | (129 | ) | — | (497 | ) | |||||||||||||||
|
Losses from partnership investments
|
— | (41 | ) | — | — | 4 | (37 | ) (7) | ||||||||||||||||
|
Fee and other income (expense)
|
225 | 98 | 370 | (18 | ) | (1 | ) | 674 | ||||||||||||||||
|
Administrative expenses
|
(1,297 | ) | (286 | ) | (422 | ) | — | — | (2,005 | ) | ||||||||||||||
|
(Provision) benefit for guaranty losses
|
(163 | ) | 52 | — | — | — | (111 | ) | ||||||||||||||||
|
Foreclosed property expense
|
(1,227 | ) | (28 | ) | — | — | — | (1,255 | ) | |||||||||||||||
|
Other (expenses) income
|
(648 | ) | (24 | ) | 115 | — | (56 | ) | (613 | ) | ||||||||||||||
|
(Loss) income before federal income taxes
|
(23,140 | ) | 413 | 11,351 | (266 | ) | (2,508 | ) | (14,150 | ) | ||||||||||||||
|
Benefit (provision) for federal income taxes
|
53 | (14 | ) | 28 | — | — | 67 | |||||||||||||||||
|
Net (loss) income
|
(23,087 | ) | 399 | 11,379 | (266 | ) | (2,508 | ) | (14,083 | ) | ||||||||||||||
|
Less: Net income attributable to noncontrolling interests
|
— | — | — | — | (4 | ) (8) | (4 | ) | ||||||||||||||||
|
Net (loss) income attributable to Fannie Mae
|
$ | (23,087 | ) | $ | 399 | $ | 11,379 | $ | (266 | ) | $ | (2,512 | ) | $ | (14,087 | ) | ||||||||
| (1) | Represents activity related to the assets and liabilities of consolidated trusts in our 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) | Gains (losses) from partnership investments are included in other expenses in our condensed consolidated statements of operations and comprehensive loss. |
150
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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)
| (8) | Represents the adjustment from equity method accounting to consolidation accounting for partnership investments that are consolidated in our condensed consolidated balance sheets. |
| 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 September 30, 2011 and
December 31, 2010.
| As of | ||||||||
|
September 30,
|
December 31,
|
|||||||
| 2011 (1) | 2010 (1) | |||||||
| (Dollars in millions) | ||||||||
|
Core
capital
(2)
|
$ | (110,943 | ) | $ | (89,516 | ) | ||
|
Statutory minimum capital
requirement
(3)
|
32,697 | 33,676 | ||||||
|
Deficit of core capital over statutory minimum capital
requirement
|
$ | (143,640 | ) | $ | (123,192 | ) | ||
| (1) | Amounts as of September 30, 2011 and December 31, 2010 represent estimates that we have 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 75% of our single-family guaranty
book of business as of September 30, 2011, compared with
77% as of December 31, 2010. Our ten largest multifamily
mortgage servicers, including their affiliates, serviced 68% of
our multifamily guaranty book of business as of
September 30, 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
$92.2 billion on the single-family mortgage loans in our
guaranty book of business as of September 30, 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 $87.7 billion and
$4.5 billion, respectively, as of September 30, 2011,
compared with $91.2 billion
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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)
and $4.7 billion, respectively, as of December 31,
2010. Eight mortgage insurance companies provided over 99% of
our mortgage insurance as of both September 30, 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. During the three month period ending
September 30, 2011, we notified PMI Mortgage Insurance Co.
(“PMI”) and Republic Mortgage Insurance Company
(“RMIC”), two of our mortgage insurer counterparties,
that they were suspended nationwide as approved mortgage
insurers.
As reported by PMI, on October 20, 2011, PMI received from
its regulator an order under which the regulator now has full
possession, management and control. The regulator is also
seeking to place PMI into receivership. Pursuant to the order,
effective October 24, 2011, the regulator instituted a
partial claim payment plan whereby all valid claims under PMI
mortgage guaranty insurance policies will be paid 50% in cash
and 50% deferred as a policyholder claim. It is uncertain when,
and if, PMI’s regulator will allow PMI to begin paying its
deferred policyholder claims
and/or
increase the amount of cash PMI pays on claims. On
October 12, 2011, RMIC voluntarily entered into an
agreement with its regulator to discontinue writing or assuming
any new mortgage guaranty insurance business in all states.
As of November 7, 2011, four of our mortgage insurers (Triad,
RMIC, PMI and Genworth Mortgage Insurance Corporation) have
publicly disclosed that they are either in run-off or, absent a
waiver, estimate they would not meet state regulatory capital
requirements for their main writing entity as of September 30,
2011. An additional two of our mortgage insurers (Mortgage
Guaranty Insurance Corporation and Radian Guaranty, Inc.) have
disclosed that, in the absence of additional capital
contributions to their writing entity, their capital might fall
below state regulatory capital requirements in the future. These
six mortgage insurers provided a combined $75.7 billion, or 82%,
of our risk in force mortgage insurance coverage of our
single-family guaranty book of business as of September 30, 2011.
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 September 30, 2011, our allowance for loan losses of
$71.4 billion, allowance for accrued interest receivable of
$2.2 billion and reserve for guaranty losses of
$916 million incorporated an estimated recovery amount of
approximately $12.7 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 $15.1 billion
as of September 30, 2011 and an adjustment of approximately
$2.4 billion 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.
152
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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)
We had outstanding receivables of $3.7 billion recorded in
“Other assets” in our condensed consolidated balance
sheets as of September 30, 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
$494 million as of September 30, 2011 and
$648 million as of December 31, 2010 was due from our
mortgage seller/servicers. We assessed the total outstanding
receivables for collectibility, and they are recorded net of a
valuation allowance of $589 million as of
September 30, 2011 and $317 million as of
December 31, 2010. These mortgage insurance receivables are
short-term in nature, having an average duration of
approximately six months, and the valuation allowance reduces
our claim receivable to the amount which is considered probable
of collection as of September 30, 2011 and
December 31, 2010.
We received proceeds under our primary and pool mortgage
insurance policies for single-family loans of $1.4 billion
and $4.6 billion for the three and nine months ended
September 30, 2011, respectively, 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 nine months ended
September 30, 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” in our condensed consolidated statements of
operations and comprehensive loss.
Financial Guarantors.
We are the beneficiary
of financial guarantees on non-agency securities held in our
investment portfolio and on non-agency securities that have been
resecuritized to include a Fannie Mae guaranty and sold to third
parties. The following table displays the total unpaid principal
balance of guaranteed non-agency securities in our portfolio as
of September 30, 2011, and December 31, 2010.
| As of | ||||||||
| September 30, 2011 | December 31, 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Alt-A private-label securities
|
$ | 1,356 | $ | 1,544 | ||||
|
Subprime private-label securities
|
1,425 | 1,487 | ||||||
|
Mortgage revenue bonds
|
5,003 | 5,264 | ||||||
|
Other mortgage-related securities
|
324 | 347 | ||||||
|
Non mortgage-related securities
|
58 | 172 | ||||||
|
Total
|
$ | 8,166 | $ | 8,814 | ||||
With the exception of Ambac Assurance Corporation
(“Ambac”), none of our financial guarantor
counterparties has failed to repay us for claims under guaranty
contracts. Ambac provided coverage on $3.4 billion, or 41%,
of our total guarantees, as of September 30, 2011. We are
also the beneficiary of financial guarantees included in
securities issued by Freddie Mac, the federal government and its
agencies that totaled $32.6 billion as of
September 30, 2011 and $25.7 billion as of
December 31, 2010. If a financial guarantor fails to meet
its obligations to us with respect to the securities for which
we have obtained financial guarantees, it could reduce the fair
value of our mortgage-related securities and result in financial
losses to us, which could have a material adverse effect on our
earnings, liquidity, financial condition and net worth.
We model our securities without assuming the benefit of
financial guarantees. We then adjust results for those external
financial guarantees from guarantors that we determine are
creditworthy, although we continue to seek collection of any
amounts due to us from all counterparties. As of
September 30, 2011, when modeling our securities for
impairments we did not assume the benefit of external financial
guarantees from any counterparty.
153
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
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
$13.3 billion as of September 30, 2011 and
$15.6 billion as of December 31, 2010. As of
September 30, 2011, 58% 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 both DUS and non-DUS multifamily loans was
$31.6 billion as of September 30, 2011 and
$30.3 billion as of December 31, 2010. As of
September 30, 2011 and December 31, 2010, 40% and 41%,
respectively, of our maximum potential loss recovery on
multifamily loans was from three DUS lenders.
Custodial Depository Institutions.
A total of
$52.1 billion in deposits for single-family payments were
received and held by 286 institutions in the month of September
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 September 30, 2011 and 92% as of
December 31, 2010 were held by institutions rated as
investment grade by S&P, Moody’s and Fitch. Our ten
largest custodial depository institutions held 93% of these
deposits as of both September 30, 2011 and
December 31, 2010. In the month of September 2011,
approximately $3.6 billion or 7% of our total deposits for
single-family payments received and held by these institutions
was in excess of the deposit insurance protection limit compared
with approximately $6.2 billion or 8% in the month of
December 2010. These amounts can vary as they are calculated
based on individual payments of mortgage borrowers and we must
estimate which borrowers are paying their regular principal and
interest payments and other types of payments, such as
prepayments from refinancing or sales.
| 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.
154
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)
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 September 30, 2011 and December 31, 2010.
