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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 March 31, 2019


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 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)

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



TABLE OF CONTENTS
		Page
PART I—Financial Information		1
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	49
	Condensed Consolidated Statements of Operations and Comprehensive Income	50
	Condensed Consolidated Statements of Cash Flows	51
	Condensed Consolidated Statements of Changes in Equity	52
	Note 1—Summary of Significant Accounting Policies	53
	Note 2—Consolidations and Transfers of Financial Assets	57
	Note 3—Mortgage Loans	59
	Note 4—Allowance for Loan Losses	64
	Note 5—Investments in Securities	66
	Note 6—Financial Guarantees	69
	Note 7—Short-Term and Long-Term Debt	69
	Note 8—Derivative Instruments	70
	Note 9—Segment Reporting	73
	Note 10—Equity	74
	Note 11—Concentrations of Credit Risk	74
	Note 12—Netting Arrangements	79
	Note 13—Fair Value	81
	Note 14—Commitments and Contingencies	92
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
	Introduction	1
	Executive Summary	2
	Legislation and Regulation	4
	Single Security Initiative	5
	Key Market Economic Indicators	7
	Consolidated Results of Operations	10
	Consolidated Balance Sheet Analysis	15
	Retained Mortgage Portfolio	16
	Total Book of Business	18
	Business Segments	19
	Single-Family Business	20
	Multifamily Business	35
	Liquidity and Capital Management	40
	Off-Balance Sheet Arrangements	44
	Risk Management	44
	Critical Accounting Policies and Estimates	46
	Impact of Future Adoption of New Accounting Guidance	46
	Forward-Looking Statements	46
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	94
Item 4.	Controls and Procedures	94
PART II—Other Information		97
Item 1.	Legal Proceedings	97
Item 1A.	Risk Factors	98
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	101
Item 3.	Defaults Upon Senior Securities	102
Item 4.	Mine Safety Disclosures	102
Item 5.	Other Information	102
Item 6.	Exhibits	102



Fannie Mae First Quarter 2019 Form 10-Q		i



		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 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 “Business—Conservatorship, Treasury Agreements and Housing Finance Reform,” “Business—Charter Act and Regulation” and “Risk Factors” in our Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”) and “Legislation and Regulation” and “Risk Factors” in this report.

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 2018 Form 10-K. You can find a “Glossary of Terms Used in This Report” in the MD&A of our 2018 Form 10-K.

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 “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 and in our 2018 Form 10-K.

Introduction

By federal charter, 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, who originate loans to borrowers. We do not originate loans or lend money directly to borrowers 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 access to credit and the supply of affordable housing. Our common stock is traded in the over-the-counter market and quoted on the OTCQB, operated by OTC Markets Group, Inc., under the ticker symbol “FNMA.”

Through our single-family and multifamily business segments, we provided $102 billion in liquidity to the mortgage market in the first quarter of 2019, which enabled the financing of approximately 527,000 home purchases, refinancings or rental units.

Fannie Mae Provided $102 Billion in Liquidity in the First Quarter of 2019



	$16.9B			171K Multifamily Rental Units



	$56.3B			229K Single-Family Home Purchases



	$28.8B			127K Single-Family Refinancings



	Unpaid Principal Balance			Units



Fannie Mae First Quarter 2019 Form 10-Q		1



		MD&A \| Executive Summary

Executive Summary

Summary of Our Financial Performance

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Quarterly Results

The decrease in our net income in the first quarter of 2019, compared with the first quarter of 2018, was primarily driven by:

•

a shift from fair value gains to fair value losses; and

•

a decrease in net interest income;

•

partially offset by an increase in our benefit for credit losses.

See “Consolidated Results of Operations” for more information on our financial results.

Net Worth. Our net worth of $5.4 billion as of March 31, 2019 reflects our comprehensive income of $2.4 billion for the first quarter of 2019 and $3.0 billion in retained capital reserves.

