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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

Commission file number: 0-50231

Federal National Mortgage Association

(Exact name of registrant as specified in its charter)

Fannie Mae



Federally chartered corporation	52-0883107	1100 15th Street, NW Washington, DC 20005	(800) 2FANNIE (800-232-6643)
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)	(Address of principal executive offices, including zip code)	(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, without par value

8.25% Non-Cumulative Preferred Stock, Series T, stated value $25 per share

8.75% Non-Cumulative Mandatory Convertible Preferred Stock, Series 2008-1, stated value $50 per share

Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series S, stated value $25 per share

7.625% Non-Cumulative Preferred Stock, Series R, stated value $25 per share

6.75% Non-Cumulative Preferred Stock, Series Q, stated value $25 per share

Variable Rate Non-Cumulative Preferred Stock, Series P, stated value $25 per share

Variable Rate Non-Cumulative Preferred Stock, Series O, stated value $50 per share

5.375% Non-Cumulative Convertible Series 2004-1 Preferred Stock, stated value $100,000 per share

5.50% Non-Cumulative Preferred Stock, Series N, stated value $50 per share

4.75% Non-Cumulative Preferred Stock, Series M, stated value $50 per share

5.125% Non-Cumulative Preferred Stock, Series L, stated value $50 per share

5.375% Non-Cumulative Preferred Stock, Series I, stated value $50 per share

5.81% Non-Cumulative Preferred Stock, Series H, stated value $50 per share

Variable Rate Non-Cumulative Preferred Stock, Series G, stated value $50 per share

Variable Rate Non-Cumulative Preferred Stock, Series F, stated value $50 per share

5.10% Non-Cumulative Preferred Stock, Series E, stated value $50 per share

5.25% Non-Cumulative Preferred Stock, Series D, stated value $50 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ

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 ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10‑K. þ

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	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 ¨ No þ

The aggregate market value of the common stock held by non-affiliates of the registrant computed by reference to the last reported sale price of the common stock quoted on the OTCQB, operated by OTC Markets Group, Inc., on June 29, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $1.6 billion.

As of January 31, 2019, there were 1,158,087,567 shares of common stock of the registrant outstanding.



Table of Contents
		Page
PART I		1
Item 1.	Business	1
	Introduction	1
	Executive Summary	2
	Mortgage Securitizations	7
	Managing Mortgage Credit Risk	11
	Conservatorship, Treasury Agreements and Housing Finance Reform	12
	Charter Act and Regulation	16
	Employees	23
	Where You Can Find Additional Information	23
	Forward-Looking Statements	23
Item 1A.	Risk Factors	25
Item 1B.	Unresolved Staff Comments	41
Item 2.	Properties	41
Item 3.	Legal Proceedings	41
Item 4.	Mine Safety Disclosures	43
PART II		43
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	43
Item 6.	Selected Financial Data	45
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47
	Key Market Economic Indicators	47
	Consolidated Results of Operations	50
	Consolidated Balance Sheet Analysis	58
	Retained Mortgage Portfolio	60
	Total Book of Business	62
	Business Segments	62
	Single-Family Business	63
	Multifamily Business	93
	Liquidity and Capital Management	103
	Off-Balance Sheet Arrangements	112
	Risk Management	113
	Critical Accounting Policies and Estimates	128
	Impact of Future Adoption of New Accounting Guidance	130
	Glossary of Terms Used in This Report	130
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	132
Item 8.	Financial Statements and Supplementary Data	132
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	132
Item 9A.	Controls and Procedures	132
Item 9B.	Other Information	138
PART III		138
Item 10.	Directors, Executive Officers and Corporate Governance	138
	Directors	138
	Corporate Governance	142
	Executive Officers	146



Fannie Mae 2018 Form 10-K		i




Item 11.	Executive Compensation	149
	Compensation Discussion and Analysis	149
	Compensation Committee Report	164
	Compensation Risk Assessment	165
	Compensation Tables and Other Information	166
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	174
Item 13.	Certain Relationships and Related Transactions, and Director Independence	175
	Policies and Procedures Relating to Transactions with Related Persons	175
	Transactions with Related Persons	177
	Director Independence	178
Item 14.	Principal Accounting Fees and Services	180
PART IV		182
Item 15.	Exhibits, Financial Statement Schedules	182
Item 16.	Form 10-K Summary	184
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1



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		Business \| Introduction

PART I




	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 provided for the exercise of certain authorities by our Board of Directors. 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 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. Congress and the Administration continue to consider options for reform of the housing finance system, including Fannie Mae. We are not permitted to retain more than $3.0 billion in capital reserves or to pay dividends or other distributions to stockholders other than the U.S. Department of the Treasury (“Treasury”). Our agreements with Treasury include covenants that significantly restrict our business activities. For additional information on the conservatorship, the uncertainty of our future, our agreements with Treasury, and recent actions and statements relating to housing finance reform by the Administration, Congress and FHFA, see “Conservatorship, Treasury Agreements and Housing Finance Reform,” “Charter Act and Regulation” and “Risk Factors.”

Forward-looking statements in this report are based on management’s current expectations and are subject to significant uncertainties and changes in circumstances, as we describe in “Business—Forward-Looking Statements.” Future events and our future results may differ materially from those reflected in our forward-looking statements due to a variety of factors, including those discussed in “Risk Factors” and elsewhere in this report.