Specifically, total assets measured at fair value on a recurring
basis and classified as Level 3 were $36.2 billion, or
1% of “Total assets,” and $39.0 billion, or 1% of
“Total assets,” in our condensed consolidated balance
sheets as of September 30, 2011 and December 31, 2010,
respectively.
| Fair Value Measurements as of September 30, 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)
|
$ | 1,150 | $ | 5,000 | $ | — | $ | — | $ | 6,150 | ||||||||||
|
Trading securities:
|
||||||||||||||||||||
|
Mortgage-related securities:
|
||||||||||||||||||||
|
Fannie Mae
|
— | 5,668 | 1,861 | — | 7,529 | |||||||||||||||
|
Freddie Mac
|
— | 2,866 | — | — | 2,866 | |||||||||||||||
|
Ginnie Mae
|
— | 261 | 36 | — | 297 | |||||||||||||||
|
Alt-A private-label securities
|
— | 1,242 | 212 | — | 1,454 | |||||||||||||||
|
Subprime private-label securities
|
— | — | 1,318 | — | 1,318 | |||||||||||||||
|
CMBS
|
— | 10,600 | — | — | 10,600 | |||||||||||||||
|
Mortgage revenue bonds
|
— | — | 718 | — | 718 | |||||||||||||||
|
Other
|
— | 147 | — | — | 147 | |||||||||||||||
|
Non-mortgage-related securities:
|
||||||||||||||||||||
|
U.S. Treasury securities
|
40,755 | — | — | — | 40,755 | |||||||||||||||
|
Asset-backed securities
|
— | 2,465 | — | — | 2,465 | |||||||||||||||
|
Total trading securities
|
40,755 | 23,249 | 4,145 | — | 68,149 | |||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||
|
Mortgage-related securities:
|
||||||||||||||||||||
|
Fannie Mae
|
— | 18,441 | 797 | — | 19,238 | |||||||||||||||
|
Freddie Mac
|
— | 13,737 | 12 | — | 13,749 | |||||||||||||||
|
Ginnie Mae
|
— | 939 | — | — | 939 | |||||||||||||||
|
Alt-A private-label securities
|
— | 5,662 | 6,625 | — | 12,287 | |||||||||||||||
|
Subprime private-label securities
|
— | — | 7,887 | — | 7,887 | |||||||||||||||
|
CMBS
|
— | 14,390 | — | — | 14,390 | |||||||||||||||
|
Mortgage revenue bonds
|
— | 8 | 10,599 | — | 10,607 | |||||||||||||||
|
Other
|
— | 14 | 3,599 | — | 3,613 | |||||||||||||||
|
Total
available-for-sale
securities
|
— | 53,191 | 29,519 | — | 82,710 | |||||||||||||||
|
Mortgage loans of consolidated trusts
|
— | 1,077 | 2,284 | — | 3,361 | |||||||||||||||
|
Other assets:
|
||||||||||||||||||||
|
Risk management derivatives:
|
||||||||||||||||||||
|
Swaps
|
— | 8,657 | 156 | — | 8,813 | |||||||||||||||
|
Swaptions
|
— | 6,898 | — | — | 6,898 | |||||||||||||||
|
Interest rate caps
|
— | 2 | — | — | 2 | |||||||||||||||
|
Other
|
2 | — | 50 | — | 52 | |||||||||||||||
|
Netting adjustment
|
— | — | — | (15,539 | ) | (15,539 | ) | |||||||||||||
|
Mortgage commitment derivatives
|
— | 476 | 21 | — | 497 | |||||||||||||||
|
Total other assets
|
2 | 16,033 | 227 | (15,539 | ) | 723 | ||||||||||||||
|
Total assets at fair value
|
$ | 41,907 | $ | 98,550 | $ | 36,175 | $ | (15,539 | ) | $ | 161,093 | |||||||||
155
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 September 30, 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
|
$ | — | $ | 439 | $ | — | $ | — | $ | 439 | ||||||||||
|
Senior floating
|
— | — | 406 | — | 406 | |||||||||||||||
|
Total of Fannie Mae
|
— | 439 | 406 | — | 845 | |||||||||||||||
|
Of consolidated trusts
|
— | 3,112 | 728 | — | 3,840 | |||||||||||||||
|
Total long-term debt
|
— | 3,551 | 1,134 | — | 4,685 | |||||||||||||||
|
Other liabilities:
|
||||||||||||||||||||
|
Risk management derivatives:
|
||||||||||||||||||||
|
Swaps
|
— | 18,476 | 160 | — | 18,636 | |||||||||||||||
|
Swaptions
|
— | 3,311 | — | — | 3,311 | |||||||||||||||
|
Other
|
4 | — | — | — | 4 | |||||||||||||||
|
Netting adjustment
|
— | — | — | (18,372 | ) | (18,372 | ) | |||||||||||||
|
Mortgage commitment derivatives
|
— | 681 | 13 | — | 694 | |||||||||||||||
|
Total other liabilities
|
4 | 22,468 | 173 | (18,372 | ) | 4,273 | ||||||||||||||
|
Total liabilities at fair value
|
$ | 4 | $ | 26,019 | $ | 1,307 | $ | (18,372 | ) | $ | 8,958 | |||||||||
156
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) | ||||||||||||||||||||
|
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 | |||||||||
157
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 as well as money market funds and certificate of deposits that are classified as Level 2. |
158
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 and nine months ended September 30, 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 and nine months ended
September 30, 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 September 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||
|
Net Unrealized
|
||||||||||||||||||||||||||||||||||||||||||||
|
Gains (Losses)
|
||||||||||||||||||||||||||||||||||||||||||||
|
Included
|
||||||||||||||||||||||||||||||||||||||||||||
|
in Net Loss
|
||||||||||||||||||||||||||||||||||||||||||||
|
Related to
|
||||||||||||||||||||||||||||||||||||||||||||
| Total Gains or (Losses) (Realized/Unrealized) |
Assets and
|
|||||||||||||||||||||||||||||||||||||||||||
|
Included in
|
Liabilities Still
|
|||||||||||||||||||||||||||||||||||||||||||
|
Balance,
|
Included
|
Other
|
Transfers
|
Transfers
|
Balance,
|
Held as of
|
||||||||||||||||||||||||||||||||||||||
|
July 1,
|
in Net
|
Comprehensive
|
out of
|
into
|
September 30,
|
September 30,
|
||||||||||||||||||||||||||||||||||||||
| 2011 | Loss | (Loss) Income | Purchases (1) | Sales (1) | Issuances (2) | Settlements (2) | Level 3 (3) | Level 3 (3) | 2011 | 2011 (4) | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||||||
|
Trading securities:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Mortgage-related:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$ | 1,679 | $ | 19 | $ | — | $ | 322 | $ | (3 | ) | $ | — | $ | (115 | ) | $ | (41 | ) | $ | — | $ | 1,861 | $ | 41 | |||||||||||||||||||
|
Ginnie Mae
|
— | — | — | — | — | — | — | — | 36 | 36 | — | |||||||||||||||||||||||||||||||||
|
Alt-A private-label securities
|
126 | 7 | — | — | — | — | (13 | ) | (73 | ) | 165 | 212 | 10 | |||||||||||||||||||||||||||||||
|
Subprime private-label securities
|
1,459 | (96 | ) | — | — | — | — | (45 | ) | — | — | 1,318 | (95 | ) | ||||||||||||||||||||||||||||||
|
Mortgage revenue bonds
|
616 | 105 | — | — | — | — | (3 | ) | — | — | 718 | 106 | ||||||||||||||||||||||||||||||||
|
Other
|
154 | (4 | ) | — | — | — | — | (3 | ) | (147 | ) | — | — | — | ||||||||||||||||||||||||||||||
|
Total trading securities
|
$ | 4,034 | $ | 31 | $ | — | $ | 322 | $ | (3 | ) | $ | — | $ | (179 | ) | $ | (261 | ) | $ | 201 | $ | 4,145 | $ | 62 | |||||||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Mortgage-related:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$ | 635 | $ | (1 | ) | $ | 16 | $ | 853 | $ | (344 | ) | $ | — | $ | (9 | ) | $ | (374 | ) | $ | 21 | $ | 797 | $ | — | ||||||||||||||||||
|
Freddie Mac
|
12 | — | — | — | — | — | (1 | ) | — | 1 | 12 | — | ||||||||||||||||||||||||||||||||
|
Alt-A private-label securities
|
6,652 | (20 | ) | (15 | ) | — | — | — | (250 | ) | (431 | ) | 689 | 6,625 | — | |||||||||||||||||||||||||||||
|
Subprime private-label securities
|
8,909 | 148 | (484 | ) | — | (363 | ) | — | (323 | ) | — | — | 7,887 | — | ||||||||||||||||||||||||||||||
|
Mortgage revenue bonds
|
10,464 | (5 | ) | 429 | — | (1 | ) | — | (288 | ) | — | — | 10,599 | — | ||||||||||||||||||||||||||||||
|
Other
|
3,707 | (10 | ) | 9 | — | — | — | (107 | ) | — | — | 3,599 | — | |||||||||||||||||||||||||||||||
|
Total
available-for-sale
securities
|
$ | 30,379 | $ | 112 | $ | (45 | ) | $ | 853 | $ | (708 | ) | $ | — | $ | (978 | ) | $ | (805 | ) | $ | 711 | $ | 29,519 | $ | — | ||||||||||||||||||
|
Mortgage loans of consolidated trusts
|
$ | 2,365 | $ | 8 | $ | — | $ | 45 | $ | — | $ | — | $ | (101 | ) | $ | (56 | ) | $ | 23 | $ | 2,284 | $ | 6 | ||||||||||||||||||||
|
Net derivatives
|
79 | 118 | — | — | — | (1 | ) | (72 | ) | (70 | ) | — | 54 | 33 | ||||||||||||||||||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Of Fannie Mae:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Senior floating
|
$ | (402 | ) | $ | (74 | ) | $ | — | $ | — | $ | — | $ | — | $ | 70 | $ | — | $ | — | $ | (406 | ) | $ | (74 | ) | ||||||||||||||||||
|
Of consolidated trusts
|
(646 | ) | 1 | — | — | 4 | (4 | ) | 18 | 35 | (136 | ) | (728 | ) | 6 | |||||||||||||||||||||||||||||
|
Total long-term debt
|
$ | (1,048 | ) | $ | (73 | ) | $ | — | $ | — | $ | 4 | $ | (4 | ) | $ | 88 | $ | 35 | $ | (136 | ) | $ | (1,134 | ) | $ | (68 | ) | ||||||||||||||||
159
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 Nine Months Ended September 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||
|
Net Unrealized
|
||||||||||||||||||||||||||||||||||||||||||||
|
Gains (Losses)
|
||||||||||||||||||||||||||||||||||||||||||||
|
Included in Net
|
||||||||||||||||||||||||||||||||||||||||||||
|
Total Gains or (Losses)
|
Loss Related to
|
|||||||||||||||||||||||||||||||||||||||||||
| (Realized/Unrealized) |
Assets and
|
|||||||||||||||||||||||||||||||||||||||||||
|
Included in
|
Liabilities Still
|
|||||||||||||||||||||||||||||||||||||||||||
|
Balance,
|
Included
|
Other
|
Transfers
|
Transfers
|
Balance,
|
Held as of
|
||||||||||||||||||||||||||||||||||||||
|
December 31,
|
in Net
|
Comprehensive
|
out of
|
into
|
September 30,
|
September 30,
|
||||||||||||||||||||||||||||||||||||||
| 2010 | Loss | (Loss) Income | Purchases (1) | Sales (1) | Issuances (2) | Settlements (2) | Level 3 (3) | Level 3 (3) | 2011 | 2011 (4) | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||||||
|
Trading securities:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Mortgage-related:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$ | 2,202 | $ | 7 | $ | — | $ | 446 | $ | (18 | ) | $ | — | $ | (344 | ) | $ | (432 | ) | $ | — | $ | 1,861 | $ | 32 | |||||||||||||||||||
|
Ginnie Mae
|
— | — | — | — | — | — | — | — | 36 | 36 | — | |||||||||||||||||||||||||||||||||
|
Alt-A private-label securities
|
20 | 8 | — | — | — | — | (14 | ) | (73 | ) | 271 | 212 | 12 | |||||||||||||||||||||||||||||||
|
Subprime private-label securities