Financial Performance Outlook

Our long-term financial performance will depend in large part upon both the size of and our share of the U.S. mortgage market, which in turn will depend upon such factors as population growth, household formation and home price appreciation. While we expect to remain profitable on an annual basis for the foreseeable future, 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 factors 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)” in our 2018 Form 10-K and in “Consolidated Results of Operations—Credit-Related Income” in this report. Further, our implementation on January 1, 2020 of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (the “CECL standard”) will likely introduce additional volatility in our results thereafter as credit-related income or expense will include expected lifetime losses on our loans and other financial instruments subject to the standard and thus become more sensitive to fluctuations in these factors.

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, which would result in a net worth deficit for



Fannie Mae First Quarter 2019 Form 10-Q		2



		MD&A \| Executive Summary

that quarter. For example, our implementation of the CECL standard will likely decrease, perhaps substantially, our retained earnings and increase our allowance for credit losses, which could result in a net worth deficit when we adopt the guidance in the first quarter of 2020. If we experience a net worth deficit in a future quarter, we will be required to draw funds from Treasury under our senior preferred stock purchase agreement with Treasury to avoid being placed into receivership. See “Risk Factors” in our 2018 Form 10-K 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 in 2008.

The chart below shows all of the funds we have drawn from Treasury pursuant to the senior preferred stock purchase agreement, as well as all of the dividends we have paid to Treasury on the senior preferred stock.

Treasury Draws and Dividend Payments: 2008 - Q1 2019

(Dollars in billions)

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⁽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.

We expect to pay Treasury a second quarter 2019 dividend of $2.4 billion by June 30, 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. We refer to this as a “net worth sweep” dividend.

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 “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” in our 2018 Form 10-K.

Although Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock and has made a commitment under the 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.



Fannie Mae First Quarter 2019 Form 10-Q		3



	MD&A \| Legislation and Regulation

Legislation and Regulation

The information in this section and in the following section on the Single Security Initiative updates and supplements information regarding legislative and regulatory developments affecting our business set forth in “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” and “Business—Charter Act and Regulation” in our 2018 Form 10-K. Also see “Risk Factors” in this report and in our 2018 Form 10-K for discussions of risks relating to legislative and regulatory matters.

Housing Finance Reform

On March 27, 2019, President Trump issued a memorandum directing the Secretary of the Treasury to develop a plan (the “Treasury Housing Reform Plan”) for administrative and legislative reforms for Fannie Mae and Freddie Mac (the “GSEs”) to achieve the following goals:


•	ending the conservatorships of the GSEs upon the completion of specified reforms;


•	facilitating competition in the housing finance market;


•	establishing regulation of the GSEs that safeguards their safety and soundness and minimizes the risks they pose to the financial stability of the United States; and


•	providing that the federal government is properly compensated for any explicit or implicit support it provides to the GSEs or the secondary housing finance market.

The memorandum states that the Treasury Housing Reform Plan shall include reform proposals to achieve the following specific objectives and, for those reforms that can be implemented administratively, include a timeline for implementation:


•	preserving access for qualified homebuyers to 30-year fixed-rate mortgages and other mortgage options that best serve the financial needs of potential homebuyers;


•	maintaining equal access to the federal housing finance system for lenders of all sizes, charter types, and geographic locations, including the maintenance of a cash window for loan sales;


•	establishing appropriate capital and liquidity requirements for the GSEs;


•	increasing competition and participation of the private sector in the mortgage market, including by authorizing FHFA to approve guarantors of conventional mortgage loans in the secondary market;


•	mitigating the risks undertaken by the GSEs, including by altering, if necessary, our respective policies on loan limits, program and product offerings, credit underwriting parameters, and the use of private capital to transfer credit risk;


•	recommending appropriate size and risk profiles for the GSEs’ retained mortgage and investment portfolios;


•	defining the role of the GSEs in multifamily mortgage finance;


•	defining the mission of the Federal Home Loan Bank system and its role in supporting federal housing finance;

