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

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from     to         
Commission File No.: 0-50231
Federal National Mortgage Association
(Exact name of registrant as specified in its charter)
Fannie Mae
Federally chartered corporation
52-0883107
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
3900 Wisconsin Avenue, NW
Washington, DC
20016
(Zip Code)
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (800) 2FANNIE (800-232-6643)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer  o
Non-accelerated filer  o (Do not check if a smaller reporting company)
Smaller reporting company  o
Emerging growth company  o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ
As of March 31, 2017, there were 1,158,087,567 shares of common stock of the registrant outstanding.
 





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

Fannie Mae First Quarter 2017 Form 10-Q
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MD&A TABLE REFERENCE
Table
Description
Page
1
Summary of Condensed Consolidated Results of Operations
12
2
Analysis of Net Interest Income and Yield
13
3
Rate/Volume Analysis of Changes in Net Interest Income
14
4
Fair Value Losses, Net
15
5
Changes in Combined Loss Reserves
16
6
Troubled Debt Restructurings and Nonaccrual Loans
17
7
Credit Loss Performance Metrics
18
8
Summary of Condensed Consolidated Balance Sheets
19
9
Summary of Mortgage-Related Securities at Fair Value
20
10
Retained Mortgage Portfolio
21
11
Retained Mortgage Portfolio Profile
22
12
Composition of Mortgage Credit Book of Business
23
13
Single-Family Business Key Performance Data
25
14
Single-Family Business Financial Results
26
15
Representation and Warranty Status of Single-Family Conventional Loans Acquired in 2013-2017
28
16
Credit Risk Transfer Transactions
29
17
Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period
30
18
Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business
32
19
Delinquency Status and Activity of Single-Family Conventional Loans
35
20
Single-Family Conventional Seriously Delinquent Loan Concentration Analysis
36
21
Statistics on Single-Family Loan Workouts
37
22
Single-Family Foreclosed Properties
38
23
Multifamily Business Key Performance Data
40
24
Multifamily Business Financial Results
41
25
Multifamily Guaranty Book of Business Key Risk Characteristics
42
26
Activity in Debt of Fannie Mae
44
27
Outstanding Short-Term Borrowings and Long-Term Debt
46
28
Cash and Other Investments Portfolio
47
29
Mortgage Insurance Coverage
51
30
Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve
55
31
Derivative Impact on Interest Rate Risk (50 Basis Points)
56

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MD&A | Introduction


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

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MD&A | Introduction


Agreements,” “Business—Legislation and Regulation—Housing Finance Reform” and “Risk Factors” and in this report in “Legislation and Regulation” and “Risk Factors.”
Although Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock, and has made a commitment under a senior preferred stock purchase agreement to provide us with funds to maintain a positive net worth under specified conditions, the U.S. government does not guarantee our securities or other obligations.
Our common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol “FNMA.” Our debt securities are actively traded in the over-the-counter market.
Executive Summary
Summary of Our Financial Performance
We recognized comprehensive income and net income of $2.8 billion in the first quarter of 2017. In comparison, we recognized comprehensive income of $936 million in the first quarter of 2016, consisting of net income of $1.1 billion, partially offset by other comprehensive loss of $200 million. The increase in our net income in the first quarter of 2017 compared with the first quarter of 2016 was primarily driven by lower fair value losses and higher net interest income, partially offset by lower credit-related income.
The table below highlights our financial results and key performance data. The performance measures shown below are discussed in later sections of the MD&A. See “MD&A—Consolidated Results of Operations” for more information on our financial results.

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MD&A | Executive Summary


Financial Results and Key Performance Data
 
First Quarter of 2017
First Quarter of 2016
Comprehensive income 
$2.8 billion
$936 million
Net income
$2.8 billion
$1.1 billion
Net interest income
      
The increase in net interest income was due to an increase in guaranty fee income partially offset by a decline in the average balance of our retained mortgage portfolio. We receive guaranty fee income as compensation for managing the credit risk on loans underlying Fannie Mae MBS held by third parties.
$5.3 billion
$4.8 billion
Net fair value losses
     
Fair value losses in the first quarter of 2017 were primarily due to losses on Connecticut Avenue SecuritiesTM (“CAS”) debt reported at fair value resulting from tightening spreads between CAS yields and LIBOR during the quarter. These fair value losses were partially offset by gains on risk management derivatives primarily due to increases in longer-term swap rates during the first quarter of 2017.
    
Fair value losses in the first quarter of 2016 were primarily due to losses on our risk management derivatives resulting from decreases in longer-term swap rates.
($40 million)
($2.8 billion)
Credit-related income
    
Credit-related income in the first quarter of 2017 was primarily driven by an increase in actual and forecasted home prices.
      
Credit-related income in the first quarter of 2016 was primarily due to decreasing interest rates and an increase in actual home prices.
$179 million
$850 million
Retained mortgage portfolio as of quarter end
$268.8 billion
$332.6 billion
Single-family guaranty book of business as of quarter end
$2.9 trillion
$2.8 trillion
Net worth as of quarter end
$3.4 billion
$2.1 billion
Capital reserve amount applicable to quarterly dividend payment to Treasury
$600 million
$1.2 billion
Dividends paid to Treasury in the quarter
   
First quarter 2017 dividend payment was based on our net worth as of December 31, 2016, less the applicable capital reserve amount.
   
First quarter 2016 dividend payment was based on our net worth as of December 31, 2015, less the applicable capital reserve amount.
$5.5 billion
$2.9 billion
We expect volatility from period to period in our financial results from a number of factors, particularly changes in market conditions that result in fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings. These instruments include derivatives and certain securities whose estimated fair value may fluctuate substantially from period to period because of changes in interest rates, the yield curve, mortgage and credit spreads, and implied volatility, as well as activity related to these financial instruments. We use derivatives to manage the interest rate risk exposure of our net portfolio, which consists of our retained mortgage portfolio, cash and other investments portfolio, and outstanding debt of Fannie Mae. Some of these financial instruments in our net portfolio are not recorded at fair value in our condensed consolidated financial statements, and as a result we may experience accounting gains or losses due to changes in interest rates or other market conditions that may not be indicative of the economic interest rate risk exposure of our net portfolio. See “Risk Management—Market Risk Management, Including Interest Rate Risk Management” for more information. In addition, our credit-related income or expense can vary substantially from period to period based on a number of factors such as changes in actual and expected home prices, fluctuations in interest rates, borrower payment behavior, the types and volume of our loss mitigation activities, the volume of foreclosures completed, and redesignations of loans from held for investment (“HFI”) to held for sale (“HFS”).
Our Strategy and Business Objectives
Our vision is to be America’s most valued housing partner and to provide liquidity, access to credit and affordability in all U.S. housing markets at all times, while effectively managing and reducing risk to our business, taxpayers and the housing finance system. In support of this vision, we are focused on:

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MD&A | Executive Summary


advancing a sustainable and reliable business model that reduces risk to the housing finance system and taxpayers;
providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners; and
serving customer needs by building a company that is efficient, innovative and continuously improving.
Advancing a sustainable and reliable business model that reduces risk to the housing finance system and taxpayers
We have significantly changed our business model since we entered conservatorship in 2008 and our business continues to evolve. We have strengthened our underwriting and eligibility standards and transitioned from a portfolio-focused business to a guaranty-focused business. In addition, we are transferring an increasing portion of the credit risk on our guaranty book of business. These changes have transformed our business model and reduced certain risks of our business as compared with our business prior to entering conservatorship.
Our business also continues to evolve as a result of our many other efforts to build a safer and sustainable housing finance system and to pursue the strategic goals identified by our conservator. See “Business—Legislation and Regulation—Housing Finance Reform—Conservator Developments and Strategic Goals” in our 2016 Form 10-K for a discussion of some of these efforts and FHFA’s strategic goals for our conservatorship.
Stronger underwriting and eligibility standards
We strengthened our underwriting and eligibility standards for loans we acquired beginning in late 2008 and 2009. These changes improved the credit quality of our single-family guaranty book of business and contributed to improvement in our credit performance. As of March 31, 2017, 88% of our single-family conventional guaranty book of business consisted of loans acquired since 2009. Our single-family serious delinquency rate has decreased each quarter since the first quarter of 2010 and was 1.12% as of March 31, 2017.
https://cdn.kscope.io/c8256551c7fd512646ca380dd77db43a-fanniemaeq1_chart-11451.jpg
__________
*
We have acquired HARP loans and other Refi Plus loans under our Refi PlusTM initiative since 2009. Our Refi Plus initiative offers refinancing flexibility to eligible borrowers who are current on their loans and whose loans are owned or guaranteed by us and meet certain additional criteria. HARP loans, which have loan-to-value (“LTV”) ratios at origination greater than 80%, refers to loans we have acquired pursuant to the Home Affordable Refinance Program® (“HARP®”). Other Refi Plus loans, which have LTV ratios at origination of 80% or less, refers to loans we have acquired under our Refi Plus initiative other than HARP loans. Loans we acquire under Refi Plus and HARP are refinancings of loans that were originated prior to June 2009.