|
1,581 | (126 | ) | — | — | — | — | (137 | ) | — | — | 1,318 | (126 | ) | ||||||||||||||||||||||||||||||
|
Mortgage revenue bonds
|
609 | 126 | — | — | — | — | (17 | ) | — | — | 718 | 129 | ||||||||||||||||||||||||||||||||
|
Other
|
152 | 1 | — | — | — | — | (6 | ) | (147 | ) | — | — | — | |||||||||||||||||||||||||||||||
|
Non-mortgage-related:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Asset-backed securities
|
12 | — | — | — | — | — | (5 | ) | (9 | ) | 2 | — | — | |||||||||||||||||||||||||||||||
|
Total trading securities
|
$ | 4,576 | $ | 16 | $ | — | $ | 446 | $ | (18 | ) | $ | — | $ | (523 | ) | $ | (661 | ) | $ | 309 | $ | 4,145 | $ | 47 | |||||||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Mortgage-related:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$ | 114 | $ | (1 | ) | $ | 28 | $ | 1,742 | $ | (383 | ) | $ | — | $ | (11 | ) | $ | (843 | ) | $ | 151 | $ | 797 | $ | — | ||||||||||||||||||
|
Freddie Mac
|
3 | — | — | — | — | — | (1 | ) | — | 10 | 12 | — | ||||||||||||||||||||||||||||||||
|
Alt-A private-label securities
|
7,049 | (19 | ) | 63 | — | — | — | (725 | ) | (1,495 | ) | 1,752 | 6,625 | — | ||||||||||||||||||||||||||||||
|
Subprime private-label securities
|
9,932 | 408 | (1,089 | ) | — | (363 | ) | — | (1,001 | ) | — | — | 7,887 | — | ||||||||||||||||||||||||||||||
|
Mortgage revenue bonds
|
11,030 | (8 | ) | 723 | — | (107 | ) | — | (1,039 | ) | — | — | 10,599 | — | ||||||||||||||||||||||||||||||
|
Other
|
3,806 | (7 | ) | 120 | — | — | — | (320 | ) | — | — | 3,599 | — | |||||||||||||||||||||||||||||||
|
Total
available-for-sale
securities
|
$ | 31,934 | $ | 373 | $ | (155 | ) | $ | 1,742 | $ | (853 | ) | $ | — | $ | (3,097 | ) | $ | (2,338 | ) | $ | 1,913 | $ | 29,519 | $ | — | ||||||||||||||||||
|
Mortgage loans of consolidated trusts
|
$ | 2,207 | $ | 38 | $ | — | $ | 102 | $ | — | $ | — | $ | (251 | ) | $ | (93 | ) | $ | 281 | $ | 2,284 | $ | 28 | ||||||||||||||||||||
|
Net derivatives
|
104 | 123 | — | — | — | (2 | ) | (101 | ) | (70 | ) | — | 54 | 49 | ||||||||||||||||||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Of Fannie Mae:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Senior floating
|
$ | (421 | ) | $ | (88 | ) | $ | — | $ | — | $ | — | $ | — | $ | 103 | $ | — | $ | — | $ | (406 | ) | $ | (89 | ) | ||||||||||||||||||
|
Of consolidated trusts
|
(627 | ) | (28 | ) | — | — | 4 | (44 | ) | 66 | 112 | (211 | ) | (728 | ) | (11 | ) | |||||||||||||||||||||||||||
|
Total long-term debt
|
$ | (1,048 | ) | $ | (116 | ) | $ | — | $ | — | $ | 4 | $ | (44 | ) | $ | 169 | $ | 112 | $ | (211 | ) | $ | (1,134 | ) | $ | (100 | ) | ||||||||||||||||
160
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 September 30, 2010 | ||||||||||||||||||||||||||||||||
|
Net Unrealized
|
||||||||||||||||||||||||||||||||
|
Gains (Losses)
|
||||||||||||||||||||||||||||||||
|
Included
|
||||||||||||||||||||||||||||||||
|
in Net Loss
|
||||||||||||||||||||||||||||||||
|
Total Gains or (Losses)
|
Related to
|
|||||||||||||||||||||||||||||||
| (Realized/Unrealized) |
Assets and
|
|||||||||||||||||||||||||||||||
|
Included
|
Purchases,
|
Liabilities Still
|
||||||||||||||||||||||||||||||
|
Balance,
|
Included
|
in Other
|
Sales,
|
Transfers
|
Transfers
|
Balance,
|
Held as of
|
|||||||||||||||||||||||||
|
July 1,
|
in Net
|
Comprehensive
|
Issuances, and
|
out of
|
into
|
September 30,
|
September 30,
|
|||||||||||||||||||||||||
| 2010 | Loss | (Loss) Income | Settlements, Net | Level 3 (3) | Level 3 (3) | 2010 | 2010 (4) | |||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||
|
Trading securities:
|
||||||||||||||||||||||||||||||||
|
Mortgage-related:
|
||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$ | 58 | $ | (7 | ) | $ | — | $ | 80 | $ | (12 | ) | $ | 1,925 | $ | 2,044 | $ | (1 | ) | |||||||||||||
|
Freddie Mac
|
4 | — | — | — | — | — | 4 | — | ||||||||||||||||||||||||
|
Ginnie Mae
|
— | — | — | 1 | — | — | 1 | — | ||||||||||||||||||||||||
|
Alt-A private-label securities
|
119 | 174 | — | (11 | ) | (24 | ) | 216 | 474 | 176 | ||||||||||||||||||||||
|
Subprime private-label securities
|
1,645 | (1 | ) | — | (53 | ) | — | — | 1,591 | (1 | ) | |||||||||||||||||||||
|
Mortgage revenue bonds
|
650 | 28 | — | — | — | — | 678 | 30 | ||||||||||||||||||||||||
|
Other
|
160 | (2 | ) | — | (3 | ) | — | — | 155 | (2 | ) | |||||||||||||||||||||
|
Non-mortgage-related:
|
||||||||||||||||||||||||||||||||
|
Asset-backed securities
|
24 | 1 | — | (10 | ) | — | — | 15 | — | |||||||||||||||||||||||
|
Total trading securities
|
$ | 2,660 | $ | 193 | $ | — | $ | 4 | $ | (36 | ) | $ | 2,141 | $ | 4,962 | $ | 202 | |||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||||||||||||||
|
Mortgage-related:
|
||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$ | 53 | $ | — | $ | — | $ | 65 | $ | (51 | ) | $ | 11 | $ | 78 | $ | — | |||||||||||||||
|
Freddie Mac
|
21 | — | — | (14 | ) | — | — | 7 | — | |||||||||||||||||||||||
|
Ginnie Mae
|
125 | — | (1 | ) | — | — | — | 124 | — | |||||||||||||||||||||||
|
Alt-A private-label securities
|
7,777 | (59 | ) | 264 | (259 | ) | (490 | ) | 1,878 | 9,111 | — | |||||||||||||||||||||
|
Subprime private-label securities
|
10,255 | (96 | ) | 183 | (402 | ) | — | — | 9,940 | — | ||||||||||||||||||||||
|
Mortgage revenue bonds
|
12,428 | 3 | 172 | (369 | ) | (2 | ) | — | 12,232 | — | ||||||||||||||||||||||
|
Other
|
3,890 | 2 | 103 | (119 | ) | — | — | 3,876 | — | |||||||||||||||||||||||
|
Total
available-for-sale
securities
|
$ | 34,549 | $ | (150 | ) | $ | 721 | $ | (1,098 | ) | $ | (543 | ) | $ | 1,889 | $ | 35,368 | $ | — | |||||||||||||
|
Mortgage loans of consolidated trusts
|
$ | — | $ | (9 | ) | $ | — | $ | 62 | $ | — | $ | — | $ | 53 | $ | (9 | ) | ||||||||||||||
|
Net derivatives
|
226 | 65 | — | (69 | ) | — | — | 222 | 21 | |||||||||||||||||||||||
|
Guaranty assets and
buy-ups
|
15 | (1 | ) | — | 3 | — | — | 17 | (2 | ) | ||||||||||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||||||||||
|
Of Fannie Mae:
|
||||||||||||||||||||||||||||||||
|
Senior floating
|
$ | (585 | ) | $ | (37 | ) | $ | — | $ | 155 | $ | — | $ | — | $ | (467 | ) | $ | (38 | ) | ||||||||||||
|
Of consolidated trusts
|
(105 | ) | 8 | — | 2 | 48 | (22 | ) | (69 | ) | 4 | |||||||||||||||||||||
|
Total long-term debt
|
$ | (690 | ) | $ | (29 | ) | $ | — | $ | 157 | $ | 48 | $ | (22 | ) | $ | (536 | ) | $ | (34 | ) | |||||||||||
161
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 Nine Months Ended September 30, 2010 | ||||||||||||||||||||||||||||||||||||
|
Net Unrealized
|
||||||||||||||||||||||||||||||||||||
|
Gains (Losses)
|
||||||||||||||||||||||||||||||||||||
|
Included in Net
|
||||||||||||||||||||||||||||||||||||
|
Total Gains or (Losses)
|
Purchases,
|
Loss Related to
|
||||||||||||||||||||||||||||||||||
| (Realized/Unrealized) |
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
|
September 30,
|
September 30,
|
||||||||||||||||||||||||||||
| 2009 | Standards | Loss | (Loss) Income | Net | Level 3 (3) | Level 3 (3) | 2010 | 2010 (4) | ||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||
|
Trading securities:
|
||||||||||||||||||||||||||||||||||||
|
Mortgage-related:
|
||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$ | 5,656 | $ | (2 | ) | $ | (3 | ) | $ | — | $ | (162 | ) | $ | (5,375 | ) | $ | 1,930 | $ | 2,044 | $ | (3 | ) | |||||||||||||
|
Freddie Mac
|
— | — | — | — | — | — | 4 | 4 | — | |||||||||||||||||||||||||||
|
Ginnie Mae
|
— | — | — | — | 1 | — | — | 1 | — | |||||||||||||||||||||||||||
|
Alt-A private-label securities
|
564 | 62 | 206 | — | (59 | ) | (613 | ) | 314 | 474 | 186 | |||||||||||||||||||||||||
|
Subprime private-label securities
|
1,780 | — | (1 | ) | — | (188 | ) | — | — | 1,591 | (1 | ) | ||||||||||||||||||||||||
|
Mortgage revenue bonds
|
600 | — | 127 | — | (49 | ) | — | — | 678 | 126 | ||||||||||||||||||||||||||
|
Other
|
154 | — | 6 | — | (5 | ) | — | — | 155 | 6 | ||||||||||||||||||||||||||
|
Non-mortgage-related:
|
||||||||||||||||||||||||||||||||||||
|
Asset-backed securities
|
107 | — | 1 | — | (59 | ) | (47 | ) | 13 | 15 | 2 | |||||||||||||||||||||||||
|
Total trading securities
|
$ | 8,861 | $ | 60 | $ | 336 | $ | — | $ | (521 | ) | $ | (6,035 | ) | $ | 2,261 | $ | 4,962 | $ | 316 | ||||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||||||||||||||||||
|
Mortgage-related:
|
||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$ | 596 | $ | (203 | ) | $ | (1 | ) | $ | 4 | $ | 147 | $ | (514 | ) | $ | 49 | $ | 78 | $ | — | |||||||||||||||
|
Freddie Mac
|
27 | — | — | (1 | ) | (25 | ) | — | 6 | 7 | — | |||||||||||||||||||||||||
|
Ginnie Mae
|
123 | — | — | 2 | (1 | ) | — | — | 124 | — | ||||||||||||||||||||||||||
|
Alt-A private-label securities
|
8,312 | 471 | (40 | ) | 998 | (934 | ) | (2,746 | ) | 3,050 | 9,111 | — | ||||||||||||||||||||||||
|
Subprime private-label securities
|
10,746 | (118 | ) | (106 | ) | 768 | (1,350 | ) | — | — | 9,940 | — | ||||||||||||||||||||||||
|
Mortgage revenue bonds
|
12,820 | 21 | 2 | 675 | (1,284 | ) | (2 | ) | — | 12,232 | — | |||||||||||||||||||||||||
|
Other
|
3,530 | 366 | (4 | ) | 357 | (373 | ) | — | — | 3,876 | — | |||||||||||||||||||||||||
|
Total
available-for-sale
securities
|
$ | 36,154 | $ | 537 | $ | (149 | ) | $ | 2,803 | $ | (3,820 | ) | $ | (3,262 | ) | $ | 3,105 | $ | 35,368 | $ | — | |||||||||||||||
|
Mortgage loans of consolidated trusts
|
$ | — | $ | — | $ | (9 | ) | $ | — | $ | 62 | $ | — | $ | — | $ | 53 | $ | (9 | ) | ||||||||||||||||
|
Net derivatives
|
123 | — | 232 | — | (128 | ) | — | (5 | ) | 222 | 85 | |||||||||||||||||||||||||
|
Guaranty assets and
buy-ups
|
2,577 | (2,568 | ) | 2 | 1 | 5 | — | — | 17 | 2 | ||||||||||||||||||||||||||
|
Long-term debt:
|
||||||||||||||||||||||||||||||||||||
|
Of Fannie Mae:
|
||||||||||||||||||||||||||||||||||||
|
Senior floating
|
$ | (601 | ) | $ | — | $ | (26 | ) | $ | — | $ | 160 | $ | — | $ | — | $ | (467 | ) | $ | (21 | ) | ||||||||||||||