•

evaluating, in consultation with the Secretary of the U.S. Department of Housing and Urban Development (“HUD”) and the Director of the Bureau of Consumer Financial Protection, the “QM Patch.” The QM patch refers to a special class of conventional mortgage loans that will be considered “qualified mortgages” under the Truth in Lending Act (“TILA”) if they (1) meet certain qualified mortgage requirements generally and (2) are eligible for sale to Fannie Mae or Freddie Mac;


•	defining the GSEs’ role in promoting affordable housing without duplicating support provided by the Federal Housing Administration (“FHA”) or other federal programs; and


•	setting the conditions necessary for the termination of the conservatorships of the GSEs, which shall include the following conditions being satisfied:


◦	the federal government is fully compensated for the explicit and implicit guarantees provided by it to the GSEs or any successor entities in the form of an ongoing payment to the United States;


◦	the GSEs’ activities are restricted to their core statutory mission and the size of investment and retained mortgage portfolios is appropriately limited; and


◦	the GSEs are subjected to heightened prudential requirements and safety and soundness standards, including increased capital requirements, designed to prevent a future taxpayer bailout and minimize risks to financial stability.

The memorandum also directs the Secretary of HUD to develop a plan for reforming FHA and Ginnie Mae. All plans are to be submitted to the President for approval as soon as practicable.



Fannie Mae First Quarter 2019 Form 10-Q		4



	MD&A \| Legislation and Regulation

We expect Congress, the Administration and FHFA to continue to consider housing finance reform, which 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—GSE and Conservatorship Risk” in our 2018 Form 10-K for more information on our uncertain future, including the risks to our business and profitability arising from our conservatorship status and potential housing finance reform.

Proposed Legislation Regarding CEO Responsibilities and Compensation

On April 11, 2019, legislation was introduced in the U.S. Senate that would prohibit either GSE from transferring or delegating any duty or responsibility of its chief executive officer, as of November 25, 2015, to any other position. The legislation would also provide that the Director of FHFA may be removed for cause for approving the compensation of any chief executive officer of a GSE at a level greater than that permitted under the Equity in Government Compensation Act of 2015, which caps the annual total direct compensation for the chief executive officers of the GSEs at $600,000 during conservatorship. If enacted, this legislation could negatively impact our business by requiring us to change our current management structure and limiting our ability to determine the roles and responsibilities of our executives in response to evolving business needs. In addition, uncertainty about and limitations on the amount and form of compensation we may pay executives and other employees impacts our ability to retain and recruit well-qualified executives and other employees. For more information on risks to our business relating to compensation limitations and legislative actions, see “Risk Factors.”

New FHFA Director

On April 15, 2019, Mark Calabria became the new Director of FHFA. As we discuss in “Risk Factors—GSE and Conservatorship Risk” in our 2018 Form 10-K, changes in leadership at FHFA could result in significant changes to FHFA’s goals for our conservatorship and have a material impact on our business and financial results.

2018 Housing Goals Performance

We are subject to housing goals established by FHFA, which call for a specified amount of mortgage loans we acquire to meet requirements relating to affordability or location. To meet our single-family housing goals, our performance must meet or exceed benchmarks established by FHFA or, if lower, the level of goals-qualifying originations in the primary mortgage market. To meet our multifamily housing goals, our performance must meet or exceed benchmarks established by FHFA. For 2018, we believe we met all of our single-family and multifamily benchmarks. Final performance results will be determined and published by FHFA sometime after the release later this year of 2018 data reported by primary mortgage market originators under the Home Mortgage Disclosure Act. For more information on our housing goals, see “Business—Charter Act and Regulation—GSE Act and Other Regulation” in our 2018 Form 10-K.