You can find a “Glossary of Terms Used in This Report” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (‘MD&A’).”

Item 1. Business

Introduction

Fannie Mae provides a stable source of liquidity to the mortgage market and supports the availability and affordability of housing in the United States. We operate in the secondary mortgage market, primarily working with lenders. We do not originate loans or lend money directly to consumers in the primary mortgage market. Instead, we securitize mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee (which we refer to as Fannie Mae MBS or our MBS); purchase mortgage loans and mortgage-related securities, primarily for securitization and sale at a later date; manage mortgage credit risk; and engage in other activities that support the supply of affordable housing. Through our single-family and multifamily business segments, we provided $512 billion in liquidity to the mortgage market in 2018, which enabled the financing of approximately 3 million home purchases, refinancings or rental units.

Fannie Mae Provided $512 Billion in Liquidity in 2018

https://cdn.kscope.io/5deb9ec59b8193902e8cbccfce67c502-a2018liquiditygrapa01.jpg



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		Business \| Executive Summary

Executive Summary

Please read this Executive Summary together with our MD&A and our consolidated financial statements as of December 31, 2018 and related notes to the consolidated financial statements.

Summary of Our Financial Performance

Consolidated Results

(Dollars in billions)

https://cdn.kscope.io/5deb9ec59b8193902e8cbccfce67c502-chart-34c6b1874101ee43cdd.jpg


⁽¹⁾	Net revenues consist of net interest income and fee and other income.



2017 vs. 2016		2018 vs. 2017


The decrease in our net income in 2017 compared with 2016 was primarily driven by: • a $9.9 billion one-time federal income tax charge resulting from the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) that drove the remeasurement of our deferred tax assets using the lower corporate tax rate enacted in the fourth quarter of 2017. The increase in our pre-tax income in 2017 compared with 2016 was primarily driven by: • higher net revenues due to $975 million of income resulting from a settlement agreement in 2017 resolving legal claims related to private-label securities we purchased.		The increase in our net income in 2018 compared with 2017 was primarily driven by a reduction in our provision for federal income taxes in 2018 due to: • the absence of the $9.9 billion one-time tax charge for federal income taxes recorded in 2017; and • the lower corporate tax rate in effect as a result of the Tax Act. The increase in our pre-tax income in 2018 compared with 2017 was primarily driven by: • a shift to fair value gains from fair value losses; • an increase in credit-related income; • partially offset by a decrease in fee and other income. .



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		Business \| Executive Summary

See “MD&A—Consolidated Results of Operations” for more information on our financial results.

Net Worth. Our net worth of $6.2 billion as of December 31, 2018 reflects our comprehensive income of $3.2 billion for the fourth quarter of 2018 and $3.0 billion in retained capital reserves.

Financial Performance Outlook

We expect to remain profitable on an annual basis for the foreseeable future; however, certain factors could result in significant volatility in our financial results from quarter to quarter or year to year. We expect quarterly volatility in our financial results due to a number of factors, particularly changes in market conditions that result in fluctuations in the estimated fair value of our derivatives and other financial instruments that we mark to market through our earnings. Other factors that may result in volatility in our quarterly financial results include developments that affect our loss reserves, such as redesignations of loans from held for investment (“HFI”) to held for sale (“HFS”), changes in interest rates, home prices or accounting standards, or events such as natural disasters, and other factors, as we discuss in “Risk Factors” and “MD&A—Consolidated Results of Operations—Credit-Related Income (Expense).”

The potential for significant volatility in our financial results could result in a net loss in a future quarter. We are permitted to retain up to $3.0 billion in capital reserves as a buffer in the event of a net loss in a future quarter. However, any net loss we experience in the future could be greater than the amount of our capital reserves, resulting in a net worth deficit for that 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. See “Risk Factors” for a discussion of the risks associated with the limitations on our ability to rebuild our capital reserves, including factors that could result in a net loss or net worth deficit in a future quarter.

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. Pursuant to the senior preferred stock purchase agreement, we issued shares of senior preferred stock to Treasury in 2008. 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 for every dividend period for which dividends were payable since we entered conservatorship.

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.

Treasury Draws and Dividend Payments: 2008 - 2018

(Dollars in billions)

https://cdn.kscope.io/5deb9ec59b8193902e8cbccfce67c502-chart-f24d903fe37b52c8823.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. 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. Draw requests have been funded in the quarter following a net worth deficit.



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		Business \| Executive Summary

We expect to pay Treasury a first quarter 2019 dividend of $3.2 billion by March 31, 2019. The senior preferred stock currently provides for dividends each quarter in the amount, if any, by which our net worth as of the end of the prior quarter exceeds a $3.0 billion capital reserve amount.

As of the date of this filing, the maximum amount of remaining funding under the agreement is $113.9 billion. If we were to draw additional funds from Treasury under the agreement with respect to a future period, the amount of remaining funding 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 “Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements.”

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 Strategic 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 risk. We are advancing this vision by pursuing four strategic objectives:


•	advancing a sustainable and reliable business model with low risk to the housing finance system and taxpayers;


•	providing great service to our customers and partners, enabling them to serve the needs of American households more effectively;


•	supporting and sustainably increasing access to credit and affordable housing; and


•	building a simple, efficient, innovative and continuously improving company.

We believe pursuing these strategic objectives will position us to compete effectively in a diverse and rapidly changing housing finance market in the years ahead.