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MD&A | Executive Summary


See “Business Segments—Single-Family Business” for information on our recent single-family acquisitions and the credit performance of our single-family mortgage loans.
Transition to a guaranty-focused business
We have two primary sources of revenues: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets. Our retained mortgage portfolio refers to the mortgage-related assets we own (which excludes the portion of assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties).
As shown in the chart below, in recent periods, an increasing portion of our net interest income has been derived from guaranty fees, rather than from our retained mortgage portfolio assets. This shift has been driven by both the guaranty fee increases we implemented in 2012 and the reduction of our retained mortgage portfolio in accordance with the requirements of our senior preferred stock purchase agreement with Treasury and direction from FHFA. More than 75% of our net interest income for the first quarter of 2017 was derived from the loans underlying our Fannie Mae MBS in consolidated trusts, which primarily generate income through guaranty fees. We expect that guaranty fees will continue to account for an increasing portion of our net interest income.
https://cdn.kscope.io/c8256551c7fd512646ca380dd77db43a-fanniemaeq1_chart-12825.jpg
__________
*
Guaranty fee income reflects the impact of a 10 basis point guaranty fee increase implemented in 2012 pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011, the incremental revenue from which is remitted to Treasury and not retained by us.
Transferring a portion of the mortgage credit risk on our single-family book of business
In late 2013, we began entering into credit risk transfer transactions with the goal of transferring, to the extent economically sensible, a portion of the mortgage credit risk on some of the recently-acquired loans in our single-family book of business in order to reduce the economic risk to us and to taxpayers of future borrower defaults. Our primary method of achieving this objective has been through our CAS and Credit Insurance Risk TransferTM (“CIRTTM”) transactions. In these transactions, we transfer to investors a portion of the mortgage credit risk associated with losses on a reference pool of mortgage loans and in exchange we pay investors a premium that effectively reduces the guaranty fee income we retain on the loans. As of March 31, 2017, $723 billion in outstanding unpaid principal balance of our single-family loans, or approximately 26% of the loans in our single-family conventional guaranty book of business measured by unpaid principal balance, were included in a

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MD&A | Executive Summary


reference pool for a credit risk transfer transaction. Over time, we expect that a larger portion of our single-family conventional guaranty book of business will be covered by credit risk transfer transactions.
The chart below shows as of the dates specified the total outstanding unpaid principal balance of our single-family loans, as well as the percentage of our total single-family conventional guaranty book of business measured by unpaid principal balance, that were included in a reference pool for a credit risk transfer transaction.
https://cdn.kscope.io/c8256551c7fd512646ca380dd77db43a-fanniemaeq1_chart-14480.jpg
For further discussion of our credit risk transfer transactions, including information on the portion of the credit risk of these loans we have transferred, see “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk: Credit Risk Transfer Transactions.”
Providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners
We continued to provide reliable, large-scale access to affordable mortgage credit to the U.S. housing market and to help struggling homeowners in the first quarter 2017:
We provided approximately $136 billion in liquidity to the mortgage market in the first quarter of 2017 through our purchases of loans and guarantees of loans and securities. This liquidity enabled borrowers to complete approximately 303,000 mortgage refinancings and approximately 233,000 home purchases, and provided financing for approximately 202,000 units of multifamily housing.
We provided approximately 25,000 loan workouts in the first quarter of 2017 to help homeowners stay in their homes or otherwise avoid foreclosure.
We helped borrowers refinance loans, including through our Refi PlusTM initiative, which offers refinancing flexibility to eligible borrowers who are current on their loans, whose loans are owned or guaranteed by us and who meet certain additional criteria. We acquired approximately 33,000 Refi Plus loans in the first quarter of 2017. Refinancings delivered to us through Refi Plus in the first quarter of 2017 reduced borrowers’ monthly mortgage payments by an average of $213.
We support affordability in the multifamily rental market. This has become more challenging in recent years as rent growth has outpaced wage growth, causing units once affordable at 120% of area median income to be affordable only at higher levels. Approximately 85% of the multifamily units we financed in the first quarter of 2017 were affordable to families earning at or below 120% of the median income in their area, providing support for both workforce housing and affordable housing.
Serving customer needs by building a company that is efficient, innovative and continuously improving
We are committed to providing our lender customers with the products, services and tools they need to serve the housing market more effectively and efficiently, as well as continuing to improve our business processes. For information on enhancements we have recently made or are currently working on, see “Business—Executive Summary—Our Strategy and Business Objectives” in our 2016 Form 10-K.

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MD&A | Executive Summary


Treasury Draws and Dividend Payments
Treasury has made a commitment under a senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. Pursuant to this agreement and the senior preferred stock we issued to Treasury in 2008, the Director of FHFA has directed us to pay dividends to Treasury on a quarterly basis since entering into conservatorship in 2008.
The chart below shows the funds we have drawn from Treasury pursuant to the senior preferred stock purchase agreement, as well as the dividend payments we have made to Treasury on the senior preferred stock, since entering into conservatorship.
https://cdn.kscope.io/c8256551c7fd512646ca380dd77db43a-fanniemaeq1_chart-11246.jpg
__________
(1) 
Under the terms of the senior preferred stock purchase agreement, dividend payments we make to Treasury do not offset our prior draws of funds from Treasury, and we are not permitted to pay down draws we have made under the agreement except in limited circumstances. Accordingly, the current aggregate liquidation preference of the senior preferred stock is $117.1 billion, due to the initial $1.0 billion liquidation preference of the senior preferred stock (for which we did not receive cash proceeds) and the $116.1 billion we have drawn from Treasury. Amounts may not sum due to rounding.
(2) 
Treasury draws are shown in the period for which requested, not when the funds were received by us. We have not requested a draw for any period since 2012.
We expect to pay Treasury a dividend of $2.8 billion for the second quarter of 2017 by June 30, 2017, calculated based on our net worth of $3.4 billion as of March 31, 2017, less the current capital reserve amount of $600 million. We expect to retain only a limited amount of any future net worth because we are required by the dividend provisions of the senior preferred stock and quarterly directives from our conservator to pay Treasury each quarter any dividends declared consisting of the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. This capital reserve amount is $600 million for each quarter of 2017 and will decrease to zero in 2018. These dividend payment provisions are referred to as “net worth sweep” dividend provisions.
If we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership. As of the date of this filing, the maximum amount of remaining funding under the agreement is $117.6 billion. If we were to draw additional funds from Treasury under the agreement in a future period, the amount of remaining funding 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

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MD&A | Executive Summary


of the senior preferred stock purchase agreement and the senior preferred stock, see “Business—Conservatorship and Treasury Agreements—Treasury Agreements” in our 2016 Form 10-K. See “Risk Factors” in our 2016 Form 10-K for a discussion of the risks associated with our limited and declining capital reserves, and “Outlook” in this report for our current expectations about our future financial results.
As described in “Legal Proceedings” and “Note 15, Commitments and Contingencies,” several lawsuits have been filed by preferred and common stockholders of Fannie Mae and Freddie Mac against one or more of the United States, Treasury and FHFA challenging actions taken by the defendants relating to the senior preferred stock purchase agreements and the conservatorships of Fannie Mae and Freddie Mac, including challenges to the net worth sweep dividend provisions of the senior preferred stock. We are also a party to some of those lawsuits. We cannot predict the course or the outcome of these lawsuits, or the actions the U.S. government (including Treasury or FHFA) may take in response to any ruling or finding in any of these lawsuits.
2017 Market Share
We were the largest issuer of single-family mortgage-related securities in the secondary market in the first quarter of 2017, with an estimated market share of new single-family mortgage-related securities issuances of 39%, compared with 41% in the fourth quarter of 2016 and 37% in the first quarter of 2016. The chart below shows our market share of single-family mortgage-related securities issuances in the first quarter of 2017 compared with that of our primary competitors.
https://cdn.kscope.io/c8256551c7fd512646ca380dd77db43a-fanniemaeq1_chart-11470.jpg
We remained a continuous source of liquidity in the multifamily market in the first quarter of 2017. We owned or guaranteed approximately 19% of the outstanding debt on multifamily properties as of December 31, 2016 (the latest date for which information is available).
Outlook
In this section, we present a number of estimates and expectations regarding our future performance, as well as future housing market conditions. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous factors. See “Forward-Looking Statements” and “Risk Factors” in this report and in our 2016 Form 10-K for discussions of factors that could cause actual results to differ materially from our current estimates and expectations. Due to the large size of our guaranty book of business, even small changes in these factors could have a significant impact on our financial results for a particular period.
Financial Results. We continued to be profitable in the first quarter of 2017, with net income of $2.8 billion. We expect to remain profitable on an annual basis for the foreseeable future; however, certain factors, such as changes in interest rates or home prices, could result in significant volatility in our financial results from quarter to quarter or year to year. Our future financial results also will be affected by a number of other factors, including: our guaranty fee rates; the volume of single-family mortgage originations in the future; the size, composition and quality of our retained mortgage portfolio and guaranty book of business; and economic and housing market conditions. Although we expect to remain profitable on an annual basis for the foreseeable future, due to our

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MD&A | Executive Summary


limited and declining capital reserves (which decrease to zero in 2018) and the potential for significant volatility in our financial results, we could experience a net worth deficit in a future quarter. If we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement to avoid being placed into receivership.
Our expectations for our future financial results do not take into account the impact on our business of potential future legislative or regulatory changes, which could have a material impact on our financial results, particularly the enactment of housing finance reform legislation, corporate income tax reform legislation and changes in accounting standards. For example, the current Administration proposes reducing the U.S. corporate income tax rate. Under applicable accounting standards, a significant reduction in the U.S. corporate income tax rate would require that we record a substantial reduction in the value of our deferred tax assets in the quarter in which the legislation is enacted. Thus, if legislation significantly lowering the U.S. corporate income tax rate is enacted, we expect to incur a significant net loss and net worth deficit for the quarter in which the legislation is enacted and we could potentially incur a net loss for that year. As noted above, if we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership.
See “Risk Factors” in this report and in our 2016 Form 10-K for discussions of the risks associated with our limited and declining capital reserves and the potential impact of legislative and regulatory actions.
Revenues. We have two primary sources of revenues: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets.
Our guaranty fee revenues consist of two primary components: (1) the base guaranty fees that we receive over the life of the loan; and (2) upfront fees we receive at loan acquisition which are amortized over the contractual life of the loan. When mortgage loans prepay faster due to a lower interest rate environment, we typically have higher amortization income. Conversely, when mortgage loans prepay more slowly due to a higher interest rate environment, we typically have lower amortization income. Our guaranty fee revenues increased in recent years primarily driven by: (1) loans with higher base guaranty fees comprising a larger part of our guaranty book of business; and (2) an increase in amortization income as a lower interest rate environment during portions of these years increased prepayments on mortgage loans. We expect loans with lower guaranty fees to continue to liquidate from our book of business and be replaced with new loans that typically have higher guaranty fees, which will contribute to increasing guaranty fee revenues; however, the impact of this trend on our guaranty fee revenues could be offset by lower amortization income if interest rates remain at higher levels and result in lower prepayments on mortgage loans. Accordingly, our guaranty fee revenues may remain relatively flat in the near term.
We expect the size of our retained mortgage portfolio to continue to decrease each year to meet the requirements of our senior preferred stock purchase agreement with Treasury and FHFA’s additional portfolio cap, which we describe in “Business—Conservatorship and Treasury Agreements—Treasury Agreements” in our 2016 10-K. These decreases in our retained mortgage portfolio will continue to negatively impact our net interest income and net revenues.
Factors that may affect our future revenues include: changes to guaranty fee pricing we may make in the future and their impact on our competitive environment and guaranty fee revenues; economic and housing market conditions, including changes in interest rates and home prices; the size, composition and quality of our guaranty book of business; the life of the loans in our guaranty book of business; the size, composition and quality of our retained mortgage portfolio; our market share; and legislative and regulatory changes.
Overall Market Conditions. While we expect the single-family serious delinquency rate for the overall mortgage market will continue to decline, we believe the rate of decline will be gradual. We expect the national single-family serious delinquency rate will remain high compared with pre-housing crisis levels because it will take some time for the remaining delinquent loans originated prior to 2009 to work their way through the foreclosure process.
We forecast that total originations in the U.S. single-family mortgage market in 2017 will decrease from 2016 levels by approximately 20% from an estimated $1.96 trillion in 2016 to $1.58 trillion in 2017, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will decrease from an estimated $949 billion in 2016 to $510 billion in 2017.

