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

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





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

Fannie Mae Third Quarter 2017 Form 10-Q
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MD&A | Introduction


PART I—FINANCIAL INFORMATION
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
We have been under conservatorship, with the Federal Housing Finance Agency (“FHFA”) acting as conservator, since September 6, 2008. As conservator, FHFA succeeded to all rights, titles, powers and privileges of the company, and of any shareholder, officer or director of the company with respect to the company and its assets. The conservator has since delegated specified authorities to our Board of Directors and has delegated to management the authority to conduct our day-to-day operations. Our directors do not have any fiduciary duties to any person or entity except to the conservator and, accordingly, are not obligated to consider the interests of the company, the holders of our equity or debt securities or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator. We describe the rights and powers of the conservator, key provisions of our agreements with the U.S. Department of the Treasury (“Treasury”), and their impact on shareholders in our annual report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”) in “Business—Conservatorship and Treasury Agreements.”
 
 
 
 
You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in conjunction with our unaudited condensed consolidated financial statements and related notes in this report and the more detailed information in our 2016 Form 10-K.
This report contains forward-looking statements that are based on management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “Forward-Looking Statements” for more information on the forward-looking statements in this report. Our actual results may differ materially from those reflected in our forward-looking statements due to a variety of factors including, but not limited to, those discussed in “Risk Factors” and elsewhere in this report and in our 2016 Form 10-K.
You can find a “Glossary of Terms Used in This Report” in the MD&A of our 2016 Form 10-K.
Introduction
Fannie Mae is a government-sponsored enterprise (“GSE”) chartered by Congress. We serve as a stable source of liquidity for purchases of homes and financing of multifamily rental housing, as well as for refinancing existing mortgages. Our role in the market enables qualified borrowers to have reliable access to affordable mortgage credit, including a variety of conforming mortgage products such as the prepayable 30-year fixed-rate mortgage that protects homeowners from fluctuations in interest rates.
We provide liquidity to the mortgage market and increase the availability and affordability of housing in the United States through our two business segments—a Single-Family business, which operates in the secondary mortgage market relating to loans secured by properties containing four or fewer residential dwelling units, and a Multifamily business, which operates in the secondary mortgage market relating primarily to loans secured by properties containing five or more residential units. We support the liquidity and stability of the U.S. mortgage market primarily by securitizing mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee, which we refer to as Fannie Mae MBS. We also purchase mortgage loans and mortgage-related securities, primarily for securitization and sale at a later date. We use the term “acquire” in this report to refer to both our securitizations and our purchases of mortgage-related assets. We do not originate loans or lend money directly to consumers in the primary mortgage market.
We remain in conservatorship and our conservatorship has no specified termination date. We do not know when or how the conservatorship will terminate, what further changes to our business will be made during or following conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated, or whether we will continue to exist following conservatorship. In addition, as a result of our agreements with Treasury and directives from our conservator, we are not permitted to retain our net worth (other than a limited amount that will decrease to zero in the first quarter of 2018), rebuild our capital position or pay dividends or other distributions to stockholders other than Treasury. Our senior preferred stock purchase agreement with Treasury also includes covenants that significantly restrict our business activities. Congress continues to consider options for reform of the housing finance system, including the GSEs. We cannot predict the prospects for the enactment, timing or final content of housing finance

Fannie Mae Third Quarter 2017 Form 10-Q
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MD&A | Introduction


reform legislation or actions the Administration or FHFA may take with respect to housing finance reform. We provide additional information on the uncertainty of our future, the conservatorship, the provisions of our agreements with Treasury, their impact on our business, and recent actions and statements relating to housing finance reform by the Administration, Congress and FHFA in “Business—Conservatorship and Treasury Agreements,” “Business—Legislation and Regulation—Housing Finance Reform” and “Risk Factors” in our 2016 Form 10-K and in “Legislation and Regulation” and “Risk Factors” in our quarterly report on Form 10-Q for the quarter ended March 31, 2017 (“First Quarter 2017 Form 10-Q”), our quarterly report on Form 10-Q for the quarter ended June 30, 2017 (“Second Quarter 2017 Form 10-Q”), and in this report.
Although Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock, and has made a commitment under a senior preferred stock purchase agreement to provide us with funds to maintain a positive net worth under specified conditions, the U.S. government does not guarantee our securities or other obligations.
Our common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol “FNMA.” Our debt securities are actively traded in the over-the-counter market.
Executive Summary
Summary of Our Financial Performance
Quarterly Results
We recognized comprehensive income and net income of $3.0 billion in the third quarter of 2017. In comparison, we recognized comprehensive income of $3.0 billion in the third quarter of 2016, consisting of net income of $3.2 billion, partially offset by other comprehensive loss of $207 million. The decrease in our net income in the third quarter of 2017 compared with the third quarter of 2016 was primarily driven by a shift to credit-related expense from credit-related income, partially offset by higher fee and other income and lower fair value losses.
Year-to-Date Results
We recognized comprehensive income of $8.9 billion in the first nine months of 2017, consisting of net income of $9.0 billion, partially offset by other comprehensive loss of $52 million. In comparison, we recognized comprehensive income of $6.8 billion in the first nine months of 2016, consisting of net income of $7.3 billion, partially offset by other comprehensive loss of $484 million. The increase in our net income in the first nine months of 2017 compared with the first nine months of 2016 was primarily driven by lower fair value losses and higher fee and other income, partially offset by lower credit-related income.
The table below highlights our financial results and key performance data. The performance measures shown below are discussed in later sections of MD&A. See “Consolidated Results of Operations” for more information on our financial results.













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


Financial Results and Key Performance Data
 
Third Quarter
First Nine Months
 
2017
2016
2017
2016
Comprehensive income 
$3.0 billion
$3.0 billion
$8.9 billion
$6.8 billion
Net income
3.0 billion
3.2 billion
9.0 billion
7.3 billion
Net interest income
Net interest income in the third quarter and first nine months of 2017 was primarily derived from guaranty fees from our guaranty book of business and remained relatively flat compared with the third quarter and first nine months of 2016. We receive guaranty fee income as compensation for managing the credit risk on loans underlying Fannie Mae MBS held by third parties.
5.3 billion
5.4 billion
15.6 billion
15.5 billion
Fee and other income
Fee and other income in the third quarter and first nine months of 2017 was primarily the result of a settlement agreement resolving legal claims related to private-label securities we purchased.
1.2 billion
0.2 billion
1.8 billion
0.6 billion

Net fair value losses
Fair value losses in the third quarter and first nine months of 2017 were primarily due to losses on commitments to sell mortgage-related securities due to an increase in prices as interest rates decreased during the commitment periods. In addition, we recognized fair value losses on our risk management derivatives primarily attributable to declines in long-term swap rates during the periods.
Fair value losses in the third quarter of 2016 were primarily due to losses on Connecticut Avenue Securities™ (“CAS”) debt we issued prior to 2016 which, unlike CAS debt we currently issue, is reported at fair value. These losses resulted from tightening spreads between CAS debt yields and LIBOR during the periods. Fair value losses in the first nine months of 2016 were primarily due to losses on risk management derivatives resulting from decreases in the fair value of our pay-fixed derivatives due to declines in longer-term swap rates.

0.3 billion
0.5 billion
1.0 billion
5.0 billion
Credit-related income (expense)
Credit-related expense in the third quarter of 2017 was primarily driven by a provision for credit losses of approximately $1.0 billion resulting from the impact of estimated incurred losses from the hurricanes, partially offset by a benefit for credit losses driven by an increase in actual home prices and the redesignation of mortgage loans from held-for-investment (“HFI”) to held-for-sale (“HFS”). Credit-related income in the first nine months of 2017 was primarily driven by an increase in actual and forecasted home prices, and the redesignation of mortgage loans from HFI to HFS. The credit-related income was partially offset by a provision for credit losses resulting from the impact of estimated incurred losses from the hurricanes.
Credit-related income in the third quarter and first nine months of 2016 was primarily attributable to an increase in home prices, including distressed property valuations. Credit-related income in the first nine months of 2016 was also attributable to a decline in actual and projected mortgage interest rates in the period.
(0.3) billion
0.6 billion
1.1 billion
3.0 billion

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



 
Third Quarter
First Nine Months
 
2017
2016
2017
2016
Retained mortgage portfolio as of period end
245.1 billion
306.5 billion
245.1 billion
306.5 billion
Single-family guaranty book of business as of period end
2.9 trillion
2.8 trillion
2.9 trillion
2.8 trillion
Net worth as of period end
3.6 billion
4.2 billion
3.6 billion
4.2 billion
Capital reserve amount applicable to quarterly dividend payment to Treasury
600 million
1.2 billion
600 million
1.2 billion
Dividends paid to Treasury in the period
   
