UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Federal National Mortgage Association

Federally chartered corporation		000-50231		52-0883107
(State or other jurisdiction		(Commission		(IRS Employer
of incorporation)		File Number)		Identification Number)

3900 Wisconsin Avenue, NW
Washington, DC		20016
(Address of principal executive offices)		(Zip Code)

(Former Name or Former Address, if Changed Since Last Report):                     

     Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

	o		Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
	o		Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
	o		Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
	o		Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

The information in this report, including the two exhibits submitted herewith, 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 document.

Item 2.02 Results of Operation and Financial Condition

     On August 16, 2007, Fannie Mae (formally known as the Federal National Mortgage Association) issued a news release reporting its filing of its Form 10-K for the year ended December 31, 2006 (the “2006 Form 10-K”) and its financial results for the periods covered by the Form 10-K. The press release, a copy of which is furnished as Exhibit 99.1 to this report, is incorporated herein by reference.

     On August 16, 2007, Fannie Mae also issued a supplement to its news release discussing the company’s credit book of business. The supplement, a copy of which is furnished as Exhibit 99.2 to this report, is incorporated herein by reference.

Item 9.01 Financial Statements and Exhibits.

     (d) Exhibits. The exhibit index filed herewith is incorporated herein by reference.

SIGNATURE

     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, hereunto duly authorized.

Date: August 16, 2007

EXHIBIT INDEX

The following exhibits are submitted herewith:

Exhibit Number				Description of Exhibit
	99.1			News release, dated August 16, 2007
	99.2			Supplement to news release, discussing credit book of business, dated August 16, 2007

Exhibit 99.1

news release Media Hotline: 1-888-326-6694 Consumer Resource Center: 1-800-732-6643

Contact:		Chuck Greener		Janis Smith
		202-752-2616		202-752-6673
Number:		4079a
Date:		August 16, 2007

FANNIE MAE FILES 2006 10-K WITH THE SEC

WASHINGTON, DC — Fannie Mae (FNM/NYSE) today filed its 2006 Annual Report on Form 10-K with the U.S. Securities and Exchange Commission (SEC), reporting annual net income of $4.1 billion in 2006, and diluted earnings per share (EPS) of $3.65. The company also reaffirmed that it expects to file its annual financial statements with the SEC on a current basis by the end of February 2008.

Summary of 2006 Results

§		Net income declined to $4.1 billion, compared with $6.3 billion in 2005
§		Drivers include lower net interest income and higher administrative expenses
§		Diluted earnings per share (EPS) declined to $3.65 per share, compared with $6.01 per share in 2005
§		Stockholders’ equity increased to $41.5 billion compared with $39.3 billion in 2005
§		Core capital grew to $42.0 billion, $3.8 billion above required 30 percent capital surplus
§		Estimated fair value of net assets (a non-GAAP measure) was $42.9 billion at year-end 2006, compared with $42.2 billion at year-end 2005
§		Mortgage credit book of business grew to $2.5 trillion, up 7.2 percent from 2005
§		Market share of single-family mortgage–related securities issuance increased in each quarter of 2006, reaching 24.7 percent in the 4th quarter
§		Dividend pay-out ratio to common shareholders increased to 32.4 percent from 17.2 percent in 2005

“Looking back, 2006 was a rebuilding year, with the completion of the restatement and the remediation of many operational, regulatory and accounting issues,” President and Chief Executive Officer Daniel H. Mudd stated. “But it was also a challenging year for the housing market and for our business.”

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Fannie Mae 2006 10-K
Page Two

The company’s 2006 earnings primarily reflect a decline in net interest income and increased administrative expenses resulting from the company’s restatement and remediation efforts as well as higher operating expenses. Also affecting earnings to a lesser extent was an increase in credit-related expenses resulting from worsening housing markets in parts of the country, particularly in the Midwest.

“Despite the headwinds we faced in the market, in 2006 we were able to meet several important objectives,” Mudd said. “Our single-family credit guaranty business gained momentum and began to retake share. We maintained our strong capital position. And, while our administrative expenses rose in 2006, we expect them to decline in 2007 and 2008 as our efficiency initiatives take hold.”