Advancing a sustainable and reliable business model with low risk to the housing finance system and taxpayers

We have significantly changed our business model over the last decade in ways that reduce risks for the housing system and taxpayers. After strengthening our underwriting and eligibility standards, we developed innovative credit risk transfer programs, and we now transfer a portion of the credit risk on our guaranty book of business to private investors. We have also transitioned from a portfolio-driven business to a guaranty-driven business. Taken together, these changes affect how we manage credit risk, market risk, and liquidity and funding risk, and they have transformed our business model into one that focuses Fannie Mae’s efforts on safely delivering the value of our risk management expertise to our customers, to taxpayers, and to the housing system as a whole.



Fannie Mae 2018 Form 10-K		4



		Business \| Executive Summary

Strong underwriting and eligibility standards

Our underwriting and eligibility standards have significantly improved the credit quality of our single-family guaranty book of business during the last decade. Combined with improvement in the overall economy, including strong home price growth and reduced levels of unemployment, our strong underwriting and eligibility standards have driven substantial improvement in our credit performance during the last decade. Our single-family serious delinquency rate decreased in 2018, primarily driven by improved loan payment performance and nonperforming loan sales, after increasing in 2017 due to Hurricanes Harvey, Irma and Maria (the “2017 hurricanes”). With the exception of 2017, our single-family serious delinquency rate has decreased in each of the last nine years.

Single-Family Serious Delinquency Rate¹

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⁽¹⁾	Calculated as of December 31 for each year shown, based on the number of single-family conventional loans that are 90 days or more past due and loans that have been referred to foreclosure but not yet foreclosed upon, divided by the number of loans in our single-family conventional guaranty book of business.

Transferring mortgage credit risk

We continue to innovate and improve our credit risk transfer programs, expanding the types of loans covered and promoting the continued growth of the credit risk transfer market. For single-family mortgages, we have relied principally on two types of transactions to transfer credit risk: our Connecticut Avenue Securities^® (“CAS”) transactions and our Credit Insurance Risk Transfer^TM (“CIRT^TM”) transactions. In these transactions, we transfer to investors a portion of the credit risk associated with losses on a reference pool of mortgage loans. In November 2018, we completed our first CAS offering under a new Real Estate Mortgage Investment Conduit (“REMIC”) structure. This new structure is designed to promote the continued growth of the market by expanding the potential investor base for these securities and limiting investor exposure to Fannie Mae counterparty risk, without disrupting the “To-Be-Announced” (“TBA”) MBS market. The new structure will also align the timing of our recognition of provisions for credit losses with the related recovery from CAS REMIC^TM transactions. While our Multifamily business has for many years used a shared-risk business model through our Delegated Underwriting and Servicing (“DUS^®”) program, we are also transferring multifamily mortgage credit risk beyond our DUS program. In 2018, we completed our third and fourth multifamily CIRT transactions since the inception of the program, and we expect to continue to expand this program and explore additional programs for transferring multifamily mortgage credit risk. See “Managing Mortgage Credit Risk,” “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management” and “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management” for more information on how we manage credit risk in our guaranty book of business.

A guaranty-driven business

We have two primary sources of revenues:


•	guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and



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		Business \| Executive Summary

•

the difference between interest income earned on the assets in our retained mortgage portfolio and our other investments portfolio (collectively, our “portfolios”) and the interest expense associated with the debt that funds those assets. Our retained mortgage portfolio, which we discuss in “MD&A—Retained Mortgage Portfolio,” refers to the mortgage-related assets we own (excluding the portion of assets that back mortgage-related securities owned by third parties), including assets we use to provide liquidity to the mortgage markets and for our loss mitigation efforts.

Both of these sources of revenues are recorded as net interest income in our consolidated financial statements.

More than 75% of our 2018 net interest income was derived from the loans underlying our Fannie Mae MBS in consolidated trusts, which primarily generate income through guaranty fees. The chart below shows the portion of our net interest income derived from guaranty fees compared with the portion derived from assets in our portfolios.

Sources of Net Interest Income and Retained Mortgage Portfolio Balance

(Dollars in billions)

https://cdn.kscope.io/5deb9ec59b8193902e8cbccfce67c502-chart-9fe2228e69089ef1086.jpg


⁽¹⁾	Guaranty fee income includes 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.

Common securitization platform and Single Security Initiative

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. These efforts include our work with Freddie Mac, our jointly owned limited liability company, Common Securitization Solutions, LLC (“CSS”), and FHFA to develop a common securitization platform that, starting in 2019, we expect to use to perform certain aspects of the securitization process. We are also working with Freddie Mac, CSS and FHFA on the “Single Security Initiative” to develop and implement a uniform mortgage-backed security for Fannie Mae and Freddie Mac. The common securitization platform and the Single Security Initiative represent significant changes for the mortgage market and for our securitization operations and business. See “Mortgage Securitizations—Common Securitization Platform and Single Security Initiative” and “Risk Factors—GSE and Conservatorship Risk” for more information on these efforts and the risks they present. See “Conservatorship, Treasury Agreements and Housing Finance Reform—Housing Finance Reform—Conservator Developments and Strategic Goals” for more information on FHFA’s strategic goals for our conservatorship.



