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FannieMae Q2.06.30.2014 10Q

 

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 June 30, 2014
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:
(202) 752-7000
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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
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 June 30, 2014, there were 1,158,080,657 shares of common stock of the registrant outstanding.
 


TABLE OF CONTENTS
 
 
Page
PART I—Financial Information
1
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
PART II—Other Information
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

i

MD&A TABLE REFERENCE
Table
Description
Page
1
Single-Family Acquisitions Statistics
5
2
Credit Statistics, Single-Family Guaranty Book of Business
7
3
Summary of Condensed Consolidated Results of Operations
17
4
Analysis of Net Interest Income and Yield
18
5
Rate/Volume Analysis of Changes in Net Interest Income
20
6
Fair Value (Losses) Gains, Net
21
7
Total Loss Reserves
22
8
Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)
23
9
Troubled Debt Restructurings and Nonaccrual Loans
25
10
Credit Loss Performance Metrics
26
11
Single-Family Credit Loss Sensitivity
27
12
Single-Family Business Results
29
13
Multifamily Business Results
32
14
Capital Markets Group Results
34
15
Capital Markets Group’s Mortgage Portfolio Activity
36
16
Capital Markets Group’s Mortgage Portfolio Composition
37
17
Capital Markets Group’s Mortgage Portfolio
38
18
Summary of Condensed Consolidated Balance Sheets
39
19
Summary of Mortgage-Related Securities at Fair Value
40
20
Comparative Measures—GAAP Change in Stockholders’ Equity and Non-GAAP Change in Fair Value of Net Assets
41
21
Supplemental Non-GAAP Consolidated Fair Value Balance Sheets
43
22
Activity in Debt of Fannie Mae
45
23
Outstanding Short-Term Borrowings and Long-Term Debt
47
24
Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year
48
25
Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year
49
26
Cash and Other Investments Portfolio
49
27
Fannie Mae Credit Ratings
50
28
Composition of Mortgage Credit Book of Business
52
29
Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition Period
54
30
Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business
56
31
Delinquency Status of Single-Family Conventional Loans
61
32
Single-Family Serious Delinquency Rates
61
33
Single-Family Conventional Serious Delinquent Loan Concentration Analysis
62
34
Statistics on Single-Family Loan Workouts
63
35
Single-Family Foreclosed Properties
64
36
Single-Family Foreclosed Property Status
65
37
Multifamily Lender Risk-Sharing
66
38
Multifamily Guaranty Book of Business Key Risk Characteristics
66
39
Multifamily Concentration Analysis
67
40
Multifamily Foreclosed Properties
67
41
Mortgage Insurance Coverage
69
42
Estimated Mortgage Insurance Benefit
71

ii

Table
Description
Page
43
Unpaid Principal Balance of Financial Guarantees
71
44
Credit Loss Exposure of Risk Management Derivative Instruments
74
45
Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve
77
46
Derivative Impact on Interest Rate Risk (50 Basis Points)
78



iii

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, 2013 (“2013 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 and the more detailed information in our 2013 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 “Risk Factors” in our 2013 Form 10-K.
You can find a “Glossary of Terms Used in This Report” in the “MD&A” of our 2013 Form 10-K.
INTRODUCTION
Fannie Mae is a government-sponsored enterprise (“GSE”) that was chartered by Congress in 1938. We serve an essential role in the functioning of the U.S. housing market and are investing in improvements to the U.S. housing finance system. Our public mission is to support liquidity and stability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold, and to increase the supply of affordable housing. Our charter does not permit us to originate loans or lend money directly to consumers in the primary mortgage market.
Fannie Mae provides reliable, large-scale access to affordable mortgage credit and indirectly enables families to buy, refinance or rent homes. We securitize mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee, which we refer to as Fannie Mae MBS. One of our key functions is to evaluate, price and manage the credit risk on the loans and securities that we guarantee. We also purchase mortgage loans and mortgage-related securities for securitization and sale at a later date and, to a declining extent, for our retained mortgage portfolio. We use the term “acquire” in this report to refer to both our securitizations and our purchases of mortgage-related assets. We obtain funds to support our business activities by issuing a variety of debt securities in the domestic and international capital markets, which attracts global capital to the United States housing market.
Our conservatorship has no specified termination date, and we do not know when or how the conservatorship will terminate, whether we will continue to exist following conservatorship, what changes to our business structure will be made during or following the conservatorship, or what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated. In addition, our agreements with Treasury that provide for financial support include covenants that significantly restrict our business activities and provide for dividends to accrue at a rate equal to our net worth less a capital reserve amount, allowing us to retain only a limited and decreasing amount of our net worth. We provide additional information on the conservatorship, the provisions of our agreements with Treasury, and their impact on our business in our 2013 Form 10-K in “Business—Conservatorship and Treasury Agreements” and “Risk Factors.” We discuss the uncertainty of our future in “Executive Summary—Outlook” and “Risk Factors.” We discuss proposals for housing finance reform that could materially affect our business in “Legislative and Regulatory Developments” in this report, in our quarterly report on Form 10-Q for the quarter ended March 31, 2014 (“First Quarter 2014 Form 10-Q”) and in “Business—Housing Finance Reform” in our 2013 Form 10-K.
Although Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock, and has made a commitment under 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.

1


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
Our Strategy and Progress
We are focused on:
•
achieving strong financial performance and strengthening our book of business;
•
supporting the housing recovery by providing reliable, large-scale access to affordable mortgage credit and helping struggling homeowners; and
•
helping to build a sustainable housing finance system.
Achieving strong financial performance and strengthening our book of business
Our actions to accomplish these goals have had a positive impact:
•
Financial Performance. We reported net income of $3.7 billion for the second quarter of 2014, compared with net income of $10.1 billion for the second quarter of 2013. See “Summary of Our Financial Performance” below for an overview of our financial performance for the second quarter and first half of 2014, compared with the second quarter and first half of 2013. We expect to remain profitable for the foreseeable future. For more information regarding our expectations for our future financial performance, see “Outlook—Financial Results” and “Outlook—Revenues” below.
•
Dividend Payments to Treasury. With our expected September 2014 dividend payment to Treasury, we will have paid a total of $130.5 billion in dividends to Treasury on our senior preferred stock. The aggregate amount of draws we have received from Treasury to date under the senior preferred stock purchase agreement is $116.1 billion. Under the terms of the senior preferred stock purchase agreement, dividend payments do not offset prior Treasury draws. See “Outlook—Dividend Obligations to Treasury” below for more information regarding our dividend payments to Treasury.
•
Book of Business. Changes we have made beginning in 2008 to strengthen our underwriting and eligibility standards have improved the credit quality of our single-family guaranty book of business. Single-family loans we have acquired since the beginning of 2009 (referred to as our “new single-family book of business”) comprised 79% of our single-family guaranty book of business as of June 30, 2014, while the single-family loans we acquired prior to 2009 (referred to as our “legacy book of business”) comprised 21% of our single-family guaranty book of business. As described below in “Strengthening Our Book of Business—New Book of Business,” we expect that our new single-family book of business will be profitable over its lifetime.
•
Credit Performance. Our single-family serious delinquency rate, which has decreased each quarter since the first quarter of 2010, was 2.05% as of June 30, 2014, compared with 2.38% as of December 31, 2013. See “Improving the Credit Performance of our Book of Business” below for additional information on the credit performance of the mortgage loans in our single-family guaranty book of business for each of the last six quarters, and for a description of our strategies for reducing credit losses on our legacy book of business.
Although we have improved our financial performance and the quality of our book of business since entering into conservatorship in 2008, we remain under conservatorship and subject to the restrictions of the senior preferred stock purchase agreement with Treasury. As a result of the senior preferred stock purchase agreement and directives from our conservator, we are not permitted to retain our net worth (other than a limited amount that will decrease to zero by 2018), rebuild our capital position or pay dividends or other distributions to stockholders other than Treasury. See “Business—Conservatorship and Treasury Agreements” in our 2013 Form 10-K for more information regarding our conservatorship and our senior preferred stock purchase agreement with Treasury. In addition, the future of our company remains uncertain. Congress continues to consider options for reform of the housing finance system, including the GSEs, and we cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation. See “Legislative and Regulatory Developments” in this report and in our First Quarter 2014 Form 10-Q and “Business—Housing Finance Reform” in our 2013 Form 10-K for information on recent proposals for housing finance reform.