|
Of consolidated trusts
|
— | (77 | ) | 15 | — | (36 | ) | 59 | (30 | ) | (69 | ) | 11 | |||||||||||||||||||||||
|
Total long-term debt
|
$ | (601 | ) | $ | (77 | ) | $ | (11 | ) | $ | — | $ | 124 | $ | 59 | $ | (30 | ) | $ | (536 | ) | $ | (10 | ) | ||||||||||||
| (1) | Purchases and sales include activity related to the consolidation and deconsolidation of assets of securitization trusts. | |
| (2) | Issuances and settlements include activity related to the consolidation and deconsolidation of liabilities of securitization trusts. | |
| (3) | 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. Transfers into Level 3 consisted primarily of Fannie Mae guaranteed |
162
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)
| mortgage-related securities and private-label mortgage-related securities backed by Alt-A loans. Prices for these securities are based on inputs from a single source or inputs that were not readily observable. | ||
| (4) | Amount represents temporary changes in fair value. Amortization, accretion and other-than-temporary impairments are not considered unrealized and are not included in this amount. |
The following tables display realized and unrealized gains and
losses included in our condensed consolidated statements of
operations and comprehensive loss for the three and nine months
ended September 30, 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 September 30, 2011 | ||||||||||||||||||||
|
Net
|
||||||||||||||||||||
|
Fair Value
|
Other-than-
|
|||||||||||||||||||
|
Interest
|
(Losses)
|
Temporary
|
||||||||||||||||||
| Income | Gains, net | Impairments | Other | Total | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Total realized and unrealized gains (losses) included in net loss
|
$ | 158 | $ | 98 | $ | (62 | ) | $ | 2 | $ | 196 | |||||||||
|
Net unrealized (losses) gains related to Level 3 assets and
liabilities still held as of September 30, 2011
|
$ | (1 | ) | $ | 34 | $ | — | $ | — | $ | 33 | |||||||||
| For the Nine Months Ended September 30, 2011 | ||||||||||||||||||||
|
Net
|
||||||||||||||||||||
|
Fair Value
|
Other-than-
|
|||||||||||||||||||
|
Interest
|
(Losses)
|
Temporary
|
||||||||||||||||||
| Income | Gains, net | Impairments | Other | Total | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Total realized and unrealized gains (losses) included in net loss
|
$ | 428 | $ | 82 | $ | (85 | ) | $ | 9 | $ | 434 | |||||||||
|
Net unrealized (losses) gains related to Level 3 assets and
liabilities still held as of September 30, 2011
|
$ | (2 | ) | $ | 26 | $ | — | $ | — | $ | 24 | |||||||||
| For the Three Months Ended September 30, 2010 | ||||||||||||||||||||
|
Net
|
||||||||||||||||||||
|
Fair Value
|
Other-than-
|
|||||||||||||||||||
|
Interest
|
(Losses)
|
Temporary-
|
||||||||||||||||||
| Income | Gains, net | Impairments | Other | Total | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Total realized and unrealized gains (losses) included in net loss
|
$ | 70 | $ | 222 | $ | (235 | ) | $ | 12 | $ | 69 | |||||||||
|
Net unrealized gains (losses) related to Level 3 assets and
liabilities still held as of September 30, 2010
|
$ | — | $ | 180 | $ | — | $ | (2 | ) | $ | 178 | |||||||||
| For the Nine Months Ended September 30, 2010 | ||||||||||||||||||||
|
Net
|
||||||||||||||||||||
|
Fair Value
|
Other-than-
|
|||||||||||||||||||
|
Interest
|
(Losses)
|
Temporary-
|
||||||||||||||||||
| Income | Gains, net | Impairments | Other | Total | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Total realized and unrealized gains (losses) included in net loss
|
$ | 282 | $ | 547 | $ | (454 | ) | $ | 26 | $ | 401 | |||||||||
|
Net unrealized gains related to Level 3 assets and
liabilities still held as of September 30, 2010
|
$ | — | $ | 382 | $ | — | $ | 2 | $ | 384 | ||||||||||
163
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 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
—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.
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
164
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)
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 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.
165
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 fair value of the guaranty assets includes 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 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.
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 with embedded
derivatives is recorded in our condensed consolidated balance
sheets at fair value on a recurring basis.
166
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
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 and nine months ended
September 30, 2011 and 2010 as a result of fair value
measurements.
|
For the
|
For the
|
|||||||||||||||||||||||
|
Three Months
|
Nine Months
|
|||||||||||||||||||||||
|
Fair Value Measurements
|
Ended
|
Ended
|
||||||||||||||||||||||
| For the Nine Months Ended September 30, 2011 | September 30, 2011 | September 30, 2011 | ||||||||||||||||||||||
|
Quoted
|
||||||||||||||||||||||||
|
Prices in
|
||||||||||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
Estimated
|
|||||||||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
Fair
|
Total
|
Total
|
|||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Value | Losses | Losses | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Mortgage loans held for sale, at lower of cost or fair value
|
$ | — | $ | 2 | $ | 204 | $ | 206 | (1) | $ | (3 | ) | $ | (16 | ) | |||||||||
|
Single-family mortgage loans held for investment, at amortized
cost:
|
||||||||||||||||||||||||
|
Of Fannie Mae
|
— | — | 40,280 | 40,280 | (2) | (1,045 | ) | (2,125 | ) | |||||||||||||||
|
Of consolidated trusts
|
— | — | 885 | 885 | (2) | (33 | ) | (131 | ) | |||||||||||||||
|
Multifamily mortgage loans held for investment, at amortized
cost:
|
||||||||||||||||||||||||
|
Of Fannie Mae
|
— | — | 1,708 | 1,708 | (2) | (183 | ) | (291 | ) | |||||||||||||||
|
Acquired property, net:
|
||||||||||||||||||||||||
|
Single-family
|
— | — | 17,642 | 17,642 | (3) | (635 | ) | (2,147 | ) | |||||||||||||||
|
Multifamily
|
— | — | 315 | 315 | (3) | (32 | ) | (81 | ) | |||||||||||||||
|
Other assets
|
— | — | 1,138 | 1,138 | (4) | (29 | ) | (94 | ) | |||||||||||||||
|
Total assets at fair value
|
$ | — | $ | 2 | $ | 62,172 | $ | 62,174 | $ | (1,960 | ) | $ | (4,885 | ) | ||||||||||
167
Table of Contents
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
|
For the
|
For the
|
|||||||||||||||||||||||
|
Three Months
|
Nine Months
|
|||||||||||||||||||||||
|
Fair Value Measurements
|
Ended
|
Ended
|
||||||||||||||||||||||
| For the Nine Months Ended September 30, 2010 | September 30, 2010 | September 30, 2010 | ||||||||||||||||||||||
|
Quoted
|
||||||||||||||||||||||||
|
Prices in
|
||||||||||||||||||||||||
|
Active
|
Significant
|
|||||||||||||||||||||||
|
Markets for
|
Other
|
Significant
|
||||||||||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
Estimated
|
|||||||||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
Fair
|
Total (Losses)
|
Total
|
|||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Value | Gains | Losses | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Mortgage loans held for sale, at lower of cost or fair value
|
$ | — | $ | 6,884 | $ | 550 | $ | 7,434 | (1)(5) | $ | (1 | ) | $ | (91 | ) (5) | |||||||||
|
Single-family mortgage loans held for investment, at amortized
cost:
|
||||||||||||||||||||||||
|
Of Fannie Mae
|
— | — | 27,329 | 27,329 | (2) | (408 | ) | (1,216 | ) | |||||||||||||||
|
Of consolidated trusts
|
— | — | 1,039 | 1,039 | (2) | (79 | ) | (182 | ) | |||||||||||||||
|
Multifamily mortgage loans held for investment, at amortized
cost:
|
||||||||||||||||||||||||
|
Of Fannie Mae
|
— | — | 1,132 | 1,132 | (2) | 95 | (142 | ) | ||||||||||||||||
|
Acquired property, net:
|
||||||||||||||||||||||||
|
Single-family
|
— | — | 15,546 | 15,546 | (3) | (768 | ) | (1,772 | ) | |||||||||||||||
|
Multifamily
|
— | — | 196 | 196 | (3) | (5 | ) | (37 | ) | |||||||||||||||
|
Other Assets:
|
||||||||||||||||||||||||
|
Guaranty assets
|
— | — | 28 | 28 | (2 | ) | (6 | ) | ||||||||||||||||
|
Partnership investments
|
— | — | 109 | 109 | (15 | ) | (104 | ) | ||||||||||||||||
|
Other assets
|
— | — | 51 | 51 | (4) | (8 | ) | (8 | ) | |||||||||||||||
|
Total assets at fair value
|
$ | — | $ | 6,884 | $ | 45,980 | $ | 52,864 | $ | (1,191 | ) | $ | (3,558 | ) | ||||||||||
| (1) | Includes $72 million and $7.1 billion of mortgage loans held for sale that were sold, deconsolidated, retained as a mortgage-related security or redesignated to mortgage loans held for investment as of September 30, 2011 and 2010, respectively. | |
| (2) | Includes $5.7 billion and $1.6 billion of mortgage loans held for investment that were liquidated or transferred to foreclosed properties as of September 30, 2011 and 2010, respectively. | |
| (3) | Includes $11.8 billion and $7.2 billion of acquired properties that were sold or transferred as of September 30, 2011 and 2010, respectively. | |
| (4) | Includes $285 million and $4 million of other assets that were sold or transferred as of September 30, 2011 and 2010, respectively. | |
| (5) | Includes $7.1 billion of estimated fair value and $68 million in losses due to the adoption of the new accounting standards. |
The following is a description of the fair valuation techniques
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
—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
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MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
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 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. 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 September 30,
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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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 | ||||||||||||||||
