SEC Filing | Fannie Mae

View:

Download DOC

Download PDF

Download XLS

Download XBRL

fnm-20210930

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-50231

Federal National Mortgage Association

(Exact name of registrant as specified in its charter)

Fannie Mae

Federally chartered corporation

52-0883107

1100 15th Street, NW

800

232-6643

Washington,

20005

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

(Address of principal executive offices, including zip code)

(Registrant’s telephone number, including area code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐ No ☑

As of October 15, 2021, there were 1,158,087,567 shares of common stock of the registrant outstanding.


TABLE OF CONTENTS
		Page
PART I—Financial Information		1
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	80
	Condensed Consolidated Statements of Operations and Comprehensive Income	81
	Condensed Consolidated Statements of Cash Flows	82
	Condensed Consolidated Statements of Changes in Equity	83
	Note 1—Summary of Significant Accounting Policies	85
	Note 2—Consolidations and Transfers of Financial Assets	90
	Note 3—Mortgage Loans	93
	Note 4—Allowance for Loan Losses	101
	Note 5—Investments in Securities	105
	Note 6—Financial Guarantees	108
	Note 7—Short-Term and Long-Term Debt	109
	Note 8—Derivative Instruments	111
	Note 9—Segment Reporting	116
	Note 10—Concentrations of Credit Risk	118
	Note 11—Netting Arrangements	122
	Note 12—Fair Value	124
	Note 13—Commitments and Contingencies	136
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
	Introduction	1
	Executive Summary	2
	Summary of Our Financial Performance	2
	Liquidity Provided in the First Nine Months of 2021	4
	Legislation and Regulation	4
	Key Market Economic Indicators	9
	Consolidated Results of Operations	13
	Consolidated Balance Sheet Analysis	26
	Retained Mortgage Portfolio	27
	Guaranty Book of Business	29
	Business Segments	30
	Single-Family Business	31
	Single-Family Mortgage Market	31
	Single-Family Market Activity	31
	Single-Family Business Metrics	32
	Single-Family Business Financial Results	33
	Single-Family Mortgage Credit Risk Management	35
	Multifamily Business	56
	Multifamily Mortgage Market	57
	Multifamily Business Metrics	57
	Multifamily Business Financial Results	59
	Multifamily Mortgage Credit Risk Management	59
	Liquidity and Capital Management	66
	Off-Balance Sheet Arrangements	71
	Risk Management	72
	Institutional Counterparty Credit Risk Management	72
	Market Risk Management, including Interest-Rate Risk Management	73
	Critical Accounting Policies and Estimates	75
	Impact of Future Adoption of New Accounting Guidance	76
	Forward-Looking Statements	76


Fannie Mae Third Quarter 2021 Form 10-Q						i


Item 3.	Quantitative and Qualitative Disclosures about Market Risk	138
Item 4.	Controls and Procedures	138
PART II—Other Information		140
Item 1.	Legal Proceedings	140
Item 1A.	Risk Factors	141
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	147
Item 3.	Defaults Upon Senior Securities	148
Item 4.	Mine Safety Disclosures	148
Item 5.	Other Information	148
Item 6.	Exhibits	149


Fannie Mae Third Quarter 2021 Form 10-Q						ii


						MD&A \| Introduction

PART I—FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



			We have been under conservatorship, with the Federal Housing Finance Agency (“FHFA”) acting as conservator, since September 6, 2008. As conservator, FHFA succeeded to all rights, titles, powers and privileges of the company, and of any shareholder, officer or director of the company with respect to the company and its assets. The conservator has since provided for the exercise of certain authorities by our Board of Directors. Our directors do not have any fiduciary duties to any person or entity except to the conservator and, accordingly, are not obligated to consider the interests of the company, the holders of our equity or debt securities, or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator.
			We do not know when or how the conservatorship will terminate, what further changes to our business will be made during or following conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated or whether we will continue to exist following conservatorship. Members of Congress and the Administration continue to express the importance of housing finance system reform.
			We are not currently permitted to pay dividends or other distributions to stockholders. Our agreements with the U.S. Department of the Treasury (“Treasury”) include a commitment from Treasury to provide us with funds to maintain a positive net worth under specified conditions; however, the U.S. government does not guarantee our securities or other obligations. Our agreements with Treasury also include covenants that significantly restrict our business activities. For additional information on the conservatorship, the uncertainty of our future, our agreements with Treasury, and recent developments relating to housing finance reform, see “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” and “Risk Factors” in our Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”) and “Legislation and Regulation” in this report and in our Form 10-Q for the quarter ended June 30, 2021 (“Second Quarter 2021 Form 10-Q”)

You should read this MD&A in conjunction with our unaudited condensed consolidated financial statements and related notes in this report and the more detailed information in our 2020 Form 10-K. You can find a “Glossary of Terms Used in This Report” in our 2020 Form 10-K.

Forward-looking statements in this report are based on management’s current expectations and are subject to significant uncertainties and changes in circumstances, as we describe in “Forward-Looking Statements.” Future events and our future results may differ materially from those reflected in our forward-looking statements due to a variety of factors, including those discussed in “Risk Factors” and elsewhere in this report and in our 2020 Form 10-K.

Introduction

Fannie Mae is a leading source of financing for mortgages in the United States, with $4.2 trillion in assets as of September 30, 2021. Organized as a government-sponsored entity, Fannie Mae is a shareholder-owned corporation. Our charter is an act of Congress, and we have a mission under that charter to provide liquidity and stability to the residential mortgage market and to promote access to mortgage credit. We were initially established in 1938.