2


Supporting the housing recovery by providing reliable, large-scale access to affordable mortgage credit and helping struggling homeowners
We continued our efforts to support the housing recovery in the second quarter of 2014. We remained the largest single issuer of mortgage-related securities in the secondary market during the second quarter of 2014 and a continuous source of liquidity in the multifamily market. We also continued to help struggling homeowners. In the second quarter of 2014, we provided over 43,000 loan workouts to help homeowners stay in their homes or otherwise avoid foreclosure. We discuss our activities to support the housing and mortgage markets in “Contributions to the Housing and Mortgage Markets” below.
Helping to build a sustainable housing finance system
We also continued our efforts to help lay the foundation for a safer, transparent and sustainable housing finance system, including pursuing the strategic goals identified by our conservator, as well as investing in improvements to our business and infrastructure. We discuss these efforts in “Helping to Build a Sustainable Housing Finance System” below.
Summary of Our Financial Performance
Comprehensive Income
Quarterly Results
We recognized comprehensive income of $3.7 billion in the second quarter of 2014, consisting of net income of $3.7 billion and other comprehensive income of $45 million. In comparison, we recognized comprehensive income of $10.3 billion in the second quarter of 2013, consisting of net income of $10.1 billion and other comprehensive income of $166 million. The decrease in our comprehensive income was primarily due to a decline in credit-related income and the recognition of fair value losses in the second quarter of 2014.
Credit-related income decreased to $1.9 billion in the second quarter of 2014 from $5.7 billion in the second quarter of 2013. Our credit results for the second quarters of 2014 and 2013 were primarily driven by increases in home prices. In addition, credit-related income in the second quarter of 2013 benefited from increases in the sales prices of our REO properties, as well as the impact of updates to the assumptions and data used to estimate our allowance for loan losses for individually impaired single-family loans, to reflect faster prepayment and lower default expectations for these loans, which resulted in a decrease to our allowance for loan losses. See “Critical Accounting Policies and Estimates—Total Loss Reserves—Single-Family Loss Reserves” in our 2013 Form 10-K for additional information.
Fair value losses of $934 million in the second quarter of 2014 were primarily driven by derivative fair value losses as longer-term swap rates declined in the second quarter of 2014. Fair value gains of $829 million in the second quarter of 2013 were primarily driven by derivative fair value gains as swap rates increased in the second quarter of 2013.
Year-to-Date Results
We recognized comprehensive income of $9.4 billion in the first half of 2014, consisting of net income of $9.0 billion and other comprehensive income of $417 million. In comparison, we recognized comprehensive income of $69.6 billion in the first half of 2013, consisting of net income of $68.8 billion and other comprehensive income of $820 million.
Our pre-tax income was $13.3 billion in the first half of 2014 compared with $20.2 billion in the first half of 2013. The decrease in our pre-tax income was primarily due to a decrease in credit-related income to $2.9 billion in the first half of 2014 from $6.9 billion in the first half of 2013 and the recognition of fair value losses of $2.1 billion in the first half of 2014 compared with fair value gains of $1.7 billion in the first half of 2013, due to the same factors that impacted the second quarter of 2014, which are described above.
In addition, net interest income decreased to $9.6 billion in the first half of 2014 from $12.0 billion in the first half of 2013, primarily due to a decline in the average balance of our retained mortgage portfolio, partially offset by higher guaranty fee income. Also contributing to the decline in our net interest income in the first half of 2014 compared with the first half of 2013 was our recognition in the first quarter of 2013 of $518 million of income from unamortized cost basis adjustments on loans repurchased by Bank of America as part of a resolution agreement that was entered into in January 2013.
These decreases were partially offset by income from settlement agreements resolving certain lawsuits relating to private-label mortgage-related securities (“PLS”) sold to us, resolutions we entered into relating to representation and warranty matters and compensatory fees related to servicing matters. In the first half of 2014, we recognized $4.9 billion in income related to these arrangements, compared with $1.5 billion in the first half of 2013.
Our comprehensive income for the first half of 2014 included a provision for federal income taxes of $4.3 billion. Our comprehensive income for the first half of 2013 included a benefit for federal income taxes of $48.6 billion resulting from the

3


release of our valuation allowance against our deferred tax assets in the first quarter of 2013, partially offset by our provision for federal income taxes in the second quarter of 2013. We discuss the factors that led to our conclusion to release the valuation allowance against our deferred tax assets in “Critical Accounting Policies and Estimates—Deferred Tax Assets” and “Note 10, Income Taxes” in our 2013 Form 10-K.
We expect volatility from period to period in our financial results from a number of factors, particularly changes in market conditions that result in periodic fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings. These instruments include derivatives and securities. The estimated fair value of our derivatives and securities may fluctuate substantially from period to period because of changes in interest rates, credit spreads and interest rate volatility, as well as activity related to these financial instruments. While the estimated fair value of our derivatives that serve to mitigate certain risk exposures may fluctuate, some of the financial instruments that generate these exposures are not recorded at fair value in our condensed consolidated financial statements. In addition, our credit-related income or expense can vary substantially from period to period primarily due to changes in home prices, borrower payment behavior and economic conditions.
See “Consolidated Results of Operations” for more information on our results.
Net Worth
Our net worth decreased to $6.1 billion as of June 30, 2014 from $9.6 billion as of December 31, 2013 primarily due to our payments to Treasury of $12.9 billion in senior preferred stock dividends, partially offset by our comprehensive income of $9.4 billion for the first half of 2014. Our expected dividend payment of $3.7 billion for the third quarter of 2014 is calculated based on our net worth of $6.1 billion as of June 30, 2014 less the applicable capital reserve amount of $2.4 billion.
Strengthening Our Book of Business
New Book of Business
Beginning in 2008, we took actions to significantly strengthen our underwriting and eligibility standards and change our pricing to promote sustainable homeownership and stability in the housing market. These actions have improved the credit quality of our book of business. Given their strong credit risk profile and based on their performance so far, we expect that in the aggregate the loans we have acquired since January 1, 2009, which comprised 79% of our single-family guaranty book of business as of June 30, 2014, will be profitable over their lifetime, by which we mean that we expect our guaranty fee income on these loans to exceed our credit losses and administrative costs for them. In contrast, we expect that the single-family loans we acquired from 2005 through 2008, in the aggregate, will not be profitable over their lifetime. See “Outlook—Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations” in this report and “Risk Factors” in our 2013 Form 10-K for a discussion of factors that could cause our expectations regarding the performance of the loans in our single-family book of business to change. For information on certain credit characteristics of our new single-family book of business as compared with our legacy book of business, see “Table 29: Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition Period.” For more information on the credit risk profile of our single-family guaranty book of business, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management,” including “Table 30: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” in that section.
Our new single-family book of business includes loans that are refinancings of loans that were in our legacy book of business, including loans acquired under our Refi PlusTM initiative, which has provided refinancing flexibility to eligible Fannie Mae borrowers since 2009. Our Refi Plus initiative includes loans acquired under the Obama Administration’s Home Affordable Refinance Program (“HARP®”). As of June 30, 2014, of the loans in our single-family guaranty book of business, 59% were non-Refi Plus loans acquired since the beginning of 2009, 20% were Refi Plus loans, and the remaining 21% were acquired prior to 2009. Information about the impact of HARP and Refi Plus on the credit characteristics of our new single-family book of business appears in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Credit Profile Summary—HARP and Refi Plus Loans” and in “Table 29: Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition Period.”
Recently Acquired Single-Family Loans
Table 1 below displays information regarding our average charged guaranty fee on and specified risk characteristics of the single-family loans we acquired in each of the last six quarters. Table 1 also displays the volume of our single-family Fannie Mae MBS issuances for these periods, which is indicative of the volume of single-family loans we acquired for these periods.

4


Table 1: Single-Family Acquisitions Statistics
 
 
2014
 
2013
 
 
 
Q2
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
 
Single-family average charged guaranty fee on new acquisitions (in basis points)(1)(2)
 
62.6

 
63.0

 
61.2

 
58.7

 
56.9

 
54.4

 
Single-family Fannie Mae MBS issuances (in millions)(3)
 
$
84,096

 
$
76,972

 
$
117,809

 
$
186,459

 
$
206,978

 
$
221,865

 
Select risk characteristics of single-family conventional acquisitions:(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average FICO credit score at origination
 
744

 
741

 
745

 
750

 
754

 
757

 
Weighted average original loan-to-value ratio(5)
 
77

%
77

%
77

%
76

%
75

%
75

%
Original loan-to-value ratio over 80%(5)(6)
 
32

%
31

%
33

%
31

%
29

%
26

%
Loan purpose:
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
 
54

%
45

%
49

%
38

%
25

%
17

%
Refinance
 
46

%
55

%
51

%
62

%
75

%
83

%
__________
(1) 
Includes the impact of a 10 basis point guaranty fee increase implemented pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011 (the “TCCA”), the incremental revenue from which must be remitted to Treasury. The resulting revenue is included in guaranty fee income and the expense is recognized as “TCCA fees.”
(2) 
Calculated based on the average contractual fee rate for our single-family guaranty arrangements entered into during the period plus the recognition of any upfront cash payments ratably over an estimated average life, expressed in basis points.
(3)
Consists of unpaid principal balance of Fannie Mae MBS issued and guaranteed by the Single-Family segment during the period.
(4) 
Calculated based on unpaid principal balance of single-family loans for each category at time of acquisition. Single-family business volume refers to both single-family mortgage loans we purchase for our retained mortgage portfolio and single-family mortgage loans we guarantee.
(5) 
The original loan-to-value (“LTV”) ratio generally is based on the original unpaid principal balance of the loan divided by the appraised property value reported to us at the time of acquisition of the loan. Excludes loans for which this information is not readily available.
(6) 
We purchase loans with original LTV ratios above 80% as part of our mission to serve the primary mortgage market and provide liquidity to the housing finance system. Except as permitted under HARP, our charter generally requires primary mortgage insurance or other credit enhancement for loans that we acquire that have an LTV ratio over 80%.
The average charged guaranty fee on our newly acquired single-family loans in the second quarter of 2014 was 62.6 basis points, slightly down from 63.0 basis points in the first quarter of 2014 but increased from 56.9 basis points in the second quarter of 2013. These shifts in our average charged guaranty fee are primarily the result of shifts in loan level price adjustments, which are higher when our acquisitions include a higher proportion of loans with higher loan-to-value (“LTV”) ratios or lower FICO credit scores. Loan level price adjustments refer to one-time cash fees that we charge at the time we initially acquire a loan based on the credit characteristics of the loan. See “Legislative and Regulatory Developments—Potential Changes to Our Single-Family Guaranty Fee Pricing” for information on potential future changes to our guaranty fee pricing.
The increase in our acquisitions of loans with higher LTV ratios in the second quarter of 2014 as compared with the second quarter of 2013 was primarily due to a decline in the percentage of our acquisitions consisting of refinance loans and a corresponding increase in the percentage of our acquisitions consisting of home purchase loans, which typically have higher LTV ratios than non-HARP refinance loans. In the second quarter of 2014, refinancings comprised approximately 46% of our single-family conventional business volume, compared with approximately 75% in the second quarter of 2013. In addition, we experienced a decline in the average FICO credit scores of our acquisitions in the second quarter of 2014 as compared with the second quarter of 2013. Despite this shift in the credit risk profile of our acquisitions, the single-family loans we acquired in the second quarter of 2014 continued to have a strong credit profile, with a weighted average original LTV ratio of 77%, a weighted average FICO credit score of 744, and a product mix with a significant percentage of fully amortizing fixed-rate mortgage loans. For more information on the credit risk profile of our single-family conventional loan acquisitions in the second quarter of 2014, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk

5


Management,” including “Table 30: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” in that section.
We expect refinancings to continue to constitute a smaller portion of our single-family business volume in 2014 than in 2013. As a result, we expect to continue to acquire a higher proportion of loans with higher LTV ratios in 2014 than in 2013. Overall mortgage originations also declined significantly in the first half of 2014 as compared with the first half of 2013, and we expect mortgage originations in 2014 to be lower overall than in 2013.
Whether the loans we acquire in the future will exhibit an overall credit profile and performance similar to our more recent acquisitions will depend on a number of factors, including our future pricing and eligibility standards and those of mortgage insurers, the Federal Housing Administration (“FHA”) and the Department of Veterans Affairs (“VA”), the percentage of loan originations representing refinancings, changes in interest rates, our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers, government policy, market and competitive conditions, and the volume and characteristics of HARP loans we acquire in the future. In addition, if our lender customers retain more of the higher-quality loans they originate, it could negatively affect the credit risk profile of our new single-family acquisitions. 
Improving the Credit Performance of our Book of Business
We continue our efforts to improve the credit performance of our book of business. In addition to acquiring loans with strong credit profiles, as we discuss above in “Strengthening Our Book of Business,” we continue to execute on our strategies for reducing credit losses on our legacy book of business, such as helping eligible Fannie Mae borrowers with high LTV ratio loans refinance into more sustainable loans through HARP, offering borrowers loan modifications that can significantly reduce their monthly payments, pursuing foreclosure alternatives and managing our real estate owned (“REO”) inventory to minimize costs and maximize sales proceeds. As we work to reduce credit losses, we also seek to assist struggling homeowners, help stabilize communities and support the housing market.
Table 2 presents information for each of the last six quarters about the credit performance of mortgage loans in our single-family guaranty book of business and our workouts. The term “workouts” refers to both home retention solutions (loan modifications and other solutions that enable a borrower to stay in his or her home) and foreclosure alternatives (short sales and deeds-in-lieu of foreclosure). The workout information in Table 2 does not reflect repayment plans and forbearances that have been initiated but not completed, nor does it reflect trial modifications that have not become permanent.

6


Table 2: Credit Statistics, Single-Family Guaranty Book of Business(1)
  
2014
 
 
2013
 
  
Q2 YTD
 
 
Q2
 
 
Q1
 
 
Full
Year
 
 
Q4
 
 
Q3
 
 
Q2
 
 
Q1
 
  
(Dollars in millions)
 
As of the end of each period: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Serious delinquency rate(2)
2.05

%
 
2.05

%
 
2.19

%
 
2.38

%
 
2.38

%
 
2.55

%
 
2.77

%
 
3.02

%
Seriously delinquent loan count
357,267

 
 
357,267

 
 
383,810

 
 
418,837

 
 
418,837

 
 
447,840

 
 
483,253

 
 
527,529

 
Troubled debt restructurings on accrual status(3)
$
144,911

 
 
$
144,911

 
 
$
144,077

 
 
$
140,512

 
 
$
140,512

 
 
$
138,165

 
 
$
136,558

 
 
$
134,325

 
Nonaccrual loans(4)
69,550

 
 
69,550

 
 
73,972

 
 
81,355

 
 
81,355

 
 
86,848

 
 
93,883

 
 
102,602

 
Foreclosed property inventory:

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of properties(5)
96,796

 
 
96,796

 
 
102,398

 
 
103,229

 
 
103,229

 
 
100,941

 
 
96,920

 
 
101,449

 
Carrying value
$
10,347

 
 
$
10,347

 
 
$
10,492

 
 
$
10,334

 
 
$
10,334

 
 
$
10,036

 
 
$
9,075

 
 
$
9,263

 
Combined loss reserves(6)
39,984

 
 
39,984

 
 
42,919

 
 
44,705

 
 
44,705

 
 
45,608

 
 
49,930

 
 
56,626

 
Total loss reserves(7)
41,657

 
 
41,657

 
 
44,760

 
 
46,689

 
 
46,689

 
 
47,664

 
 
52,141

 
 
59,114

 
During the period: 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreclosed property (number of properties): 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisitions(5)
63,574

 
 
31,678

 
 
31,896

 
 
144,384

 
 
32,208

 
 
37,353

 
 
36,106

 
 
38,717

 
Dispositions
(70,007
)
 
 
(37,280
)
 
 
(32,727
)
 
 
(146,821
)
 
 
(29,920
)
 
 
(33,332
)
 
 
(40,635
)
 
 
(42,934
)
 
Credit-related income(8)
$
2,783

 
 
$
1,781

 
 
$
1,002

 
 
$
11,205

 
 
$
848

 
 
$
3,642

 
 
$
5,681

 
 
$
1,034

 
Credit losses(9)
2,624

 
 
1,497

 
 
1,127

 
 
4,452

 
 
325

 
 
1,083

 
 
1,541

 
 
1,503

 
REO net sales prices to unpaid principal balance(10)
68

%
 
69

%
 
68

%
 
67

%
 
68

%
 
68

%
 
68

%
 
65

%
Short sales net sales price to unpaid principal balance(11)
71

%
 
72

%
 
71

%
 
67

%
 
70

%
 
68

%
 
67

%
 
64

%
Loan workout activity (number of loans): 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home retention loan workouts(12)
71,938

 
 
33,639

 
 
38,299

 
 
172,029

 
 
41,053

 
 
39,559

 
 
43,782

 
 
47,635

 
Short sales and deeds-in-lieu of foreclosure
19,643

 
 
9,516

 
 
10,127

 
 
61,949

 
 
13,021

 
 
15,092

 
 
17,710

 
 
16,126

 
Total loan workouts
91,581

 
 
43,155

 
 
48,426

 
 
233,978

 
 
54,074

 
 
54,651

 
 
61,492

 
 
63,761

 
Loan workouts as a percentage of the average balance of delinquent loans in our guaranty book of business(13)
24.98

%
 
24.69

%
 
25.70

%
 
26.01

%
 
26.59

%
 
25.32

%
 
26.93

%
 
25.88

%
__________
(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 mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
(2) 
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. We include single-family conventional loans that we own and those that back Fannie Mae MBS in the calculation of the single-family serious delinquency rate.
(3) 
A troubled debt restructuring (“TDR”) is a modification to the contractual terms of a loan in which a concession is granted to a borrower experiencing financial difficulty.
(4) 
We generally classify single-family loans as nonaccrual when the payment of principal or interest on the loan is two or more months past due according to its contractual terms. Excludes off-balance sheet loans in unconsolidated Fannie Mae MBS trusts that would meet our criteria for nonaccrual status if the loans had been on-balance sheet.

7


(5) 
Includes acquisitions through deeds-in-lieu of foreclosure. Also includes held for use properties, which are reported in our condensed consolidated balance sheets as a component of “Other assets.”
(6) 
Consists of the allowance for loan losses for single-family loans recognized in our condensed consolidated balance sheets and the reserve for guaranty losses related to both loans backing Fannie Mae MBS that we do not consolidate in our condensed consolidated balance sheets and loans that we have guaranteed under long-term standby commitments. For additional information on the change in our loss reserves see “Consolidated Results of Operations—Credit-Related Income—Benefit for Credit Losses.”
(7) 
Consists of (a) the combined loss reserves, (b) allowance for accrued interest receivable and (c) allowance for preforeclosure property taxes and insurance receivables.
(8) 
Consists of (a) the benefit for credit losses and (b) foreclosed property income.
(9) 
Consists of (a) charge-offs, net of recoveries and (b) foreclosed property income, adjusted to exclude the impact of fair value losses resulting from credit-impaired loans acquired from MBS trusts.
(10) 
Calculated as the amount of sale proceeds received on disposition of REO properties during the respective period, excluding those subject to repurchase requests made to our sellers or servicers, divided by the aggregate unpaid principal balance of the related loans at the time of foreclosure. Net sales price represents the contract sales price less selling costs for the property and other charges paid by the seller at closing.
(11) 
Calculated as the amount of sale proceeds received on properties sold in short sale transactions during the respective period divided by the aggregate unpaid principal balance of the related loans. Net sales price represents the contract sales price less the selling costs for the property and other charges paid by the seller at the closing, including borrower relocation incentive payments and subordinate lien(s) negotiated payoffs.
(12) 
Consists of (a) modifications, which do not include trial modifications, loans to certain borrowers who have received bankruptcy relief that are classified as TDRs, or repayment plans or forbearances that have been initiated but not completed and (b) repayment plans and forbearances completed. See “Table 34: Statistics on Single-Family Loan Workouts” in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Problem Loan Management—Loan Workout Metrics” for additional information on our various types of loan workouts.
(13) 
Calculated based on annualized problem loan workouts during the period as a percentage of the average balance of delinquent loans in our single-family guaranty book of business.
We provide additional information on our credit-related expense or income in “Consolidated Results of Operations—Credit-Related Income” and on the credit performance of mortgage loans in our single-family book of business in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.”
We provide more information on our efforts to reduce our credit losses in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management” and “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management” in both this report and our 2013 Form 10-K. See also “Risk Factors” in our 2013 Form 10-K, where we describe factors that may adversely affect the success of our efforts, including our reliance on third parties to service our loans, conditions in the foreclosure environment, and risks relating to our mortgage insurer counterparties.
Contributions to the Housing and Mortgage Markets
Liquidity and Support Activities
As the largest provider of residential mortgage credit in the United States, we indirectly enable families to buy, refinance or rent homes. During the second quarter of 2014, we continued to provide critical liquidity and support to the U.S. mortgage market in a number of important ways:
•
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. The approximately $96 billion in liquidity we provided to the mortgage market in the second quarter of 2014 through our purchases and guarantees of loans and securities enabled borrowers to complete approximately 212,000 mortgage refinancings and approximately 215,000 home purchases, and provided financing for approximately 93,000 units of multifamily housing.
•
Our role in the market enables 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 provided over 43,000 loan workouts in the second quarter of 2014 to help homeowners stay in their homes or otherwise avoid foreclosure. These efforts helped to stabilize neighborhoods, home prices and the housing market.
•
We helped borrowers refinance loans, including through our Refi Plus initiative. We acquired approximately 77,000 Refi Plus loans in the second quarter of 2014. Refinancings delivered to us through Refi Plus in the second quarter