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MD&A | Executive Summary


Home Prices. Based on our home price index, we estimate that home prices on a national basis increased by 0.5% in the first quarter of 2017. We expect the rate of home price appreciation in 2017 to be slightly lower than the rate in 2016. We also expect significant regional variation in the timing and rate of home price growth.
Credit Losses. Our credit losses, which include our charge-offs, net of recoveries, reflect our realization of losses on our loans. Our credit losses were $1.2 billion for the first quarter of 2017, down from $1.6 billion for the first quarter of 2016. We expect our credit losses for 2017 to be lower than for 2016, absent further significant redesignations of loans from HFI to HFS; however, we expect a significantly smaller decline in credit losses for 2017 than the decline for 2016. See “Consolidated Results of Operations—Credit-Related Income (Expense)—Credit Loss Performance Metrics” for a discussion of our credit losses for the first quarter of 2017 and the first quarter of 2016.
Loss Reserves. Our allowance for loan losses was $22.1 billion as of March 31, 2017, down from $23.5 billion as of December 31, 2016. Our loss reserves declined in recent years and are expected to decline further in 2017; however, we expect a smaller decline in our loss reserves in 2017 than the decline in 2016. For a discussion of the factors that contributed to the decline in our loss reserves in the first quarter of 2017, see “Consolidated Results of Operations—Credit-Related Income (Expense)” and “Consolidated Balance Sheet Analysis—Mortgage Loans and Allowance for Loan Losses.”
Legislation and Regulation
The information in this section updates and supplements information regarding legislation and regulation affecting our business set forth in “Business—Legislation and Regulation” in our 2016 Form 10-K. Also see “Risk Factors” in this report and in our 2016 Form 10-K for discussions of risks relating to legislative and regulatory matters.
Housing Finance Reform
Congress continues to consider housing finance reform that could result in significant changes in our structure and role in the future. As a result, there continues to be significant uncertainty regarding the future of our company. See “Risk Factors” for a discussion of the risks to our business relating to the uncertain future of our company.
Single Security Initiative. Since 2014, we, Freddie Mac and FHFA have been working on developing and implementing a common mortgage-backed security for Fannie Mae and Freddie Mac. In March 2017, FHFA announced that implementation of the Single Security Initiative by Fannie Mae and Freddie Mac is planned for the second quarter of 2019.
Historically, Fannie Mae MBS have 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. As the implementation date of the Single Security Initiative approaches, some Fannie Mae MBS and comparable Freddie Mac PCs are trading closer to or at parity. See “Business—Legislation and Regulation—Housing Finance Reform—Conservator Developments and Strategic Goals” and “Risk Factors” in our 2016 Form 10-K for more information on the expected features of the securities and a discussion of the risks to our business associated with the Single Security Initiative for Fannie Mae and Freddie Mac.
The Fannie and Freddie Open Records Act of 2017
On April 27, 2017, the House of Representatives passed, by a vote of 425 to 0, the Fannie and Freddie Open Records Act of 2017. If enacted, this bill would subject Fannie Mae and Freddie Mac to the Freedom of Information Act, a law that provides the public the right to access records from federal agencies. The bill provides an exemption for trade secrets and confidential or privileged commercial or financial information. It is unclear whether the Senate will consider this or similar legislation. If this bill were to pass the Senate and be signed into law, it could impose substantial operational burdens on us and adversely affect our business. 

Fannie Mae First Quarter 2017 Form 10-Q
10


 
MD&A | Legislation and Regulation


Housing Goals
2016 Housing Goals Performance
We are subject to housing goals, which establish specified requirements for our mortgage acquisitions relating to affordability or location. Our single-family performance is measured against the lower of benchmarks established by FHFA or goals-qualifying originations in the primary mortgage market. Multifamily goals are established as a number of units to be financed.
For 2016, we believe we met two of our five single-family benchmarks. The single-family benchmarks we believe we did not meet were the low-income families home purchase and refinance benchmarks and the very low-income families home purchase benchmark. Low-income families are defined as those with income equal to or less than 80% of area median income, and very low-income families as those with income equal to or less than 50% of area median income. In addition, we believe we met our multifamily goal and subgoals for 2016. Final performance results will be determined and published by FHFA sometime after the release in the fall of 2017 of data reported by primary market originators under the Home Mortgage Disclosure Act. To determine whether we met our low-income families home purchase and refinance goals and our very low-income families home purchase goal, FHFA will compare our performance with that of the market. We will be in compliance with these goals if we meet the applicable market share measures for these goals.
2017 Single-Family Housing Goals: Low-Income Areas Home Purchase Goal Benchmark
Each year, FHFA sets the benchmark level for our acquisitions of single-family owner-occupied home purchase mortgage loans for families in low-income areas based on the benchmark level for the low-income areas home purchase subgoal (which is 14% for 2017), plus an adjustment factor reflecting an additional incremental share of mortgages for moderate-income families (defined as income equal to or less than 100% of area median income) in designated disaster areas. In April 2017, FHFA set the 2017 overall low-income areas home purchase benchmark goal at 18%.
See “Business—Legislation and Regulation—GSE Act and Other Regulation of Our Business—Housing Goals” in our 2016 Form 10-K for a more detailed discussion of our housing goals.
Ability to Repay
Regulation Z, which was issued by the Consumer Financial Protection Bureau (the “CFPB”) in 2013 to implement a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), requires lenders to determine a borrower’s “ability to repay” a mortgage loan. The rule offers several options for complying, including making loans that meet certain terms and characteristics (referred to as “qualified mortgages”). In March 2017, a CFPB official announced that the agency would soon begin its statutorily-mandated assessment of the ability to repay and qualified mortgage provisions. The CFPB is required to assess the effectiveness of the regulations in light of their stated goals and to publish a report, after public comment, on whether to modify, expand or eliminate the regulations. The CFPB’s assessment is due no later than January 10, 2019. To the extent that this assessment leads to regulatory changes in how lenders comply with the ability to repay rules or how loans gain qualified mortgage status, these changes may have a material effect on the quality and quantity of loans available for sale to Fannie Mae.

Fannie Mae First Quarter 2017 Form 10-Q
11


 
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.
Table 1: Summary of Condensed Consolidated Results of Operations
 
For the Three Months
 
Ended March 31,
 
2017
 
2016
 
Variance
 
(Dollars in millions)
Net interest income
$
5,346

 
$
4,769

 
$
577

Fee and other income
249

 
203

 
46

Net revenues
5,595

 
4,972

 
623

Investment gains (losses), net
(9
)
 
69

 
(78
)
Fair value losses, net
(40
)
 
(2,813
)
 
2,773

Administrative expenses
(684
)
 
(688
)
 
4

Credit-related income:
 
 
 
 
 
Benefit for credit losses
396

 
1,184

 
(788
)
Foreclosed property expense
(217
)
 
(334
)
 
117

Total credit-related income
179

 
850

 
(671
)
Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) fees
(503
)
 
(440
)
 
(63
)
Other expenses, net
(382
)
 
(264
)
 
(118
)
Income before federal income taxes
4,156

 
1,686

 
2,470

Provision for federal income taxes
(1,383
)
 
(550
)
 
(833
)
Net income
$
2,773

 
$
1,136

 
$
1,637

Total comprehensive income
$
2,779

 
$
936

 
$
1,843

Net Interest Income
We have two primary sources of net interest income: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets.
Guaranty fees consist of two primary components: (1) base guaranty fees that we receive over the life of the loan; and (2) upfront fees that we receive at the time of loan acquisition, primarily related to single-family loan level pricing adjustments and other fees we receive from lenders, which are amortized over the contractual life of the loan. We recognize almost all of our guaranty fee revenue in net interest income due to the consolidation of the substantial majority of loans underlying our Fannie Mae MBS in consolidated trusts on our balance sheet. Those guaranty fees are the primary component of the difference between the interest income on loans in consolidated trusts and the interest expense on the debt of consolidated trusts.

Fannie Mae First Quarter 2017 Form 10-Q
12


 
MD&A | Consolidated Results of Operations


Table 2 displays an analysis of our net interest income, average balances, and related yields earned on assets and incurred on liabilities. For most components of the average balances, we use a daily weighted average of amortized cost. When daily average balance information is not available, such as for mortgage loans, we use monthly averages. Table 3 displays the change in our net interest income between periods and the extent to which that variance is attributable to: (1) changes in the volume of our interest-earning assets and interest-bearing liabilities or (2) changes in the interest rates of these assets and liabilities.
Table 2: Analysis of Net Interest Income and Yield
 
For the Three Months Ended March 31,
 
2017
 
2016
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
(Dollars in millions)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of Fannie Mae
$
200,051

 
$
2,093

 
4.18
%
 
$
238,041

 
$
2,335

 
3.92
%
Mortgage loans of consolidated trusts
2,923,792

 
24,954

 
3.41

 
2,817,328

 
24,626

 
3.50

Total mortgage loans(1)
3,123,843

 
27,047

 
3.46

 
3,055,369

 
26,961

 
3.53

Mortgage-related securities, net
15,394

 
142

 
3.69

 
26,580

 
269

 
4.05

Non-mortgage-related securities(2)
55,994

 
101

 
0.72

 
50,257

 
54

 
0.43

Federal funds sold and securities purchased under agreements to resell or similar arrangements
40,586

 
66

 
0.65

 
24,195

 
29

 
0.48

Advances to lenders
4,506

 
28

 
2.49

 
3,546

 
19

 
2.12

Total interest-earning assets
$
3,240,323

 
$
27,384

 
3.38
%
 
$
3,159,947

 
$
27,332

 
3.46
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-term funding debt
$
32,454

 
$
43

 
0.53
%
 
$
60,085

 
$
50

 
0.33
%
Long-term funding debt
289,791

 
1,686

 
2.33

 
318,944

 
1,854

 
2.33

Total funding debt
322,245

 
1,729

 
2.15

 
379,029

 
1,904

 
2.01

Debt securities of consolidated trusts held by third parties
2,925,290

 
20,309

 
2.78

 
2,800,436

 
20,659

 
2.95

Total interest-bearing liabilities
$
3,247,535

 
$
22,038

 
2.71
%
 
$
3,179,465

 
$
22,563

 
2.84
%
Net interest income/net interest yield
 
 
$
5,346

 
0.66
%
 
 
 
$
4,769

 
0.60
%
 
As of March 31,
 
2017
 
2016
Selected benchmark interest rates
 
 
 
3-month LIBOR
1.15
%
 
0.63
%
2-year swap rate
1.62

 
0.84

5-year swap rate
2.05

 
1.17

10-year swap rate
2.38

 
1.64

30-year Fannie Mae MBS par coupon rate
3.13

 
2.57

__________
(1) 
Average balance includes mortgage loans on nonaccrual status. Typically, interest income on nonaccrual mortgage loans is recognized when cash is received. Interest income not recognized for loans on nonaccrual status was $216 million for the first quarter of 2017 compared with $338 million for the first quarter of 2016.
(2) 
Includes cash equivalents.