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		Business \| Executive Summary

Providing great service to our customers and partners, enabling them to serve the needs of American households more effectively

We achieve our mission through our customers. Responding to and anticipating the changing needs of our mortgage lender and servicer customers with products, services and tools that offer greater speed, efficiency and effectiveness is a core part of our strategy. In 2018, we continued to make improvements to our business processes and policies to serve our customers better and enhance the value they can deliver to borrowers. We continue to work towards our goal of a digital mortgage process that meaningfully reduces the time, cost and risk of originating and servicing mortgage loans. In addition to providing value to our customers, we believe these improvements will encourage lenders to safely expand their lending to a wider range of qualified borrowers. We also continue to work on enhancing our customers’ day-to-day experience in doing business with us.

We believe our investments in an improved customer experience will provide us with not only a competitive advantage, but also allow us to collaborate with customers more effectively on long-term efforts to create new solutions to serve a continuously changing housing finance market.

Supporting and sustainably increasing access to credit and affordable housing

We have a mission to provide liquidity and promote stability and affordability in the residential mortgage market. This mission includes promoting access to mortgage credit throughout the nation. We are focused on supporting sustainable access to credit and affordable housing, within our risk tolerance. Market forces in recent years have contributed to an overall decline in the supply of affordable housing for both single-family homes and multifamily rental housing. We are working on multiple fronts to help address housing affordability issues. For example:


•	Serving underserved markets. We began implementing our Duty to Serve plan in January 2018, which incorporates innovative solutions to expand our reach into three underserved markets: manufactured housing; affordable housing preservation; and rural housing.


•	Providing liquidity through our activities. We continue to support housing affordability through our purchases of loans to meet our single-family and multifamily housing goals. In addition, in 2018 our Multifamily business resumed investing in low income housing tax credit (“LIHTC”) projects to help support and preserve the supply of affordable housing.


•	Financing programs to address affordable housing supply and barriers to homeownership. We are working with some customers and other partners to develop and test financing programs that could spur the development of more affordable housing supply and help borrowers prudently overcome barriers to homeownership.


•	Advancing sustainable, healthy communities. Through our Sustainable Communities Initiative, we are working with partners to find new ways to increase, improve and preserve the supply of affordable housing through the advancement of sustainable, healthy communities.


•	Collaboration to reduce cost of producing and maintaining housing. We have initiated a number of collaborations with participants in the housing industry to find ways housing can be produced and maintained with lower costs, with a focus on cost reductions that our secondary market role could help enable.


•	Macroeconomic and housing research. We are working to understand and help educate the market about a variety of related macroeconomic and housing issues, including the effect that inadequate new home production in the current expansion has in limiting housing affordability, particularly for low- and moderate-income borrowers.

See “Charter Act and Regulation—Charter Act” for more information about our mission.

Building a simple, efficient, innovative and continuously improving company

With the goal of making Fannie Mae more competitive and responsive to changing market conditions and customer expectations, we continue to work on internal, multiyear initiatives to make our organization simpler, more efficient and more innovative. For example, we made significant progress in 2018 on a number of strategic projects to improve our technology infrastructure, including projects aimed at simplifying the customer experience and improving our data infrastructure. We also continued to implement plans designed to improve the effectiveness of our organization, including continuing to increase the percentage of our workforce using our Way of Working management system, which is based on lean management principles and techniques.

Mortgage Securitizations

We support market liquidity by issuing Fannie Mae MBS that are readily traded in the capital markets. We create Fannie Mae MBS by placing mortgage loans in a trust and issuing securities that are backed by those mortgage loans. Monthly payments received on the loans are the primary source of payments passed through to Fannie Mae MBS holders. We guarantee to the



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		Business \| Mortgage Securitizations

MBS trust that we will supplement amounts received by the MBS trust as required to permit timely payment of principal and interest on the trust certificates. In return for this guaranty, we receive guaranty fees.

Below we discuss (1) the three broad categories of our securitization transactions; (2) features of our MBS trusts; (3) single-class and multi-class Fannie Mae MBS and (4) our work to develop a common securitization platform and a uniform mortgage-backed security.

Securitization Transactions

We currently securitize a substantial majority of the single-family and multifamily mortgage loans we acquire. Our securitization transactions primarily fall within three broad categories: lender swap transactions, portfolio securitizations, and structured securitizations.

Lender Swap Transactions

Our most common type of securitization transaction is our “lender swap transaction.” In a single-family lender swap transaction, a mortgage lender that operates in the primary mortgage market generally delivers a pool of mortgage loans to us in exchange for Fannie Mae MBS backed by these mortgage loans. Lenders may hold the Fannie Mae MBS they receive from us or sell them to investors. A pool of mortgage loans is a group of mortgage loans with similar characteristics. After receiving the mortgage loans in a lender swap transaction, we place them in a trust for which we serve as trustee. This trust is established for the sole purpose of holding the mortgage loans separate and apart from our corporate assets. We deliver to the lender (or its designee) Fannie Mae MBS that are backed by the pool of mortgage loans in the trust and that represent an undivided beneficial ownership interest in each of the mortgage loans. We guarantee to each MBS trust that we will supplement amounts received by the MBS trust as required to permit timely payment of principal and interest on the related Fannie Mae MBS. We are entitled to a portion of the interest payment as a fee for providing our guaranty. The mortgage servicer also retains a portion of the interest payment as a fee for servicing the loan. Then, on behalf of the trust, we make monthly distributions to the Fannie Mae MBS certificateholders from the principal and interest payments and other collections on the underlying mortgage loans.