Affordable Housing Allocations

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”) requires us to set aside in each fiscal year an amount equal to 4.2 basis points of the unpaid principal balance of our new business purchases and to pay this amount to specified HUD and Treasury funds in support of affordable housing. New business purchases consist of single-family and multifamily whole mortgage loans purchased during the period and single-family and multifamily mortgage loans underlying Fannie Mae MBS issued during the period pursuant to lender swaps, which we describe in “Business—Mortgage Securitizations” in our 2018 Form 10-K. We are prohibited from passing through the cost of these allocations to the originators of the mortgage loans that we purchase or securitize. For each year’s new business purchases since 2015, we have set aside amounts for these contributions and transferred the funds when directed by FHFA to do so. See “Total Book of Business” for information on our contribution for 2018 new business purchases and our expense related to our 2019 new business purchases.

Single Security Initiative

Upcoming Transition to UMBS and Reliance on Common Securitization Platform

After five years of working on the Single Security Initiative with Freddie Mac, our jointly owned limited liability company, Common Securitization Solutions, LLC (“CSS”), and FHFA, we expect that in June 2019 we and Freddie Mac will start issuing single-family uniform mortgage-backed securities, or “UMBS.” At that time, we will also begin using the common securitization platform we have developed in conjunction with FHFA, Freddie Mac and CSS to perform certain aspects of the securitization process. The objective of the Single Security Initiative is to enhance the overall liquidity of Fannie Mae and Freddie Mac MBS eligible for forward trading in the to-be-announced (“TBA”) market by supporting their fungibility without regard to which company is the issuer. Forward trading of UMBS began in March 2019, and, as of April 25, 2019, $755 billion of UMBS had been traded in the TBA market for settlement beginning in June 2019.



Fannie Mae First Quarter 2019 Form 10-Q		5



	MD&A \| Single Security Initiative

The common securitization platform and the Single Security Initiative represent significant changes for the mortgage market and for our securitization operations and business. We expect that once we begin issuing UMBS, the vast majority of our single-family MBS will be issued as UMBS. See “Business—Mortgage Securitizations—Common Securitization Platform and Single Security Initiative” in our 2018 Form 10-K and “Risk Factors” in this report for more information on these efforts and the risks they present.

Final Rule on MBS Prepayment Rates

On February 28, 2019, FHFA issued a final rule to require Fannie Mae and Freddie Mac to align their programs, policies and practices that affect the prepayment rates of TBA-eligible MBS. The rule applies to Fannie Mae’s and Freddie Mac’s current offerings of TBA-eligible MBS and to the new UMBS expected to be issued starting in June 2019. In proposing the rule, FHFA noted that “[t]he industry has expressed concerns that Fannie Mae and Freddie Mac UMBS may not be truly fungible because differences in Fannie Mae and Freddie Mac policies could result in materially differing cash flows (as a result of, e.g., differing prepayment speeds).” FHFA, as conservator, had previously responded to industry input by imposing alignment mandates on Fannie Mae and Freddie Mac, and publishing a Prepayment Monitoring Report. The final rule codifies FHFA’s previous mandates and is intended to ensure that Fannie Mae and Freddie Mac programs, policies and practices that individually have a material effect on cash flows (including policies that affect prepayment speeds) are and will continue to be aligned.



Fannie Mae First Quarter 2019 Form 10-Q		6



	MD&A \| Key Market Economic Indicators

Key Market Economic Indicators

The graphs below display certain macroeconomic indicators that can significantly influence our business and financial results.

Selected Benchmark Interest Rates

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——— 3-month LIBOR⁽¹⁾	——— 2-year swap rate⁽¹⁾	——— 10-year swap rate⁽¹⁾
——— 10-year Treasury rate⁽¹⁾	——— 30-year Fannie Mae MBS par coupon rate⁽¹⁾	——— 30-year FRM rate⁽²⁾


⁽¹⁾	According to Bloomberg.


⁽²⁾	Refers to the U.S. weekly average fixed-rate mortgage rate according to Freddie Mac's Primary Mortgage Market Survey®. These rates are reported using the latest available data for a given period.