| September 30, 2011 | December 31, 2010 | |||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
| Value | Fair Value | Value | Fair Value | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Financial assets:
|
||||||||||||||||
|
Cash and cash
equivalents
(1)
|
$ | 80,268 | $ | 80,268 | $ | 80,975 | $ | 80,975 | ||||||||
|
Federal funds sold and securities purchased under agreements to
resell or similar arrangements
|
35,950 | 35,950 | 11,751 | 11,751 | ||||||||||||
|
Trading securities
|
68,149 | 68,149 | 56,856 | 56,856 | ||||||||||||
|
Available-for-sale
securities
|
82,710 | 82,710 | 94,392 | 94,392 | ||||||||||||
|
Mortgage loans held for sale
|
309 | 309 | 915 | 915 | ||||||||||||
|
Mortgage loans held for investment, net of allowance for loan
losses:
|
||||||||||||||||
|
Of Fannie Mae
|
329,848 | 303,953 | 358,698 | 319,367 | ||||||||||||
|
Of consolidated trusts
|
2,567,663 | 2,663,443 | 2,564,107 | 2,610,145 | ||||||||||||
|
Mortgage loans held for investment
|
2,897,511 | 2,967,396 | 2,922,805 | 2,929,512 | ||||||||||||
|
Advances to lenders
|
5,145 | 5,029 | 7,215 | 6,990 | ||||||||||||
|
Derivative assets at fair value
|
723 | 723 | 1,137 | 1,137 | ||||||||||||
|
Guaranty assets and
buy-ups
|
480 | 858 | 458 | 814 | ||||||||||||
|
Total financial assets
|
$ | 3,171,245 | $ | 3,241,392 | $ | 3,176,504 | $ | 3,183,342 | ||||||||
|
Financial liabilities:
|
||||||||||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
$ | — | $ | — | $ | 52 | $ | 51 | ||||||||
|
Short-term debt:
|
||||||||||||||||
|
Of Fannie Mae
|
193,718 | 193,759 | 151,884 | 151,974 | ||||||||||||
|
Of consolidated trusts
|
5,004 | 5,004 | 5,359 | 5,359 | ||||||||||||
|
Long-term debt:
|
||||||||||||||||
|
Of Fannie Mae
|
551,085 | 580,238 | 628,160 | 649,684 | ||||||||||||
|
Of consolidated trusts
|
2,441,969 | 2,588,550 | 2,411,597 | 2,514,929 | ||||||||||||
|
Derivative liabilities at fair value
|
4,273 | 4,273 | 1,715 | 1,715 | ||||||||||||
|
Guaranty obligations
|
765 | 3,920 | 769 | 3,854 | ||||||||||||
|
Total financial liabilities
|
$ | 3,196,814 | $ | 3,375,744 | $ | 3,199,536 | $ | 3,327,566 | ||||||||
| (1) | Includes restricted cash of $56.0 billion and $63.7 billion as of September 30, 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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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 September 30, 2011 and December 31,
2010.
| As of | ||||||||||||||||||||||||
| September 30, 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
|
$ | 3,361 | $ | 845 | $ | 3,840 | $ | 2,962 | $ | 893 | $ | 2,271 | ||||||||||||
|
Unpaid principal balance
|
3,853 | 712 | 3,952 | 3,456 | 829 | 2,572 | ||||||||||||||||||
| (1) | Includes nonaccrual loans with a fair value of $211 million and $219 million as of September 30, 2011 and December 31, 2010, respectively. The difference between unpaid principal balance and the fair value of these nonaccrual loans as of September 30, 2011 is $227 million. Includes loans that are 90 days past due with a fair value |
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MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
| of $367 million and $369 million as of September 30, 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 September 30, 2011 is $256 million. | ||
| (2) | Includes interest-only debt instruments with no unpaid principal balance and a fair value of $123 million and $151 million as of September 30, 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
(losses) gains, net” in our condensed consolidated
statements of operations and comprehensive loss for the periods
ended September 30, 2011 and 2010.
| For the Three Months Ended September 30, | ||||||||||||||||
| 2011 | 2010 | |||||||||||||||
|
Long-Term
|
Total Gains
|
Long-Term
|
||||||||||||||
| Loans | Debt | (Losses) | Debt | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Changes in instrument-specific credit risk
|
$ | 27 | $ | 8 | $ | 35 | $ | (3 | ) | |||||||
|
Other changes in fair value
|
(30 | ) | (79 | ) | (109 | ) | (44 | ) | ||||||||
|
Fair value losses, net
|
$ | (3 | ) | $ | (71 | ) | $ | (74 | ) | $ | (47 | ) | ||||
| For the Nine Months Ended September 30, | ||||||||||||||||
| 2011 | 2010 | |||||||||||||||
|
Long-Term
|
Total Gains
|
Long-Term
|
||||||||||||||
| Loans | Debt | (Losses) | Debt | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Changes in instrument-specific credit risk
|
$ | (184 | ) | $ | 12 | $ | (172 | ) | $ | 5 | ||||||
|
Other changes in fair value
|
111 | (72 | ) | 39 | (70 | ) | ||||||||||
|
Fair value losses, net
|
$ | (73 | ) | $ | (60 | ) | $ | (133 | ) | $ | (65 | ) | ||||
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. In some of the matters, indeterminate amounts are
sought. Modern pleading practice in the U.S. permits
considerable variation in the assertion of monetary damages or
other relief. Jurisdictions may permit claimants not to specify
the monetary damages sought or may permit claimants to state
only that the amount sought is sufficient to invoke the
jurisdiction of the trial court. This variability in pleadings,
together with our and our counsel’s actual experience in
litigating or settling claims, leads us to
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MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
conclude that the monetary relief that may be sought by
plaintiffs bears little relevance to its merits or disposition
value.
On a quarterly and annual basis, we review relevant information
about all pending legal actions and proceedings for the purpose
of evaluating and revising our contingencies, reserves and
disclosures.
Legal actions and proceedings of all types are subject to many
uncertain factors that generally cannot be predicted with
assurance. Accordingly, the outcome of any given matter and the
amount or range of potential loss at particular points in time
is frequently difficult to ascertain. Uncertainties can include
how fact finders will evaluate documentary evidence and the
credibility and effectiveness of witness testimony, and how
trial and appellate courts will apply the law. Disposition
valuations are also subject to the uncertainty of how opposing
parties and their counsel view the evidence and applicable law.
Further, FHFA adopted a regulation on June 20, 2011, which
provides, in part, that while we are in conservatorship, FHFA
will not pay claims by our current or former shareholders,
unless the Director of FHFA determines it is in the interest of
the conservatorship. The presence of this regulation and the
Director of FHFA’s assertion that it will not pay claims
asserted in certain cases discussed below while we are in
conservatorship creates additional uncertainty in those cases.
We have established a reserve for those matters where a loss is
probable and where we can reasonably estimate the amount of such
loss. Reserves have been established for certain of the matters
noted below. These reserves did not have a material adverse
effect on our financial statements. 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 the remaining legal actions or proceedings, including those
where there is only a reasonable possibility that a loss may be
incurred, we are not currently able to estimate the reasonably
possible losses or ranges of losses and we have not established
a reserve with respect to those actions or proceedings. We are
often unable to estimate the possible loss or range of loss,
particularly for proceedings that are in their early stages of
development, where plaintiffs seek substantial or indeterminate
damages, or where there may be novel or unsettled legal
questions relevant to the proceedings or settlement negotiations
have not occurred or progressed. Further, as noted above,
FHFA’s regulation and the Director of FHFA’s assertion
creates additional uncertainty with respect to certain cases.
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 matters described
below, we believe we have valid defenses to the claims in these
proceedings and intend to defend these matters 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
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MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
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. On August 18, 2011, the parties
filed various motions for summary judgment.
On October 7, 2011, FHFA, as conservator, filed a motion to
stay this case for the duration of our conservatorship based on
a regulation FHFA adopted on June 20, 2011, which
provides in part that while we are in conservatorship, FHFA will
not pay claims by our current or former shareholders, unless the
Director of FHFA determines it is in the interest of the
conservatorship. The Acting Director of FHFA has determined it
will not pay the claims asserted in this case while we are in
conservatorship. FHFA maintains, therefore, that continuing
litigation of this matter would be a waste of resources.
Alternatively, FHFA has stated it will seek a stay of this case,
while a separate lawsuit challenging the regulation is decided.
In September and December, 2010, plaintiffs served expert
reports claiming damages to plaintiffs under various scenarios
ranging cumulatively from $2.2 billion to
$8.6 billion. Given the substantial and novel legal
questions that remain, including those raised by FHFA’s
regulation and the Director of FHFA’s determination, we are
currently unable to estimate the reasonably possible loss or
range of loss arising from this litigation.
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. Given the early status of
these matters, the absence of a specified demand or claim by the
plaintiffs and the substantial and novel legal questions that
remain, we are currently unable to estimate the reasonably
possible loss or range of loss arising from these lawsuits.