3.1 billion
2.9 billion
11.4 billion
6.7 billion
Impact of Hurricanes Harvey, Irma and Maria. As of September 30, 2017, our allowance for loan losses of $20.2 billion includes an estimate of incurred credit losses from Hurricanes Harvey, Irma and Maria (collectively, the “hurricanes”) of approximately $1.0 billion. Approximately 80% of the estimate relates to our single-family mortgage loans in Puerto Rico which, as of September 30, 2017, had an unpaid principal balance of $8.9 billion. See “Critical Accounting Policies and Estimates” for further information.
Future Volatility. We expect volatility from period to period in our financial results from a number of factors, particularly changes in market conditions that result in fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings. These instruments include derivatives and certain securities whose estimated fair value may fluctuate substantially from period to period because of changes in interest rates, the yield curve, mortgage and credit spreads, and implied volatility, as well as activity related to these financial instruments. We use derivatives to manage the interest rate risk exposure of our net portfolio, which consists of our retained mortgage portfolio, other investments portfolio, and outstanding debt of Fannie Mae. Some of these financial instruments in our net portfolio are not recorded at fair value in our condensed consolidated financial statements, and as a result we may experience accounting gains or losses due to changes in interest rates or other market conditions that may not be indicative of the economic interest rate risk exposure of our net portfolio. See “Risk ManagementMarket Risk Management, Including Interest Rate Risk Management” for more information. In addition, our credit-related income or expense can vary substantially from period to period based on a number of factors such as changes in actual and expected home prices, fluctuations in interest rates, borrower payment behavior, the types and volume of our loss mitigation activities, the volume of foreclosures completed, the impact of natural disasters, and redesignations of loans from HFI to HFS.
Our Strategy and Business Objectives
Our vision is to be America’s most valued housing partner and to provide liquidity, access to credit and affordability in all U.S. housing markets at all times, while effectively managing and reducing risk to our business, taxpayers and the housing finance system. In support of this vision, we are focused on:
advancing a sustainable and reliable business model that reduces risk to the housing finance system and taxpayers;
providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners; and
serving customer needs by building a company that is efficient, innovative and continuously improving.
Advancing a sustainable and reliable business model that reduces risk to the housing finance system and taxpayers
We have significantly changed our business model since we entered conservatorship in 2008 and our business continues to evolve. We have strengthened our underwriting and eligibility standards and transitioned from a portfolio-focused business to a guaranty-focused business. In addition, we are transferring an increasing portion of the credit risk on our guaranty book of business. These changes have transformed our business model and reduced certain risks of our business as compared with our business prior to entering conservatorship.
Our business also continues to evolve as a result of our many other efforts to build a safer and sustainable housing finance system and to pursue the strategic goals identified by our conservator. See “Business—Legislation and Regulation—Housing Finance Reform—Conservator Developments and Strategic Goals” in our 2016 Form 10-K for a discussion of some of these efforts and FHFA’s strategic goals for our conservatorship.

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


Stronger underwriting and eligibility standards
We strengthened our underwriting and eligibility standards for loans we acquired beginning in late 2008 and 2009. These changes improved the credit quality of our single-family guaranty book of business and contributed to improvement in our credit performance. As of September 30, 2017, 90% of our single-family conventional guaranty book of business consisted of loans acquired since 2009. Our single-family serious delinquency rate has declined or remained flat each quarter since the first quarter of 2010 and was 1.01% as of September 30, 2017.
https://cdn.kscope.io/6311ff4c0717519ea96c211637792ff3-fanniemaeq3_chart-59217.jpg
__________
*
We have acquired HARP loans and other Refi Plus loans under our Refi PlusTM initiative since 2009. Our Refi Plus initiative offers refinancing flexibility to eligible borrowers who are current on their loans and whose loans are owned or guaranteed by us and meet certain additional criteria. HARP loans, which have loan-to-value (“LTV”) ratios at origination greater than 80%, refers to loans we have acquired pursuant to the Home Affordable Refinance Program® (“HARP®”). Other Refi Plus loans, which have LTV ratios at origination of 80% or less, refers to loans we have acquired under our Refi Plus initiative other than HARP loans. Loans we acquire under Refi Plus and HARP are refinancings of loans that were originated prior to June 2009.
See “Business Segments—Single-Family Business” for information on our recent single-family acquisitions and the credit performance of our single-family mortgage loans.
Transition to a guaranty-focused business
We have two primary sources of revenues: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets. Our retained mortgage portfolio refers to the mortgage-related assets we own (which excludes the portion of assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties).
As shown in the chart below, in recent years an increasing portion of our net interest income has been derived from guaranty fees, rather than from our retained mortgage portfolio assets. This shift has been driven by both the guaranty fee increases we implemented in 2012 and the reduction of our retained mortgage portfolio. More than 75% of our net interest income for the first nine months of 2017 was derived from the loans underlying our Fannie Mae MBS in consolidated trusts, which primarily generate income through guaranty fees.


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


https://cdn.kscope.io/6311ff4c0717519ea96c211637792ff3-fanniemaeq3_chart-04507.jpg
__________
*
Guaranty fee income reflects the impact of a 10 basis point guaranty fee increase implemented in 2012 pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011, the incremental revenue from which is remitted to Treasury and not retained by us.
Transferring a portion of the mortgage credit risk on our single-family book of business
In late 2013, we began entering into credit risk transfer transactions with the goal of transferring, to the extent economically sensible, a portion of the mortgage credit risk on some of the recently acquired loans in our single-family book of business in order to reduce the economic risk to us and to taxpayers of future borrower defaults. Our primary method of achieving this objective has been through our CAS and Credit Insurance Risk TransferTM (“CIRTTM”) transactions. In these transactions, we transfer to investors a portion of the mortgage credit risk associated with losses on a reference pool of mortgage loans and in exchange we pay investors a premium that effectively reduces the guaranty fee income we retain on the loans. As of September 30, 2017, $884 billion in outstanding unpaid principal balance of our single-family loans, or 31% of the loans in our single-family conventional guaranty book of business measured by unpaid principal balance, were included in a reference pool for a credit risk transfer transaction. Over time, we expect that a larger portion of our single-family conventional guaranty book of business will be covered by credit risk transfer transactions.
The chart below shows as of the dates specified the total outstanding unpaid principal balance of our single-family loans, as well as the percentage of our total single-family conventional guaranty book of business measured by unpaid principal balance, that were included in a reference pool for a credit risk transfer transaction.

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


https://cdn.kscope.io/6311ff4c0717519ea96c211637792ff3-fanniemaeq3_chart-08586.jpg
The risk in force of these transactions, which refers to the maximum amount of losses that could be absorbed by credit risk transfer investors, was approximately $28 billion as of September 30, 2017. For further discussion of our credit risk transfer transactions, including more detailed information on the portion of the credit risk of these loans we have transferred, see “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk: Single-Family Credit Risk Transfer Transactions.”
Providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners
We continued to provide reliable, large-scale access to affordable mortgage credit to the U.S. housing market and to help struggling homeowners in the third quarter of 2017:
We provided approximately $150 billion in liquidity to the mortgage market in the third quarter of 2017 through our purchases of loans and guarantees of loans and securities. This liquidity enabled borrowers to complete approximately 229,000 mortgage refinancings and approximately 358,000 home purchases, and provided financing for approximately 189,000 units of multifamily housing.
We provided approximately 23,500 loan workouts in the third quarter of 2017 to help homeowners stay in their homes or otherwise avoid foreclosure.
We helped borrowers refinance loans, including through our Refi PlusTM initiative, which offers refinancing flexibility to eligible borrowers who are current on their loans, whose loans are owned or guaranteed by us and who meet certain additional criteria. We acquired approximately 17,800 Refi Plus loans in the third quarter of 2017. Refinancings delivered to us through Refi Plus in the third quarter of 2017 reduced borrowers’ monthly mortgage payments by an average of $182.
We support affordability in the multifamily rental market. Supporting affordability has become more challenging as rent growth has generally outpaced wage growth in recent years, making units at many income levels less affordable than in prior years. Approximately 90% of the multifamily units we financed in the third quarter of 2017 were affordable to families earning at or below 120% of the median income in their area, providing support for both workforce housing and affordable housing.
Serving customer needs by building a company that is efficient, innovative and continuously improving
We are committed to providing our lender customers with the products, services and tools they need to serve the housing market more effectively and efficiently, as well as continuing to improve our business processes. See “Business—Executive Summary—Our Strategy and Business Objectives” in our 2016 Form 10-K for information on changes we have made to help our customers originate mortgages with increased certainty and efficiency, and lower costs.