How Interest Rates Can Affect Our Financial Results

•

Net interest income. In a rising interest rate environment, our mortgage loans tend to prepay more slowly, which typically results in lower net amortization income from cost basis adjustments on mortgage loans and related debt. Conversely, in a declining interest rate environment, our mortgage loans tend to prepay faster, resulting in higher net amortization income from cost basis adjustments on mortgage loans and related debt.

•

Fair value gains (losses). We have exposure to fair value gains and losses resulting from changes in interest rates, primarily through our risk management derivatives and mortgage commitment derivatives, which we mark to market. Generally, we experience fair value losses when swap rates decrease and fair value gains when swap rates increase; however, because the composition of our derivative position varies across the yield curve, different yield curve changes (for example, parallel, steepening or flattening) will generate different gains and losses.

•

Credit-related income (expense). Increases in mortgage interest rates tend to lengthen the expected lives of our modified loans, which increases the impairment on these loans and results in increases in the provision for credit losses. Conversely, decreases in mortgage interest rates tend to shorten the expected lives of our modified loans, which reduces the impairment on these loans and results in decreases in the provision for credit losses.



Fannie Mae First Quarter 2019 Form 10-Q		7



	MD&A \| Key Market Economic Indicators

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We expect home price appreciation on a national basis to slow slightly in 2019, as compared with 2018. We also expect significant regional variation in the timing and rate of home price growth. For further discussion on housing activity, see “Single-Family Business—Single-Family Mortgage Market” and “Multifamily Business—Multifamily Mortgage Market.”

How home prices can affect our financial results

•

Actual and forecasted home prices impact our provision or benefit for credit losses.

•

Changes in home prices affect the amount of equity that borrowers have in their homes. Borrowers with less equity typically have higher delinquency and default rates.

•

As home prices increase, the severity of losses we incur on defaulted loans that we hold or guarantee decreases because the amount we can recover from the properties securing the loans increases. Decreases in home prices increase the losses we incur on defaulted loans.

⁽¹⁾

Calculated internally using property data on loans purchased by Fannie Mae, Freddie Mac, and other third-party home sales data. Fannie Mae’s home price index is a weighted repeat transactions index, measuring average price changes in repeat sales on the same properties. Fannie Mae’s home price index excludes prices on properties sold in foreclosure. Fannie Mae’s home price estimates are based on preliminary data and are subject to change as additional data become available.

https://cdn.kscope.io/429f9021f07c86281c44b16797bff414-chart-40ad8fa189b5e19340a.jpg

How housing activity can affect our financial results

•

Homebuilding has typically been a leading indicator of broader economic indicators, such as the U.S. Gross Domestic Product, or GDP, and the unemployment rate. Residential construction activity tends to soften prior to a weakness in the economy and can improve prior to a recovery in economic activity. Broader economic indicators can affect several mortgage market factors including the demand for both single-family and multifamily housing and the level of loan delinquencies.

•

Fewer housing starts results in fewer properties being available for purchase, which can lower the volume of originations in the mortgage market.

•

Construction activity can also affect credit losses. When the pace of construction does not meet demand, the resulting growth in home prices can increase the risk profile of new purchase money mortgage loans and increase the risk of default if home prices subsequently decline. Reduced construction may also coincide with a broader deterioration in housing conditions, which may result in higher future delinquencies and greater losses on defaulted loans.


⁽²⁾	According to U.S. Census Bureau and subject to revision.



Fannie Mae First Quarter 2019 Form 10-Q		8



	MD&A \| Key Market Economic Indicators

GDP, Unemployment Rate and Personal Income

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⁽¹⁾	According to the U.S. Bureau of Labor Statistics and subject to revision.


⁽²⁾	Personal income growth through the fourth quarter of 2018 is the quarterly average of the monthly series calculated by the Federal Reserve Bank of St. Louis. Growth in the first quarter of 2019 is based on January 2019 data, the most recent data available at the time this report was prepared.