Lender Swap Transaction

https://cdn.kscope.io/5deb9ec59b8193902e8cbccfce67c502-lenderswap2018.jpg

Our Multifamily business generally creates multifamily Fannie Mae MBS in lender swap transactions in a manner similar to our Single-Family business. Our multifamily lender customers typically deliver only one mortgage loan to back each multifamily Fannie Mae MBS. The characteristics of each mortgage loan are used to establish guaranty fees on a risk-adjusted basis. Securitizing a multifamily mortgage loan into a Fannie Mae MBS facilitates its sale into the secondary market.



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		Business \| Mortgage Securitizations

Portfolio Securitization Transactions

In contrast to our lender swap securitizations, in which a mortgage lender delivers a pool of mortgage loans to us that we immediately place in a trust for securitization, we also purchase mortgage loans and mortgage-related securities for securitization and sale at a later date through our “portfolio securitization transactions.” Most of our portfolio securitization transactions are driven by our single-family whole loan conduit activities, pursuant to which we purchase single-family whole loans from a large group of typically smaller lenders principally for the purpose of securitizing the loans into Fannie Mae MBS, which may then be sold to dealers and investors. We also securitize loans that have been held in our portfolio for a longer period of time, including reperforming loans. Reperforming loans are mortgage loans on which the borrower had previously been delinquent but subsequently became current, either with or without a modification.

Portfolio Securitization Transaction

https://cdn.kscope.io/5deb9ec59b8193902e8cbccfce67c502-wholeloan2018.jpg

Structured Securitization Transactions

In a “structured securitization transaction,” we create structured Fannie Mae MBS, typically for our lender customers or securities dealer customers, in exchange for a transaction fee. In these transactions, the customer “swaps” a mortgage-related asset that it owns (typically a mortgage security) in exchange for a structured Fannie Mae MBS we issue. The process for issuing Fannie Mae MBS in a structured securitization is similar to the process involved in our lender swap securitizations described above.

We also issue structured transactions backed by multifamily Fannie Mae MBS through the Fannie Mae Guaranteed Multifamily Structures (“Fannie Mae GeMS^TM”) program, which provides additional liquidity and stability to the multifamily market, while expanding the investor base for multifamily Fannie Mae MBS.

Features of Our MBS Trusts

Our MBS trusts hold either single-family or multifamily mortgage loans or mortgage-related securities. Each trust operates in accordance with a trust agreement or a trust indenture. Generally, each MBS trust is also governed by an issue supplement documenting the formation of that MBS trust, the identification of its related assets and the issuance of the related Fannie Mae MBS. The trust agreement or the trust indenture, together with the issue supplement and any amendments, are considered the “trust documents” that govern an individual MBS trust.

Single-Class and Multi-Class Fannie Mae MBS

Fannie Mae MBS trusts may be single-class or multi-class. Single-class MBS are MBS in which the investors receive principal and interest payments on the mortgage loans backing the MBS directly in proportion to their percentage ownership of the MBS issuance. Multi-class MBS are MBS, including REMICs, in which the cash flows on the underlying mortgage assets are divided, creating several classes of securities, each of which represents a beneficial ownership interest in the assets of the related MBS trust and entitles the related holder to a specific portion and priority of cash flows. Terms to maturity of some multi-class Fannie Mae MBS, particularly REMIC classes, may match or be shorter than the maturity of the underlying



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		Business \| Mortgage Securitizations

mortgage loans and/or mortgage-related securities. After these classes mature, cash flows received on the underlying mortgage assets are allocated to the remaining classes in accordance with the payment terms of the securities. As a result, each of the classes in a multi-class MBS may have a different coupon rate, average life, repayment sensitivity or final maturity. Structured Fannie Mae MBS are either multi-class MBS or single-class MBS that are typically resecuritizations of other single-class Fannie Mae MBS. In a resecuritization, pools of MBS are collected and securitized.

Common Securitization Platform and Single Security Initiative

In pursuit of the strategic goals identified by our conservator, for the past several years we have been working with FHFA, Freddie Mac and CSS on the development of a common securitization platform that we expect to use beginning in 2019 to perform certain aspects of the securitization process. We have also been working on developing and implementing a single-family uniform mortgage-backed security for Fannie Mae and Freddie Mac.

Common Securitization Platform

The intended purpose of the common securitization platform, which is operated by CSS, is to replace certain elements of Fannie Mae’s and Freddie Mac’s proprietary systems for securitizing mortgages and performing associated back office and administrative functions. In addition, FHFA specified that the design of the common securitization platform should allow for the integration of additional market participants in the future.

While Fannie Mae and Freddie Mac each fund CSS and each appoint two managers to the CSS Board of Managers, CSS operates as a company separate from us and Freddie Mac. Freddie Mac began using the common securitization platform for some activities relating to the issuance of its current single-class fixed-rate mortgage-backed securities in November 2016. We continue to work with FHFA, Freddie Mac and CSS on building and testing the common securitization platform, as well as on implementing required changes to our systems and operations to integrate with the common securitization platform in support of the initial issuance of the single security expected in June 2019.