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


Treasury Draws and Dividend Payments
Treasury has made a commitment under a senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. Acting as successor to the rights, titles, powers and privileges of the Board, the conservator has declared and directed us to pay dividends to Treasury on the senior preferred stock on a quarterly basis since we entered into conservatorship in 2008.
The chart below shows the funds we have drawn from Treasury pursuant to the senior preferred stock purchase agreement, as well as the dividend payments we have made to Treasury on the senior preferred stock, since entering into conservatorship.
https://cdn.kscope.io/6311ff4c0717519ea96c211637792ff3-fanniemaeq3_chart-01102.jpg
__________
(1) 
Under the terms of the senior preferred stock purchase agreement, dividend payments we make to Treasury do not offset our prior draws of funds from Treasury, and we are not permitted to pay down draws we have made under the agreement except in limited circumstances. Accordingly, the current aggregate liquidation preference of the senior preferred stock is $117.1 billion, due to the initial $1.0 billion liquidation preference of the senior preferred stock (for which we did not receive cash proceeds) and the $116.1 billion we have drawn from Treasury. Amounts may not sum due to rounding.
(2) 
Treasury draws are shown in the period for which requested, not when the funds were received by us. We have not requested a draw for any period since 2012.
The dividend provisions of the senior preferred stock provide for quarterly dividends consisting of the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. This capital reserve amount is $600 million for each quarter of 2017 and will decrease to zero in the first quarter of 2018. These are referred to as “net worth sweep” dividend provisions. As a result of these provisions, we will pay Treasury a dividend of $3.0 billion for the fourth quarter of 2017 by December 31, 2017, calculated based on our net worth of $3.6 billion as of September 30, 2017, less the current capital reserve amount of $600 million, if our conservator declares a dividend in this amount before December 31, 2017. To the extent that these quarterly dividends are not paid, they will accumulate and be added to the liquidation preference of the senior preferred stock. This would not affect the amount of available funding from Treasury under the senior preferred stock purchase agreement.
If we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership. As of the date of this filing, the maximum amount of remaining funding under the agreement is $117.6 billion. If we were to draw additional funds from Treasury under the agreement in a future period, the amount of remaining funding

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


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

https://cdn.kscope.io/6311ff4c0717519ea96c211637792ff3-fanniemaeq3_chart-00917.jpg
We remained a continuous source of liquidity in the multifamily market in the third quarter of 2017. We owned or guaranteed approximately 20% of the outstanding debt on multifamily properties as of June 30, 2017 (the latest date for which information is available).

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


Outlook
In this section, we present a number of estimates and expectations regarding our future performance, as well as future home prices. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous factors. See “Forward-Looking Statements” and “Risk Factors” in this report and in our 2016 Form 10-K for discussions of factors that could cause actual results to differ materially from our current estimates and expectations. Due to the large size of our guaranty book of business, even small changes in these factors could have a significant impact on our financial results for a particular period.
Financial Results. We continued to be profitable in the third quarter of 2017, with net income of $3.0 billion. We expect to remain profitable on an annual basis for the foreseeable future; however, certain factors, such as changes in interest rates or home prices, could result in significant volatility in our financial results from quarter to quarter or year to year. Our future financial results also will be affected by a number of other factors, including: our guaranty fee rates; the volume of single-family mortgage originations in the future; the size, composition and quality of our retained mortgage portfolio and guaranty book of business; and economic and housing market conditions. Although we expect to remain profitable on an annual basis for the foreseeable future, due to our limited and declining capital reserves (which decrease to zero in the first quarter of 2018) and the potential for significant volatility in our financial results, we could experience a net worth deficit in a future quarter. If we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement to avoid being placed into receivership.
Our expectations for our future financial results do not take into account the impact on our business of potential future legislative or regulatory changes, which could have a material impact on our financial results, particularly the enactment of housing finance reform legislation, corporate income tax reform legislation and changes in accounting standards. For example, the current Administration proposes reducing the U.S. corporate income tax rate. Under applicable accounting standards, a significant reduction in the U.S. corporate income tax rate would require that we record a substantial reduction in the value of our deferred tax assets in the quarter in which the legislation is enacted. Thus, if legislation significantly lowering the U.S. corporate income tax rate is enacted, we expect to incur a significant net loss and net worth deficit for the quarter in which the legislation is enacted and we could potentially incur a net loss for that year. As noted above, if we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership.
See “Risk Factors” in our 2016 Form 10-K and in this report for discussions of the risks associated with our limited and declining capital reserves and the potential impact of legislative and regulatory actions.
Revenues. We have two primary sources of revenues: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets.
Our guaranty fee revenues consist of two primary components: (1) the base guaranty fees that we receive over the life of the loan; and (2) upfront fees we receive at loan acquisition which are amortized over the contractual life of the loan. When mortgage loans prepay faster due to a lower interest rate environment, we typically have higher amortization income. Conversely, when mortgage loans prepay more slowly due to a higher interest rate environment, we typically have lower amortization income. Our guaranty fee revenues increased in recent years primarily driven by: (1) loans with higher base guaranty fees comprising a larger part of our guaranty book of business; and (2) an increase in amortization income as a lower interest rate environment during portions of these years increased prepayments on mortgage loans. We expect loans with lower guaranty fees to continue to liquidate from our book of business and be replaced with new loans that typically have higher guaranty fees, which will contribute to increasing guaranty fee revenues. However, the impact of this trend on our guaranty fee revenues could be more than offset by lower amortization income if mortgage loans prepay more slowly due to a higher interest rate environment.
We expect the size of our retained mortgage portfolio to continue to decrease in 2017, which will continue to negatively impact our net interest income and net revenues.
Factors that may affect our future revenues include: changes to guaranty fee pricing we may make in the future and their impact on our competitive environment and guaranty fee revenues; economic and housing market conditions, including changes in interest rates and home prices; the size, composition and quality of our guaranty

Fannie Mae Third Quarter 2017 Form 10-Q
10


 
 
MD&A | Executive Summary


book of business; the life of the loans in our guaranty book of business; the size, composition and quality of our retained mortgage portfolio; our market share; and legislative and regulatory changes.
Home Prices. Based on our home price index, we estimate that home prices on a national basis increased by 1.1% in the third quarter of 2017 and by 5.3% in the first nine months of 2017. We expect the rate of home price appreciation on a national basis in 2017 will be similar to the estimated 5.7% rate in 2016. We also expect significant regional variation in the timing and rate of home price growth.
Credit Losses. Our credit losses, which include our charge-offs, net of recoveries, reflect our realization of losses on our loans. Our credit losses were $2.4 billion for the first nine months of 2017, down from $3.0 billion for the first nine months of 2016. We expect our credit losses for 2017 to be lower than for 2016; however, we expect a significantly smaller decline in credit losses for 2017 than the $7.0 billion decline for 2016. See “Consolidated Results of OperationsCredit-Related Income (Expense)Credit Loss Performance Metrics” for a discussion of our credit losses for the third quarter and first nine months of 2017 and 2016.
Loss Reserves. Our allowance for loan losses was $20.2 billion as of September 30, 2017, down from $23.5 billion as of December 31, 2016. Our loss reserves declined in recent years and are expected to decline further in 2017. For more information on the factors that contributed to changes in our loss reserves in the third quarter and first nine months of 2017, see “Consolidated Results of OperationsCredit-Related Income (Expense),” “Consolidated Balance Sheet Analysis—Mortgage Loans and Allowance for Loan Losses” and “Critical Accounting Policies and Estimates.”
Legislation and Regulation
The information in this section updates and supplements information regarding legislation and regulation affecting our business set forth in “Business—Legislation and Regulation” in our 2016 Form 10-K and in “MD&A—Legislation and Regulation” in our First Quarter 2017 Form 10-Q and in our Second Quarter 2017 Form 10-Q. Also see “Risk Factors” in this report and in our 2016 Form 10-K for discussions of risks relating to legislative and regulatory matters.
Housing Finance Reform
Congress continues to consider housing finance reform that could result in significant changes in our structure and role in the future. As a result, there continues to be significant uncertainty regarding the future of our company. See “Risk Factors” for a discussion of the risks to our business relating to the uncertain future of our company.
The Future of LIBOR and Alternative Reference Rates
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced its intention to stop persuading or compelling the group of major banks that sustains LIBOR to submit rate quotations after 2021. As a result, it is uncertain whether LIBOR will continue to be quoted after 2021. The Federal Reserve convened a group of private-market participants, known as the Alternative Reference Rate Committee, to identify a set of alternative U.S. dollar reference interest rates and an adoption plan for those alternative rates. In June 2017 that committee recommended an alternative reference rate which the Federal Reserve Bank of New York would publish that, in the consensus view of the Alternative Reference Rate Committee, would be its preferred alternative reference rate. At this time, it is not possible to predict the effect of these developments. Because we routinely engage in transactions involving financial instruments that reference LIBOR, these developments could have a material impact on us.
2016 Housing Goals Performance
We are subject to housing goals, which establish specified requirements for our mortgage acquisitions relating to affordability or location. Our single-family performance is measured against the lower of benchmarks established by FHFA or goals-qualifying originations in the primary mortgage market. Multifamily goals are established as a number of units to be financed.
In October 2017, after the release of data reported under the Home Mortgage Disclosure Act, FHFA notified us that it had preliminarily determined that we met three of our five single-family housing goals and all of our multifamily housing goals for 2016. For the single-family very low-income families home purchase goal, FHFA