“Downward pressure on home prices in 2006, particularly in parts of the Midwest, led to an increase in credit losses,” Mudd added. “While our credit loss ratio grew to 2.7 basis points (0.027 percent) of our total credit book, it remained below Fannie Mae’s normal historical range of between 4 and 6 basis points. We will continue to maintain a disciplined approach to pricing and managing credit risk.”

“We made a decision several years ago to step back from the riskier margins of the mortgage market. That decision cost us significant market share at that time, but as the market began to correct, particularly in the latter half of 2006, we began to get some of that market share back.”

Mudd concluded, “So far in 2007, our overall book of business is growing faster than the overall mortgage market, as demand grows for the more traditional products that make up the overwhelming majority of our book. While we do expect our credit loss ratio to increase in 2007 from continuing strain in the housing market, we believe Fannie Mae is well-positioned to weather the turmoil in the mortgage market.”

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Fannie Mae 2006 10-K
Page Three

A detailed discussion of Fannie Mae’s credit risk profile accompanies this release.

“Our 2006 10-K filing is one of the last major hurdles we had to clear in our progress toward becoming a current, SOX-compliant public company,” said Robert T. Blakely, Executive Vice President and Chief Financial Officer. “We are on a solid path to reporting our audited 2007 annual financial results on time.”

Blakely added, “I’ve accomplished what I set out to do when I came to Fannie Mae. I’ve benefited from the strength of the company’s leadership team, the guidance of our Board, and the tremendous depth and talent of our finance team. It has been deeply gratifying to see the determination and commitment of Fannie Mae’s people translate into tangible progress and improvements that will have a lasting positive impact.”

Fannie Mae said that the previously announced transition to a new CFO, Executive Vice President Stephen M. Swad, will become effective as the company turns its attention to the preparation and filing of its 2007 financial statements. Mr. Blakely will continue serving as an Executive Vice President of the company through the end of 2007.

“Bob Blakely and his team have built a strong foundation for Fannie Mae’s financial reporting,” Swad said. “Going forward, we will be building on that foundation, with a focus on continually reviewing and identifying ways to enhance the transparency and utility of our financial disclosures. Our actions will reflect Fannie Mae’s commitment to provide investors with both the GAAP view of our performance and with additional metrics consistent with those that management uses to run our business and assess our performance.”

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Fannie Mae 2006 10-K
Page Four

2006 Consolidated Results

The following discussion of our consolidated results of operations is based on our results for the years ended December 31, 2006, 2005 and 2004. Table 3 presents a condensed summary of our consolidated results of operations for these periods.

Table 3: Condensed Consolidated Results of Operations

														Variance
		For the Year Ended December 31,												2006 vs. 2005								2005 vs. 2004
		2006				2005				2004				$				%				$				%
		(Dollars in millions, except per share amounts)
Net interest income		$	6,752			$	11,505			$	18,081			$	(4,753	)			(41	)%		$	(6,576	)			(36	)%
Guaranty fee income			4,174				3,925				3,715				249				6				210				6
Losses on certain guaranty contracts			(439	)			(146	)			(111	)			(293	)			(201	)			(35	)			(32	)
Fee and other income			859				1,526				404				(667	)			(44	)			1,122				278
Investment losses, net			(683	)			(1,334	)			(362	)			651				49				(972	)			(269	)
Derivatives fair value losses, net			(1,522	)			(4,196	)			(12,256	)			2,674				64				8,060				66
Debt extinguishment gains (losses), net			201				(68	)			(152	)			269				396				84				55
Losses from partnership investments			(865	)			(849	)			(702	)			(16	)			(2	)			(147	)			(21	)
Administrative expenses			(3,076	)			(2,115	)			(1,656	)			(961	)			(45	)			(459	)			(28	)
Credit-related expenses(1)			(783	)			(428	)			(363	)			(355	)			(83	)			(65	)			(18	)
Other non-interest expenses			(405	)			(249	)			(599	)			(156	)			(63	)			350				58
Income before federal income taxes and extraordinary gains (losses)			4,213				7,571				5,999				(3,358	)			(44	)			1,572				26
Provision for federal income taxes			(166	)			(1,277	)			(1,024	)			1,111				87				(253	)			(25	)
Extraordinary gains (losses), net of tax effect			12				53				(8	)			(41	)			(77	)			61				763
Net income		$	4,059			$	6,347			$	4,967			$	(2,288	)			(36	)%		$	1,380				28	%
Diluted earnings per common share		$	3.65			$	6.01			$	4.94			$	(2.36	)			(39	)%		$	1.07				22	%

Net income was $4.1 billion in 2006, compared with $6.3 billion in 2005. The key drivers affecting earnings were:

Net interest income declined by $4.8 billion, to $6.8 billion, in 2006, driven by a lower average portfolio balance and a decline in the spread between the average yield on our interest-earning assets and our borrowing costs.