8


of 2014 reduced borrowers’ monthly mortgage payments by an average of $150. Some borrowers’ monthly payments increased as they took advantage of the ability to refinance through Refi Plus to reduce the term of their loan, to switch from an adjustable-rate mortgage to a fixed-rate mortgage or to switch from an interest-only mortgage to a fully amortizing mortgage.
•
We support affordability in the multifamily rental market. Over 85% of the multifamily units we financed in the second quarter of 2014 were affordable to families earning at or below the median income in their area.
•
In addition to purchasing and guaranteeing loans, we provide funds to the mortgage market through short-term financing and other activities. These activities are described in more detail in our 2013 Form 10-K in “Business—Business Segments—Capital Markets.”
2014 Market Share
We remained the largest single issuer of mortgage-related securities in the secondary market during the second quarter of 2014, with an estimated market share of new single-family mortgage-related securities issuances of 39%, compared with 41% in the first quarter of 2014 and 45% in the second quarter of 2013. See “Outlook—Revenues” for a discussion of the impact on our market share of the decline in originations that are refinancings.
We remained a continuous source of liquidity in the multifamily market in the second quarter and first half of 2014. We owned or guaranteed approximately 20% of the outstanding debt on multifamily properties as of March 31, 2014 (the latest date for which information is available).
Helping to Build a Sustainable Housing Finance System
We have invested significant resources towards helping to build a safer, transparent and sustainable housing finance system, primarily through pursuing the strategic goals identified by our conservator. On May 13, 2014, FHFA released its 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac, along with a set of corporate performance objectives for Fannie Mae and Freddie Mac, referred to as the 2014 conservatorship scorecard. The new strategic plan, which updates FHFA’s 2012 Strategic Plan, and the scorecard identify three reformulated strategic goals:
•
Maintain, in a safe and sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster liquid, efficient, competitive and resilient national housing finance markets.
•
Reduce taxpayer risk through increasing the role of private capital in the mortgage market.
•
Build a new single-family securitization infrastructure for use by Fannie Mae and Freddie Mac and adaptable for use by other participants in the secondary market in the future.
In reformulating the goals, FHFA increased emphasis on the maintain goal, making it the first goal and doubling the scorecard weight given to this goal, from 20% in the 2013 conservatorship scorecard to 40% in the 2014 conservatorship scorecard. The reduce goal is focused on ways to bring additional private capital into the housing finance system in order to reduce taxpayer risk. Finally, development of the common securitization platform, which is the core of the build goal, was revised to focus on making the new shared system operational for the existing single-family securitization activities of Fannie Mae and Freddie Mac. The build goal also involves working towards the development of a single common security for Fannie Mae and Freddie Mac, which we discuss in “Legislative and Regulatory Developments—Housing Finance Reform and the Role of the GSEs—Conservator Developments.” The reduce and build goals are each weighted 30% in the 2014 conservatorship scorecard, which is set forth in our current report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on May 14, 2014.
In addition to working on FHFA’s conservatorship scorecard objectives, we are working on related initiatives to help prepare our business and infrastructure for potential future changes in the structure of the U.S. housing finance system and to help ensure our safety and soundness during conservatorship. These projects will likely take several years to implement.
Housing and Mortgage Market and Economic Conditions
Economic growth strengthened in the second quarter of 2014. According to the U.S. Bureau of Economic Analysis advance estimate, the inflation-adjusted U.S. gross domestic product, or GDP, rose by 4.0% on an annualized basis in the second quarter of 2014, compared with a decline of 2.1% in the first quarter of 2014. The overall economy gained an estimated 831,000 jobs in the second quarter of 2014. According to the U.S. Bureau of Labor Statistics, over the 12 months ending in June 2014, the economy created an estimated 2.6 million non-farm jobs. The unemployment rate was 6.1% in June 2014, compared with 6.7% in March 2014. In July 2014, non-farm payrolls increased by 209,000 jobs, and the unemployment rate increased to 6.2%.

9


Total originations in the U.S. single-family mortgage market were an estimated $317.4 billion in the second quarter of 2014, up from an estimated $237.2 billion in the first quarter of 2014, driven by an increase in purchase originations to an estimated $188.0 billion in the second quarter of 2014 from an estimated $123.4 billion in the first quarter of 2014. According to the Federal Reserve, total U.S. residential mortgage debt outstanding, which includes $9.85 trillion of single-family debt outstanding, was estimated to be approximately $10.79 trillion as of March 31, 2014 (the latest date for which information is available), compared with $10.82 trillion as of December 31, 2013.
Housing activity increased during the second quarter of 2014 as compared with the first quarter of 2014. Total existing home sales averaged 4.9 million units annualized in the second quarter of 2014, a 5.8% increase from the first quarter of 2014, according to data from the National Association of REALTORS®. Sales of foreclosed homes and preforeclosure, or “short,” sales (together, “distressed sales”) accounted for 11% of existing home sales in June 2014, compared with 14% in March 2014 and 15% in June 2013. According to the U.S. Census Bureau, new single-family home sales declined during the second quarter of 2014, averaging an annualized rate of 419,000 units, a 2.8% decrease from the first quarter of 2014.
The number of months’ supply, or the inventory/sales ratio, of available existing homes and of new homes each increased in the second quarter of 2014. According to the U.S. Census Bureau, the number of months’ supply of new homes was 5.8 months as of June 30, 2014, compared with 5.7 months as of March 31, 2014. According to data from the National Association of REALTORS®, the months’ supply of existing unsold homes was 5.5 months as of June 30, 2014, compared with a 5.1 months’ supply as of March 31, 2014.
The overall mortgage market serious delinquency rate, which has trended down since peaking in the fourth quarter of 2009, remained historically high at 5.0% as of March 31, 2014 (the latest date for which information was available), according to the Mortgage Bankers Association National Delinquency Survey, compared with 5.4% as of December 31, 2013. We provide information about Fannie Mae’s serious delinquency rate, which also decreased in the first quarter of 2014, in “Improving the Credit Performance of our Book of Business.”
Based on our home price index, we estimate that home prices on a national basis increased by 2.7% in the second quarter of 2014 and by 3.7% in the first half of 2014, following increases of 8.3% in 2013 and 4.1% in 2012. Despite the recent increases in home prices, we estimate that, through June 30, 2014, home prices on a national basis remained 10.7% 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.
Many homeowners continue to have “negative equity” in their homes as a result of declines in home prices since 2006, which means their principal mortgage balance exceeds the current market value of their home. This increases the likelihood that borrowers will abandon their mortgage obligations and that the loans will become delinquent and proceed to foreclosure. According to CoreLogic, Inc. the number of residential properties with mortgages in a negative equity position in the first quarter of 2014 was approximately 6.3 million, down from 6.6 million in the fourth quarter of 2013 and from 9.8 million in the first quarter of 2013. The percentage of properties with mortgages in a negative equity position in the first quarter of 2014 was 12.7%, down from 13.4% in the fourth quarter of 2013, from 20.2% in the first quarter of 2013 and from its peak of 26.0% reached in the fourth quarter of 2009.
Thirty-year mortgage rates ended the quarter at 4.14% for the week of June 26, 2014, down from 4.40% for the week ended March 27, 2014, according to Freddie Mac.
During the second quarter of 2014, the multifamily sector continued to exhibit solid fundamentals, according to preliminary third-party data, with vacancy levels declining and rent growth increasing. The national multifamily vacancy rate for institutional investment-type apartment properties decreased to an estimated 4.75% as of June 30, 2014, compared with 5.00% as of March 31, 2014 and 5.10% as of June 30, 2013.
National asking rents increased by an estimated 0.75% during the second quarter of 2014, compared with an increase of 0.50% during the first quarter of 2014. Continued demand for multifamily rental units was reflected in the estimated positive net absorption (that is, the net change in the number of occupied rental units during the time period) of approximately 35,000 units during the second quarter of 2014, according to preliminary data from Reis, Inc., compared with approximately 41,000 units during the first quarter of 2014.
As a result of the continued demand for multifamily rental units over the past few years, there has been an increase in the amount of new multifamily construction development nationally. Approximately 279,000 new multifamily units are expected to be completed this year. The bulk of this new supply is concentrated in a limited number of metropolitan areas. As a result, multifamily fundamentals could be impacted in certain localized areas, producing a temporary slowdown in net absorption rates, occupancy levels and effective rents in those areas later in 2014.