Single Security Initiative

The uniform mortgage-backed security, which we, Freddie Mac and FHFA have been working on since 2014, is intended to maximize liquidity for both Fannie Mae and Freddie Mac mortgage-backed securities in the TBA market. In March 2018, FHFA announced that Fannie Mae and Freddie Mac will start issuing these uniform mortgage-backed securities, or “UMBS,” on June 3, 2019. FHFA has determined that the following features will apply to these securities:


•	Fannie Mae and Freddie Mac will each issue and guarantee UMBS directly backed by mortgage loans it has acquired, referred to as first-level securities, and will not cross-guarantee each other’s first-level securities;


•	mortgage loans backing first-level uniform mortgage-backed securities will be limited to fixed-rate mortgage loans now eligible for financing through the TBA market;


•	Fannie Mae and Freddie Mac will each be able to issue and guarantee second-level securities, also referred to as resecuritizations, backed by first- or second-level UMBS issued by either company;


•	key features of the new uniform mortgage-backed security will be the same as those of the current Fannie Mae MBS;


•	the loan- and security-level disclosures for uniform mortgage-backed securities will closely resemble those of Freddie Mac participation certificates (“Freddie Mac PCs”); and


•	investors in Freddie Mac PCs will have the option to exchange legacy Freddie Mac PCs for comparable uniform mortgage-backed securities backed by the same mortgage loans; there will not be an exchange option for legacy Fannie Mae MBS because FHFA expects investors to treat them as fungible with the uniform mortgage-backed securities.

Once UMBS are issued, lender customers, securities dealers and other investors will be able to swap UMBS issued by either Fannie Mae or Freddie Mac for a new form of structured security issued and guaranteed by Fannie Mae (to be called “Supers”) that combines collateral and provides Fannie Mae’s guaranty of principal and interest on the underlying UMBS, even if that UMBS was not issued by Fannie Mae. We expect that once we begin issuing UMBS, the vast majority of our single-family MBS will be issued as UMBS.

Historically, Fannie Mae MBS had a trading advantage over comparable Freddie Mac PCs. One of FHFA’s stated objectives for the Single Security Initiative is to reduce the costs to Freddie Mac and taxpayers that result from differences in liquidity of Fannie Mae MBS and Freddie Mac PCs. In the last couple of years, as the implementation date of the Single Security Initiative has drawn closer, Fannie Mae MBS and comparable Freddie Mac PCs have been trading at or near parity. See “Risk Factors” for a discussion of the risks to our business associated with the Single Security Initiative.



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		Business \| Managing Mortgage Credit Risk

Managing Mortgage Credit Risk

We facilitate the flow of global capital into the U.S. mortgage market by assuming and managing credit risk. Accordingly, effective credit risk management is a key component of our overall operations. Our single-family and multifamily businesses have built a comprehensive approach to credit risk management with end-to-end processes.

Our single-family credit risk management strategy includes acquisition and servicing policies, underwriting and servicing standards, portfolio diversification and monitoring, problem loan and real estate owned (“REO”) management, and the transfer of credit risk through credit enhancements including risk transfer transactions.

The Federal National Mortgage Association Charter Act, which we refer to as the Charter Act or our charter, requires that we obtain credit enhancements on our single-family conventional mortgage loans that have loan-to-value (“LTV”) ratios over 80% when we acquire them. We use several types of credit enhancements, including primary mortgage insurance and pool mortgage insurance.

In addition, our Single-Family business has developed risk-sharing capabilities to obtain credit enhancement by transferring portions of our single-family mortgage credit risk to the private market. In most of our credit risk transfer transactions, investors receive payments, which effectively reduce the guaranty fee income we retain on the loans. In exchange we transfer to investors a small portion of our expected losses and a significant portion of the losses we expect we would incur in a stressed credit environment, such as a severe or prolonged downturn.

The chart below displays the percentage of loans in our single-family guaranty book of business, measured by unpaid principal balance, that are covered by one or more forms of credit enhancement, including mortgage insurance or a credit risk transfer transaction.

Single-Family Guaranty Book of Business with Credit Enhancement

https://cdn.kscope.io/5deb9ec59b8193902e8cbccfce67c502-chart-a28d5c334489f9f9286.jpg

The portion of our single-family guaranty book of business without credit enhancement consists mostly of:


•	loans that did not require credit enhancement at the time we acquired them because they had LTV ratios below 80%;


•	loans we acquired before the inception of or too recently to be included in our CAS or CIRT programs; and


•	loans that are not in our current target population for credit risk transfer transactions because they have lower LTV ratios, are intermediate-term or adjustable-rate mortgages, or were acquired under our former Refi Plus^TM refinancing initiative for borrowers with high LTV ratios due to declines in home prices.

We will continue to transfer more credit risk to investors in future years. See “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management” for more information on credit enhancements on our single-family loans, including our target criteria for including loans in a credit risk transfer transaction, and how we manage credit risk in our single-family guaranty book.

Our Multifamily business uses a shared-risk business model that distributes credit risk to the private markets, primarily through our DUS program, which was initiated in 1988. Under DUS, we delegate to lenders the ability to underwrite multifamily loans in accordance with our standards and requirements, and our DUS lenders typically share with us approximately one-third of the credit risk on these loans, aligning the interests of lenders and Fannie Mae from day one. We also transfer multifamily mortgage credit risk outside of our DUS program, including through multifamily CIRT transactions. We expect to expand our multifamily CIRT program and explore additional programs for transferring multifamily credit risk. As of December 31, 2018, 98% of the unpaid principal balance of loans in our multifamily guaranty book of business had lender risk-sharing, compared with 96% as of December 31, 2017. See “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management” for more information on how we manage credit risk in our multifamily guaranty book.