Fannie Mae Third Quarter 2017 Form 10-Q
11


 
MD&A | Legislation and Regulation


preliminarily determined that our performance was 5.2% of our 2016 acquisitions of single-family owner-occupied purchase money mortgage loans, which failed to meet the FHFA-established benchmark of 6% or the overall market level of 5.4% for 2016. For the single-family low-income families refinancing goal, FHFA preliminarily determined that our performance was 19.5% of our 2016 acquisitions of single-family owner-occupied refinance mortgage loans, which failed to meet the FHFA-established benchmark of 21% or the overall market level of 19.8% for 2016.
If FHFA’s final determination is that we did not meet these housing goals, it will determine whether the goals were feasible. If FHFA finds that these goals were feasible, we may become subject to a housing plan that could require us to take additional steps, which may increase our credit losses and credit-related expenses. The housing plan must describe the actions we would take to meet the goal in the next calendar year and be approved by FHFA. The potential penalties for failure to comply with housing plan requirements include a cease-and-desist order and civil money penalties.
See “Business—Legislation and Regulation—GSE Act and Other Regulation of Our Business—Housing Goals” in our 2016 Form 10-K for a more detailed discussion of our housing goals.
Consolidated Results of Operations
This section provides a discussion of our condensed consolidated results of operations and should be read together with our condensed consolidated financial statements, including the accompanying notes.
Table 1: Summary of Condensed Consolidated Results of Operations
 
For the Three Months
 
For the Nine Months
 
Ended September 30,
 
Ended September 30,
 
2017
 
2016
 
Variance
 
2017
 
2016
 
Variance
 
(Dollars in millions)
Net interest income
$
5,274

 
$
5,435

 
$
(161
)
 
$
15,622

 
$
15,490

 
$
132

Fee and other income
1,194

 
175

 
1,019

 
1,796

 
552

 
1,244

Net revenues
6,468

 
5,610

 
858

 
17,418

 
16,042

 
1,376

Investment gains, net
313

 
467

 
(154
)
 
689

 
934

 
(245
)
Fair value losses, net
(289
)
 
(491
)
 
202

 
(1,020
)
 
(4,971
)
 
3,951

Administrative expenses
(664
)
 
(661
)
 
(3
)
 
(2,034
)
 
(2,027
)
 
(7
)
Credit-related income (expense):
 
 
 
 
 
 
 
 
 
 
 
Benefit (provision) for credit losses
(182
)
 
673

 
(855
)
 
1,481

 
3,458

 
(1,977
)
Foreclosed property expense
(140
)
 
(110
)
 
(30
)
 
(391
)
 
(507
)
 
116

Total credit-related income (expense)
(322
)
 
563

 
(885
)
 
1,090

 
2,951

 
(1,861
)
Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) fees
(531
)
 
(465
)
 
(66
)
 
(1,552
)
 
(1,358
)
 
(194
)
Other expenses, net
(427
)
 
(300
)
 
(127
)
 
(1,100
)
 
(818
)
 
(282
)
Income before federal income taxes
4,548

 
4,723

 
(175
)
 
13,491

 
10,753

 
2,738

Provision for federal income taxes
(1,525
)
 
(1,527
)
 
2

 
(4,495
)
 
(3,475
)
 
(1,020
)
Net income
$
3,023

 
$
3,196

 
$
(173
)
 
$
8,996

 
$
7,278

 
$
1,718

Total comprehensive income
$
3,048

 
$
2,989

 
$
59

 
$
8,944

 
$
6,794

 
$
2,150

Net Interest Income
We have two primary sources of net interest income:
the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and
the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets.
Guaranty fees consist of two primary components:
base guaranty fees that we receive over the life of the loan; and

Fannie Mae Third Quarter 2017 Form 10-Q
12


 
MD&A | Consolidated Results of Operations


upfront fees that we receive at the time of loan acquisition, primarily related to single-family loan level pricing adjustments and other fees we receive from lenders, which are amortized over the contractual life of the loan.
Guaranty fees include revenues generated by the 10 basis point increase in guaranty fees we implemented in 2012 pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us. We recognize almost all of our guaranty fee revenue in net interest income due to the consolidation of the substantial majority of loans underlying our Fannie Mae MBS in consolidated trusts on our balance sheet. Those guaranty fees are the primary component of the difference between the interest income on loans in consolidated trusts and the interest expense on the debt of consolidated trusts.
Table 2 displays an analysis of our net interest income, average balances, and related yields earned on assets and incurred on liabilities. For most components of the average balances, we use a daily weighted average of amortized cost. When daily average balance information is not available, such as for mortgage loans, we use monthly averages. Table 3 displays the change in our net interest income between periods and the extent to which that variance is attributable to: (1) changes in the volume of our interest-earning assets and interest-bearing liabilities or (2) changes in the interest rates of these assets and liabilities.
Table 2: Analysis of Net Interest Income and Yield
 
For the Three Months Ended September 30,
 
2017
 
2016
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
(Dollars in millions)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of Fannie Mae
$
181,445

 
$
1,879

 
4.14
%
 
$
226,334

 
$
2,357

 
4.17
%
Mortgage loans of consolidated trusts
2,979,153

 
25,168

 
3.38

 
2,837,241

 
23,254

 
3.28

Total mortgage loans(1)
3,160,598

 
27,047

 
3.42

 
3,063,575

 
25,611

 
3.34

Mortgage-related securities, net
12,132

 
99

 
3.30

 
19,258

 
203

 
4.22

Non-mortgage-related securities(2)
57,880

 
173

 
1.17

 
57,013

 
71

 
0.49

Other(3)
41,728

 
142

 
1.33

 
35,731

 
66

 
0.72

Total interest-earning assets
$
3,272,338

 
$
27,461

 
3.36
%
 
$
3,175,577

 
$
25,951

 
3.27
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-term funding debt
$
27,967

 
$
71

 
0.99
%
 
$
50,579

 
$
55

 
0.43
%
Long-term funding debt
268,312

 
1,506

 
2.25

 
302,629

 
1,647

 
2.18

Total funding debt
296,279

 
1,577

 
2.13

 
353,208

 
1,702

 
1.93

Debt securities of consolidated trusts held by third parties
2,984,811

 
20,610

 
2.76

 
2,839,871

 
18,814

 
2.65

Total interest-bearing liabilities
$
3,281,090

 
$
22,187

 
2.70
%
 
$
3,193,079

 
$
20,516

 
2.57
%
Net interest income/net interest yield
 
 
$
5,274

 
0.64
%
 
 
 
$
5,435

 
0.68
%


Fannie Mae Third Quarter 2017 Form 10-Q
13


 
MD&A | Consolidated Results of Operations


 
For the Nine Months Ended September 30,
 
2017
 
2016
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
(Dollars in millions)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of Fannie Mae
$
190,552

 
$
5,950

 
4.16
%
 
$
232,222

 
$
7,082

 
4.07
%
Mortgage loans of consolidated trusts
2,951,478

 
75,155

 
3.40

 
2,826,405

 
71,746

 
3.38

Total mortgage loans(1)
3,142,030

 
81,105

 
3.44

 
3,058,627

 
78,828

 
3.44

Mortgage-related securities, net
13,796

 
368

 
3.55

 
22,966

 
713

 
4.14

Non-mortgage-related securities(2)
56,145

 
414

 
0.97

 
53,509

 
182

 
0.45

Other(3)
42,705

 
351

 
1.08

 
30,104

 
160

 
0.70

Total interest-earning assets
$
3,254,676

 
$
82,238

 
3.37
%
 
$
3,165,206

 
$
79,883

 
3.36
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-term funding debt
$
30,231

 
$
170

 
0.74
%
 
$
55,580

 
$
161

 
0.38
%
Long-term funding debt
280,030

 
4,821

 
2.30

 
308,349

 
5,237

 
2.26

Total funding debt
310,261

 
4,991

 
2.14

 
363,929

 
5,398

 
1.98

Debt securities of consolidated trusts held by third parties
2,953,203

 
61,625

 
2.78

 
2,819,775

 
58,995

 
2.79

Total interest-bearing liabilities
$
3,263,464

 
$
66,616

 
2.72
%
 
$
3,183,704

 
$
64,393

 
2.70
%
Net interest income/net interest yield
 
 
$
15,622

 
0.64
%
 
 
 
$
15,490

 
0.65
%

 
As of September 30,
 
2017
 
2016
Selected benchmark interest rates
 
 
 
3-month LIBOR
1.33
%
 
0.85
%
2-year swap rate
1.74

 
1.01

5-year swap rate
2.00

 
1.18

10-year swap rate
2.29

 
1.46

30-year Fannie Mae MBS par coupon rate
2.97

 
2.36

__________
(1) 
Average balance includes mortgage loans on nonaccrual status. Typically, interest income on nonaccrual mortgage loans is recognized when cash is received. Interest income not recognized for loans on nonaccrual status was $209 million and $611 million, respectively, for the third quarter and first nine months of 2017, compared with $318 million and $977 million, respectively, for the third quarter and first nine months of 2016.
(2) 
Includes cash equivalents.
(3) 
Consists of federal funds sold and securities purchased under agreements to resell or similar arrangements and advances to lenders.