10


Outlook
Uncertainty Regarding our Future Status. We expect continued significant uncertainty regarding the future of our company and the housing finance system, including how long the company will continue to be in its current form, the extent of our role in the market, what form we will have, what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated and whether we will continue to exist following conservatorship.
We cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation. See “Legislative and Regulatory Developments” in this report and in our First Quarter 2014 Form 10‑Q and “Business—Housing Finance Reform” in our 2013 Form 10-K for discussion of proposals for reform of the housing finance system, including the GSEs, that could materially affect our business, including proposed federal legislation that, among other things, would require the wind down of Fannie Mae and Freddie Mac. See “Risk Factors” in both this report and in our 2013 Form 10-K for a discussion of the risks to our business relating to the uncertain future of our company.
Financial Results. Our financial results continued to be strong in the second quarter of 2014, with net income of $3.7 billion. We expect to remain profitable for the foreseeable future. While we expect our annual net income to remain strong over the next few years, we expect our annual net income to be substantially lower than our net income for 2013. We discuss the reasons for this expectation, and note our expectation that certain factors that contributed to a large portion of our 2013 net income will not contribute as significantly or at all to our earnings in 2014 or future years, in “Business—Executive Summary—Outlook—Financial Results” in our 2013 Form 10-K. Our earnings will be affected by a number of factors, including: changes in home prices; changes in interest rates; 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. Some of these factors, such as changes in interest rates or home prices, could result in significant variability in our earnings from quarter to quarter or year to year. 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 as noted in “Uncertainty Regarding our Future Status” above.
Revenues. While changes in interest rates and home prices may result in volatility in our net income, we expect stable revenues similar to the second quarter of 2014 as we operate in a more normalized business environment. We currently have two primary sources of revenues: (1) 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; and (2) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties. 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). Historically, we have generated the majority of our revenues from the difference between the interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets. As we discuss in our 2013 Form 10-K in “Business—Conservatorship and Treasury Agreements—Treasury Agreements—Covenants under Treasury Agreements,” we are required to reduce the size of our retained mortgage portfolio each year until we hold no more than $250 billion in mortgage assets by the end of 2018. As a result of both the shrinking of our retained mortgage portfolio and the impact of guaranty fee increases, an increasing portion of our revenues in recent years has been derived from guaranty fees rather than from interest income earned on our retained mortgage portfolio assets. We recognize almost all of our guaranty fee revenue in net interest income in our condensed consolidated statements of operations and comprehensive income due to the consolidation of the substantial majority of our MBS trusts on our balance sheets. The percentage of our net interest income derived from guaranty fees on loans underlying our Fannie Mae MBS has increased in recent periods. We estimate that approximately half of our net interest income for the first half of 2014 was derived from guaranty fees on loans underlying our Fannie Mae MBS, compared with approximately one-third of our net interest income for the first half of 2013. We expect that guaranty fees will continue to account for an increasing portion of our revenues.
The decrease in the balance of mortgage assets held in our retained mortgage portfolio contributed to a decline in our net interest income in the second quarter of 2014 as compared with the second quarter of 2013. We expect continued decreases in the size of our retained mortgage portfolio, which will continue to negatively impact our net interest income and revenues; however, we also expect increases in our guaranty fee revenues will at least partially offset the negative impact of the decline in our retained mortgage portfolio. The extent to which the positive impact of increased guaranty fee revenues will offset the negative impact of the decline in the size of our retained mortgage portfolio will depend on many factors, including: changes to guaranty fee pricing we may make in the future; 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; economic and housing market conditions; and legislative and regulatory changes.

11


Although our single-family acquisition volume declined significantly in the first half of 2014 as compared with the first half of 2013, liquidations of loans from our single-family guaranty book of business also declined. Accordingly, the size of our single-family guaranty book of business remained relatively flat during the first half of 2014. The decline in our single-family acquisition volume reflects a decrease in originations of single-family mortgages that are refinancings. The decrease in refinancings as a percentage of originations has reduced our market share. See “Contributions to the Housing and Mortgage Markets—2014 Market Share,” above, for information on our market share and “Overall Market Conditions,” below, for information on our expectations for refinancing originations.
Our single-family guaranty fee revenues increased in the first half of 2014 as compared with the first half of 2013, as loans with higher guaranty fees have become a larger part of our guaranty book of business. We expect our single-family acquisition volumes this year to continue to remain lower than prior year volumes; however, we also expect liquidations of loans from our single-family guaranty book of business to remain lower. As a result, we do not expect these lower volumes to have a material adverse effect on the size of our single-family guaranty book of business or on our single-family guaranty fee revenues in the near term. However, if the current reduction in our acquisition volume accelerates or remains ongoing for a significant period of time or if the rate of liquidations of loans from our single-family guaranty book increases without a corresponding increase in our acquisitions, it could adversely affect the size of our single-family guaranty book of business and our single-family guaranty fee revenues over the long term.
Dividend Obligations to Treasury. 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 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 $2.4 billion for each quarter of 2014 and then decreases by $600 million annually until it reaches zero in 2018.
From 2009 through the first quarter of 2012, we received a total of $116.1 billion from Treasury under the senior preferred stock purchase agreement. This funding provided us with the capital and liquidity needed to fulfill our mission of providing liquidity and support to the nation’s housing finance markets and to avoid a trigger of mandatory receivership under the Federal Housing Finance Regulatory Reform Act of 2008 (the “2008 Reform Act”). In addition, a portion of the $116.1 billion we received from Treasury was drawn to pay dividends to Treasury because, prior to 2013, our dividend payments on the senior preferred stock accrued at an annual rate of 10%, and we were directed by our conservator to pay these dividends to Treasury each quarter even when we did not have sufficient income to pay the dividend. We have not received funds from Treasury under the agreement since the first quarter of 2012. From 2008 through the second quarter of 2014, we paid a total of $126.8 billion in dividends to Treasury on the senior preferred stock. Under the terms of the senior preferred stock purchase agreement, dividend payments do not offset prior Treasury draws, 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.
The Director of FHFA directs us to make dividend payments on the senior preferred stock on a quarterly basis. In September 2014, we expect to pay Treasury additional senior preferred stock dividends of $3.7 billion for the third quarter of 2014.
Overall Market Conditions. We expect that single-family mortgage loan serious delinquency and severity rates will continue their downward trend, but that single-family serious delinquency and severity rates will remain high compared with pre-housing crisis levels because it will take some time for the remaining delinquent loans with high mark-to-market LTV ratios originated prior to 2009 to work their way through the foreclosure process. Despite steady demand and stable fundamentals at the national level, the multifamily sector may continue to exhibit below average fundamentals in certain local markets and with certain properties. We expect the level of multifamily foreclosures in 2014 will generally remain commensurate with 2013 levels.
The increase in mortgage rates since the first half of 2013 has resulted in a decline in single-family mortgage originations, driven by a decline in refinancings. We forecast that total originations in the U.S. single-family mortgage market in 2014 will decrease from 2013 levels by approximately 41%, from an estimated $1.91 trillion in 2013 to $1.13 trillion in 2014, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will decrease from an estimated $1.18 trillion in 2013 to $428.6 billion in 2014. We forecast that total single-family mortgage debt outstanding will increase slightly in 2014, increasing from an estimated $9.89 trillion as of December 31, 2013 to $9.94 trillion as of December 31, 2014.
In recent years, the Federal Reserve has purchased a significant amount of mortgage-related securities issued by us, Freddie Mac and Ginnie Mae. The Federal Reserve began to taper these purchases in January 2014. The Federal Reserve’s tapering of its mortgage-related securities purchases, or possible future sales of mortgage-related securities by the Federal Reserve, could

12


result in increases in mortgage interest rates and adversely affect our single-family business volume. See “Risk Factors” in our 2013 Form 10-K for a description of the potential risks to our business as a result of increases in mortgage interest rates.
Home Prices. Based on our home price index, we estimate that home prices on a national basis increased by 2.7% in the second quarter of 2014 and by 3.7% in the first half of 2014. Although we expect home price growth to continue in 2014, we expect the rate of home price growth on a national basis in 2014 will be lower than in 2013. Future home price changes may be very different from our expectations as a result of significant inherent uncertainty in the current market environment, including uncertainty about the effect of recent and future changes in mortgage rates; actions the federal government has taken and may take with respect to fiscal policies, mortgage finance programs and policies, and housing finance reform; the Federal Reserve’s purchases and sales of mortgage-related securities; the impact of those actions on and changes generally in unemployment and the general economic and interest rate environment; and the impact on the U.S. economy of global economic conditions. 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. We currently realize losses on loans, through our charge-offs, at the time of foreclosure or when we accept short sales or deeds-in-lieu of foreclosure. Our credit losses were $1.5 billion in the second quarter of 2014, compared with $1.6 billion in the second quarter of 2013, and $2.6 billion in the first half of 2014, compared with $3.1 billion in the first half of 2013. Although our credit losses have declined in recent years, we expect our credit losses in 2014 and 2015 will be higher than in 2013. The amounts we recognized in 2013 pursuant to a number of repurchase and compensatory fee resolution agreements reduced our 2013 credit losses from what they otherwise would have been. Moreover, we expect our implementation of the charge-off provisions required by FHFA’s Advisory Bulletin AB 2012-02 in 2015 will increase our credit losses for 2015 from what they otherwise would be. We expect our credit losses to resume their downward trend beginning in 2016. See “Legislative and Regulatory Developments—FHFA Advisory Bulletin Regarding Framework for Adversely Classifying Loans” for further information about this Advisory Bulletin.
Loss Reserves. Our total loss reserves consist of (1) our allowance for loan losses, (2) our allowance for accrued interest receivable, (3) our allowance for preforeclosure property taxes and insurance receivables, and (4) our reserve for guaranty losses. Our total loss reserves were $42.1 billion as of June 30, 2014, down from $47.3 billion as of December 31, 2013. We expect our loss reserves will continue to decline in 2014, but at a slower pace than in 2013. Although our loss reserves have declined substantially from their peak and are expected to decline further, we expect our loss reserves will remain elevated relative to the levels experienced prior to the 2008 housing crisis for an extended period because (1) we expect future defaults on loans that we acquired prior to 2009 and the resulting charge-offs will occur over a period of years and (2) a significant portion of our reserves represents concessions granted to borrowers upon modification of their loans and our reserves will continue to reflect these concessions until the loans are fully repaid or default.
Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations. We present a number of estimates and expectations in this executive summary regarding our future performance, including estimates and expectations regarding our future financial results and profitability, the level and sources of our revenues, our future dividend payments to Treasury, the profitability and performance of single-family loans we have acquired, our future acquisitions, future liquidations of loans from our single-family guaranty book of business, our future credit losses and our future loss reserves. We also present a number of estimates and expectations in this executive summary regarding future housing market conditions, including expectations regarding future delinquency and severity rates, future mortgage originations, future refinancings, future single-family mortgage debt outstanding and future home prices. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous factors. Our future estimates of our performance and housing market conditions, as well as the actual results, may differ materially from our current estimates and expectations as a result of: the timing and level of, as well as regional variation in, home price changes; changes in interest rates, unemployment rates and other macroeconomic and housing market variables; our future guaranty fee pricing and the impact of that pricing on our competitive environment; our future serious delinquency rates; our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers; future legislative or regulatory requirements that have a significant impact on our business, such as a requirement that we implement a principal forgiveness program; future legislative or regulatory changes that have a significant impact on our business, such as the enactment of housing finance reform legislation; actions we may be required to take by FHFA, as our conservator or as our regulator, such as changes in the type of business we do; future updates to our models relating to our loss reserves, including the assumptions used by these models; future changes to our accounting policies; significant changes in modification and foreclosure activity; changes in borrower behavior, such as an increasing number of underwater borrowers who strategically default on their mortgage loans; the effectiveness of our loss mitigation strategies, management of our REO inventory and pursuit of contractual remedies; whether our counterparties meet their obligations in full; resolution or settlement agreements we may enter into with our counterparties; changes in the fiscal and monetary policies of the Federal Reserve, including the effect of the tapering of its program of purchasing mortgage-related securities and any