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	Business \| Conservatorship, Treasury Agreements and Housing Finance Reform

Conservatorship, Treasury Agreements and Housing Finance Reform

Conservatorship

On September 6, 2008, the Director of FHFA appointed FHFA as our conservator, pursuant to authority provided by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended, including by the Federal Housing Finance Regulatory Reform Act of 2008 (together, the “GSE Act”). The conservatorship is a statutory process designed to preserve and conserve our assets and property and put the company in a sound and solvent condition.

The conservatorship has no specified termination date and there continues to be significant uncertainty regarding the future of our company, including how long the company will continue to exist in its current form, the extent of our role in the market, how long we will be in 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, and whether we will continue to exist following conservatorship. For more information on the risks to our business relating to the conservatorship and uncertainties regarding the future of our company and business, as well as the adverse effects of the conservatorship on the rights of holders of our common and preferred stock, see “Risk Factors.”

Our conservatorship could terminate through a receivership. For information on the circumstances under which FHFA is required or permitted to place us into receivership and the potential consequences of receivership, see “Charter Act and Regulation—GSE Act and Other Regulation—Receivership” and “Risk Factors.”

Management of the Company during Conservatorship

Upon its appointment, the conservator immediately succeeded to (1) all rights, titles, powers and privileges of Fannie Mae, and of any shareholder, officer or director of Fannie Mae with respect to Fannie Mae and its assets, and (2) title to the books, records and assets of any other legal custodian of Fannie Mae. The conservator subsequently issued an order that provided for our Board of Directors to exercise specified authorities. The conservator also provided instructions regarding matters for which conservator decision or notification is required. The conservator retains the authority to amend or withdraw its order and instructions at any time. For more information on the authorities of our Board of Directors during conservatorship, see “Directors, Executive Officers and Corporate Governance—Corporate Governance—Conservatorship and Board Authorities.”

Our directors serve on behalf of the conservator and exercise their authority as directed by and with the approval, where required, of the conservator. Our directors have no fiduciary duties to any person or entity except to the conservator. Accordingly, our directors 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.

Because we are in conservatorship, our common stockholders currently do not have the ability to elect directors or to vote on other matters. The conservator eliminated common and preferred stock dividends (other than dividends on the senior preferred stock issued to Treasury) during the conservatorship.

Powers of the Conservator under the GSE Act

FHFA has broad powers when acting as our conservator. As conservator, FHFA can direct us to enter into contracts or enter into contracts on our behalf. Further, FHFA may transfer or sell any of our assets or liabilities (subject to limitations and post-transfer notice provisions for transfers of certain types of financial contracts), without any approval, assignment of rights or consent of any party. However, mortgage loans and mortgage-related assets that have been transferred to a Fannie Mae MBS trust must be held by the conservator for the beneficial owners of the Fannie Mae MBS and cannot be used to satisfy the general creditors of the company. Neither the conservatorship nor the terms of our agreements with Treasury change our obligation to make required payments on our debt securities or perform under our mortgage guaranty obligations.

Treasury Agreements

On September 7, 2008, we, through FHFA, in its capacity as conservator, and Treasury entered into a senior preferred stock purchase agreement, pursuant to which we issued to Treasury one million shares of Variable Liquidation Preference Senior Preferred Stock, Series 2008-2, which we refer to as the “senior preferred stock,” and a warrant to purchase shares of common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis at the time the warrant is exercised for a nominal price.

The senior preferred stock purchase agreement was amended and restated on September 26, 2008 and was subsequently amended three times: in May 2009, December 2009 and August 2012. In addition, the dividend and liquidation preference provisions of the senior preferred stock were amended in December 2017 pursuant to a letter agreement between us, through FHFA in its capacity as conservator, and Treasury. See “Risk Factors” for a description of the risks to our business relating to the senior preferred stock purchase agreement, as well as the adverse effects of the senior preferred stock and the warrant on the rights of holders of our common stock and other series of preferred stock.



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	Business \| Conservatorship, Treasury Agreements and Housing Finance Reform

Senior Preferred Stock Purchase Agreement

The senior preferred stock purchase agreement provides that, on a quarterly basis, we may draw funds up to the amount, if any, by which our total liabilities exceed our total assets, as reflected in our consolidated balance sheet, prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), for the applicable fiscal quarter (referred to as the “deficiency amount”), up to the maximum amount of remaining funding under the agreement. As of the date of this filing, the maximum amount of remaining funding under the agreement is $113.9 billion. If we were to draw additional funds from Treasury under the agreement with respect to a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw. The senior preferred stock purchase agreement provides that the deficiency amount will be calculated differently if we become subject to receivership or other liquidation process.

Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the senior preferred stock purchase agreement. The amount of remaining funding under the agreement also would not change if the full quarterly dividend amount were not declared and paid to Treasury.

Treasury’s funding commitment under the senior preferred stock purchase agreement has no expiration date. The agreement provides that Treasury’s funding commitment will terminate under any of the following circumstances: (1) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding commitment at that time; (2) the payment in full of, or reasonable provision for, all of our liabilities (whether or not contingent, including mortgage guaranty obligations); or (3) the funding by Treasury of the maximum amount that may be funded under the agreement. In addition, Treasury may terminate its funding commitment and declare the agreement null and void if a court vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of the conservator or otherwise curtails the conservator’s powers. Treasury may not terminate its funding commitment under the agreement solely by reason of our being in conservatorship, receivership or other insolvency proceeding, or due to our financial condition or any adverse change in our financial condition.