Administrative expenses increased $961 million to $3.1 billion in 2006, primarily due to costs associated with our efforts to return to timely financial reporting. In addition, we experienced an increase in our ongoing daily operations costs during 2006 due to an increase in our hiring efforts and staffing levels, as we redesigned our organizational structure to enhance our risk governance framework and strengthen our internal controls.

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Fannie Mae 2006 10-K
Page Five

Net derivatives fair value losses fell by $2.7 billion, to $1.5 billion, in 2006, largely attributable to rising interest rates increasing the aggregate fair value of the company’s interest rate swaps and reducing contractual interest settlements.

Guaranty fee income increased by approximately $249 million to $4.2 billion in 2006, primarily due to an increase in average outstanding Fannie Mae MBS and other guarantees.

Credit-related expenses increased $355 million to $783 million in 2006, due to an increase in the provision for credit losses and an increase in foreclosed property expense. The provision for credit losses increased by $148 million in 2006, principally reflecting a trend of higher charge-offs that began in the second half of 2006. Foreclosed property expense increased to $194 million in 2006 (compared with income of $13 million in 2005). These increases in credit-related expenses resulted from the significant slowdown in home price appreciation in 2006, as well as continued economic weakness in the Midwest, which led to higher default rates, as well as an increase in losses on foreclosed properties.

Other non-interest expenses increased by $156 million to $405 million in 2006, largely attributable to higher credit enhancement expense, due in part to the company’s acquisition of insurance coverage related to our increased purchase of non-traditional mortgage products that we believe may present higher credit risk, such as Alt-A and subprime loans.

Fee and other income decreased by $667 million to $859 million in 2006, primarily due to foreign currency exchange losses of $230 million, as compared with gains of $625 million in 2005. Currency-related losses were mostly offset by mark-to-market gains in currency swaps, which are recognized in our income statements as a component of “Derivatives fair value gains (losses), net.”

Net investment losses decreased by $651 million to $683 million in 2006, primarily due to unrealized gains of $8 million on trading securities, as compared with unrealized losses of $415 million in 2005, and lower impairment losses of $853 million in 2006, as compared with $1.2 billion in 2005.

2006 Stockholders’ Equity and Core Capital

Stockholders’ equity increased from $39.3 billion at year-end 2005 to $41.5 billion at year-end 2006, principally driven by net income, offset partially by the payment of $1.7 billion in dividends to common and preferred stockholders.

Fannie Mae’s core capital at year-end 2006 grew slightly to $42.0 billion, $3.8 billion above the 30 percent capital surplus required by our regulator.

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Fannie Mae 2006 10-K
Page Six

2006 Fair Value of Net Assets (Non-GAAP)

Because Fannie Mae’s assets and liabilities consist predominately of financial instruments, the company routinely uses fair value measures to make investment decisions and to measure, monitor and manage risk. The company’s consolidated fair value balance sheets (found in Annex 1 of this press release) include the following non-GAAP financial measures: the estimated fair value of other assets and total assets; the estimated fair value of other liabilities and total liabilities; and the estimated fair value of net assets (net of tax effect).

Fannie Mae’s estimated fair value of net assets (net of tax effect), a non-GAAP measure, increased to $42.9 billion as of December 31, 2006, compared with $42.2 billion as of year-end 2005. This increase is after a reduction of $1.5 billion from capital transactions in 2006. The estimated fair value of net assets at December 31, 2006 and December 31, 2005 included increases in the estimated fair value of net assets, excluding capital transactions, of approximately $2.2 billion and $3.5 billion, respectively.