Fannie Mae First Quarter 2017 Form 10-Q
13


 
MD&A | Consolidated Results of Operations


Table 3: Rate/Volume Analysis of Changes in Net Interest Income
  
For the Three Months Ended
  
March 31, 2017 vs. 2016
  
Total
 
Variance Due to:(1)
  
Variance
 
Volume
 
Rate
 
(Dollars in millions)
Interest income:
 
 
 
 
 
Mortgage loans of Fannie Mae
$
(242
)
 
$
(390
)
 
$
148

Mortgage loans of consolidated trusts
328

 
917

 
(589
)
Total mortgage loans
86

 
527

 
(441
)
Mortgage-related securities, net
(127
)
 
(105
)
 
(22
)
Non-mortgage-related securities(2)
47

 
7

 
40

Federal funds sold and securities purchased under agreements to resell or similar arrangements
37

 
24

 
13

Advances to lenders
9

 
6

 
3

Total interest income
$
52

 
$
459

 
$
(407
)
Interest expense:
 
 
 
 
 
Short-term funding debt
(7
)
 
(29
)
 
22

Long-term funding debt
(168
)
 
(170
)
 
2

Total funding debt
(175
)
 
(199
)
 
24

Debt securities of consolidated trusts held by third parties
(350
)
 
950

 
(1,300
)
Total interest expense
$
(525
)
 
$
751

 
$
(1,276
)
Net interest income
$
577

 
$
(292
)
 
$
869

__________
(1) 
Combined rate/volume variances are allocated to rate and volume based on the relative size of each variance.
(2) 
Includes cash equivalents.
Net interest income and net interest yield increased in the first quarter of 2017 compared with the first quarter of 2016 was due to an increase in guaranty fee income driven by: (1) an increase in amortization income in the first quarter of 2017 due to activity related to increased prepayments on mortgage loans and liquidations of MBS debt of consolidated trusts, which accelerated the amortization of cost basis adjustments on the loans and related debt; and (2) loans with higher base guaranty fees comprising a larger part of our guaranty book of business in the first quarter of 2017 compared with the first quarter of 2016. The increase in net interest income due to higher guaranty fee income was partially offset by a decline in the average balance of our retained mortgage portfolio as we continued to reduce this portfolio. See “Retained Mortgage Portfolio” for more information.


Fannie Mae First Quarter 2017 Form 10-Q
14


 
MD&A | Consolidated Results of Operations


Fair Value Losses, Net
Table 4 displays the components of our fair value gains and losses.
Table 4: Fair Value Losses, Net
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(Dollars in millions)
Risk management derivatives fair value gains (losses) attributable to:
 
 
 
Net contractual interest expense accruals on interest rate swaps
$
(255
)
 
$
(269
)
Net change in fair value during the period
367

 
(2,102
)
Total risk management derivatives fair value gains (losses), net
112

 
(2,371
)
Mortgage commitment derivatives fair value losses, net
(80
)
 
(362
)
Total derivatives fair value gains (losses), net
32

 
(2,733
)
Trading securities gains, net
68

 
28

CAS debt fair value losses, net(1)
(162
)
 
(60
)
Other, net(2)
22

 
(48
)
Fair value losses, net
$
(40
)
 
$
(2,813
)
__________
(1) 
Consists of fair value losses on CAS debt reported at fair value.
(2) 
Consists of fair value gains and losses on non-CAS debt and mortgage loans.
Fair value losses in the first quarter of 2017 were primarily due to losses on CAS debt reported at fair value resulting from tightening spreads between CAS yields and LIBOR during the first quarter of 2017. These fair value losses in the first quarter of 2017 were partially offset by gains on risk management derivatives primarily due to increases in the fair value of our pay-fixed derivatives due to increases in longer-term swap rates during the first quarter of 2017.
Fair value losses in the first quarter of 2016 were primarily due to losses on risk management derivatives resulting from decreases in the fair value of our pay-fixed derivatives due to declines in longer-term swap rates during the first quarter of 2016.
Credit-Related Income (Expense)
We refer to our benefit (provision) for loan losses and benefit (provision) for guaranty losses collectively as our “benefit (provision) for credit losses.” Credit-related income (expense) consists of our benefit (provision) for credit losses and foreclosed property income (expense).
Benefit for Credit Losses
Our combined loss reserves provide for an estimate of credit losses incurred in our guaranty book of business, including concessions we granted borrowers upon modification of their loans. We establish our combined loss reserves through our provision for credit losses for losses that we believe have been incurred and will eventually be realized over time in our financial statements. When we reduce our combined loss reserves, we recognize a benefit for credit losses. When we determine that a loan is uncollectible, typically upon foreclosure or other liquidation event (such as a deed-in-lieu of foreclosure or a short sale), we recognize a charge-off against our combined loss reserves. For a subset of delinquent single-family loans, we charge off the portion of the loans that is deemed uncollectible prior to foreclosure when the loans have been delinquent for a specified length of time and meet specified mark-to-market LTV ratios. We also recognize a charge-off upon the redesignation of loans from HFI to HFS. We record recoveries of previously charged-off amounts as a reduction to charge-offs.

Fannie Mae First Quarter 2017 Form 10-Q
15


 
MD&A | Consolidated Results of Operations


Table 5 displays the changes in the combined loss reserves, which consists of the allowance for loan losses and the reserve for guaranty losses.
Table 5: Changes in Combined Loss Reserves
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(Dollars in millions)
Changes in combined loss reserves:
 
 
 
Beginning balance
$
23,835

 
$
28,590

Benefit for credit losses
(396
)
 
(1,184
)
Charge-offs
(1,062
)
 
(1,303
)
Recoveries
119

 
165

Other
30

 
64

Ending balance
$
22,526

 
$
26,332

 
As of
 
March 31, 2017
 
December 31, 2016
 
(Dollars in millions)
Allocation of combined loss reserves:
 
 
 
 
 
Balance at end of each period attributable to:
 
 
 
 
 
Single-family
$
22,326

 
 
$
23,639

 
Multifamily
200

 
 
196

 
       Total
$
22,526

 
 
$
23,835

 
Single-family and multifamily combined loss reserves as a percentage of applicable guaranty book of business:
 
 
 
 
 
Single-family
0.78

%
 
0.83

%
Multifamily
0.08

 
 
0.08

 
Combined loss reserves as a percentage of:
 
 
 
 
 
Total guaranty book of business
0.72

%
 
0.77

%
Recorded investment in nonaccrual loans
55.03

 
 
53.62

 
The amount of our provision or benefit for credit losses may vary from period to period based on a number of factors such as changes in actual and expected home prices, fluctuations in interest rates, borrower payment behavior, the types and volumes of our loss mitigation activities, the volume of foreclosures completed, and redesignations of loans from HFI to HFS. In addition, our provision or benefit for credit losses and our combined loss reserves can be impacted by updates to the models, assumptions and data used in determining our allowance for loan losses.
The following factors contributed to our benefit for credit losses in each of the periods presented:
We recognized a benefit for credit losses in the first quarter of 2017 primarily due to an increase in actual and forecasted home prices. Higher home prices decrease the likelihood that loans will default and reduce the amount of credit loss on loans that do default, which impacts our estimate of losses and ultimately reduces our total combined loss reserves and provision for credit losses.
We recognized a benefit for credit losses in the first quarter of 2016 primarily due to decreasing interest rates and an increase in actual home prices. Actual and projected mortgage interest rates declined during the first quarter of 2016. As mortgage interest rates decline, we expect an increase in future prepayments on single-family individually impaired loans, including modified loans. Higher expected prepayments shorten the expected lives of modified loans, which decreases the impairment relating to concessions provided on these loans and results in a decrease in the provision for credit losses. Home prices, including distressed property valuations, increased during the first quarter of 2016.

Fannie Mae First Quarter 2017 Form 10-Q
16


 
MD&A | Consolidated Results of Operations


We discuss our expectations regarding our future loss reserves in “Executive Summary—Outlook—Loss Reserves.”
Troubled Debt Restructurings and Nonaccrual Loans
Table 6 displays the composition of loans restructured in a troubled debt restructuring (“TDR”) that are on accrual status and loans on nonaccrual status. The table includes our recorded investment in HFI and HFS mortgage loans. For information on the impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 3, Mortgage Loans.”
Table 6: Troubled Debt Restructurings and Nonaccrual Loans
 
As of
 
March 31,
2017
 
December 31, 2016
 
(Dollars in millions)
TDRs on accrual status:
 
 
 
 
 
 
 
Single-family
 
$
126,193

 
 
 
$
127,353

 
Multifamily
 
140

 
 
 
141

 
Total TDRs on accrual status
 
$
126,333

 
 
 
$
127,494

 
Nonaccrual loans:
 
 
 
 
 
 
 
Single-family
 
$
40,554

 
 
 
$
44,047

 
Multifamily
 
383

 
 
 
403

 
Total nonaccrual loans
 
$
40,937

 
 
 
$
44,450

 
Accruing on-balance sheet loans past due 90 days or more(1)
 
$
369

 
 
 
$
402

 
 
For the Three Months
 
 
Ended March 31,
 
 
 
2017
 
 
 
2016
 
 
 
(Dollars in millions)
 
Interest related to on-balance sheet TDRs and nonaccrual loans:
 
 
 
 
 
 
 
Interest income forgone(2)
 
$
970

 
 
 
$
1,238

 
Interest income recognized for the period(3)
 
1,459

 
 
 
1,610

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

Fannie Mae First Quarter 2017 Form 10-Q
17


 
MD&A | Consolidated Results of Operations


Table 7 displays the components of our credit loss performance metrics as well as our single-family and multifamily initial charge-off severity rates.
Table 7: Credit Loss Performance Metrics
 