Fannie Mae Third Quarter 2017 Form 10-Q
14


 
MD&A | Consolidated Results of Operations


Table 3: Rate/Volume Analysis of Changes in Net Interest Income
 
 
 
 
 
 
  
For the Three Months Ended
 
For the Nine Months Ended
  
September 30, 2017 vs. 2016
 
September 30, 2017 vs. 2016
  
Total Variance
 
Variance Due to:(1)
 
Total Variance
 
Variance Due to:(1)
  
 
Volume
 
Rate
 
 
Volume
 
Rate
 
(Dollars in millions)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of Fannie Mae
$
(478
)
 
$
(465
)
 
$
(13
)
 
$
(1,132
)
 
$
(1,298
)
 
$
166

Mortgage loans of consolidated trusts
1,914

 
1,185

 
729

 
3,409

 
3,184

 
225

Total mortgage loans
1,436

 
720

 
716

 
2,277

 
1,886

 
391

Mortgage-related securities, net
(104
)
 
(66
)
 
(38
)
 
(345
)
 
(260
)
 
(85
)
Non-mortgage-related securities(2)
102

 
1

 
101

 
232

 
9

 
223

Other(3)
76

 
8

 
68

 
191

 
62

 
129

Total interest income
$
1,510

 
$
663

 
$
847

 
$
2,355

 
$
1,697

 
$
658

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Short-term funding debt
16

 
(33
)
 
49

 
9

 
(96
)
 
105

Long-term funding debt
(141
)
 
(191
)
 
50

 
(416
)
 
(487
)
 
71

Total funding debt
(125
)
 
(224
)
 
99

 
(407
)
 
(583
)
 
176

Debt securities of consolidated trusts held by third parties
1,796

 
999

 
797

 
2,630

 
2,861

 
(231
)
Total interest expense
$
1,671

 
$
775

 
$
896

 
$
2,223

 
$
2,278

 
$
(55
)
Net interest income
$
(161
)
 
$
(112
)
 
$
(49
)
 
$
132

 
$
(581
)
 
$
713

__________
(1) 
Combined rate/volume variances are allocated to rate and volume based on the relative size of each variance.
(2) 
Includes cash equivalents.
(3) 
Consists of federal funds sold and securities purchased under agreements to resell or similar arrangements and advances to lenders.
Net interest income and net interest yield decreased in the third quarter of 2017 compared with the third quarter of 2016 due to a decline in the average balance of our retained mortgage portfolio as we continued to reduce this portfolio. The decrease in net interest income was partially offset by a slight increase in guaranty fee income driven by loans with higher base guaranty fees comprising a larger part of our guaranty book of business in the third quarter of 2017 compared with the third quarter of 2016.
Net interest income increased in the first nine months of 2017 compared with the first nine months of 2016 due to an increase in guaranty fee income driven by: (1) loans with higher base guaranty fees comprising a larger part of our guaranty book of business in the first nine months of 2017 compared with the first nine months of 2016; and (2) an increase in amortization income in the first nine months of 2017 due to activity related to increased prepayments on mortgage loans and liquidations of MBS debt of consolidated trusts, which accelerated the amortization of cost basis adjustments on the loans and related debt. The increase in net interest income due to higher guaranty fee income was partially offset by a decline in the average balance of our retained mortgage portfolio as we continued to reduce this portfolio. See “Retained Mortgage Portfolio” for information about our retained mortgage portfolio.
We initially recognize mortgage loans and debt of consolidated trusts in our consolidated balance sheets at fair value. We recognize the difference between: (1) the initial fair value of the consolidated trust’s mortgage loans and debt and (2) the unpaid principal balance of these mortgage loans and debt as cost basis adjustments in our consolidated balance sheets. We amortize cost basis adjustments, including premiums and discounts on mortgage loans and securities, as a yield adjustment over the contractual life of the loan or security as a component of net interest income. Net unamortized premiums on debt of consolidated trusts exceeded net unamortized premiums on the related mortgage loans of consolidated trusts by $36.9 billion as of September 30, 2017, compared with $34.7 billion as of December 31, 2016. The amortization of this net premium position will contribute to our net interest income over time.

Fannie Mae Third Quarter 2017 Form 10-Q
15


 
MD&A | Consolidated Results of Operations


We had $7.8 billion in net unamortized discounts and other cost basis adjustments on mortgage loans of Fannie Mae included in our consolidated balance sheets as of September 30, 2017, compared with $10.4 billion as of December 31, 2016. This net discount position on mortgage loans was primarily recorded upon the acquisition of credit-impaired loans and the extent to which we may record them as income in future periods will be based on the actual performance of the loans.
Fee and Other Income
Fee and other income includes transaction fees, technology fees, multifamily fees and other miscellaneous income. Fee and other income increased in the third quarter and first nine months of 2017, compared with the third quarter and first nine months of 2016, primarily as a result of $975 million of income in the third quarter of 2017 resulting from a settlement agreement resolving legal claims related to private-label securities we purchased. See “Legal Proceedings—FHFA Private-Label Mortgage-Related Securities Litigation” for additional information.
Fair Value Losses, Net
The estimated fair value of our derivatives and trading securities may fluctuate substantially from period to period because of changes in interest rates, credit spreads and interest rate volatility, as well as activity related to these financial instruments. While the estimated fair value of our derivatives that serve to mitigate certain risk exposures may fluctuate, some of the financial instruments that generate these exposures are not recorded at fair value in our condensed consolidated financial statements.
Table 4 displays the components of our fair value gains and losses.
Table 4: Fair Value Losses, Net
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in millions)
Risk management derivatives fair value gains (losses) attributable to:
 
 
 
 
 
 
 
Net contractual interest expense accruals on interest rate swaps
$
(223
)
 
$
(295
)
 
$
(702
)
 
$
(855
)
Net change in fair value during the period
75

 
362

 
364

 
(2,639
)
Total risk management derivatives fair value gains (losses), net
(148
)
 
67

 
(338
)
 
(3,494
)
Mortgage commitment derivatives fair value losses, net
(248
)
 
(216
)
 
(520
)
 
(945
)
Total derivatives fair value losses, net
(396
)
 
(149
)
 
(858
)
 
(4,439
)
Trading securities gains, net
59

 
38

 
145

 
88

CAS debt fair value gains (losses), net(1)
113

 
(388
)
 
(218
)
 
(616
)
Other, net(2)
(65
)
 
8

 
(89
)
 
(4
)
Fair value losses, net
$
(289
)
 
$
(491
)
 
$
(1,020
)
 
$
(4,971
)
__________
(1) 
Consists of fair value gains and losses on CAS debt reported at fair value.
(2) 
Consists of fair value gains and losses on non-CAS debt and mortgage loans.
Fair value losses in the third quarter and first nine months of 2017 were primarily driven by:
decreases in the fair value of our mortgage commitments due to losses on commitments to sell mortgage-related securities due to an increase in prices as interest rates decreased during most of the commitment periods; and
decreases in the fair value of our pay-fixed risk management derivatives due to declines in longer-term swap rates during the second quarter and most of the third quarter.
Fair value losses in the third quarter of 2016 were primarily due to losses on CAS debt reported at fair value resulting from tightening spreads between CAS debt yields and LIBOR during the periods. Fair value losses in the first nine months of 2016 were primarily due to losses on risk management derivatives resulting from decreases in the fair value of our pay-fixed derivatives due to declines in longer-term swap rates.