Business Segment Results

Fannie Mae’s business is organized into three complementary business segments:

	•		The Single-Family Credit Guaranty business works with lender customers to securitize single-family mortgage loans into Fannie Mae MBS and to facilitate the purchase of single-family mortgage loans for our portfolio.
	§		The Housing and Community Development (HCD) business works with lender customers to securitize multifamily mortgage loans into Fannie Mae MBS and to facilitate the purchase of multifamily mortgage loans for our portfolio.

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Fannie Mae 2006 10-K
Page Seven

			Our HCD business also helps to expand the supply of affordable housing by investing in rental and for-sale housing projects, including rental housing that is eligible for federal low-income housing tax credits.
	•		The Capital Markets group manages the company’s investment activity in mortgage loans and mortgage-related securities, and has responsibility for managing the company’s assets and liabilities and the company’s liquidity and capital positions.

Table 11: Business Segment Summary Financial Information

		For the Year Ended December 31,
		2006				2005				2004
		(Dollars in millions)
Net Revenue:(1)
Single-Family Credit Guaranty		$	6,073			$	5,585			$	5,007
Housing and Community Development			510				607				527
Capital Markets			5,202				10,764				16,666
Total		$	11,785			$	16,956			$	22,200
Net income:
Single-Family Credit Guaranty		$	2,044			$	2,623			$	2,396
Housing and Community Development			338				503				425
Capital Markets			1,677				3,221				2,146
Total		$	4,059			$	6,347			$	4,967

		As of December 31,
		2006				2005
Total assets:
Single-Family Credit Guaranty		$	15,777			$	14,450
Housing and Community Development			14,100				12,075
Capital Markets			814,059				807,643
Total		$	843,936			$	834,168

Single-Family Credit Guaranty:

Single-Family net income for 2006 was $2.0 billion, down from $2.6 billion in 2005, reflecting a $488 million increase in net revenue that was more than offset by a $308 million increase in losses on certain single-family guaranty contracts, a $553 million increase in administrative expenses, a $123 million increase in the provision for credit losses and an increase of $218 million of foreclosed property expense.

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Fannie Mae 2006 10-K
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The single-family book of business grew at a rate of 7.2 percent. This growth rate — somewhat slower than the overall market — reflects the company’s strategic decision to limit participation in certain non-traditional segments of the market when management concluded that pricing did not adequately reflect underlying risks in assets made available for securitization.

Single-family guaranty fee income increased by approximately 6 percent, due to a 4 percent increase in the average Single-Family mortgage credit book of business and an increase in the average effective guaranty fee rate on the Single-Family book.

Losses on guaranty contracts were $439 million in 2006, compared with $146 million in 2005. This increase was driven primarily by the slowdown in home price appreciation in 2006, which led us to increase our expectation of modeled credit losses on some of our guaranty pools. In addition, mortgage financing to targeted populations and geographic areas, as part of our efforts to meet our affordable housing goals in 2006, contributed to the increase in losses on guaranty contracts.

Fannie Mae’s market share of Single-Family mortgage-related securities issuance increased in each consecutive quarter of 2006, with a 4th quarter market share of 24.7 percent.

The single-family credit loss ratio, while remaining low, increased to 2.8 basis points, or 0.028 percent, of the total single-family credit book, from about 1.9 basis points in 2005.

Housing and Community Development:

HCD net income decreased by $165 million to $338 million in 2006, resulting from an increase in administrative expenses and credit enhancement expense and a decline in net revenues, which were partially offset by investment tax credits as HCD increased its investment activity.

HCD guaranty fee income remained essentially unchanged in 2006 from 2005.

Losses from partnership investments were $865 million in 2006, a slight increase compared to 2005 as HCD increased its investment activity. These losses were more than offset by Low Income Housing Tax Credit (LIHTC) tax benefits, a primary driver in reducing the company’s 2006 effective corporate tax rate of approximately 4 percent.

LIHTC investments increased to $8.8 billion in 2006, compared with $7.7 billion in 2005. LIHTC is the largest investment activity for HCD.

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Fannie Mae 2006 10-K
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Capital Markets:

Capital Markets net income declined to $1.7 billion in 2006, from $3.2 billion in 2005, primarily due to a substantial decrease in net interest income, which was partially offset by a drop in derivatives fair value losses, lower impairment expense and lower income tax expense.

Net interest income was $6.2 billion, compared with $10.9 billion in 2005, driven by a decline in our average portfolio balances as well as substantial compression of the spread between interest earned on our assets and interest expense on our debt.