For the Three Months Ended March 31,
 
2017
 
2016
 
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
 
(Dollars in millions) 
Charge-offs, net of recoveries
$
943

 
12.1
bps
 
$
1,138

 
15.0
bps
Foreclosed property expense
217

 
2.8
 
 
334

 
4.4
 
Credit losses including the effect of fair value losses on acquired credit-impaired loans
1,160

 
14.9
 
 
1,472

 
19.4
 
Plus: Impact of acquired credit-impaired loans on charge-offs and foreclosed property expense(2)
61

 
0.8
 
 
100

 
1.3
 
Credit losses and credit loss ratio
$
1,221

 
15.7
bps
 
$
1,572

 
20.7
bps
Credit losses attributable to:
 
 
 
 
 
 
 
 
 
Single-family
$
1,221

 
 
 
 
$
1,569

 
 
 
Multifamily
0

 
 
 
 
3

 
 
 
     Total
$
1,221

 
 
 
 
$
1,572

 
 
 
Single-family initial charge-off severity rate(3)
 
 
16.97
%
 
 
 
23.16
%
Multifamily initial charge-off severity rate(3)(4)
 
 
0.00
%
 
 
 
15.35
%
__________
(1) 
Basis points are based on the annualized amount for each line item presented divided by the average guaranty book of business during the period.
(2) 
Includes fair value losses from acquired credit-impaired loans.
(3) 
Single-family and multifamily rates exclude fair value losses on credit-impaired loans acquired from MBS trusts and any costs, gains or losses associated with REO after initial acquisition through final disposition. The single-family rate includes charge-offs pursuant to the provisions of FHFA’s Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” and charge-offs of property tax and insurance receivables, while it excludes charge-offs from short sales and third-party sales. Multifamily rate is net of risk sharing agreements.
(4) 
Multifamily initial charge-off severity rate reflects one loan that was foreclosed on during the quarter without any credit losses.
We discuss our expectations regarding our future credit losses in “Executive Summary—Outlook—Credit Losses.”
Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) Fees
Pursuant to the TCCA, in 2012, FHFA directed us to increase our single-family guaranty fees by 10 basis points and remit this increase to Treasury. This TCCA-related revenue is included in “Net interest income” and the expense is recognized as “TCCA fees.” TCCA fees increased in the first quarter of 2017 compared with the first quarter of 2016 as our book of business subject to the TCCA continued to grow. We expect the guaranty fees collected and expenses incurred under the TCCA to continue to increase in the future.

Fannie Mae First Quarter 2017 Form 10-Q
18


 
MD&A | Consolidated Balance Sheet Analysis


Consolidated Balance Sheet Analysis
This section provides a discussion of our condensed consolidated balance sheets and should be read together with our condensed consolidated financial statements, including the accompanying notes.
Table 8: Summary of Condensed Consolidated Balance Sheets
 
As of
 
 
 
March 31, 2017
 
December 31, 2016
 
Variance
 
(Dollars in millions)
Assets 
 
 
 
 
 
Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar arrangements
$
60,248

 
$
55,639

 
$
4,609

Restricted cash
27,321

 
36,953

 
(9,632
)
Investments in securities(1)
45,405

 
48,925

 
(3,520
)
Mortgage loans:
 
 
 
 
 
Of Fannie Mae
192,204

 
207,190

 
(14,986
)
Of consolidated trusts
2,939,427

 
2,896,028

 
43,399

Allowance for loan losses
(22,129
)
 
(23,465
)
 
1,336

Mortgage loans, net of allowance for loan losses
3,109,502

 
3,079,753

 
29,749

Deferred tax assets, net
32,647

 
33,530

 
(883
)
Other assets
28,631

 
33,168

 
(4,537
)
Total assets
$
3,303,754

 
$
3,287,968

 
$
15,786

Liabilities and equity
 
 
 
 
 
Debt:
 
 
 
 
 
Of Fannie Mae
$
327,183

 
$
327,097

 
$
86

Of consolidated trusts
2,954,471

 
2,935,219

 
19,252

Other liabilities
18,721

 
19,581

 
(860
)
Total liabilities
3,300,375

 
3,281,897

 
18,478

Equity
3,379

 
6,071

 
(2,692
)
Total liabilities and equity
$
3,303,754

 
$
3,287,968

 
$
15,786

__________
(1) 
Includes $30.2 billion as of March 31, 2017 and $32.3 billion as of December 31, 2016 of U.S. Treasury securities that are included in our other investments portfolio.
Cash and Other Investments Portfolio
Our cash and other investments portfolio consists of cash and cash equivalents, securities purchased under agreements to resell or similar arrangements, and investments in U.S. Treasury securities. See “Liquidity and Capital ManagementLiquidity ManagementCash and Other Investments Portfolio” for additional information on our cash and other investments portfolio.
Restricted Cash
Restricted cash primarily includes unscheduled borrower payments received by servicers of loans backing consolidated trusts due to be remitted to the MBS certificateholders in the subsequent month. Our restricted cash decreased as of March 31, 2017 compared with the balance as of December 31, 2016 primarily as a result of a decrease in prepayments received on mortgage loans in March 31, 2017 compared with prepayments received in December 31, 2016.

Fannie Mae First Quarter 2017 Form 10-Q
19


 
MD&A | Consolidated Balance Sheet Analysis


Investments in Mortgage-Related Securities
Our investments in mortgage-related securities are classified in our condensed consolidated balance sheets as either trading or available-for-sale and are measured at fair value. Table 9 displays the fair value of our investments in trading and available-for-sale mortgage-related securities. We classify private-label securities as Alt-A, subprime or commercial mortgage-backed securities (“CMBS”) if the securities were labeled as such when issued. We have also invested in subprime private-label mortgage-related securities that we have resecuritized to include our guaranty.
Table 9: Summary of Mortgage-Related Securities at Fair Value
 
As of
 
March 31, 2017
 
December 31, 2016
 
(Dollars in millions)
Mortgage-related securities:
 
 
 
 
 
 
 
Fannie Mae
 
$
6,967

 
 
 
$
7,323

 
Other agency
 
2,523

 
 
 
2,605

 
Alt-A and subprime private-label securities
 
3,252

 
 
 
3,345

 
CMBS
 
855

 
 
 
1,580

 
Mortgage revenue bonds
 
1,205

 
 
 
1,293

 
Other mortgage-related securities
 
448

 
 
 
462

 
Total
 
$
15,250

 
 
 
$
16,608

 
The decrease in mortgage-related securities at fair value from December 31, 2016 to March 31, 2017 was primarily driven by liquidations.
See “Note 5, Investments in Securities” for additional information on our investments in mortgage-related securities, including the composition of our trading and available-for-sale securities at amortized cost and fair value and the gross unrealized gains and losses related to our available-for-sale securities as of March 31, 2017 and December 31, 2016.
Mortgage Loans and Allowance for Loan Losses
The increase in mortgage loans, net of allowance, from December 31, 2016 to March 31, 2017 was driven by an increase in mortgage loans of consolidated trusts as we continued to add to our guaranty book of business through securitization activity. Partially offsetting this was a decline in mortgage loans of Fannie Mae resulting from liquidations, portfolio securitizations and sales. For additional information on our mortgage loans, see “Note 3, Mortgage Loans.”
The decrease in our allowance for loan losses from December 31, 2016 to March 31, 2017 was driven primarily by redesignations of loans from held for investment to held for sale and charge-offs, which relieved the allowance on these loans, as well as an increase in actual and forecasted home prices. See “Consolidated Results of OperationsCredit-Related Income (Expense)Benefit for Credit Losses” for more information.
Other Assets
The decrease in other assets from December 31, 2016 to March 31, 2017 was primarily driven by a decrease in advances to lenders as a result of lower lender funding needs. For additional information on our accounting policy for advances to lenders, refer to “Note 1, Summary of Significant Accounting Policies” in our 2016 Form 10-K.
Debt
Debt of Fannie Mae is the primary means of funding our mortgage investments. Debt of consolidated trusts represents the amount of Fannie Mae MBS issued from consolidated trusts and held by third-party certificateholders. We provide a summary of the activity of the debt of Fannie Mae and a comparison of the mix between our outstanding short-term and long-term debt in “Liquidity and Capital ManagementLiquidity ManagementDebt Funding.” Also see “Note 7, Short-Term Borrowings and Long-Term Debt” for additional information on our outstanding debt.
Debt of Fannie Mae remained relatively flat from December 31, 2016 to March 31, 2017. The increase in debt of consolidated trusts from December 31, 2016 to March 31, 2017 was primarily driven by sales of Fannie Mae

Fannie Mae First Quarter 2017 Form 10-Q
20


 
MD&A | Consolidated Balance Sheet Analysis


MBS, which are accounted for as issuances of debt of consolidated trusts in our condensed consolidated balance sheets, since the MBS certificate ownership is transferred from us to a third party.
Stockholders’ Equity
Our net equity decreased as of March 31, 2017 compared with December 31, 2016 due to our payment of senior preferred stock dividends to Treasury during the first quarter of 2017, partially offset by our comprehensive income recognized during the first quarter of 2017.
Retained Mortgage Portfolio
Our retained mortgage portfolio consists of mortgage loans and mortgage-related securities that we own and includes Fannie Mae MBS and non-Fannie Mae mortgage-related securities. Assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties are not included in our retained mortgage portfolio.
The amount of mortgage assets that we may own is restricted by our senior preferred stock purchase agreement with Treasury and FHFA’s additional cap, as described in “BusinessConservatorship and Treasury AgreementsTreasury Agreements” in our 2016 Form 10-K. We plan to reduce our retained mortgage portfolio to no more than the FHFA cap of $259.6 billion as of December 31, 2017, which also would be in compliance with the senior preferred stock purchase agreement cap of $288.4 billion. Table 10 displays the unpaid principal balance of our retained mortgage portfolio.
Table 10: Retained Mortgage Portfolio
 
As of
 
March 31, 2017
 
December 31, 2016
 
(Dollars in millions)
Single-family:
 
 
 
 
 
 
 
Mortgage loans(1)
 
$
168,722

 
 
 
$
181,219

 
Reverse mortgages
 
28,720

 
 
 
29,443

 
Mortgage-related securities:
 
 
 
 
 
 
 
Agency securities(2)
 
37,901

 
 
 
25,667

 
Fannie Mae-wrapped reverse mortgage securities
 
7,245

 
 
 
7,420

 
Other Fannie Mae-wrapped securities
 
3,726

 
 
 
3,773

 
Private-label and other securities
 
4,788

 
 
 
4,980

 
Total single-family mortgage-related securities(3)
 
53,660

 
 
 
41,840

 
Total single-family mortgage loans and mortgage-related securities
 
251,102

 
 
 
252,502

 
Multifamily:
 
 
 
 
 
 
 
Mortgage loans(4)
 
7,297

 
 
 
9,407

 
Mortgage-related securities:
 
 
 
 
 
 
 
Agency securities(2)
 
8,478

 
 
 
7,693

 
CMBS
 
853

 
 
 
1,567

 
Mortgage revenue bonds
 
1,103

 
 
 
1,185

 
Total multifamily mortgage-related securities(5)
 
10,434

 
 
 
10,445

 
Total multifamily mortgage loans and mortgage-related securities
 
17,731

 
 
 
19,852

 
Total retained mortgage portfolio
 
$
268,833

 
 
 
$
272,354

 
__________
(1) 
Includes single-family loans restructured in a TDR that were on accrual status of $109.8 billion and $119.4 billion as of March 31, 2017 and December 31, 2016, respectively, and single-family loans on nonaccrual status of $36.2 billion and $38.7 billion as of March 31, 2017 and December 31, 2016, respectively.
(2) 
Includes Fannie Mae, Freddie Mac and Ginnie Mae mortgage-related securities, excluding Fannie Mae-wrapped reverse mortgage securities and other Fannie Mae-wrapped securities.