13


future sales of such securities; changes in the fair value of our assets and liabilities; impairments of our assets; changes in generally accepted accounting principles (“GAAP”); credit availability; natural and other disasters; and other factors, including those discussed in “Forward-Looking Statements,” “Risk Factors” and elsewhere in this report and in our 2013 Form 10-K. 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.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
The information in this section updates and supplements information regarding legislative and regulatory developments set forth in “Business—Housing Finance Reform” and “Business—Our Charter and Regulation of Our Activities” in our 2013 Form 10-K and in “MD&A—Legislative and Regulatory Developments” in our First Quarter 2014 Form 10-Q. Also see “Risk Factors” in this report and in our 2013 Form 10-K for a discussion of risks relating to legislative and regulatory matters.
Housing Finance Reform and the Role of the GSEs
Legislative Developments
Policymakers and others have focused significant attention in recent years on how to reform the nation’s housing finance system, including what role, if any, Fannie Mae and Freddie Mac should play in that system. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law in July 2010, called for enactment of meaningful structural reforms of Fannie Mae and Freddie Mac. See “Business—Housing Finance Reform” in our 2013 Form 10-K and “MD&A—Legislative and Regulatory Developments” in our First Quarter 2014 Form 10-Q for a description of activities relating to GSE reform that occurred in 2011 through the first quarter of 2014, including descriptions of: the Administration’s housing policy priorities, which include winding down Fannie Mae and Freddie Mac through a responsible transition; the Administration’s February 2011 report on GSE reform, which discusses potential options for a new long-term structure for the housing finance system following the wind-down of Fannie Mae and Freddie Mac; and legislation considered in the current Congress relating to housing finance system reform and the terms of Fannie Mae’s and Freddie Mac’s senior preferred stock purchase agreements with Treasury.
Congress has continued to consider housing finance reform and the future of the GSEs this year. On May 15, 2014, the Senate Banking Committee approved the Housing Finance Reform and Taxpayer Protection Act of 2014, which is also known as the Johnson-Crapo bill. This bill, if enacted in its current form, would result in the wind-down and eventual liquidation of Fannie Mae and Freddie Mac and would materially affect our business prior to our eventual liquidation. Despite activity at the committee level, neither the full Senate nor the full House of Representatives has considered the Johnson-Crapo bill or any other housing finance reform bill in the current Congress.
We expect Congress to continue to consider housing finance reform legislation. We cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation. As a result, there continues to be significant uncertainty regarding the future of our company. See “Risk Factors” in this report and our 2013 Form 10-K for discussions of the risks to our business relating to the uncertain future of our company and of how the uncertain future of our company may adversely affect our ability to retain and recruit well-qualified employees, including senior management.
Conservator Developments
In addition to the legislative debate, actions taken by our conservator have an impact on the role of the GSEs in the nation’s housing finance system now and in the future. On May 13, 2014, FHFA released its 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac, along with the 2014 conservatorship scorecard. We discuss the reformulated strategic goals in the new strategic plan and the scorecard in “Executive Summary—Helping to Build a Sustainable Housing Finance System.” For a discussion of the prior formulation of FHFA’s strategic goals for the conservatorships, please see “MD&A—Executive Summary—Helping to Build a Sustainable Housing Finance System” in our 2013 Form 10-K.
The strategic plan includes a goal that involves working toward the development of the operational and systems capabilities to issue a single common security for Fannie Mae and Freddie Mac. Development of a single common security could reduce the trading advantage Fannie Mae mortgage-backed securities have over Freddie Mac securities. If this were to occur, it could negatively impact our ability to compete for mortgage assets in the secondary market, and therefore could adversely affect our results of operations.

14


Potential Changes to Our Single-Family Guaranty Fee Pricing
In December 2013, FHFA directed Fannie Mae and Freddie Mac to increase base single-family guaranty fees for all mortgages by 10 basis points. FHFA also directed Fannie Mae and Freddie Mac to make changes to single-family loan level price adjustments, which are one-time cash fees that are charged at the time a loan is acquired based on the credit characteristics of the loan. The changes were to become effective in March and April 2014. In January 2014, FHFA Director Melvin Watt directed Fannie Mae and Freddie Mac to suspend the implementation of these guaranty fee changes pending further review by FHFA. 
FHFA subsequently announced on June 5, 2014 that it was requesting public input on the guaranty fees that Fannie Mae and Freddie Mac charge lenders. FHFA’s request for input includes questions related to guaranty fee policy and implementation, including what factors and goals should be considered in setting guaranty fees, target return on capital and amount of capital required. 
FHFA Determination Not to Reduce Current Conforming Loan Limits
In December 2013, FHFA requested public input on a plan to gradually reduce the conforming loan limits for one-family residences. FHFA’s announcement noted that reducing loan limits furthered its goal of contracting the market presence of Fannie Mae and Freddie Mac gradually over time, and was in line with President Obama’s August 2013 request that FHFA reduce loan limits in order to reduce the government’s footprint in the market. In areas where the statutory maximum loan limit for one-family residences is currently $417,000, FHFA’s plan would have reduced the loan limit to $400,000, a reduction of approximately 4%. The loan limit would be reduced by the same percentage in areas with higher limits. On May 13, 2014, Director Watt announced that FHFA will not use its authority as conservator to reduce current loan limits, indicating that the decision was motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market.
FHFA Advisory Bulletin Regarding Framework for Adversely Classifying Loans
In April 2012, FHFA issued Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” (the “Advisory Bulletin”), which is applicable to Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The Advisory Bulletin establishes guidelines for adverse classification and identification of specified single-family and multifamily assets and off-balance sheet credit exposures. The Advisory Bulletin indicates that this guidance considers and is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000.
Among other requirements, this Advisory Bulletin requires that we classify the portion of an outstanding single-family loan balance in excess of the fair value of the underlying property, less costs to sell and adjusted for any credit enhancements, as a “loss” no later than when the loan becomes 180 days delinquent, except in certain specified circumstances (such as those involving properly secured loans with an LTV ratio equal to or less than 60%). For multifamily loans, the Advisory Bulletin requires that any portion of a loan balance that exceeds the amount secured by the fair value of the collateral, less costs to sell, for which there is no available and reliable source of repayment other than the sale of the underlying real estate collateral, to be classified as a “loss.” The Advisory Bulletin also requires us to charge off the portion of the loan classified as a “loss.” The Advisory Bulletin specifies that, if we subsequently receive full or partial payment of a previously charged-off loan, we may report a recovery of the amount, either through our loss reserves or as a reduction in our foreclosed property expenses. In May 2013, FHFA issued an additional Advisory Bulletin clarifying the implementation timeline for AB 2012-02, requiring that: (1) the asset classification provisions of AB 2012-02 should be implemented by January 1, 2014; and (2) the charge-off provisions of AB 2012-02 should be implemented no later than January 1, 2015. Effective January 1, 2014, we implemented the asset classification provisions of AB 2012-02, and we provide FHFA with this information on a quarterly basis.
We establish an allowance for loan losses against our loans either through our collective loss reserve or our loss reserve for individually impaired loans. Thus, at the time single-family loans become 180 days delinquent, we have already established an allowance for loan losses against them. The Advisory Bulletin requires us to change our practice for determining when a loan is deemed uncollectible to the date the loan is classified as a “loss” as described above. This is a change from our current practice for determining when a loan is deemed to be uncollectible, which is based on historical data and results in a loan being deemed to be uncollectible at the date of foreclosure or other liquidation event (such as a deed-in-lieu of foreclosure or a short sale).
In the period in which we adopt the Advisory Bulletin, our allowance for loan losses on the impacted loans will be eliminated and the corresponding recorded investment in the loan will be reduced by the amounts that are charged off. Under our existing accounting practices and upon adoption of the Advisory Bulletin, the ultimate amount of losses we realize on our

15


loan portfolio will be the same over time; however, the timing of when we recognize the losses in our financial statements will differ.
We are working with FHFA to consider how the Advisory Bulletin may impact our credit risk management practices. During the past twelve months, approximately 40% of our first-time modifications were initiated after loans became 180 days delinquent. This is a result of a number of factors, including servicer backlogs, lack of borrower responsiveness to loss mitigation efforts, and extended foreclosure timelines, which affect the willingness of borrowers to engage regarding loss mitigation options. Given the current rate of modification activity after loans become 180 days delinquent, the benefit we expect from borrower re-performance is significant in estimating the losses for this population of loans. In July 2013, we introduced a streamlined modification program that may accelerate the timing of our modifications; however, we still expect a meaningful number of modifications to be initiated after our loans become 180 days past due. As we obtain incremental information on the performance of this program, we will enhance our loss estimates, as necessary, to reflect the change in the expected timing and volume of modifications.
We are working with FHFA to resolve certain implementation issues related to our adoption of the Advisory Bulletin. We do not expect that the adoption of the Advisory Bulletin will have a material impact on our financial position or results of operations.
For information on the risks presented by our adoption of the Advisory Bulletin, see “Risk Factors” in our 2013 Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the condensed consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in “Note 1, Summary of Significant Accounting Policies” in this report and in our 2013 Form 10-K.
We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. Management has discussed any significant changes in judgments and assumptions in applying our critical accounting policies with the Audit Committee of our Board of Directors. See “Risk Factors” in our 2013 Form 10-K for a discussion of the risks associated with the need for management to make judgments and estimates in applying our accounting policies and methods. We have identified four of our accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. These critical accounting policies and estimates are as follows:
•    Fair Value Measurement;
•    Total Loss Reserves;
•    Other-Than-Temporary Impairment of Investment Securities; and
•    Deferred Tax Assets.
See “MD&A—Critical Accounting Policies and Estimates” in our 2013 Form 10-K for a discussion of these critical accounting policies and estimates.
CONSOLIDATED RESULTS OF OPERATIONS
This section provides a discussion of our condensed consolidated results of operations for the periods indicated and should be read together with our condensed consolidated financial statements, including the accompanying notes.