⁽³⁾	According to the U.S. Bureau of Economic Analysis and subject to revision.

How GDP, the unemployment rate and personal income can affect our financial results


•	Changes in GDP, the unemployment rate and personal income can affect several mortgage market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies.


•	Decreases in the unemployment rate typically result in lower levels of delinquencies, which often correlate to a decrease in credit losses.


•	Slower growth or outright declines in personal income heightens the risk of delinquency by reducing homeowners’ ability to pay their mortgages. Slower income growth could also lower affordability, constraining home sales and mortgage originations.



Fannie Mae First Quarter 2019 Form 10-Q		9



	MD&A \| Consolidated Results of Operations

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.



Summary of Condensed Consolidated Results of Operations
		For the Three Months Ended March 31,
		For the Three Months Ended March 31,
		2019			2018			Variance
	(Dollars in millions)
Net interest income		$	4,733		$	5,232		$	(499	)
Fee and other income		227			320			(93		)
Net revenues		4,960			5,552			(592		)
Investment gains, net		133			250			(117		)
Fair value gains (losses), net		(831		)	1,045			(1,876		)
Administrative expenses		(744		)	(750		)	6
Credit-related income:
Benefit for credit losses		650			217			433
Foreclosed property expense		(140		)	(162		)	22
Total credit-related income		510			55			455
Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) fees		(593		)	(557		)	(36		)
Other expenses, net		(408		)	(203		)	(205		)
Income before federal income taxes		3,027			5,392			(2,365		)
Provision for federal income taxes		(627		)	(1,131		)	504
Net income		$	2,400		$	4,261		$	(1,861	)
Total comprehensive income		$	2,361		$	3,938		$	(1,577	)

Net Interest Income

We have two primary sources of net interest income:


•	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 our other investments portfolio (collectively, our “portfolios”) and the interest expense associated with the debt that funds those assets. See “Retained Mortgage Portfolio” and “Liquidity and Capital Management—Liquidity Management—Other Investments Portfolio” for more information about our portfolios.

Guaranty fees consist of two primary components:


•	base guaranty fees that we receive over the life of the loan; and


•	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 into net interest income as cost basis adjustments over the contractual life of the loan. We refer to this as amortization income.

We recognize almost all of our guaranty fee revenue in net interest income because we consolidate the substantial majority of loans underlying our Fannie Mae MBS in consolidated trusts on our consolidated balance sheets. 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.



Fannie Mae First Quarter 2019 Form 10-Q		10



	MD&A \| Consolidated Results of Operations

The table below displays the components of our net interest income from our guaranty book of business and from our portfolios.



Components of Net Interest Income
		For the Three Months Ended March 31,
		2019		2018		Variance
	(Dollars in millions)
Net interest income from guaranty book of business:
Base guaranty fee income, net of TCCA		$	2,259	$	2,089	$	170
Base guaranty fee income related to TCCA⁽¹⁾		593		557		36
Net amortization income		982		1,508		(526		)
Total net interest income from guaranty book of business		3,834		4,154		(320		)
Net interest income from portfolios⁽²⁾		899		1,078		(179		)
Total net interest income		$	4,733	$	5,232	$	(499	)


⁽¹⁾	Revenues generated by the 10 basis point guaranty fee increase we implemented pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us.


⁽²⁾	Includes interest income from assets held in our retained mortgage portfolio and our other investments portfolio, as well as other assets used to generate lender liquidity. Also includes interest expense on our outstanding Connecticut Avenue Securities^®of $382 million and $302 million for the first quarter of 2019 and 2018, respectively.

Net interest income from base guaranty fees increased in the first quarter of 2019 compared with the first quarter of 2018 due to an increase in the size of our guaranty book of business and loans with higher base guaranty fees comprising a larger part of our guaranty book of business in the first quarter of 2019 compared with the first quarter of 2018.