Fannie Mae First Quarter 2017 Form 10-Q
21


 
MD&A | Retained Mortgage Portfolio


(3) 
The fair value of these single-family mortgage-related securities was $55.3 billion and $42.9 billion as of March 31, 2017 and December 31, 2016, respectively.
(4) 
Includes multifamily loans restructured in a TDR that were on accrual status of $130 million and $131 million as of March 31, 2017 and December 31, 2016, respectively, and multifamily loans on nonaccrual status of $224 million and $246 million as of March 31, 2017 and December 31, 2016, respectively.
(5) 
The fair value of these multifamily mortgage-related securities was $11.2 billion as of March 31, 2017 and December 31, 2016.
We purchased $3.1 billion of loans from our single-family MBS trusts in the first quarter of 2017, the majority of which were delinquent.
We primarily use our retained mortgage portfolio to: (1) provide liquidity to the mortgage market and (2) support our loss mitigation activities. Previously, we also used our retained mortgage portfolio for investment purposes.
Table 11 below separates the instruments within our retained mortgage portfolio by unpaid principal balance into three categories based on each instrument’s use. “Lender liquidity,” which includes balances related to our whole loan conduit activity, supports our efforts to provide liquidity to the Single-Family and Multifamily mortgage markets. “Loss mitigation” supports our loss mitigation efforts through the purchase of delinquent loans from MBS trusts. “Other” represents assets that were previously purchased for investment purposes. More than half of the balance of “Other” consisted of reverse mortgage loans and Fannie Mae-wrapped reverse mortgage securities as of March 31, 2017 and December 31, 2016.
Table 11: Retained Mortgage Portfolio Profile
 
As of
 
March 31, 2017
 
December 31, 2016
 
Single-Family 
 
Multifamily
 
Total 
 
% of Mortgage Credit Book of Business
 
Single-Family 
 
Multifamily 
 
Total 
 
% of Mortgage Credit Book of Business
 
(Dollars in millions)
Lender liquidity
$
48,950

 
$
8,478

 
$
57,428

 
2
%
 
$
36,272

 
$
7,694

 
$
43,966

 
2
%
Loss mitigation
151,402

 
354

 
151,756

 
5

 
164,028

 
376

 
164,404

 
5

Other
50,750

 
8,899

 
59,649

 
2

 
52,202

 
11,782

 
63,984

 
2

Total
$
251,102

 
$
17,731

 
$
268,833

 
9
%
 
$
252,502

 
$
19,852

 
$
272,354

 
9
%
Mortgage Credit Book of Business
Table 12 displays the composition of our mortgage credit book of business based on unpaid principal balance. Our single-family mortgage credit book of business accounted for 92% of our mortgage credit book of business as of March 31, 2017 and December 31, 2016. While our mortgage credit book of business includes all of our mortgage-related assets, both on- and off-balance sheet, our guaranty book of business excludes non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.

Fannie Mae First Quarter 2017 Form 10-Q
22


 
MD&A | Mortgage Credit Book of Business


Table 12: Composition of Mortgage Credit Book of Business
 
As of
 
March 31, 2017
 
December 31, 2016
 
Single-Family 
 
Multifamily 
 
Total 
 
Single-Family 
 
Multifamily 
 
Total 
 
(Dollars in millions)
Mortgage loans and Fannie Mae MBS(1)
$
2,856,991

 
$
240,691

 
$
3,097,682

 
$
2,838,086

 
$
229,896

 
$
3,067,982

Unconsolidated Fannie Mae MBS, held by third parties(2)
7,313

 
1,107

 
8,420

 
7,795

 
1,159

 
8,954

Other credit guarantees(3)
2,098

 
12,927

 
15,025

 
2,193

 
13,142

 
15,335

Guaranty book of business
$
2,866,402

 
$
254,725

 
$
3,121,127

 
$
2,848,074

 
$
244,197

 
$
3,092,271

Other agency mortgage-related securities(4)
2,413

 

 
2,413

 
2,500

 

 
2,500

Other mortgage-related securities(5)
4,788

 
1,956

 
6,744

 
4,980

 
2,752

 
7,732

Mortgage credit book of business  
$
2,873,603

 
$
256,681

 
$
3,130,284

 
$
2,855,554

 
$
246,949

 
$
3,102,503

Guaranty Book of Business Detail:
 
 
 
 
 
 
 
 
 
 
 
Conventional Guaranty Book of Business(6)
$
2,822,247

 
$
253,414

 
$
3,075,661

 
$
2,802,572

 
$
242,834

 
$
3,045,406

Government Guaranty Book of Business(7)
$
44,155

 
$
1,311

 
$
45,466

 
$
45,502

 
$
1,363

 
$
46,865

__________
(1) 
Consists of mortgage loans and Fannie Mae MBS recognized in our condensed consolidated balance sheets. The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.
(2) 
The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.
(3) 
Consists of single-family and multifamily credit enhancements that we have provided and that are not otherwise reflected in the table.
(4) 
Consists of mortgage-related securities issued by Freddie Mac and Ginnie Mae.
(5) 
Primarily includes mortgage revenue bonds, Alt-A and subprime PLS, and CMBS.
(6) 
Consists of mortgage loans and mortgage-related securities that are not guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies.
(7) 
Consists of mortgage loans and mortgage-related securities guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies.
The GSE Act requires us to set aside each year an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of our total new business purchases and to pay this amount to specified U.S. Department of Housing and Urban Development and Treasury funds. 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. In February 2017, we paid $268 million to the funds based on our new business purchases in 2016. Our new business purchases were $136.0 billion for the first three months of 2017. Accordingly, we recognized an expense of $57 million related to this obligation for the first three months of 2017. We expect to pay this amount, plus additional amounts to be accrued based on our new business purchases in the remaining nine months of 2017, to the funds on or before March 1, 2018. See “Business—Legislation and Regulation—GSE Act and Other Regulation of Our Business—Affordable Housing Allocations” in our 2016 Form 10-K for more information regarding this obligation.

Fannie Mae First Quarter 2017 Form 10-Q
23


 
MD&A | Business Segments


Business Segments
Overview
We have two reportable business segments: Single-Family and Multifamily. Previously, we had a third reportable business segment, Capital Markets, which was incorporated into the Single-Family and Multifamily segments in the fourth quarter of 2016. Results of our two business segments are intended to reflect each segment as if it were a stand-alone business. We have revised the presentation of our segment results for the prior periods to be consistent with the current period presentation.
This section describes the following for each of our business segments:
market conditions relating to the business segment;
the segment’s business and financial results; and
credit risk management relating to the business segment.
This section should be read together with our comparative discussion of our condensed consolidated results of operations in “Consolidated Results of Operations.”
Single-Family Business
Single-Family Housing and Mortgage Market and Economic Conditions
According to the U.S. Bureau of Economic Analysis advance estimate, the inflation-adjusted U.S. gross domestic product, or GDP, rose by 0.7% on an annualized basis in the first quarter of 2017, compared with an increase of 2.1% in the fourth quarter of 2016. The overall economy gained an estimated 2.1 million non-farm jobs in the first quarter of 2017. According to the U.S. Bureau of Labor Statistics, over the 12 months ending in March 2017, the economy created an estimated 533,000 non-farm jobs. The unemployment rate was 4.5% in March 2017, compared with 4.7% in December 2016.
According to the Federal Reserve, total U.S. residential mortgage debt outstanding, which includes $10.3 trillion of single-family debt outstanding, was estimated to be approximately $11.5 trillion as of December 31, 2016 (the latest date for which information is available) and $11.4 trillion as of September 30, 2016.
Housing sales increased in the first quarter of 2017 compared with the fourth quarter of 2016. Total existing home sales averaged 5.6 million units annualized in the first quarter of 2017, an increase of 1.4% from the fourth quarter of 2016, according to data from the National Association of REALTORS®. Sales of foreclosed homes and preforeclosure, or “short,” sales (together, “distressed sales”) accounted for 6.0% of existing home sales in March 2017, compared with 7.0% in December 2016 and 8.0% in March 2016. According to the U.S. Census Bureau, new single-family home sales increased during the first quarter of 2017, averaging an annualized rate of 598,000 units, a 6.0% gain from the fourth quarter of 2016.
The number of months’ supply, or the inventory/sales ratio, of available existing homes and of new homes were each below their historical average at the end of the first quarter of 2017. According to the U.S. Census Bureau, the months’ supply of new single-family unsold homes was 5.2 months as of March 31, 2017, compared with 5.6 months as of December 31, 2016. According to the National Association of REALTORS®, the months’ supply of existing unsold homes was 3.8 months as of March 31, 2017, compared with 3.6 months as of December 31, 2016.
The overall mortgage market serious delinquency rate fell to 3.1% as of December 31, 2016 (the latest date for which information is available), according to the Mortgage Bankers Association’s National Delinquency Survey, compared with 3.4% as of December 31, 2015. We provide information about Fannie Mae’s serious delinquency rate, in “Single-Family Mortgage Credit Risk Management” below.
Based on our home price index, we estimate that home prices on a national basis increased by 0.5% in the first quarter of 2017, following increases of 5.8% in 2016, 4.7% in 2015 and 4.3% in 2014. We estimate that, through March 31, 2017, home prices on a national basis remained 0.7% below their peak in the third quarter of 2006. Our home price estimates are based on preliminary data and are subject to change as additional data become available.