16


Table 3 displays a summary of our condensed consolidated results of operations for the periods indicated.
Table 3: Summary of Condensed Consolidated Results of Operations
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
 
2014
 
2013
 
Variance
 
2014
 
2013
 
Variance
 
 
(Dollars in millions)
Net interest income
 
$
4,904

 
$
5,667

 
$
(763
)
 
$
9,642

 
$
11,971

 
$
(2,329
)
Fee and other income
 
383

 
485

 
(102
)
 
4,738

 
1,053

 
3,685

Net revenues
 
5,287

 
6,152

 
(865
)
 
14,380

 
13,024

 
1,356

Investment gains, net
 
506

 
290

 
216

 
652

 
408

 
244

Fair value (losses) gains, net
 
(934
)
 
829

 
(1,763
)
 
(2,124
)
 
1,663

 
(3,787
)
Administrative expenses
 
(697
)
 
(626
)
 
(71
)
 
(1,369
)
 
(1,267
)
 
(102
)
Credit-related income
 
 
 
 
 
 
 
 
 
 
 
 
Benefit for credit losses
 
1,639

 
5,383

 
(3,744
)
 
2,413

 
6,340

 
(3,927
)
Foreclosed property income
 
214

 
332

 
(118
)
 
476

 
592

 
(116
)
Total credit-related income
 
1,853

 
5,715

 
(3,862
)
 
2,889

 
6,932

 
(4,043
)
Other non-interest expenses(1)
 
(596
)
 
(280
)
 
(316
)
 
(1,100
)
 
(566
)
 
(534
)
Income before federal income taxes
 
5,419

 
12,080

 
(6,661
)
 
13,328

 
20,194

 
(6,866
)
(Provision) benefit for federal income taxes
 
(1,752
)
 
(1,985
)
 
233

 
(4,336
)
 
48,586

 
(52,922
)
Net income
 
3,667

 
10,095

 
(6,428
)
 
8,992

 
68,780

 
(59,788
)
Less: Net income attributable to noncontrolling interest
 
(1
)
 
(11
)
 
10

 
(1
)
 
(11
)
 
10

Net income attributable to Fannie Mae
 
$
3,666

 
$
10,084

 
$
(6,418
)
 
$
8,991

 
$
68,769

 
$
(59,778
)
Total comprehensive income attributable to Fannie Mae
 
$
3,711

 
$
10,250

 
$
(6,539
)
 
$
9,408

 
$
69,589

 
$
(60,181
)
__________
(1) 
Consists of net other-than-temporary impairments, debt extinguishment gains, net, TCCA fees and other expenses, net.
Net Interest Income
We currently have two primary sources of net interest income: (1) 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; and (2) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties, which we refer to as mortgage loans of consolidated trusts.
Table 4 displays an analysis of our net interest income, average balances, and related yields earned on assets and incurred on liabilities for the periods indicated. 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 5 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.

17


Table 4: Analysis of Net Interest Income and Yield
 
For the Three Months Ended June 30,
 
2014
 
2013
 
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
$
288,904

 
$
2,632

 
3.64
%
 
$
332,779

 
$
3,209

 
3.86
%
Mortgage loans of consolidated trusts
2,764,340

 
25,533

 
3.69
 
 
2,690,045

 
24,847

 
3.69
 
Total mortgage loans(1)
3,053,244

 
28,165

 
3.69
 
 
3,022,824

 
28,056

 
3.71
 
Mortgage-related securities
146,632

 
1,719

 
4.69
 
 
218,313

 
2,489

 
4.56
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(100,240
)
 
(1,171
)
 
4.67
 
 
(140,139
)
 
(1,629
)
 
4.65
 
Total mortgage-related securities, net
46,392

 
548

 
4.72
 
 
78,174

 
860

 
4.40
 
Non-mortgage securities(2)
34,410

 
9

 
0.10
 
 
53,711

 
13

 
0.10
 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
28,731

 
6

 
0.08
 
 
72,228

 
22

 
0.12
 
Advances to lenders
2,896

 
18

 
2.46
 
 
5,452

 
27

 
1.96
 
Total interest-earning assets
$
3,165,673

 
$
28,746

 
3.63
%
 
$
3,232,389

 
$
28,978

 
3.59
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt(3)
$
80,682

 
$
20

 
0.10
%
 
$
105,098

 
$
36

 
0.14
%
Long-term debt
403,082

 
2,129

 
2.11
 
 
508,768

 
2,552

 
2.01
 
Total short-term and long-term funding debt
483,764

 
2,149

 
1.78
 
 
613,866

 
2,588

 
1.69
 
Debt securities of consolidated trusts
2,818,331

 
22,864

 
3.25
 
 
2,772,111

 
22,352

 
3.23
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(100,240
)
 
(1,171
)
 
4.67
 
 
(140,139
)
 
(1,629
)
 
4.65
 
Total debt securities of consolidated trusts held by third parties
2,718,091

 
21,693

 
3.19
 
 
2,631,972

 
20,723

 
3.15
 
Total interest-bearing liabilities
$
3,201,855

 
$
23,842

 
2.98
%
 
$
3,245,838

 
$
23,311

 
2.87
%
Net interest income/net interest yield
 
 
$
4,904

 
0.62
%
 
 
 
$
5,667

 
0.70
%


18


 
For the Six Months Ended June 30,
 
2014
 
2013
 
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
$
292,493

 
$
5,266

 
3.60
%
 
$
339,209

 
$
7,039

 
4.15
%
Mortgage loans of consolidated trusts
2,767,973

 
51,487

 
3.72
 
 
2,679,643

 
50,241

 
3.75
 
Total mortgage loans(1)
3,060,466

 
56,753

 
3.71
 
 
3,018,852

 
57,280

 
3.79
 
Mortgage-related securities
152,114

 
3,538

 
4.65
 
 
227,310

 
5,172

 
4.55
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(104,019
)
 
(2,429
)
 
4.67
 
 
(146,562
)
 
(3,426
)
 
4.68
 
Total mortgage-related securities, net
48,095

 
1,109

 
4.61
 
 
80,748

 
1,746

 
4.32
 
Non-mortgage securities(2)
34,020

 
15

 
0.09
 
 
48,325

 
26

 
0.11
 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
31,050

 
11

 
0.07
 
 
71,023

 
49

 
0.14
 
Advances to lenders
3,054

 
37

 
2.41
 
 
5,767

 
57

 
1.97
 
Total interest-earning assets
$
3,176,685

 
$
57,925

 
3.65
%
 
$
3,224,715

 
$
59,158

 
3.67
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt(3)
$
71,856

 
$
40

 
0.11
%
 
$
108,923

 
$
78

 
0.14
%
Long-term debt
422,727

 
4,474

 
2.12
 
 
511,339

 
5,227

 
2.04
 
Total short-term and long-term funding debt
494,583

 
4,514

 
1.83
 
 
620,262

 
5,305

 
1.71
 
Debt securities of consolidated trusts
2,820,316

 
46,198

 
3.28
 
 
2,763,662

 
45,308

 
3.28
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(104,019
)
 
(2,429
)
 
4.67
 
 
(146,562
)
 
(3,426
)
 
4.68
 
Total debt securities of consolidated trusts held by third parties
2,716,297

 
43,769

 
3.22
 
 
2,617,100

 
41,882

 
3.20
 
Total interest-bearing liabilities
$
3,210,880

 
$
48,283

 
3.01
%
 
$
3,237,362

 
$
47,187

 
2.92
%
Net interest income/net interest yield
 
 
$
9,642

 
0.61
%
 
 
 
$
11,971

 
0.74
%

 
As of June 30,
 
2014
 
2013
Selected benchmark interest rates(4)
 
 
 
 
 
3-month LIBOR
0.23
%
 
0.27
%
2-year swap rate
0.58
 
 
0.51
 
5-year swap rate
1.70
 
 
1.57
 
30-year Fannie Mae MBS par coupon rate
3.18
 
 
3.32
 
__________
(1) 
Average balance includes mortgage loans on nonaccrual status. Interest income on nonaccrual mortgage loans is recognized when cash is received. Interest income not recognized for loans on nonaccrual status was $454 million and $981 million, respectively, for the second quarter and first half of 2014 compared with $718 million and $1.5 billion, respectively, for the second quarter and first half of 2013.
(2) 
Includes cash equivalents.
(3) 
Includes federal funds purchased and securities sold under agreements to repurchase.
(4) 
Data from IntercontinentalExchange Group, Inc., Thomson Reuters and Bloomberg L.P.

19


Table 5: Rate/Volume Analysis of Changes in Net Interest Income
  
For the Three Months Ended
 
For the Six Months Ended
  
June 30, 2014 vs. 2013
 
June 30, 2014 vs. 2013
  
Total
 
Variance Due to:(1)
 
Total
 
Variance Due to:(1)
  
Variance
 
Volume
 
Rate
 
Variance
 
Volume
 
Rate
 
(Dollars in millions) 
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of Fannie Mae
$
(577
)
 
$
(407
)
 
$
(170
)
 
$
(1,773
)
 
$
(904
)
 
$
(869
)
Mortgage loans of consolidated trusts
686

 
686

 
—

 
1,246

 
1,646

 
(400
)
Total mortgage loans
109

 
279

 
(170
)
 
(527
)
 
742

 
(1,269
)
Total mortgage-related securities, net
(312
)
 
(373
)
 
61

 
(637
)
 
(754
)
 
117

Non-mortgage securities(2)
(4
)
 
(5
)
 
1

 
(11
)
 
(7
)
 
(4
)
Federal funds sold and securities purchased under agreements to resell or similar arrangements
(16
)
 
(11
)
 
(5
)
 
(38
)
 
(20
)
 
(18
)
Advances to lenders
(9
)
 
(15
)
 
6

 
(20
)
 
(31
)
 
11

Total interest income
(232
)
 
(125
)
 
(107
)
 
(1,233
)
 
(70
)
 
(1,163
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Short-term debt(3)
(16
)
 
(7
)
 
(9
)
 
(38
)
 