Fannie Mae Third Quarter 2017 Form 10-Q
16


 
MD&A | Consolidated Results of Operations


Credit-Related Income (Expense)
We refer to our benefit (provision) for loan losses and benefit (provision) for guaranty losses collectively as our “benefit (provision) for credit losses.” Credit-related income (expense) consists of our benefit (provision) for credit losses and foreclosed property income (expense).
Provision (Benefit) for Credit Losses
Our combined loss reserves provide for an estimate of credit losses incurred in our guaranty book of business, including concessions we granted borrowers upon modification of their loans. We establish our combined loss reserves through our provision for credit losses for losses that we believe have been incurred and will eventually be realized over time in our financial statements. When we reduce our combined loss reserves, we recognize a benefit for credit losses. When we determine that a loan is uncollectible, typically upon foreclosure or other liquidation event (such as a deed-in-lieu of foreclosure or a short sale), we recognize a charge-off against our combined loss reserves. For a subset of delinquent single-family loans, we charge off the portion of the loans that is deemed uncollectible prior to foreclosure when the loans have been delinquent for a specified length of time and meet specified mark-to-market LTV ratios. We also recognize a charge-off upon the redesignation of loans from HFI to HFS. If the amounts charged off upon redesignation exceed the allowance related to the loans, we record a provision for credit losses. If the amounts charged off are less than the allowance related to the loans, we recognize a benefit for credit losses. We record recoveries of previously charged-off amounts as a reduction to charge-offs.
Table 5 displays the changes in the combined loss reserves, which consists of the allowance for loan losses and the reserve for guaranty losses.
Table 5: Changes in Combined Loss Reserves
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in millions)
Changes in combined loss reserves:
 
 
 
 
 
 
 
Beginning balance
$
20,742

 
$
24,089

 
$
23,835

 
$
28,590

Provision (benefit) for credit losses
182

 
(673
)
 
(1,481
)
 
(3,458
)
Charge-offs
(458
)
 
(630
)
 
(2,224
)
 
(2,761
)
Recoveries
75

 
207

 
373

 
536

Other
(17
)
 
10

 
21

 
96

Ending balance
$
20,524

 
$
23,003

 
$
20,524

 
$
23,003

 
As of
 
September 30, 2017
 
December 31, 2016
 
(Dollars in millions)
Allocation of combined loss reserves:
 
 
 
 
 
Balance at end of each period attributable to:
 
 
 
 
 
Single-family
$
20,291

 
 
$
23,639

 
Multifamily
233

 
 
196

 
       Total
$
20,524

 
 
$
23,835

 
Single-family and multifamily combined loss reserves as a percentage of applicable guaranty book of business:
 
 
 
 
 
Single-family
0.70

%
 
0.83

%
Multifamily
0.09

 
 
0.08

 
Combined loss reserves as a percentage of:
 
 
 
 
 
Total guaranty book of business
0.65

%
 
0.77

%
Recorded investment in nonaccrual loans
53.84

 
 
53.62

 

Fannie Mae Third Quarter 2017 Form 10-Q
17


 
MD&A | Consolidated Results of Operations


The following factors impacted our provision for credit losses in the third quarter of 2017:
The estimate of incurred losses from the hurricanes contributed approximately $1.0 billion to the provision for credit losses, the majority of which relates to single-family loans located in Puerto Rico.
This was partially offset by a benefit primarily due to higher actual home prices. Higher home prices decrease the likelihood that loans will default and reduce the amount of credit loss on loans that do default, which impacts our estimate of losses and ultimately reduces our total loss reserves and provision for credit losses.
In addition, we recognized a benefit from the redesignation of certain reperforming single-family loans from HFI to HFS during the period as we no longer intend to hold them to maturity. Upon redesignation of these loans, we recorded the loans at the lower of cost or fair value via a charge-off to the allowance for loan losses. Amounts recorded in the allowance related to the loans exceeded the amount charged off, which reduced the provision for credit losses.
The following factors impacted our benefit for credit losses in the first nine months of 2017:
We recognized a benefit for credit losses due to higher actual and forecasted home prices.
We also recognized a benefit from the redesignation of certain reperforming and nonperforming single-family loans from HFI to HFS during the period.
This was partially offset by the estimate of incurred losses from the hurricanes, which contributed approximately $1.0 billion to the allowance for loan losses.
The following factors contributed to our benefit for credit losses in the third quarter and first nine months of 2016:
We recognized a benefit for credit losses in the third quarter of 2016 primarily due to an increase in home prices, including distressed property valuations.
We recognized a benefit for credit losses in the first nine months of 2016 primarily due to an increase in home prices, including distressed property valuations and a decline in interest rates. As mortgage interest rates decline, we expect an increase in future prepayments on single-family individually impaired loans, including modified loans. Higher expected prepayments shorten the expected lives of modified loans, which decreases the impairment relating to concessions provided on these loans and results in a decrease in the provision for credit losses.
We discuss our expectations regarding our future loss reserves in “Executive SummaryOutlook—Loss Reserves.”
Troubled Debt Restructurings and Nonaccrual Loans
Table 6 displays the composition of loans restructured in a troubled debt restructuring (“TDR”) that are on accrual status and loans on nonaccrual status. The table includes our recorded investment in HFI and HFS mortgage loans. For information on the impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 3, Mortgage Loans.”
Table 6: Troubled Debt Restructurings and Nonaccrual Loans
 
As of
 
September 30, 2017
 
December 31, 2016
 
(Dollars in millions)
TDRs on accrual status:
 
 
 
 
 
 
 
Single-family
 
$
117,724

 
 
 
$
127,353

 
Multifamily
 
164

 
 
 
141

 
Total TDRs on accrual status
 
$
117,888

 
 
 
$
127,494

 
Nonaccrual loans:
 
 
 
 
 
 
 
Single-family
 
$
37,797

 
 
 
$
44,047

 
Multifamily
 
322

 
 
 
403

 
Total nonaccrual loans
 
$
38,119

 
 
 
$
44,450

 
Accruing on-balance sheet loans past due 90 days or more(1)
 
$
289

 
 
 
$
402

 

Fannie Mae Third Quarter 2017 Form 10-Q
18


 
MD&A | Consolidated Results of Operations


 
For the Nine Months
 
Ended September 30,
 
2017
 
2016
 
(Dollars in millions)
Interest related to on-balance sheet TDRs and nonaccrual loans:
 
 
 
Interest income forgone(2)
$
2,628

 
$
3,312

Interest income recognized for the period(3)
4,253

 
4,565

__________
(1) 
Includes loans that, as of the end of each period, are 90 days or more past due and continuing to accrue interest. The majority of these amounts consists of loans insured or guaranteed by the U.S. government and loans for which we have recourse against the seller in the event of a default.
(2) 
Represents the amount of interest income we did not recognize, but would have recognized during the period for nonaccrual loans and TDRs on accrual status as of the end of each period had the loans performed according to their original contractual terms.
(3) 
Represents interest income recognized during the period, including the amortization of any deferred cost basis adjustments, for loans classified as either nonaccrual loans or TDRs on accrual status as of the end of each period. Includes primarily amounts accrued while the loans were performing and cash payments received on nonaccrual loans.
Credit Loss Performance Metrics
Our credit-related income (expense) should be considered in conjunction with our credit loss performance metrics. Our credit loss performance metrics, however, are not defined terms within generally accepted accounting principles (“GAAP”) and may not be calculated in the same manner as similarly titled measures reported by other companies. Because management does not view changes in the fair value of our mortgage loans as credit losses, we adjust our credit loss performance metrics for the impact associated with our acquisition of credit-impaired loans from unconsolidated MBS trusts. We also exclude interest forgone on nonaccrual loans and TDRs, other-than-temporary impairment losses resulting from deterioration in the credit quality of our mortgage-related securities and accretion of interest income on acquired credit-impaired loans from credit losses. We believe that credit loss performance metrics may be useful to investors as the losses are presented as a percentage of our book of business and have historically been used by analysts, investors and other companies within the financial services industry. Moreover, by presenting credit losses with and without the effect of fair value losses associated with the acquisition of credit-impaired loans, investors are able to evaluate our credit performance on a more consistent basis among periods.