Most provisions of the senior preferred stock purchase agreement may be waived or amended by mutual agreement of the parties; however, no waiver or amendment of the agreement is permitted that would decrease Treasury’s aggregate funding commitment or add conditions to Treasury’s funding commitment if the waiver or amendment would adversely affect in any material respect the holders of our debt securities or guaranteed Fannie Mae MBS.

In the event of our default on payments with respect to our debt securities or guaranteed Fannie Mae MBS, if Treasury fails to perform its obligations under its funding commitment and if we and/or the conservator are not diligently pursuing remedies with respect to that failure, any holder of such defaulted debt securities or Fannie Mae MBS may file a claim in the United States Court of Federal Claims for relief requiring Treasury to fund us up to (1) the amount necessary to cure the payment defaults on our debt and Fannie Mae MBS, (2) the deficiency amount, or (3) the amount of remaining funding under the senior preferred stock purchase agreement, whichever is the least. Any payment that Treasury makes under those circumstances will be treated for all purposes as a draw under the agreement that will increase the liquidation preference of the senior preferred stock.

Senior Preferred Stock

Shares of the senior preferred stock have no par value and have a stated value and initial liquidation preference equal to $1,000 per share, for an aggregate initial liquidation preference of $1.0 billion. Under the terms of the senior preferred stock, the aggregate liquidation preference is increased by the following:


•	any amounts Treasury pays to us pursuant to its funding commitment under the senior preferred stock purchase agreement (a total of $119.8 billion as of the date of this filing),


•	any quarterly commitment fees that are payable but not paid in cash (no such fees have become payable, nor will they under the current terms of the agreement and the senior preferred stock), and


•	any dividends that are payable but not paid in cash to Treasury, regardless of whether or not they are declared.

In addition, the December 2017 letter agreement increased the aggregate liquidation preference of the senior preferred stock by $3.0 billion as of December 31, 2017.

Accordingly, the aggregate liquidation preference of the senior preferred stock was $123.8 billion as of December 31, 2018.

Treasury, as the holder of the senior preferred stock, is entitled to receive, when, as and if declared, out of legally available funds, cumulative quarterly cash dividends. The dividends we have paid to Treasury on the senior preferred stock during conservatorship have been declared by, and paid at the direction of, our conservator, acting as successor to the rights, titles, powers and privileges of the Board of Directors.

The dividend provisions of the senior preferred stock have been amended twice.


•	Original Dividend Rate. As originally issued, the senior preferred stock provided for cumulative quarterly cash dividends at an annual rate of 10% per year on the stock’s then-current liquidation preference. This dividend rate was applicable from the fourth quarter of 2008 through the fourth quarter of 2012.


•	“Net Worth Sweep” Amendment. As amended in August 2012, the senior preferred stock provides for a “net worth sweep” dividend. For each quarterly dividend period, the dividend amount is the amount, if any, by which our net



Fannie Mae 2018 Form 10-K		13



	Business \| Conservatorship, Treasury Agreements and Housing Finance Reform

worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. Our net worth is defined as the amount, if any, by which our total assets (excluding Treasury’s funding commitment and any unfunded amounts related to the commitment) exceed our total liabilities (excluding any obligation in respect of capital stock), in each case as reflected on our balance sheet prepared in accordance with GAAP. The applicable capital reserve amount was initially $3.0 billion for dividend periods in 2013 and decreased by $600 million each year until it reached $600 million for dividend periods in 2017. These provisions became applicable in the first quarter of 2013 and remain in effect as modified by the December 2017 letter agreement.

•

December 2017 Amendment. As amended in December 2017, the applicable capital reserve amount was increased to $3.0 billion. If we do not declare and pay the dividend amount in full for any dividend period for which dividends are payable, then the applicable capital reserve amount will thereafter be zero. The December 2017 letter agreement also reduced by $2.4 billion the dividend amount otherwise payable for the fourth quarter of 2017.

As a result of these amended dividend provisions, for each quarterly period beginning with the first quarter of 2018, dividends on the senior preferred stock accumulate and are payable based on the amount by which our net worth as of the end of the immediately preceding fiscal quarter exceeds $3.0 billion. If our net worth does not exceed the applicable capital reserve amount of $3.0 billion as of the end of the immediately preceding fiscal quarter, then dividends will neither accumulate nor be payable for such period.

The senior preferred stock ranks ahead of our common stock and all other outstanding series of our preferred stock, as well as any capital stock we issue in the future, as to both dividends and rights upon liquidation. As a result, if we are liquidated, the holder of the senior preferred stock is entitled to its then-current liquidation preference (which includes any accumulated but unpaid dividends) before any distribution is made to the holders of our common stock or other preferred stock.

The senior preferred stock provides that we may not, at any time, declare or pay dividends on, make distributions with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any common stock or other securities ranking junior to the senior preferred stock unless (1) full cumulative dividends on the outstanding senior preferred stock (including any unpaid dividends added to the liquidation preference) have been declared and paid in cash, and (2) all amounts required to be paid with the net proceeds of any issuance of capital stock for cash (as described in the following paragraph) have been paid in cash. Shares of the senior preferred stock