Net amortization income from our guaranty book of business decreased in the first quarter of 2019 compared with the first quarter of 2018 primarily due to lower amortization income from our guaranty book of business driven by a higher prevailing interest rate environment, which resulted in lower mortgage prepayment activity during the quarter.

We initially recognize mortgage loans and debt of consolidated trusts in our condensed consolidated balance sheet at fair value. The difference between the initial fair value and the carrying value of these instruments is recorded as cost basis adjustments, either as premiums or discounts. These cost basis adjustments are amortized as yield adjustments over the contractual lives of the loans or debt. On a net basis, for mortgage loans and debt of consolidated trusts, we are in a premium position with respect to debt of consolidated trusts, which represents deferred income we will recognize in our condensed consolidated statements of operations and comprehensive income as amortization income in future periods.

Deferred Income Represented by Net Premium Position on

Debt of Consolidated Trusts

(Dollars in billions)

https://cdn.kscope.io/429f9021f07c86281c44b16797bff414-chart-bf6403bc97dd5169b5b.jpg

The timing of when we recognize amortization income can vary based on a number of factors, the most significant of which is interest rates. In a rising interest rate environment, our mortgage loans tend to prepay more slowly, which typically results in lower net amortization income. Conversely, in a declining interest rate environment, our mortgage loans tend to prepay faster, resulting in higher net amortization income.



Fannie Mae First Quarter 2019 Form 10-Q		11



	MD&A \| Consolidated Results of Operations

Net interest income from portfolios decreased in the first quarter of 2019 compared with the first quarter of 2018 primarily due to a decline in the average balance of our retained mortgage portfolio. See “Retained Mortgage Portfolio” for more information.

A higher interest rate environment and possible decreases in our retained mortgage portfolio could result in a decrease in our net interest income in 2019.

Analysis of Net Interest Income

The table below 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.



Analysis of Net Interest Income and Yield
	For the Three Months Ended March 31,
	2019							2018
	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	$	119,495	$	1,323		4.43	%	$	163,134	$	1,736		4.26	%
Mortgage loans of consolidated trusts	3,153,383		28,445			3.61		3,048,711		26,298			3.45
Total mortgage loans⁽¹⁾	3,272,878		29,768			3.64		3,211,845		28,034			3.49
Mortgage-related securities	9,044		102			4.51		10,531		100			3.80
Non-mortgage-related securities⁽²⁾	60,833		378			2.49		51,707		207			1.60
Federal funds sold and securities purchased under agreements to resell or similar arrangements	41,533		263			2.53		37,389		142			1.52
Advances to lenders	3,703		32			3.46		3,844		31			3.23
Total interest-earning assets	$	3,387,991	$	30,543		3.61	%	$	3,315,316	$	28,514		3.44	%
Interest-bearing liabilities:
Short-term funding debt	$	20,712	$	(125	)	2.41	%	$	31,242	$	(106	)	1.36	%
Long-term funding debt	179,152		(1,114		)	2.49		214,397		(1,158		)	2.16
Connecticut Avenue Securities^®(“CAS”)	24,884		(382		)	6.14		22,473		(302		)	5.38
Total debt of Fannie Mae	224,748		(1,621		)	2.89		268,112		(1,566		)	2.34
Debt securities of consolidated trusts held by third parties	3,156,398		(24,189		)	3.07		3,050,041		(21,716		)	2.85
Total interest-bearing liabilities	$	3,381,146	$	(25,810	)	3.05	%	$	3,318,153	$	(23,282	)	2.81	%
Net interest income/net interest yield			$	4,733		0.56	%			$	5,232		0.63	%

⁽¹⁾

Average balance includes mortgage loans on nonaccrual status. A single-family loan is placed on nonaccrual status when the payment of principal or interest on the loan is 60 days or more past due. A multifamily loan is placed on nonaccrual status when the loan becomes 90 days or more past due according to its contractual terms or is deemed individually impaired. Typically, interest income on nonaccrual mortgage loans is recognized when cash is received. Interest income not recognized for loans on nonaccrual status was $111 million for the first quarter of 2019, compared with $168 million for the first quarter of 2018.