Fannie Mae Third Quarter 2017 Form 10-Q
19


 
MD&A | Consolidated Results of Operations


Table 7 displays the components of our credit loss performance metrics as well as our single-family and multifamily initial charge-off severity rates.
Table 7: Credit Loss Performance Metrics
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
 
(Dollars in millions) 
Charge-offs, net of recoveries
$
383

 
4.9
bps
 
$
423

 
5.6
bps
 
$
1,851

 
7.9
bps
 
$
2,225

 
9.8
bps
Foreclosed property expense
140

 
1.8
 
 
110

 
1.4
 
 
391

 
1.7
 
 
507

 
2.2
 
Credit losses including the effect of fair value losses on acquired credit-impaired loans
523

 
6.7
 
 
533

 
7.0
 
 
2,242

 
9.6
 
 
2,732

 
12.0
 
Plus: Impact of acquired credit-impaired loans on charge-offs and foreclosed property expense(2)
61

 
0.7
 
 
83

 
1.1
 
 
183

 
0.7
 
 
273

 
1.1
 
Credit losses and credit loss ratio
$
584

 
7.4
bps
 
$
616

 
8.1
bps
 
$
2,425

 
10.3
bps
 
$
3,005

 
13.1
bps
Credit losses attributable to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
$
600

 
 
 
 
$
622

 
 
 
 
$
2,439

 
 
 
 
$
3,003

 
 
 
Multifamily(3)
(16
)
 
 
 
 
(6
)
 
 
 
 
(14
)
 
 
 
 
2

 
 
 
     Total
$
584

 
 
 
 
$
616

 
 
 
 
$
2,425

 
 
 
 
$
3,005

 
 
 
Single-family initial charge-off severity rate(4)
 
 
13.8
%
 
 
 
16.0
%
 
 
 
15.5
%
 
 
 
20.3
%
Multifamily initial charge-off severity rate(4)
 
 
11.8
%
 
 
 
22.0
%
 
 
 
7.2
%
 
 
 
15.4
%
__________
(1) 
Basis points are based on the annualized amount for each line item presented divided by the average guaranty book of business during the period.
(2) 
Includes fair value losses from acquired credit-impaired loans.
(3) 
Negative credit losses are the result of recoveries on previously charged-off amounts.
(4) 
Single-family and multifamily rates exclude fair value losses on credit-impaired loans acquired from MBS trusts and any costs, gains or losses associated with real estate owned (“REO”) after initial acquisition through final disposition. The single-family rate includes charge-offs pursuant to the provisions of FHFA’s Advisory Bulletin 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” and charge-offs of property tax and insurance receivables, while it excludes charge-offs from short sales and third-party sales. Multifamily rate is net of risk sharing agreements.
Credit losses and our credit loss ratio decreased in the third quarter and first nine months of 2017 compared with the third quarter and first nine months of 2016 primarily due to lower charge-offs as a result of lower serious delinquencies.
We discuss our expectations regarding our future credit losses in “Executive SummaryOutlook—Credit Losses.”

Fannie Mae Third Quarter 2017 Form 10-Q
20


 
MD&A | Consolidated Results of Operations


Table 8 displays concentrations of our single-family credit losses based on geography, credit characteristics and loan vintages.
Table 8: Credit Loss Concentration Analysis
 
Percentage of Single-Family Conventional Guaranty Book of Business Outstanding(1)
 
Percentage of Single-Family Credit Losses(2)
 
As of
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
September 30,

December 31,

September 30,
 
 
2017

2016

2016
 
2017
 
2016
 
2017
 
2016
Geographical distribution:
 
 
 
 
 
 
 
 
 
 
 
 
 
California
19
%
 
19
%
 
20
%
 
9
%
 
1
%
 
9
%
 
1
%
Florida
6

 
6

 
6

 
3

 
4

 
10

 
7

Illinois
4

 
4

 
4

 
9

 
10

 
9

 
8

New Jersey
4

 
4

 
4

 
17

 
18

 
14

 
18

New York
5

 
5

 
5

 
12

 
11

 
11

 
20

All other states
62

 
62

 
61

 
50

 
56

 
47

 
46

Select higher-risk product features(3)
21

 
21

 
22

 
55

 
68

 
60

 
59

Vintages:(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
2004 and prior
4

 
5

 
4

 
11

 
13

 
11

 
16

2005 - 2008
7

 
8

 
9

 
66

 
60

 
66

 
64

2009 - 2017
89

 
87

 
87

 
23

 
27

 
23

 
20

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

Fannie Mae Third Quarter 2017 Form 10-Q
21


 
MD&A | Consolidated Balance Sheet Analysis


Consolidated Balance Sheet Analysis
This section provides a discussion of our condensed consolidated balance sheets and should be read together with our condensed consolidated financial statements, including the accompanying notes.
Table 9: Summary of Condensed Consolidated Balance Sheets
 
As of
 
 
 
September 30, 2017
 
December 31, 2016
 
Variance
 
(Dollars in millions)
Assets 
 
 
 
 
 
Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar arrangements
$
47,654

 
$
55,639

 
$
(7,985
)
Restricted cash
28,137

 
36,953

 
(8,816
)
Investments in securities(1)
42,849

 
48,925

 
(6,076
)
Mortgage loans:
 
 
 
 
 
Of Fannie Mae
174,964

 
207,190

 
(32,226
)
Of consolidated trusts
2,997,989

 
2,896,028

 
101,961

Allowance for loan losses
(20,194
)
 
(23,465
)
 
3,271

Mortgage loans, net of allowance for loan losses
3,152,759

 
3,079,753

 
73,006

Deferred tax assets, net
30,454

 
33,530

 
(3,076
)
Other assets
28,906

 
33,168

 
(4,262
)
Total assets
$
3,330,759

 
$
3,287,968

 
$
42,791

Liabilities and equity
 
 
 
 
 
Debt:
 
 
 
 
 
Of Fannie Mae
$
291,289

 
$
327,097

 
$
(35,808
)
Of consolidated trusts
3,017,294

 
2,935,219

 
82,075

Other liabilities
18,528

 
19,581

 
(1,053
)
Total liabilities
3,327,111

 
3,281,897

 
45,214

Equity
3,648

 
6,071

 
(2,423
)
Total liabilities and equity
$
3,330,759

 
$
3,287,968

 
$
42,791

__________
(1) 
Includes $30.8 billion as of September 30, 2017 and $32.3 billion as of December 31, 2016 of U.S. Treasury securities that are included in our other investments portfolio.
Other Investments Portfolio
Our other investments portfolio consists of cash and cash equivalents, securities purchased under agreements to resell or similar arrangements, and investments in U.S. Treasury securities. See “Liquidity and Capital ManagementLiquidity ManagementOther Investments Portfolio” for additional information on our other investments portfolio.
Restricted Cash
Restricted cash primarily includes unscheduled borrower payments received by servicers of loans backing consolidated trusts due to be remitted to the MBS certificateholders in the subsequent month. Our restricted cash decreased as of September 30, 2017 compared with the balance as of December 31, 2016 primarily as a result of a decrease in prepayments received on mortgage loans in September 2017 compared with prepayments received in December 2016.

Fannie Mae Third Quarter 2017 Form 10-Q
22


 
MD&A | Consolidated Balance Sheet Analysis


Investments in Mortgage-Related Securities
Our investments in mortgage-related securities are classified in our condensed consolidated balance sheets as either trading or available-for-sale and are measured at fair value. Table 10 displays the fair value of our investments in trading and available-for-sale mortgage-related securities. We classify private-label securities as Alt-A, subprime or commercial mortgage-backed securities (“CMBS”) if the securities were labeled as such when issued. We have also invested in subprime private-label mortgage-related securities that we have resecuritized to include our guaranty.
Table 10: Summary of Mortgage-Related Securities at Fair Value
 
As of
 
September 30, 2017
 
December 31, 2016
 
(Dollars in millions)
Mortgage-related securities:
 
 
 
 
 
 
 
Fannie Mae
 
$
6,308

 
 
 
$
7,323

 
Other agency
 
1,819

 
 
 
2,605

 
Alt-A and subprime private-label securities
 
2,583

 
 
 
3,345

 
CMBS
 
191

 
 
 
1,580

 
Mortgage revenue bonds
 
750

 
 
 
1,293

 
Other mortgage-related securities
 
399

 
 
 
462

 
Total
 
$
12,050

 
 
 
$
16,608

 
The decrease in mortgage-related securities at fair value from December 31, 2016 to September 30, 2017 was primarily driven by liquidations and sales of securities.
See “Note 5, Investments in Securities” for additional information on our investments in mortgage-related securities, including the composition of our trading and available-for-sale securities at amortized cost and fair value and the gross unrealized gains and losses related to our available-for-sale securities as of September 30, 2017 and December 31, 2016.
Mortgage Loans and Allowance for Loan Losses
The increase in mortgage loans, net of allowance for loan losses, from December 31, 2016 to September 30, 2017 was driven by an increase in mortgage loans of consolidated trusts as we continued to add to our guaranty book of business through securitization activity. Partially offsetting this was a decline in mortgage loans of Fannie Mae resulting from liquidations, portfolio securitizations and sales. For additional information on our mortgage loans, see “Note 3, Mortgage Loans.”
The decrease in our allowance for loan losses from December 31, 2016 to September 30, 2017 was primarily driven by the relief of the allowance for loan losses upon redesignation of certain reperforming and nonperforming single-family loans from HFI to HFS, liquidations and higher actual and forecasted home prices. This decrease was partially offset by estimated incurred losses of approximately $1.0 billion resulting from the hurricanes.
Other Assets
The decrease in other assets from December 31, 2016 to September 30, 2017 was primarily driven by a decrease in advances to lenders as a result of lower lender funding needs. For additional information on our accounting policy for advances to lenders, refer to “Note 1, Summary of Significant Accounting Policies” in our 2016 Form 10-K.
Debt
Debt of Fannie Mae is the primary means of funding our mortgage purchases. Debt of consolidated trusts represents the amount of Fannie Mae MBS issued from consolidated trusts and held by third-party certificateholders. We provide a summary of the activity of the debt of Fannie Mae and a comparison of the mix between our outstanding short-term and long-term debt in “Liquidity and Capital ManagementLiquidity ManagementDebt Funding.” Also see “Note 7, Short-Term Borrowings and Long-Term Debt” for additional information on our outstanding debt.