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 seek various forms of relief, including
rescission, damages, interest, costs, attorneys’ and
experts’ fees, and other equitable and injunctive relief.
On October 13, 2009, the Court entered an order allowing
FHFA to intervene.
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
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MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
complaint on December 31, 2010. Defendants’ motions
for reconsideration were denied on April 11, 2011. On
July 28, 2011 lead plaintiffs filed motions to certify 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.
On October 12, 2011, FHFA, as conservator, filed a letter
with the court requesting a pre-motion conference to discuss
FHFA’s intention to file a motion to stay this case for the
duration of our conservatorship based on a regulation FHFA
adopted on June 20, 2011, which provides in part that while
we are in conservatorship, FHFA will not pay claims by our
current or former shareholders, unless the Director of FHFA
determines it is in the interest of the conservatorship. The
Acting Director of FHFA has determined it will not pay the
claims asserted in this case while we are in conservatorship.
FHFA maintains, therefore, that continuing litigation of this
matter is a waste of resources. Alternatively, FHFA will seek a
stay of this case while a separate lawsuit challenging the
regulation is decided.
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. On
November 2, 2011, we filed a letter notifying the court of two
recent decisions by the U.S. Court of Appeals for the Second
Circuit that are relevant to the defendants’ motions to
dismiss.
Comprehensive
Investment Services v. Mudd, et al.
This individual securities action was originally filed on
May 13, 2009, by plaintiff Comprehensive Investment
Services, Inc. against certain of our former officers and
directors, and certain of our underwriters in the Southern
District of Texas. 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
. Plaintiff
filed an amended complaint on May 11, 2011 against us,
certain of our former officers, and certain of our underwriters.
The amended complaint alleges 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; and violations of the Texas
Business and Commerce Code, common law fraud, and negligent
misrepresentation in connection with Fannie Mae’s May 2008
$2.0 billion offering of 8.25% non-cumulative preferred
Series T stock. Plaintiff seeks relief in the form of
rescission, actual damages, punitive damages, interest, costs,
attorneys’ and experts’ fees, and other equitable and
injunctive relief. On July 11, 2011, defendants filed
motions to dismiss the amended complaint, which are now fully
briefed and remain pending. Given the preliminary stage of this
lawsuit, the absence of a specified demand or claim by the
plaintiff and the substantial and novel legal questions that
remain, we are currently unable to estimate the reasonably
possible loss or range of loss arising from this litigation.
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FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
Smith v.
Fannie Mae, et al.
This individual securities 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 in the Central District of California. On
April 12, 2010, 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
. Plaintiff filed an amended complaint on
April 19, 2011, which alleges 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 in
connection with Fannie Mae’s December 2007
$7.0 billion offering of 7.75%
fixed-to-floating
rate non-cumulative preferred Series S stock. Plaintiff
seeks relief in the form of rescission, actual damages
(including interest), and exemplary and punitive damages. On
July 11, 2011, defendants filed motions to dismiss the
amended complaint, which are now fully briefed and remain
pending. Given the preliminary stage of this lawsuit, the
absence of a specified demand or claim by the plaintiff and the
substantial and novel legal questions that remain, we are
currently unable to estimate the reasonably possible loss or
range of loss arising from this litigation.
Alenick v.
Merrill Lynch, et al.
On May 12, 2011, Zeke Alenick filed an individual
securities action against one of our former officers, certain of
our underwriters, and an employee of one of our underwriters in
New York State Court. Plaintiff alleges common law fraud,
recklessness, negligence, and violations of §349 of the New
York General Business Law 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 damages, punitive damages, and rescission.
On June 13, 2011, the case was removed to the United States
District Court for the Southern District of New York and
accepted as related to
In re Fannie Mae 2008 Securities
Litigation
and
In re 2008 Fannie Mae ERISA
Litigation
. On July 18 and 25, 2011, Alenick filed motions
to dismiss voluntarily all defendants. The court granted those
motions on July 25 and 28, 2011, and closed the case.
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.
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| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Information about market risk is set forth in
“MD&A—Risk Management—Market Risk
Management, Including Interest Rate Risk Management.”
| Item 4. | Controls and Procedures |
Overview
We are required under applicable laws and regulations to
maintain controls and procedures, which include disclosure
controls and procedures as well as internal control over
financial reporting, as further described below.
Evaluation
of Disclosure Controls and Procedures
Disclosure
Controls and Procedures
Disclosure controls and procedures refer to controls and other
procedures designed to provide reasonable assurance that
information required to be disclosed in the reports we file or
submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and
forms of the 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 Chief Financial Officer, as
appropriate, to allow timely decisions regarding our required
disclosure. In designing and evaluating our disclosure controls
and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management was required to apply its
judgment in evaluating and implementing possible controls and
procedures.
Evaluation
of Disclosure Controls and Procedures
As required by
Rule 13a-15
under the Exchange Act, management has evaluated, with the
participation of our Chief Executive Officer and Chief Financial
Officer, the effectiveness of our disclosure controls and
procedures as in effect as of September 30, 2011, the end
of the period covered by this report. As a result of
management’s evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls
and procedures were not effective at a reasonable assurance
level as of September 30, 2011 or as of the date of filing
this report.
Our disclosure controls and procedures were not effective as of
September 30, 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
September 30, 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 September 30, 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 September 30, 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 September 30, 2011 (“Third Quarter 2011 Form 10-Q”), and engaged in discussions regarding issues associated with the information contained in those filings. Prior to filing our Third Quarter 2011 Form 10-Q, FHFA provided Fannie Mae management with a written acknowledgement that it had reviewed the Third Quarter 2011 Form 10-Q, and it was not aware of any material misstatements or omissions in the Third Quarter 2011 Form 10-Q and had no objection to our filing the Third 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
Overview
Management is required to evaluate, with the participation of
our Chief Executive Officer and Chief Financial Officer, whether
any changes in our internal control over financial reporting
that occurred during our last fiscal quarter have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting. Below we describe
changes in our internal control over financial reporting since
June 30, 2011 that management believes have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Changes
in Management
During the third quarter of 2011, Susan R. McFarland became our
new Chief Financial Officer, succeeding David C. Hisey as our
principal financial officer. Mr. Hisey continued to serve
as our principal accounting officer until the fourth quarter of
2011, when Gregory A. Fink, Senior Vice President and Controller
of Fannie Mae, was appointed as our principal accounting
officer. Mr. Hisey continues to serve as our Executive Vice
President and Deputy Chief Financial Officer.
In addition, John Nichols, who had previously been our interim
Chief Risk Officer, was appointed our Chief Risk Officer in the
third quarter of 2011.
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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
and First Quarter 2011
Form 10-Q
and Second Quarter
Form 10-Q.
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,
First Quarter 2011
Form 10-Q
or Second Quarter 2011
Form 10-Q.
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.
FHFA
Private-Label Mortgage-Related Securities
Litigation
In the third quarter of 2011, FHFA, as conservator for us and
for Freddie Mac, filed 16 lawsuits on behalf of us and Freddie
Mac against various financial institutions, their officers and
unaffiliated underwriters who were responsible for marketing and
selling private-label mortgage-related securities to us. The
lawsuits seek to recover losses we and Freddie Mac incurred on
the securities. FHFA filed 13 of these lawsuits in the
U.S. District Court for the Southern District of New
York—against Bank of America Corp.; Barclays Bank PLC;
Citigroup, Inc.; Credit Suisse Holdings (USA), Inc.; Deutsche
Bank AG; First Horizon National Corporation; Goldman,
Sachs & Co.; HSBC North America Holdings Inc.;
JPMorgan Chase & Co.; Merrill Lynch & Co.;
Nomura Holding America Inc.; SG Americas, Inc.; and UBS Americas
Inc. and against certain related entities and individuals. Two
lawsuits—against Countrywide Financial Corporation and
Morgan Stanley—were filed in the Supreme Court of the State
of New York for the County of New York, and one—against The
Royal Bank of Scotland Group PLC—was filed in the
U.S. District Court for the District of Connecticut. The
lawsuit against UBS was filed on July 27, 2011, and all the
others were filed on September 2, 2011. The lawsuits allege
that the defendants violated federal securities laws and state
common law by making material misstatements and omissions in the
offering documents for the securities that were sold to Fannie
Mae and Freddie Mac regarding the characteristics of the loans
underlying the securities. Some of the complaints also allege
state securities law violations and common law fraud. The
complaints seek, among other things, rescission and recovery of
consideration paid for the securities at issue in the lawsuits,
monetary damages and, in certain cases, punitive damages for
common law fraud.
Investigation
by Office of the Inspector General of FHFA and U.S. Attorney for
the Eastern District of Virginia
On October 27, 2011, we received notice of an ongoing
investigation by the Office of the Inspector General of FHFA
(“FHFA OIG”) and the U.S. Attorney for the
Eastern District of Virginia with regard to a multifamily
agreement with The Related Companies, L.P. The financial impact
of the agreement was not material to our financial statements.
In connection with the investigation, we received a subpoena for
documents from the FHA OIG. We are cooperating with this
investigation.
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| 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
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 importance of proceeding with
a careful transition plan and providing the necessary financial
support to Fannie Mae and Freddie Mac during the transition
period.
The Subcommittee on Capital Markets and Government Sponsored
Enterprises of the Financial Services Committee has approved
numerous bills that could constrain the current operations of
the GSEs or alter the existing authority that FHFA or Treasury
have over the enterprises. In addition, several bills have been
introduced in the Senate and House of Representatives that would
place the GSEs into receivership after a period of time and
either grant federal charters to new entities to engage in
activities similar to those currently engaged in by the GSEs or
leave secondary mortgage market activities to entities in the
private sector. We expect that Congress will continue to hold
hearings and consider legislation in the remainder of 2011 and
in 2012 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 will likely be insufficient to repay the liquidation
preference of any series of our preferred stock or to 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
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terms of the senior preferred stock purchase agreement, Treasury
may not provide these funds to us within the required
60 days if it has exhausted its borrowing authority or if
there is a government shutdown. 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 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 administrative expenses of the receiver and the
immediately preceding conservator, the secured and unsecured
claims against the company (including repaying all outstanding
debt obligations), 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.
Efforts
that we undertake, including those we are required or asked to
undertake by FHFA, other government agencies or Congress, in
pursuit of providing liquidity, stability and affordability to
the mortgage market and providing assistance to struggling
homeowners, or in pursuit of other goals, may adversely affect
our business, results of operations, financial condition,
liquidity and net worth.