Fannie Mae First Quarter 2017 Form 10-Q
24


 
MD&A | Business Segments


Thirty-year fixed-rate mortgage rates ended the quarter at 4.14% for the week of March 31, 2017, down from 4.32% for the week of December 31, 2016, according to Freddie Mac’s Primary Mortgage Market Survey®.
Single-Family Business Metrics
Table 13: Single-Family Business Key Performance Data
 
For the Three Months Ended March 31,
 
2017

2016
 
(Dollars in millions)
Securitization Activity/New Business
 
 
 
 
 
Single-family Fannie Mae MBS issuances
$
127,791

 
 
$
101,797

 
Single-family Fannie Mae MBS outstanding, at end of period
$
2,695,565

 
 
$
2,624,000

 
Portfolio Data
 
 
 
 
 
Single-family retained mortgage portfolio, at end of period
$
251,102

 
 
$
305,353

 
Credit Guaranty Activity
 
 
 
 
 
Average single-family guaranty book of business(1)
$
2,857,238

 
 
$
2,826,544

 
Average charged guaranty fee on single-family guaranty book of business:(2)
 
 
 
 
 
Fee, net of TCCA fees (in basis points)(3)
41.9

 
 
40.4

 
Total fee (in basis points)
49.1

 
 
46.8

 
Average charged guaranty fee on new single-family acquisitions:(2)
 
 
 
 
 
Fee, net of TCCA fees (in basis points)(3)
48.7

 
 
49.2

 
Total fee (in basis points)
58.7

 
 
59.2

 
Single-family credit loss ratio (in basis points)(4)
17.1

 
 
22.2

 
Single-family serious delinquency rate, at end of period(5)
1.12

%
 
1.44

%
__________
(1) 
Our single-family guaranty book of business consists of (a) single-family mortgage loans of Fannie Mae, (b) single-family mortgage loans underlying Fannie Mae MBS, and (c) other credit enhancements that we provide on single-family mortgage assets, such as long-term standby commitments. It excludes non-Fannie Mae single-family mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
(2) 
Calculated based on the average guaranty fee rate for our single-family guaranty arrangements plus the recognition of any upfront cash payments over an estimated average life.
(3) 
Excludes the impact of a 10 basis point guaranty fee increase implemented in 2012 pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us.
(4) 
Calculated based on single-family segment credit losses divided by the average single-family guaranty book of business.
(5) 
Calculated based on the number of single-family conventional loans that are 90 days or more past due or in the foreclosure process, divided by the number of loans in our single-family conventional guaranty book of business.
Our single-family Fannie Mae MBS issuances increased in the first quarter of 2017 compared with the first quarter of 2016, driven primarily by an increase in refinance activity. Additionally, home purchase mortgage loans increased in the first quarter of 2017 compared with the first quarter of 2016.

Fannie Mae First Quarter 2017 Form 10-Q
25


 
MD&A | Business Segments


Single-Family Business Financial Results
Table 14: Single-Family Business Financial Results
 
For the Three Months Ended March 31,
 
2017
 
2016
 
Variance
 
(Dollars in millions)
Net interest income(1)
$
4,756

 
$
4,245

 
$
511

Fee and other income
76

 
67

 
9

Net revenues
4,832

 
4,312

 
520

Investment gains (losses), net
(50
)
 
56

 
(106
)
Fair value losses, net
(12
)
 
(2,850
)
 
2,838

Administrative expenses
(601
)
 
(609
)
 
8

Credit-related income(2)
184

 
828

 
(644
)
TCCA fees(1)
(503
)
 
(440
)
 
(63
)
Other expenses, net
(256
)
 
(246
)
 
(10
)
Income before federal income taxes
3,594

 
1,051

 
2,543

Provision for federal income taxes
(1,252
)
 
(389
)
 
(863
)
Net income
$
2,342

 
$
662

 
$
1,680

__________
(1) 
Reflects the impact of a 10 basis point guaranty fee increase implemented in 2012 pursuant to the TCCA, the incremental revenue from which is remitted to Treasury. The resulting revenue is included in net interest income and the expense is recognized as “TCCA fees.”
(2) 
Consists of the benefit for credit losses and foreclosed property expense.
Single-family net income increased in the first quarter of 2017 compared with the first quarter of 2016. The increase in net income was primarily due to lower fair value losses and higher net interest income in the first quarter of 2017, partially offset by lower credit-related income in the first quarter of 2017.
Fair value losses decreased in the first quarter of 2017 compared with the first quarter of 2016. The fair value losses that are reported for the single-family segment are consistent with the fair value losses reported in our condensed consolidated statements of operations and comprehensive income. We discuss our fair value gains and losses in “Consolidated Results of Operations—Fair Value Losses, Net.”
Single-family net interest income increased in the first quarter of 2017 compared with the first quarter of 2016, primarily due to an increase in guaranty fee income driven by: (1) an increase in amortization income due to activity related to increased prepayments on mortgage loans and liquidations of MBS debt of consolidated trusts in the first quarter of 2017, which accelerated the amortization of cost basis adjustments on the loans and related debt; and (2) loans with higher base guaranty fees comprising a larger part of our guaranty book of business in the first quarter of 2017 compared with the first quarter of 2016. The increase in single-family net interest income due to higher guaranty fee income was partially offset by a decline in the average balance of our retained mortgage portfolio as we continued to reduce this portfolio.
We recognized lower single-family credit-related income in the first quarter of 2017 compared with the first quarter of 2016. Credit-related income in the first quarter of 2017 was driven by an increase in actual and forecasted home prices. Credit-related income in the first quarter of 2016 was primarily due to decreasing interest rates and an increase in actual home prices. See “Consolidated Results of OperationsCredit-Related Income (Expense)” for more information on the drivers of our credit-related income or expense.
Single-Family Mortgage Credit Risk Management
Our strategy in managing single-family mortgage credit risk consists of five primary components:
our acquisition and servicing policies along with our underwriting and servicing standards;
the transfer of credit risk through risk transfer transactions and the use of credit enhancements; 
portfolio diversification and monitoring;

Fannie Mae First Quarter 2017 Form 10-Q
26


 
MD&A | Business Segments


management of problem loans; and
REO management.
This section updates our discussion of single-family mortgage credit risk management in our 2016 Form 10-K in “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk Management.” For additional information on how we manage risk, see “MD&A—Risk Management” and “Risk Factors” in our 2016 Form 10-K.
The single-family credit statistics we focus on and report below generally relate to our single-family conventional guaranty book of business, which represents the substantial majority of our total single-family guaranty book of business. We exclude from these credit statistics approximately 1% of our single-family conventional guaranty book of business for which our loan level information is incomplete as of March 31, 2017 and December 31, 2016. We typically obtain this data from the sellers or servicers of the mortgage loans in our guaranty book of business and receive representations and warranties from them as to the accuracy of the information. While we perform various quality assurance checks by sampling loans to assess compliance with our underwriting and eligibility criteria, we do not independently verify all reported information. We rely on a combination of new data verification tools we are making available to lenders and lender representations regarding the accuracy of the characteristics of loans in our guaranty book of business. See “Risk Factors” in our 2016 Form 10-K for a discussion of the risk that we could experience mortgage fraud as a result of this reliance on lender representations. We provide information on non-Fannie Mae mortgage-related securities held in our portfolio in “Note 5, Investments in Securities.”
Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards
For an overview and additional information on our quality control process, see “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementSingle-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards” in our 2016 Form 10-K.
Repurchase Requests
If we determine that a mortgage loan did not meet our underwriting or eligibility requirements, loan representations or warranties were violated or a mortgage insurer rescinded coverage, then our mortgage sellers and/or servicers are obligated to either repurchase the loan or foreclosed property, reimburse us for our losses or provide other remedies, unless the loan is eligible for representation and warranty relief as described below. We collectively refer to our demands that mortgage sellers and servicers meet these obligations as repurchase requests. The unpaid principal balance of single-family loans that are subject to a repurchase request has declined significantly since we strengthened our underwriting standards in late 2008 and 2009, implemented changes to our quality control process in 2013 and implemented our revised representation and warranty framework described below. As of March 31, 2017, we had issued repurchase requests on approximately 0.13% of the $470.9 billion of unpaid principal balance of single-family loans delivered to us during the twelve months ended July 2016. Our total outstanding repurchase requests were $287 million as of March 31, 2017, compared with $303 million as of December 31, 2016.
Representation and Warranty Relief
We implemented a revised representation and warranty framework in 2013 to provide lenders with a higher degree of certainty and clarity regarding their exposure to repurchase requests on future deliveries, as well as greater consistency around repurchase timelines and remedies. This framework was further revised in 2014. Under the framework, lenders are relieved of certain repurchase liabilities for loans that meet specific requirements. In addition, through our Day 1 CertaintyTM initiative we have developed new tools that enable lenders to obtain relief from certain representations and warranties at an earlier date than provided for under the framework. For information on our representation and warranty framework and our Day 1 Certainty initiative, see “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementSingle-Family Acquisition and Servicing Policies and Underwriting and Servicing StandardsRepresentation and Warranty Relief” in our 2016 Form 10-K.
As of March 31, 2017, approximately 50% of the outstanding loans in our single-family conventional guaranty book of business were acquired after January 1, 2013 and are subject to the revised representation and warranty framework, compared with 48% as of December 31, 2016. Table 15 below displays information regarding the relief status of single-family conventional loans, based only on payment history or the satisfactory conclusion of a

Fannie Mae First Quarter 2017 Form 10-Q
27


 
MD&A | Business Segments


full-file quality control review, delivered to us beginning in 2013 under the revised representation and warranty framework.
Table 15: Representation and Warranty Status of Single-Family Conventional Loans Acquired in 2013-2017
 
As of March 31, 2017
 
Refi Plus
 
Non-Refi Plus
 
Total
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
(Dollars in millions)
Single-family conventional loans that:
 
 
 
 
 
 
 
 
 
 
 