Fannie Mae Third Quarter 2017 Form 10-Q
23


 
MD&A | Consolidated Balance Sheet Analysis


The decrease in debt of Fannie Mae from December 31, 2016 to September 30, 2017 was primarily driven by lower funding needs, as our retained mortgage portfolio decreased. The increase in debt of consolidated trusts from December 31, 2016 to September 30, 2017 was primarily driven by sales of Fannie Mae MBS, which are accounted for as issuances of debt of consolidated trusts in our condensed consolidated balance sheets, since the MBS certificate ownership is transferred from us to a third party.
Stockholders’ Equity
Our net equity decreased as of September 30, 2017 compared with December 31, 2016 due to our payments of senior preferred stock dividends to Treasury during the first nine months of 2017, partially offset by our comprehensive income recognized during the first nine months of 2017.
Retained Mortgage Portfolio
Our retained mortgage portfolio consists of mortgage loans and mortgage-related securities that we own, including Fannie Mae MBS and non-Fannie Mae mortgage-related securities. Assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties are not included in our retained mortgage portfolio.
Table 11 displays the unpaid principal balance of our retained mortgage portfolio.
Table 11: Retained Mortgage Portfolio
 
As of
 
September 30, 2017
 
December 31, 2016
 
(Dollars in millions)
Single-family:
 
 
 
 
 
 
 
Mortgage loans(1)
 
$
152,731

 
 
 
$
181,219

 
Reverse mortgages
 
27,456

 
 
 
29,443

 
Mortgage-related securities:
 
 
 
 
 
 
 
Agency securities(2)
 
36,714

 
 
 
25,667

 
Fannie Mae-wrapped reverse mortgage securities
 
6,884

 
 
 
7,420

 
Other Fannie Mae-wrapped securities
 
3,518

 
 
 
3,773

 
Private-label and other securities
 
3,623

 
 
 
4,980

 
Total single-family mortgage-related securities(3)
 
50,739

 
 
 
41,840

 
Total single-family mortgage loans and mortgage-related securities
 
230,926

 
 
 
252,502

 
Multifamily:
 
 
 
 
 
 
 
Mortgage loans(4)
 
5,252

 
 
 
9,407

 
Mortgage-related securities:
 
 
 
 
 
 
 
Agency securities(2)
 
8,095

 
 
 
7,693

 
CMBS
 
191

 
 
 
1,567

 
Mortgage revenue bonds
 
669

 
 
 
1,185

 
Total multifamily mortgage-related securities(5)
 
8,955

 
 
 
10,445

 
Total multifamily mortgage loans and mortgage-related securities
 
14,207

 
 
 
19,852

 
Total retained mortgage portfolio
 
$
245,133

 
 
 
$
272,354

 
__________
(1) 
Includes single-family loans restructured in a TDR that were on accrual status of $93.4 billion and $119.4 billion as of September 30, 2017 and December 31, 2016, respectively, and single-family loans on nonaccrual status of $32.6 billion and $38.7 billion as of September 30, 2017 and December 31, 2016, respectively.
(2) 
Includes Fannie Mae, Freddie Mac and Ginnie Mae mortgage-related securities, excluding Fannie Mae-wrapped reverse mortgage securities and other Fannie Mae-wrapped securities.
(3) 
The fair value of these single-family mortgage-related securities was $52.9 billion and $42.9 billion as of September 30, 2017 and December 31, 2016, respectively.

Fannie Mae Third Quarter 2017 Form 10-Q
24


 
MD&A | Retained Mortgage Portfolio


(4) 
Includes multifamily loans restructured in a TDR that were on accrual status of $159 million and $131 million as of September 30, 2017 and December 31, 2016, respectively, and multifamily loans on nonaccrual status of $133 million and $246 million as of September 30, 2017 and December 31, 2016, respectively.
(5) 
The fair value of these multifamily mortgage-related securities was $9.6 billion and $11.2 billion as of September 30, 2017 and December 31, 2016, respectively.
In support of our loss mitigation strategy, we purchased $8.9 billion of loans from our single-family MBS trusts in the first nine months of 2017, the substantial majority of which were delinquent. See “Business—Mortgage Securitizations—Purchases of Loans from Our MBS Trusts” in our 2016 Form 10-K for more information relating to our purchases of loans from MBS trusts.
We primarily use our retained mortgage portfolio to: (1) provide liquidity to the mortgage market and (2) support our loss mitigation activities. Previously, we also used our retained mortgage portfolio for investment purposes.
The amount of mortgage assets that we may own is restricted by our senior preferred stock purchase agreement with Treasury and FHFA’s additional cap, as described in “BusinessConservatorship and Treasury AgreementsTreasury Agreements” in our 2016 Form 10-K. Our retained mortgage portfolio is already below the caps that will become effective on December 31, 2017, and is below the final $250 billion cap under the senior preferred stock purchase agreement, which becomes effective on December 31, 2018. The amount is not yet below the final FHFA cap of $225 billion that becomes effective on December 31, 2018. We expect the size of our retained mortgage portfolio will continue to decrease in 2017.
Table 12 below separates the instruments within our retained mortgage portfolio by unpaid principal balance into three categories based on each instrument’s use. “Lender liquidity,” which includes balances related to our whole loan conduit activity, supports our efforts to provide liquidity to the Single-Family and Multifamily mortgage markets. “Loss mitigation” supports our loss mitigation efforts through the purchase of delinquent loans from MBS trusts. “Other” represents assets that were previously purchased for investment purposes. More than half of the balance of “Other” consisted of reverse mortgage loans and Fannie Mae-wrapped reverse mortgage securities as of September 30, 2017 and December 31, 2016.
Table 12: Retained Mortgage Portfolio Profile
 
As of
 
September 30, 2017
 
December 31, 2016
 
Single-Family
 
Multifamily
 
Total
 
% of Mortgage Credit Book of Business
 
Single-Family
 
Multifamily
 
Total
 
% of Mortgage Credit Book of Business
 
(Dollars in millions)
Lender liquidity
$
52,041

 
$
8,095

 
$
60,136

 
2
%
 
$
36,272

 
$
7,694

 
$
43,966

 
2
%
Loss mitigation
131,077

 
292

 
131,369

 
4

 
164,028

 
376

 
164,404

 
5

Other
47,808

 
5,820

 
53,628

 
2

 
52,202

 
11,782

 
63,984

 
2

Total
$
230,926

 
$
14,207

 
$
245,133

 
8
%
 
$
252,502

 
$
19,852

 
$
272,354

 
9
%
Mortgage Credit Book of Business
Table 13 displays the composition of our mortgage credit book of business based on unpaid principal balance. Our single-family mortgage credit book of business accounted for 92% of our mortgage credit book of business as of September 30, 2017 and December 31, 2016. While our mortgage credit book of business includes all of our mortgage-related assets, both on- and off-balance sheet, our guaranty book of business excludes non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.

Fannie Mae Third Quarter 2017 Form 10-Q
25


 
MD&A | Mortgage Credit Book of Business


Table 13: Composition of Mortgage Credit Book of Business
 
As of
 
September 30, 2017
 
December 31, 2016
 
Single-Family 
 
Multifamily 
 
Total 
 
Single-Family 
 
Multifamily 
 
Total 
 
(Dollars in millions)
Mortgage loans and Fannie Mae MBS(1)
$
2,882,463

 
$
253,031

 
$
3,135,494

 
$
2,838,086

 
$
229,896

 
$
3,067,982

Unconsolidated Fannie Mae MBS, held by third parties(2)
6,688

 
1,086

 
7,774

 
7,795

 
1,159

 
8,954

Other credit guarantees(3)
1,925

 
12,564

 
14,489

 
2,193