Prior to the conservatorship, our business was managed with a
strategy to maximize shareholder returns, while fulfilling our
mission. Our conservator has directed us to focus primarily on
minimizing our credit losses from delinquent mortgages and
providing assistance to struggling homeowners to help them
remain in their homes. As a result, we may continue to take a
variety of actions designed to address this focus that could
adversely affect our economic returns, possibly significantly,
such as: reducing our guaranty fees and modifying loans to
extend the maturity, lower the interest rate or defer or forgive
principal owed by the borrower. These activities may have short-
and long-term adverse effects on our business, results of
operations, financial condition, liquidity and net worth. For
example, while we do not at this time know the ultimate impact
on us of the changes to HARP described in
“MD&A—Legislative and Regulatory
Developments,” we expect we may incur additional
credit-related expenses as a result of acquiring refinancings
made under HARP’s revised terms. The amount of any
additional credit-related expenses we incur depends on a number
of factors, including the terms, credit profile and volume of
our acquisitions under the revised program. At this time, we do
not know how many of these refinancings we will acquire. We have
also incurred substantial costs in connection with HAMP, as we
discuss in “MD&A—Consolidated Results of
Operations—Financial Impact of the Making Home Affordable
Program on Fannie Mae” in our 2010
Form 10-K.
Other agencies of the U.S. government or Congress also may
ask us to undertake significant efforts to support the housing
and mortgage markets, as well as struggling homeowners.
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Limitations
on our ability to access the debt capital markets could have a
material adverse effect on our ability to fund our operations
and generate net interest income.
Our ability to fund our business depends primarily on our
ongoing access to the debt capital markets. Our level of net
interest income depends on how much lower our cost of funds is
compared to what we earn on our mortgage assets. Market concerns
about matters such as the extent of government support for our
business, the future of our business (including future
profitability, future structure, regulatory actions and GSE
status) and the creditworthiness of the U.S. government
could cause a severe negative effect on our access to the
unsecured debt markets, particularly for long-term debt. We
believe that our ability in 2010 and the first nine months of
2011 to issue debt of varying maturities at attractive pricing
resulted from federal government support of us and the financial
markets, including the Federal Reserve’s purchases of our
debt and MBS. As a result, we believe that our status as a GSE
and continued federal government support is essential to
maintaining our access to debt funding. Changes or perceived
changes in the government’s support of us or the markets
could have a material adverse effect on our ability to fund our
operations. As recently as September 2011, the Federal Reserve
announced that, to help support conditions in mortgage markets,
it will now reinvest principal payments from its holdings of
agency debt and agency mortgage-backed securities in agency
mortgage-backed securities. However, there can be no assurance
that the government will continue to support us or the markets,
or that our current level of access to debt funding will
continue. In addition, due to our reliance on the
U.S. government’s support, our access to debt funding
also could be materially adversely affected by a change or
perceived change in the creditworthiness of the
U.S. government.
Future changes or disruptions in the financial markets could
significantly change the amount, mix and cost of funds we
obtain, as well as our liquidity position. If we are unable to
issue both short- and long-term debt securities at attractive
rates and in amounts sufficient to operate our business and meet
our obligations, it likely would interfere with the operation of
our business and have a material adverse effect on our
liquidity, results of operations, financial condition and net
worth.
Our
liquidity contingency plans may be difficult or impossible to
execute during a liquidity crisis.
We believe that our liquidity contingency plans may be difficult
or impossible to execute during a liquidity crisis. If we cannot
access the unsecured debt markets, our ability to repay maturing
indebtedness and fund our operations could be significantly
impaired. In this event, our alternative sources of
liquidity—consisting of our cash and other investments
portfolio and the unencumbered mortgage assets in our mortgage
portfolio—may not be sufficient to meet our liquidity needs.
We believe that the amount of mortgage-related assets that we
could successfully borrow against or sell in the event of a
liquidity crisis or significant market disruption is
substantially lower than the amount of mortgage-related assets
we hold. Due to the large size of our portfolio of mortgage
assets, current market conditions and the significant amount of
distressed assets in our mortgage portfolio, there likely would
be insufficient market demand for large amounts of these assets
over a prolonged period of time, which would limit our ability
to borrow against or sell these assets.
To the extent that we are able to obtain funding by pledging or
selling mortgage-related securities as collateral, we anticipate
that a discount would be applied that would reduce the value
assigned to those securities. Depending on market conditions at
the time, this discount could result in proceeds significantly
lower than the current market value of these securities and
could thereby reduce the amount of financing we obtain. In
addition, our primary source of collateral is Fannie Mae MBS
that we own. In the event of a liquidity crisis in which the
future of our company is uncertain, counterparties may be
unwilling to accept Fannie Mae MBS as collateral. As a result,
we may not be able to sell or borrow against these securities in
sufficient amounts to meet our liquidity needs.
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A decrease in the credit ratings on our senior unsecured
debt could have an adverse effect on our ability to issue debt
on reasonable terms and trigger additional collateral
requirements, and would likely do so if such a decrease were not
based on a similar action on the credit ratings of the
U.S. government.
Credit ratings on our senior unsecured debt, as well as the
credit ratings of the U.S. government, are primary factors
that could affect our borrowing costs and our access to the debt
capital markets. 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.
On August 5, 2011, S&P lowered the long-term sovereign
credit rating on the U.S. to “AA+.” As a result
of this action, and because we directly rely on the
U.S. government for capital support, on August 8,
2011, S&P lowered our long-term senior debt rating to
“AA+” with a negative outlook. Previously, our
long-term senior debt had been rated by S&P as
“AAA” and had been on CreditWatch Negative. S&P
affirmed our short-term senior debt rating of
“A-1+”
and removed it from CreditWatch Negative. In assigning a
negative outlook on the U.S. government’s long-term
debt rating, S&P noted that it may lower the
U.S. government’s long-term debt rating to
“AA” within the next two years if it sees less
reduction in spending than agreed to or higher interest rates,
or if new fiscal pressures during the period result in a higher
general government debt trajectory than S&P currently
assumes. If S&P further lowers the
U.S. government’s long-term debt rating, we expect
that S&P would lower our long-term debt rating
correspondingly.
After the U.S. government’s statutory debt limit was
raised on August 2, 2011, Fitch affirmed its rating and
stable outlook of our long-term debt, and Moody’s confirmed
the U.S. government’s rating and our long-term debt
ratings. Moody’s also removed the designation that these
ratings were under review for possible downgrade. Moody’s
revised the outlook for both the U.S. government’s
rating and our long-term debt ratings to negative. In assigning
the negative outlook to the U.S. government’s rating,
Moody’s indicated there would be a risk of a downgrade if
(1) there is a weakening in fiscal discipline in the coming
year; (2) further fiscal consolidation measures are not
adopted in 2013; (3) the economic outlook deteriorates
significantly; or (4) there is an appreciable rise in the
U.S. government’s funding costs over and above what is
currently expected. As of November 3, 2011, our long-term
debt continued to be rated “Aaa” by Moody’s and
“AAA” by Fitch.
S&P, Moody’s and Fitch have all indicated that they
would likely lower their ratings on the debt of Fannie Mae and
certain other government-related entities if they were to lower
their ratings on the U.S. government.
We currently cannot predict whether one or more of these rating
agencies will downgrade our debt ratings in the future, nor can
we predict the potential impact. Although S&P’s
downgrade of our credit rating has not increased our borrowing
costs or limited our access to the debt capital markets to date,
an additional reduction in our credit ratings could have a
material adverse impact on our access to debt funding or on the
cost of our debt funding, and would likely do so if it were not
based on a similar action on the credit ratings of the
U.S. government. An additional reduction in our credit
ratings may also trigger additional collateral requirements
under our derivatives contracts and other borrowing
arrangements, 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.”
Further
deterioration in the credit quality of, or defaults by, one or
more of our mortgage insurer counterparties could result in
nonpayment of claims under mortgage insurance policies, business
disruptions and increased concentration risk.
We rely heavily on mortgage insurers to provide insurance
against borrower defaults on single-family conventional mortgage
loans with LTV ratios over 80% at the time of acquisition. The
already weak financial condition of many of our mortgage insurer
counterparties deteriorated at an accelerated pace during the
third
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quarter of 2011, which increases the significant risk that these
counterparties will fail to fulfill their obligations to
reimburse us for claims under insurance policies. Since
January 1, 2009, the insurer financial strength ratings of
all of our major mortgage insurer counterparties have been
downgraded multiple times to reflect their weakened financial
condition. In 2008, one of our top eight mortgage insurer
counterparties, Triad Guaranty Insurance Corporation
(“Triad”), ceased issuing commitments for new mortgage
insurance, and, under an order received from its regulator, is
now paying all valid claims 60% in cash and 40% by the creation
of a deferred payment obligation, which may be paid in the
future. Since June 30, 2011, two more of our top eight
insurer counterparties, PMI Mortgage Insurance Co.
(“PMI”) and Republic Mortgage Insurance Company
(“RMIC”) were ordered to or agreed with their
regulators to cease issuing commitments for new mortgage
insurance. RMIC’s parent company has announced that RMIC is
in run-off operating mode. RMIC’s parent company has also
indicated that it is more likely than not that the capital
contributed to RMIC by its parent company will “continue on
a path toward full depletion in relatively short order.”
PMI has received an order from its regulator under which the
regulator now has full possession, management and control of
PMI. The regulator is also seeking to place PMI into
receivership. The regulator instituted a partial claim payment
plan whereby all valid claims under PMI’s mortgage guaranty
insurance policies will be paid 50% in cash and 50% deferred as
a policyholder claim. RMIC’s state regulators could take
additional corrective action, which may include the issuance of
an order to defer payment of claims
and/or
placement of the mortgage insurance writing entity into
receivership. It is uncertain when, and if, Triad’s or
PMI’s regulator will allow deferred policyholder claims to
be paid
and/or
increase the amount of cash paid on claims.
As of November 7, 2011, four of our mortgage insurers (Triad,
RMIC, PMI and Genworth Mortgage Insurance Corporation) have
publicly disclosed that they are either in run-off or, absent a
waiver, estimate they would not meet state regulatory capital
requirements for their main writing entity as of September 30,
2011. An additional two of our mortgage insurers (Mortgage
Guaranty Insurance Corporation and Radian Guaranty, Inc.) have
disclosed that, in the absence of additional capital
contributions to their writing entity, their capital might fall
below state regulatory capital requirements in the future. These
six mortgage insurers provided a combined $75.7 billion, or 82%,
of our risk in force mortgage insurance coverage of our
single-family guaranty book of business as of September 30,
2011. If mortgage insurers are not able to raise capital and
they exceed their
risk-to-capital
limits, they will likely be forced into run-off or receivership
unless they can secure and maintain a waiver from their state
regulator. This would increase the risk that they will fail to
pay our claims under insurance policies, and could also cause
the quality and speed of their claims processing to deteriorate.
We are unable to determine how long certain of our mortgage
insurer counterparties will remain below their state-imposed
risk-to-capital
limits.