Obtained relief
$
168,511

 
1,216,122

 
$
374,492

 
1,996,962

 
$
543,003

 
3,213,084

Remain eligible for relief
24,587

 
160,249

 
1,084,499

 
5,070,838

 
1,109,086

 
5,231,087

Are not eligible for relief
4,370

 
29,091

 
14,471

 
77,898

 
18,841

 
106,989

Total outstanding loans acquired since January 1, 2013
$
197,468

 
1,405,462

 
$
1,473,462

 
7,145,698

 
$
1,670,930

 
8,551,160

As of March 31, 2017, approximately 38% of loans acquired under the revised representation and warranty framework had obtained relief, compared with 37% as of December 31, 2016. Providing lenders with relief from repurchasing loans for breaches of certain representations and warranties on loans that meet specified eligibility requirements shifts some of the risk of non-compliance with our requirements back to us. However, we believe that we have taken appropriate steps to mitigate this risk, including moving the primary focus and timing of our quality control reviews to shortly after loan delivery. We also retain the right to review all loans, including reviews for any violations of “life of loan” representations and warranties.
Transfer of Mortgage Credit Risk: Credit Risk Transfer Transactions
Our Single-Family business has developed risk-sharing capabilities to transfer portions of our single-family mortgage credit risk to the private market. The goal of these transactions is, to the extent economically sensible, to transfer a portion of the existing mortgage credit risk on a portion of recently acquired loans in our single-family guaranty book of business in order to reduce the economic risk to us and to taxpayers of future borrower defaults. Our primary method of achieving this objective has been through our CAS and CIRT transactions. In these transactions, we transfer to investors a portion of the mortgage credit risk associated with losses on a reference pool of mortgage loans and in exchange we pay investors a premium that effectively reduces the guaranty fee income we retain on the loans. We enter into other types of credit risk transfer transactions in addition to our CAS and CIRT transactions, including lender risk-sharing transactions. For information on our credit risk transfer transactions, see “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementTransfer of Mortgage Credit RiskCredit Risk Transfer Transactions” in our 2016 Form 10-K.
As of March 31, 2017, $723 billion in outstanding unpaid principal balance of our single-family loans, or approximately 26% of the loans in our single-family conventional guaranty book of business measured by unpaid principal balance, were included in a reference pool for a credit risk transfer transaction. During the first three months of 2017, pursuant to our credit risk transfer transactions, we transferred a portion of the mortgage credit risk on single-family mortgages with an unpaid principal balance of $108 billion at the time of the transactions. Our CAS and CIRT transactions are our primary credit risk transfer transactions. In the first three months of 2017, we incurred $175 million on our outstanding CAS debt for the spread over LIBOR at the time of issuance of the debt and $41 million in CIRT premiums, compared with $101 million on CAS debt and $21 million in CIRT premiums in the first three months of 2016. These amounts increased from the first three months of 2016 to the first three months of 2017 as we continue to transfer credit risk on a larger portion of our single-family book of business.
We generally include approximately half of our recent single-family acquisitions in credit risk transfer transactions, as we target only certain types of loan categories for these transactions. Loan categories we have targeted for credit risk transfer transactions generally consist of fixed-rate 30-year single-family conventional loans that meet certain credit performance characteristics, are non-Refi Plus and have LTV ratios between 60% and 97%. The portion of our single-family loan acquisitions we include in credit risk transfer transactions can vary from period to period based on market conditions and other factors.

Fannie Mae First Quarter 2017 Form 10-Q
28


 
MD&A | Business Segments


Table 16 displays the mortgage credit risk transferred to third parties and retained by Fannie Mae at the time of issuance and the outstanding reference pool balances as of March 31, 2017, pursuant to our single-family credit risk transfer transactions.
Table 16: Credit Risk Transfer Transactions
Issuances from Inception to March 31, 2017
(Dollars in billions)

https://cdn.kscope.io/c8256551c7fd512646ca380dd77db43a-crtgraphica02.jpg
Senior
 
Fannie Mae(1)
 
 
$905
 
 
 
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Fannie Mae(1)
 
CIRT(2)(3)
 
CAS(2)
 
Lender Risk-Sharing(2)
 
Initial Reference Pool(4)
$1
 
$4
 
$22
 
$1
 
$939
 
 
 
 
 
 
 
 
 
 
 
First Loss
 
Fannie Mae(1)
 
    CAS(2)(5)
 
 
 
 
$5
 
$1
 
 
 
 
Outstanding as of March 31, 2017
(Dollars in billions)

https://cdn.kscope.io/c8256551c7fd512646ca380dd77db43a-crtgraphica03.jpg
Senior
 
Fannie Mae(1)
 
 
$694
 
 
 
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Fannie Mae(1)
 
CIRT(2)(3)
 
CAS(2)
 
Lender Risk-Sharing(2)
 
Outstanding Reference Pool(4)(6)
$1
 
$4
 
$17
 
$1
 
$723
 
 
 
 
 
 
 
 
 
 
 
First Loss
 
Fannie Mae(1)
 
    CAS(2)(5)
 
 
 
 
$5
 
$1
 
 
 
 
__________
(1) 
Credit risk retained by Fannie Mae. Tranche sizes vary across programs.
(2) 
Credit risk transferred to third parties. Tranche sizes vary across programs.
(3) 
Includes mortgage pool insurance transactions covering loans with an unpaid principal balance of approximately $7 billion at issuance and approximately $5 billion outstanding as of March 31, 2017.
(4) 
For CIRT and some lender risk-sharing transactions, “reference pool” reflects a pool of covered loans.
(5) 
For CAS transactions, “First Loss” represents all B tranche balances.
(6) 
For CAS and some lender risk-sharing transactions, represents outstanding reference pools, not the outstanding unpaid principal balance of the underlying loans, as of March 31, 2017.
As shown in the outstanding balances in Table 16 above, we have designed our credit risk transfer transactions so that prepayment activity typically has a more substantial impact on the senior tranches retained by Fannie Mae than on the risk transferred to third parties. Principal payments on the underlying reference pool are first allocated between the senior tranches and then applied sequentially to the subordinate tranches. Losses are applied in

Fannie Mae First Quarter 2017 Form 10-Q
29


 
MD&A | Business Segments


reverse sequential order starting with the first loss tranche. For CAS transactions, all principal payments and losses are allocated pro rata between the sold notes and the portion we retain. The decreases in outstanding balances from issuance to March 31, 2017 in the senior and mezzanine tranches are the result of paydowns. Outstanding balances from issuance to March 31, 2017 in the first loss tranches decreased only slightly as the losses allocated to those tranches were insignificant.
While these deals are expected to mitigate some of our potential future credit losses, they are not designed to shield us from all losses. We retain a portion of the risk of future credit losses on loans covered by CAS and CIRT transactions, including all or at least half of the first loss positions and all of the senior loss positions. In addition, on our CAS transactions, we retain a pro rata share of risk equal to approximately 5% of all notes sold. When structuring these transactions, we seek to optimize benefit to cost considerations by taking into account a number of factors, including the level of investor demand, liquidity and pricing levels, and the amount of risk reduction provided assuming various economic scenarios. See “Risk Factors” in our 2016 Form 10-K for a discussion of factors that may limit our ability to use credit risk transfer transactions to mitigate some of our potential future credit losses, including factors that may result in these transactions providing less protection than we expect.
Single-Family Portfolio Diversification and Monitoring
Overview
Diversification within our single-family mortgage credit book of business by product type, loan characteristics and geography is an important factor that influences credit quality and performance and may reduce our credit risk. We monitor various loan attributes, in conjunction with housing market and economic conditions, to determine if our pricing, eligibility and underwriting criteria accurately reflect the risk associated with loans we acquire or guarantee. In some cases, we may decide to significantly reduce our participation in riskier loan product categories. We also review the payment performance of loans in order to help identify potential problem loans early in the delinquency cycle and to guide the development of our loss mitigation strategies. For information on key loan attributes, see “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementSingle-Family Portfolio Diversification and Monitoring” in our 2016 Form 10-K.
Credit Risk Profile of Our Single-Family Acquisitions and Book of Business
We initiated underwriting and eligibility changes that became effective for deliveries in late 2008 and 2009 and that focused on strengthening our underwriting and eligibility standards to promote sustainable homeownership. The result of many of these changes is reflected in the substantially improved credit risk profile of our single-family loan acquisitions since 2009.
Table 17 below displays information regarding the credit characteristics of the loans in our single-family conventional guaranty book of business by acquisition period.
Table 17: Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period
 
As of March 31, 2017
 
% of Single-Family Conventional Guaranty Book of Business(1)
 
Current Estimated Mark-to-Market LTV Ratio(2)
 
Current Estimated Mark-to-Market LTV Ratio>100%(3)
 
Serious Delinquency Rate
2009-2017 acquisitions, excluding HARP and other Refi Plus loans
73
%
 
59
%
 
*
%
 
0.24
%
HARP loans(4)
8
 
 
75
 
 
9
 
 
1.14
 
Other Refi Plus loans(5)
7
 
 
45
 
 
*
 
 
0.43
 
2005-2008 acquisitions
8
 
 
71
 
 
12
 
 
5.97
 
2004 and prior acquisitions
4
 
 
43
 
 
1
 
 
2.79
 
Total single-family conventional guaranty book of business
100
%
 
60
%
 
2
%
 
1.12
%
__________
*
Represents less than 0.5%

Fannie Mae First Quarter 2017 Form 10-Q
30


 
MD&A | Business Segments


(1)
Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business as of March 31, 2017.
(2) 
The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loans as of the end of the period divided by the estimated current value of the properties, which we calculate using an internal valuation model that estimates periodic changes in home value. Excludes loans for which this information is not readily available.
(3) 
The current estimated mark-to-market LTV ratio greater than 100% is based on the unpaid principal balance of the loans with mark-to-market LTV ratios greater than 100% for each category as of the end of the period divided by the aggregate unpaid principal balance of loans for each category in our single-family conventional guaranty book of business as of March 31, 2017.
(4) 
HARP loans, which we began to acquire in 2009, have LTV ratios at origination in excess of 80%. Some borrowers for HARP loans may have lower FICO credit scores and may provide less documentation than we would otherwise require. As of March 31, 2017, HARP loans had a weighted average FICO credit score at origination of 726 compared with 745 for loans in our single-family book of business overall.
(5) 
Other Refi Plus loans, which we began to acquire in 2009, includes all other Refi Plus loans that are not HARP loans.

Fannie Mae First Quarter 2017 Form 10-Q
31


 
MD&A | Business Segments


Table 18 displays our single-family conventional business volumes and our single-family conventional guaranty book of business, based on certain key risk characteristics that we use to evaluate the risk profile and credit quality of our single-family loans.
Table 18: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1)
 
Percent of Single-Family Conventional Business Volume at Acquisition(2)
Percent of Single-Family