(23
)
 
(15
)
Long-term debt
(423
)
 
(553
)
 
130

 
(753
)
 
(932
)
 
179

Total short-term and long-term funding debt
(439
)
 
(560
)
 
121

 
(791
)
 
(955
)
 
164

Total debt securities of consolidated trusts held by third parties
970

 
840

 
130

 
1,887

 
1,921

 
(34
)
Total interest expense
531

 
280

 
251

 
1,096

 
966

 
130

Net interest income
$
(763
)
 
$
(405
)
 
$
(358
)
 
$
(2,329
)
 
$
(1,036
)
 
$
(1,293
)
__________
(1) 
Combined rate/volume variances are allocated to both rate and volume based on the relative size of each variance.
(2) 
Includes cash equivalents.
(3) 
Includes federal funds purchased and securities sold under agreements to repurchase.
Net interest income decreased in the second quarter of 2014 compared with the second quarter of 2013, primarily due to a 21% decline in the average balance of our retained mortgage portfolio. The decrease in net interest income from our retained mortgage portfolio was partially offset by increased guaranty fee revenue, as loans with higher guaranty fees have become a larger part of our guaranty book of business. 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 MBS trusts on our balance sheet.
The decrease in net interest income in the first half of 2014 compared with the first half of 2013 was a result of the same factors that impacted our quarterly results described above. Additionally, the first half of 2013 included the recognition of $518 million of income from unamortized cost basis adjustments on loans repurchased by Bank of America as part of a resolution agreement that was entered into in January 2013.
Net interest yield decreased in the second quarter and first half of 2014 compared with the second quarter and first half of 2013 due to the decline in the percentage of net interest income from our retained mortgage portfolio, which has a higher net interest yield than the net interest yield from guaranty fees.
Fee and Other Income
Fee and other income includes transaction fees, technology fees, multifamily fees and other miscellaneous income. Fee and other income increased in the first half of 2014 compared with the first half of 2013 primarily as a result of $4.2 billion recognized as income in the first half of 2014 compared with $145 million in the first half of 2013, both resulting from settlement agreements resolving certain lawsuits relating to PLS sold to us. See “Legal Proceedings—FHFA Private-Label Mortgage-Related Securities Litigation” for additional information.

20


Fair Value (Losses) Gains, Net
Table 6 displays the components of our fair value gains and losses.
Table 6: Fair Value (Losses) Gains, Net
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in millions)
Risk management derivatives fair value (losses) gains attributable to:
 
 
 
 
 
 
 
Net contractual interest expense accruals on interest rate swaps
$
(257
)
 
$
(181
)
 
$
(456
)
 
$
(381
)
Net change in fair value during the period
(679
)
 
872

 
(1,420
)
 
1,503

Total risk management derivatives fair value (losses) gains, net
(936
)
 
691

 
(1,876
)
 
1,122

Mortgage commitment derivatives fair value (losses) gains, net
(310
)
 
497

 
(655
)
 
628

Total derivatives fair value (losses) gains, net
(1,246
)
 
1,188

 
(2,531
)
 
1,750

Trading securities gains (losses), net
249

 
(228
)
 
394

 
168

Other, net(1)
63

 
(131
)
 
13

 
(255
)
Fair value (losses) gains, net
$
(934
)
 
$
829

 
$
(2,124
)
 
$
1,663

  
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
2013
5-year swap rate:
 
 
 
 
 
 
 
As of January 1
 
 
 
 
1.79
%
 
0.86
%
As of March 31
 
 
 
 
1.80
%
 
0.95
%
As of June 30
 
 
 
 
1.70
%
 
1.57
%
10-year swap rate:
 
 
 
 
 
 
 
As of January 1
 
 
 
 
3.09
%
 
1.84
%
As of March 31
 
 
 
 
2.84
%
 
2.01
%
As of June 30
 
 
 
 
2.63
%
 
2.70
%
__________
(1) 
Consists of debt fair value gains (losses), net; debt foreign exchange gains (losses), net; and mortgage loans fair value gains (losses), net.
Risk Management Derivatives Fair Value (Losses) Gains, Net
Risk management derivative instruments are an integral part of our interest rate risk management strategy. We supplement our issuance of debt securities with derivative instruments to further reduce duration risk, which includes prepayment risk. We recognized risk management derivative fair value losses in the second quarter and first half of 2014 primarily as a result of decreases in the fair value of our pay-fixed derivatives due to declines in longer-term swap rates during the periods. We recognized risk management derivative fair value gains in the second quarter and first half of 2013 primarily as a result of increases in the fair value of our pay-fixed derivatives due to increases in swap rates during the periods.
We present, by derivative instrument type, the fair value gains and losses, net on our derivatives for the three and six months ended June 30, 2014 and 2013 in “Note 9, Derivative Instruments.”

21


Mortgage Commitment Derivatives Fair Value (Losses) Gains, Net
We recognized fair value losses on our mortgage commitments in the second quarter and first half of 2014 primarily due to losses on commitments to sell mortgage-related securities driven by an increase in prices as interest rates decreased during the commitment period. We recognized fair value gains on our mortgage commitments in the second quarter and first half of 2013 primarily due to gains on commitments to sell mortgage-related securities as a result of a decrease in prices as interest rates increased during the commitment period.
Trading Securities Gains, Net
Gains from trading securities in the second quarter and first half of 2014 were driven by higher prices on securities primarily due to a decrease in interest rates, in addition to a narrowing of credit spreads on PLS.
Losses from trading securities in the second quarter of 2013 were primarily driven by lower prices on commercial mortgage-backed securities (“CMBS”) due to a widening of credit spreads and higher interest rates. Gains from trading securities in the first half of 2013 were primarily driven by higher prices on Alt-A and subprime PLS due to the narrowing of credit spreads on these securities as well as improvements in the credit outlook of certain financial guarantors of these securities in the first quarter of 2013. These gains were partially offset by the losses on CMBS in the second quarter of 2013.
Credit-Related Income
We refer to our benefit for loan losses and (benefit) provision for guaranty losses collectively as our “benefit for credit losses.” Credit-related income consists of our benefit for credit losses and foreclosed property income.
Benefit for Credit Losses
Table 7 displays the components of our total loss reserves and our total fair value losses previously recognized on loans purchased out of unconsolidated MBS trusts reflected in our condensed consolidated balance sheets. Because these fair value losses lowered our recorded loan balances, we have fewer inherent losses in our guaranty book of business and consequently require lower total loss reserves. For these reasons, we consider these fair value losses as an “effective reserve,” apart from our total loss reserves, to the extent that we expect to realize these amounts as credit losses on the acquired loans in the future. The fair value losses shown in Table 7 represent credit losses we expect to realize in the future or amounts that will eventually be recovered, either through net interest income for loans that cure or through foreclosed property income for loans where the sale of the collateral exceeds our recorded investment in the loan. We exclude these fair value losses from our credit loss calculation as described in “Credit Loss Performance Metrics.”
Table 7: Total Loss Reserves
 
As of
 
June 30,
2014
 
December 31, 2013
 
 
(Dollars in millions)
 
Allowance for loan losses
 
$
39,067

 
 
 
$
43,846

 
Reserve for guaranty losses(1)
 
1,384

 
 
 
1,449

 
Combined loss reserves
 
40,451

 
 
 
45,295

 
Allowance for accrued interest receivable
 
944

 
 
 
1,156

 
Allowance for preforeclosure property taxes and insurance receivable(2)
 
739

 
 
 
839

 
Total loss reserves
 
42,134

 
 
 
47,290

 
Fair value losses previously recognized on acquired credit-impaired loans(3)
 
10,573

 
 
 
11,316

 
Total loss reserves and fair value losses previously recognized on acquired credit-impaired loans
 
$
52,707

 
 
 
$
58,606

 
__________
(1) 
Amount included in “Other liabilities” in our condensed consolidated balance sheets.
(2) 
Amount included in “Other assets” in our condensed consolidated balance sheets.
(3) 
Represents the fair value losses on loans purchased out of unconsolidated MBS trusts reflected in our condensed consolidated balance sheets.
Table 8 displays changes in the total allowance for loan losses, reserve for guaranty losses and the total combined loss reserves for the periods indicated.

22


Table 8: Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in millions)
Changes in combined loss reserves:
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
Beginning balance
$
41,911

 
$
56,461

 
$
43,846

 
$
58,795

Benefit for loan losses
(1,558
)
 
(5,449
)
 
(2,430
)
 
(6,433
)
Charge-offs(1)
(1,911
)
 
(2,218
)
 
(3,510
)
 
(4,938
)
Recoveries
458

 
572

 
849

 
1,844

Other(2)
167

 
277

 
312

 
375

Ending balance
$
39,067

 
$
49,643

 
$
39,067

 
$
49,643

Reserve for guaranty losses:

 

 
 
 

Beginning balance
$
1,520

 
$
1,203

 
$
1,449

 
$
1,231

(Benefit) provision for guaranty losses
(81
)
 
66

 
17

 
93

Charge-offs
(49
)
 
(39
)
 
(77
)
 
(95
)
Recoveries
(6
)
 
—

 
(5
)
 
1

Ending balance
$
1,384

 
$
1,230

 
$
1,384

 
$
1,230

Combined loss reserves:

 

 
 
 

Beginning balance
$
43,431

 
$
57,664

 
$
45,295

 
$
60,026

Benefit for credit losses
(1,639
)
 
(5,383
)
 
(2,413
)
 
(6,340
)
Charge-offs(1)
(1,960
)
 
(2,257
)
 
(3,587
)
 
(5,033
)
Recoveries
452

 
572

 
844

 
1,845

Other(2)
167

 
277

 
312

 
375

Ending balance
$
40,451

 
$
50,873

 
$
40,451

 
$
50,873


 
 
As of
 
 
June 30,
2014
 
December 31, 2013
 
 
(Dollars in millions)
Allocation of combined loss reserves:
 
 
 
 
 
 
 
 
Balance at end of each period attributable to:
 
 
 
 
 
 
 
 
Single-family
 
 
$
39,984

 
 
 
$
44,705

 
Multifamily
 
 
467

 
 
 
590