Some mortgage insurers have been exploring corporate
restructurings, intended to provide relief from
risk-to-capital
limits in certain states. A restructuring plan that would
involve contributing capital to a subsidiary would result in
less liquidity available to its parent company to pay claims on
its existing book of business and an increased risk that its
parent company will not pay its claims in full in the future.
If our assessment of one or more of our mortgage insurer
counterparty’s ability to fulfill its obligations to us
worsens and our internal credit rating for the insurer is
further downgraded, it could result in a significant increase in
our loss reserves and increase our credit losses.
Many mortgage insurers stopped insuring new mortgages with
higher
loan-to-value
ratios or with lower borrower credit scores or on select
property types, which has contributed to the reduction in our
business volumes for high
loan-to-value
ratio loans. As our charter generally requires us to obtain
credit enhancement on single-family conventional mortgage loans
with
loan-to-value
ratios over 80% at the time of purchase, an inability to find
suitable credit enhancement may inhibit our ability to pursue
new business opportunities, meet our housing goals and otherwise
support the housing and mortgage markets. For example, where
mortgage insurance or other credit enhancement is not available,
we may be hindered in our ability to refinance loans into more
affordable loans. In addition, access to fewer mortgage insurer
counterparties will increase our concentration risk with the
remaining mortgage insurers in the industry.
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Changes in the foreclosure environment and our reliance on
servicers and their counsel and other service providers to
complete foreclosures could continue to have a material adverse
effect on our business, results of operations, financial
condition and net worth.
Circumstances in the foreclosure environment over the last few
years have resulted in foreclosures proceeding at a slow pace.
As a result of the housing market downturn that began in 2006
and significantly worsened in 2008, the volume of foreclosures
to be processed by servicers and states significantly increased
in 2009 and the first nine months of 2010. In October 2010, a
number of single-family mortgage servicers temporarily halted
some or all of the foreclosures they were processing after
discovering deficiencies in their and their service
providers’ foreclosure processes. Although servicers have
generally ended their outright foreclosure halts, the processing
of foreclosures continues to be slow in many states due to
continuing issues in the servicer foreclosure process, including
efforts by servicers to comply with regulatory consent orders,
recent changes in state foreclosure laws, court rules and
proceedings, and the pipeline of foreclosures resulting from
these delays and the elevated level of foreclosures caused by
the housing market downturn. In addition, court budget cuts in
Florida and other states could further delay the processing of
foreclosures.
These changes in the foreclosure environment have negatively
affected our foreclosure timelines, credit-related expenses and
single-family serious delinquency rates, and we expect they will
continue to do so. We believe these changes also will delay the
recovery of the housing market. These changes could also
negatively affect the value of the private-label securities we
hold and result in additional impairments on these securities.
In addition, the failure of our servicers or their service
providers 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.
The servicer foreclosure process deficiencies have generated
significant concern and are currently being reviewed by various
government agencies and the various state attorneys general,
which could lead to additional new laws, regulation, rules or
agreements that negatively affect our ability to foreclose
expeditiously or increase our costs.
In addition, FHFA directed us in October 2011 to phase out the
practice of requiring mortgage servicers to use our network of
retained attorneys to perform default- and foreclosure-related
legal services for our loans. Phasing out the requirement that
servicers use our retained attorney network may negatively
impact the performance of default- and foreclosure-related legal
services for our loans, which may adversely impact our efforts
to reduce our credit losses.
Challenges
to the
MERS
®
company, system and processes could pose operational,
reputational and legal risks for us.
MERSCORP, Inc. (“MERSCORP”) 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.
Several legal challenges have been made disputing MERS ’s
ability to initiate foreclosures, act as nominee in local land
records,
and/or
assign mortgages or take other action on behalf of the loan
owner. These challenges seek judicial relief ranging from money
damages to injunctive/declaratory relief seeking the prevention
of mortgage assignments by MERS
and/or
the
voiding of completed foreclosures in which MERS appeared in the
chain of title. 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, which could cause additional costs and time in
the recordation
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process. These challenges also could result in court decisions
that substantially delay new or pending foreclosures, or void
completed foreclosures in certain jurisdictions, which would
require that we re-foreclose on the affected properties, thereby
increasing our costs and lengthening the time it takes for us to
foreclose on and dispose of the properties.
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 and MERSCORP to address significant
weaknesses in, among other things, oversight, management
supervision and corporate governance at MERS and MERSCORP that
were uncovered as part of the regulators’ review of
mortgage servicers’ foreclosure processing. Failures by
MERS or MERSCORP 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, or the enforcement action against, MERS and
MERSCORP or the impact on our business, results of operations
and financial condition.
A
failure in our operational systems or infrastructure, or those
of third parties, could materially adversely affect our
business, impair our liquidity, cause financial losses and harm
our reputation.
Shortcomings or failures in our internal processes, people or
systems could have a material adverse effect on our risk
management, liquidity, financial statement reliability,
financial condition and results of operations; disrupt our
business; and result in legislative or regulatory intervention,
liability to customers, financial losses and damage to our
reputation. For example, our business is highly dependent on our
ability to manage and process, on a daily basis, an extremely
large number of transactions, many of which are highly complex,
across numerous and diverse markets and in an environment in
which we must make frequent changes to our core processes in
response to changing external conditions. These transactions are
subject to various legal, accounting and regulatory standards.
Our financial, accounting, data processing or other operating
systems and facilities may fail to operate properly or become
disabled, adversely affecting our ability to process these
transactions. In addition, we rely on information provided by
third parties in processing many of our transactions, and that
information may be incorrect or we may fail to properly manage
or analyze it.
We rely upon business processes that are highly dependent on
people, legacy technology and the use of numerous complex
systems and models to manage our business and produce books and
records upon which our financial statements are prepared. This
reliance increases the risk that we may be exposed to financial,
reputational or other losses as a result of inadequately
designed internal processes or systems, or failed execution of
our systems. While we continue to enhance our technology,
operational controls and organizational structure in order to
reduce our operational risk, these actions may not be effective
to manage these risks and may create additional operational risk
as we execute these enhancements. In addition, as our use of
third-party service providers for some of our business functions
increases, we increasingly face the risk of an operational
failure with respect to these third parties.
We also face the risk of operational failure, termination or
capacity constraints of any of the clearing agents, exchanges,
clearinghouses or other financial intermediaries we use to
facilitate our securities and derivatives transactions. Any such
failure, termination or constraint could adversely affect our
ability to effect transactions or manage our exposure to risk,
and could have a significant adverse impact on our business,
liquidity, financial condition, net worth and results of
operations.
Our operations rely on the secure processing, storage and
transmission of confidential and other information in our
computer systems and networks. Our computer systems, software
and networks may be vulnerable to breaches, unauthorized access,
misuse, computer viruses or other malicious code and other
events that could
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have a security impact. If one or more of such events occur,
this potentially could jeopardize our or our customers’ or
counterparties’ confidential and other information
processed and stored in, and transmitted through, our computer
systems and networks, or otherwise cause interruptions or
malfunctions in our, our customers’, our
counterparties’ or third parties’ operations, which
could result in significant losses, reputational damage,
litigation, regulatory fines or penalties, or adversely affect
our business, financial condition or results of operations. In
addition, we may be required to expend significant additional
resources to modify our protective measures or to investigate
and remediate vulnerabilities or other exposures arising from
operational and security risks.
In addition, we have experienced, and expect we may continue to
experience, substantial changes in management, employees and our
business structure and practices since the conservatorship
began. These changes could increase our operational risk and
result in business interruptions and financial losses. In
addition, due to events that are wholly or partially beyond our
control, our systems could fail to operate properly, which could
lead to financial losses, business disruptions, legal and
regulatory sanctions and reputational damage.
| 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
September 30, 2011, 583 restricted stock units vested, as a
result of which 403 shares of common stock were issued, and
180 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.
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.
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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 third 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
|
||||||||||||||||
|
July 1-31
|
2 | $ | 0.34 | — | — | |||||||||||
|
August 1-31
|
— | 0.27 | — | — | ||||||||||||
|
September 1-30
|
— | 0.27 | — | — | ||||||||||||
|
Total
|
2 | |||||||||||||||
| (1) | Consists of shares of common stock reacquired from employees to pay an aggregate of $576 in withholding taxes due upon the vesting of previously issued restricted stock. | |
| (2) | We do not 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. In
addition, FHFA’s regulations relating to conservatorship
and receivership operations, which became effective
July 20, 2011, prohibit us from paying any dividends while
in conservatorship unless authorized by the Director of FHFA.
The Acting Director of FHFA directs us to make dividend payments
on the senior preferred stock on a quarterly basis.
Restrictions under Senior Preferred Stock Purchase
Agreement.
The senior preferred stock purchase
agreement prohibits us from declaring or paying any dividends on
Fannie Mae equity securities (other than the senior preferred
stock) without the prior written consent of Treasury.
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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 |
On November 4, 2011, Gregory A. Fink, Senior Vice President
and Controller of Fannie Mae, was appointed as the
company’s principal accounting officer, effective on that
date. As of that date, David C. Hisey no longer serves as the
company’s principal accounting officer. Mr. Hisey
continues to serve as the company’s Executive Vice
President and Deputy Chief Financial Officer.
Gregory A. Fink, 44, has been Senior Vice President—Finance
of Fannie Mae since April 2009, as well as the company’s
Controller since September 2010. Mr. Fink previously served
as Vice President—Financial Reporting from October 2006 to
April 2009. Mr. Fink joined Fannie Mae in March 2006 as
Vice President—Accounting Policy.
| 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.
190
Table of Contents
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: November 8, 2011
| By: |
/s/ Susan
R. McFarland
|
Susan R. McFarland
Executive Vice President and
Chief Financial Officer
Date: November 8, 2011
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Table of Contents
INDEX TO
EXHIBITS
|
Item
|
Description
|
|||
| 3 | .1 | Fannie Mae Charter Act (12 U.S.C. § 1716 et seq.) as amended through July 30, 2008 (Incorporated by reference to Exhibit 3.1 to Fannie Mae’s 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.) | ||
| 31 | .1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a) | ||
| 31 | .2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a) | ||
| 32 | .1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 | ||
| 32 | .2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | ||
| 101 | . INS | XBRL Instance Document* | ||
| 101 | . SCH | XBRL Taxonomy Extension Schema* | ||
| 101 | . CAL | XBRL Taxonomy Extension Calculation* | ||
| 101 | . LAB | XBRL Taxonomy Extension Labels* | ||
| 101 | . PRE | XBRL Taxonomy Extension Presentation* | ||
| 101 | . DEF | XBRL Taxonomy Extension Definition* | ||
| * | The financial information contained in these XBRL documents is unaudited. The information in these exhibits shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of Section 18, nor shall they be deemed incorporated by reference into any disclosure document relating to Fannie Mae, except to the extent, if any, expressly set forth by specific reference in such filing. |
E-1
Table of Contents
FR008
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