⁽²⁾	Consists of cash, cash equivalents and U.S Treasury securities.

Fair Value Gains (Losses), Net

The estimated fair value of our derivatives, trading securities and other financial instruments carried at 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. 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. We are developing capabilities to implement hedge accounting to reduce interest rate volatility in our consolidated statements of operations and comprehensive income.



Fannie Mae First Quarter 2019 Form 10-Q		12



	MD&A \| Consolidated Results of Operations

The table below displays the components of our fair value gains and losses.



Fair Value Gains (Losses), Net
		For the Three Months Ended March 31,
		2019			2018
	(Dollars in millions)
Risk management derivatives fair value gains (losses) attributable to:
Net contractual interest expense accruals on interest rate swaps		$	(266	)	$	(215	)
Net change in fair value during the period		(122		)	510
Total risk management derivatives fair value gains (losses), net		(388		)	295
Mortgage commitment derivatives fair value gains (losses), net		(300		)	564
Credit enhancement derivatives fair value gains (losses), net		(7		)	4
Total derivatives fair value gains (losses), net		(695		)	863
Trading securities gains, net		92			98
CAS debt fair value losses, net		(22		)	(8		)
Other, net⁽¹⁾		(206		)	92
Fair value gains (losses), net		$	(831	)	$	1,045


⁽¹⁾	Consists of fair value gains and losses on non-CAS debt and mortgage loans.

Fair value losses in the first quarter of 2019 were primarily driven by:


•	net interest expense accruals on our risk management derivatives combined with decreases in the fair value of our pay-fixed risk management derivatives due to declines in longer-term swap rates during the quarter, which were partially offset by increases in the fair value of our receive-fixed risk management derivatives;


•	decreases in the fair value of our mortgage commitment derivatives due to losses on commitments to sell mortgage-related securities as a result of increases in the prices of securities as interest rates decreased during the commitment periods; and


•	losses driven by increases in the fair value of long-term debt of consolidated trusts held at fair value.

Fair value gains in the first quarter of 2018 were primarily driven by:


•	increases in the fair value of our mortgage commitments due to gains on commitments to sell mortgage-related securities due to a decrease in prices as interest rates increased during the commitment periods; and


•	increases in the fair value of our pay-fixed risk management derivatives due to an increase in longer-term swap rates during the quarter.

Credit-Related Income

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 overall size of our allowance, events such as natural disasters, the types and volume of our loss mitigation activities, the volume of foreclosures completed, and redesignations of loans from HFI to HFS. In addition, our credit-related income or expense and our loss reserves can be impacted by updates to the models, assumptions and data used in determining our allowance for loan losses.

While the redesignation of certain reperforming and nonperforming single-family loans from HFI to HFS has been a significant driver of credit-related income in recent periods, we may see a reduced impact from this activity in the future to the extent the population of loans we are considering for redesignation declines. Further, our implementation of the CECL standard on January 1, 2020 will likely introduce additional volatility in our results thereafter as credit-related income or expense will include expected lifetime losses on our loans and other financial instruments subject to the standard and thus become more sensitive to fluctuations in the factors detailed above.



Fannie Mae First Quarter 2019 Form 10-Q		13



	MD&A \| Consolidated Results of Operations

Benefit for Credit Losses

The table below provides quantitative analysis of the drivers of our single-family benefit for credit losses for the periods presented. Many of the drivers that contribute to our benefit or provision for credit losses overlap or are interdependent. The attribution shown below is based on internal allocation estimates. The table does not display our multifamily benefit or provision for credit losses as the amounts for all periods presented were less than $50 million.



Components of Benefit for Credit Losses
	For the Three Months Ended March 31,
	2019	2018
	(Dollars in billions)
Single-family benefit for credit losses:
Changes in loan activity⁽¹⁾	$ *	$	(0.2	)
Redesignation of loans from HFI to HFS