Derivatives fair value losses were $1.5 billion in 2006, a decline of 64 percent, primarily due to the overall rise in interest rates in 2006, which resulted in an increase in the fair value of our derivatives. In particular, the aggregate fair value of our interest rate swaps increased and we experienced a significant reduction in the net contractual interest expense recognized on our interest rate swaps.

2007 Outlook

Industry trends that Fannie Mae believes will have a continued effect on 2007 financial results include the decline in the growth of mortgage debt outstanding, the national decline in average home prices, increasing mortgage interest rates and the disruption of liquidity in the mortgage market. These factors have led to an increase in the inventory of unsold homes, which has contributed to slower home sales and reduced sale prices following a borrower default on a mortgage loan. More specifically, Fannie Mae believes the following:

	•		Its book of business growth will exceed the growth of U.S. residential mortgage debt outstanding as borrowers refinance into the longer-term fixed-rate mortgage loans that represent the substantial majority of the company’s mortgage credit book of business.
	•		A lower volume of interest-earning assets and further increases in the cost of Fannie Mae’s debt are expected to result in a continued decline in net interest income in 2007, although at a slower rate of decline than in 2006.

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Fannie Mae 2006 10-K
Page Ten

	•		We anticipate that the losses we incur at inception of guaranty contracts will more than double in 2007 compared to 2006, primarily as a result of the decline in home prices as well as continued investment in loans that support the company’s housing goals.
	•		Our credit loss ratio is expected to increase in 2007 to what we believe is Fannie Mae’s normal historical range of 4 to 6 basis points of our total credit book, although it may move outside that range depending on market factors and the risk profile of our mortgage credit book of business. Market factors that we believe will have a significant effect on our credit loss ratio primarily include lack of job stability or growth, declines in home prices and increases in interest rates.

Conclusion

“Though the housing market continues to cool in 2007 and the credit environment remains challenging, I believe Fannie Mae is well situated for the future,” Mudd said. “Strategic decisions we made in the past several years — particularly with respect to our discipline in the non-traditional parts of the mortgage finance market — have positioned us to do well as the housing market stabilizes. Our remediation and the cost-intensive work of returning to timely filing are nearly complete, which will free up significant resources and management time to deliver mission goals, business results and shareholder returns.”

Conference Call

Fannie Mae will host a conference call for the investment community this afternoon at 1:00 p.m. Eastern Time. Mary Lou Christy, Senior Vice President, Investor Relations, will host the call. Daniel H. Mudd, President and Chief Executive Officer, Robert Blakely, Chief Financial Officer, Enrico Dallavecchia, Chief Risk Officer, and Steve Swad, Chief Financial Officer Designate, will address investors and analysts and will be available for a question and answer session along with other members of senior management.

The dial-in number for the call is 1-800-553-0351, and for international callers, 612-332-0923. The confirmation code is 883169.

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Please dial in 5 to 10 minutes prior to the start of the call. The conference call will also be web cast at www.fanniemae.com and will be available for 30 days after the call.

# # #

Certain statements in this press release, including those relating to our future performance, including our income, credit losses, administrative expenses and other losses; our current view of industry trends and our expectations for our industry; our future plans, and our future business activities, may be considered forward-looking statements within the meaning of the federal securities laws. Although Fannie Mae believes that the expectations set forth in these statements are based upon reasonable assumptions, Fannie Mae’s future operations and its actual performance may differ materially from what is indicated in any forward-looking statements. Additional information that could cause actual results to differ materially from these statements are detailed in Fannie Mae’s annual report on SEC Form 10-K for the year ended December 31, 2006, including the “Risk Factors” section, and in its reports on SEC Form 8-K.

Any security holder may receive a copy of Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2006 free of charge, by sending a request to: Fannie Mae, Investor Relations, 3900 Wisconsin Avenue N.W., Washington, DC 20016. The 10-K, and all other Fannie Mae forms filed with the SEC, can also be obtained on the company’s web site at www.fanniemae.com/ir/sec/.

 

 

See Notes to Consolidated Financial Statements.

 

 

See Notes to Consolidated Financial Statements.

 

 

See Notes to Consolidated Financial Statements.

 

 

See Notes to Consolidated Financial Statements.