Our revenues are primarily driven by guaranty fees we receive for assuming the credit risk on loans underlying the mortgage-backed securities we issue. We do not originate loans or lend money directly to borrowers. Rather, we work primarily with lenders who originate loans to borrowers. We securitize those loans into Fannie Mae mortgage-backed securities that we guarantee (which we refer to as Fannie Mae MBS or our MBS).

Effectively managing credit risk is key to our business. In exchange for assuming credit risk on the loans we acquire, we receive guaranty fees. These fees take into account the credit risk characteristics of the loans we acquire. Guaranty fees are set at the time we acquire loans and do not change over the life of the loan. How long a loan remains in our guaranty book is heavily dependent on interest rates. When interest rates decrease, a larger portion of our book of business turns over as more loans refinance. On the other hand, as interest rates increase, fewer loans refinance and our book turns over more slowly. Since guaranty fees are set at the time a loan is originated, the impact of any change in guaranty fees on future revenues is dependent on the rate at which newly originated loans replace the existing loans in our book of business.


Fannie Mae Third Quarter 2021 Form 10-Q						1


			MD&A \| Executive Summary \| Summary of Our Financial Performance

Executive Summary

Summary of Our Financial Performance

https://cdn.kscope.io/f5fb7ec7649f7274877862a8ad9a78e0-fnm-20210930_g1.jpg

•Net revenues increased $334 million in the third quarter of 2021 compared with the third quarter of 2020, primarily due to higher base guaranty fees due to an increase in the size of our guaranty book of business, partially offset by a decrease in amortization income as a result of lower prepayment volumes and a decrease in net interest income from portfolios in the third quarter of 2021 compared with the third quarter of 2020.

•Net income increased $613 million in the third quarter of 2021 compared with the third quarter of 2020, driven primarily by an increase in credit-related income, an increase in net revenues and lower fair value losses, partially offset by lower investment gains.

◦Credit-related income in the third quarter of 2021 was primarily driven by strong actual and forecasted home price growth and a reduction in our estimate of losses we expect to incur as a result of the COVID-19 pandemic.

◦The increase in net revenues is discussed above.

◦The decrease in fair value losses was driven by lower losses on commitments to sell mortgage-related securities in the third quarter of 2021 than in the third quarter of 2020. In the third quarter of 2021, commitment pricing remained relatively stable, whereas prices increased during the third quarter of 2020, driving fair value losses during the commitment period in 2020.

◦The decrease in investment gains was due to lower reperforming loan sales volume in the third quarter of 2021 compared with the third quarter of 2020.

•Net worth increased to $42.2 billion as of September 30, 2021 from $37.3 billion as of June 30, 2021. The increase is attributable to $4.8 billion of comprehensive income for the third quarter of 2021.


Fannie Mae Third Quarter 2021 Form 10-Q						2


			MD&A \| Executive Summary \| Summary of Our Financial Performance

https://cdn.kscope.io/f5fb7ec7649f7274877862a8ad9a78e0-fnm-20210930_g2.jpg

•Net revenues increased $4.2 billion in the first nine months of 2021 compared with the first nine months of 2020, primarily due to an increase in net amortization income as a result of high prepayment volumes from loan refinancings in the first nine months of 2021 driven by the low interest-rate environment, as well as higher base guaranty fees due to an increase in the size of our guaranty book of business. The increase in net revenues was partially offset by a decrease in net interest income from portfolios in the first nine months of 2021 compared with the first nine months of 2020.

•Net income increased $9.8 billion in the first nine months of 2021 compared with the first nine months of 2020, primarily driven by a shift from credit-related expense in the first nine months of 2020 to credit-related income in the first nine months of 2021 and higher net revenues as discussed above. Credit-related expense in the first nine months of 2020 was driven by economic dislocation caused by the COVID-19 pandemic. Credit-related income in the first nine months of 2021 was primarily driven by strong actual and forecasted home price growth, a benefit from the redesignation of certain nonperforming and reperforming loans and a reduction in our estimate of losses we expect to incur as a result of the COVID-19 pandemic, partially offset by a provision for higher actual and projected interest rates. An additional driver of increased net income included a shift from fair value losses in the first nine months of 2020 to fair value gains in the first nine months of 2021 primarily related to commitments to sell mortgage-related securities.

•Net worth increased to $42.2 billion as of September 30, 2021 from $25.3 billion as of December 31, 2020. The increase is attributable to $16.9 billion of comprehensive income for the first nine months of 2021.

Financial Performance Outlook

Our financial results benefited significantly in the third quarter and first nine months of 2021 from high refinance volumes, which contributed to our net amortization income, and the high pace of home price growth, which contributed to our credit-related income. We expect the pace of both refinance volumes and home price growth to moderate from recent quarters. Specifically, we expect modest increases in mortgage interest rates and the large number of borrowers who have refinanced recently will result in fewer borrowers who can benefit from a refinancing in the future, leading to lower amortization income from prepayment activity. In addition, we expect lower home price growth will likely reduce the amount of positive benefit, if any, to credit-related income (provision) in the near future related to home price changes. See “Key Market Economic Indicators” for a discussion of how home prices, interest rates and other macroeconomic factors can affect our financial results.


Fannie Mae Third Quarter 2021 Form 10-Q						3


			MD&A \| Executive Summary \| Liquidity Provided in First Nine Months of 2021

Liquidity Provided in the First Nine Months of 2021

Through our single-family and multifamily business segments, we provided $1.1 trillion in liquidity to the mortgage market in the first nine months of 2021, enabling the financing of approximately 4.3 million home purchases, refinancings or rental units.

Fannie Mae Provided $1.1 Trillion in Liquidity in the First Nine Months of 2021

Unpaid Principal Balance

Units

$344B

1.1M

Single-Family Home Purchases

$726B

2.7M

Single-Family Refinancings

$49B

511K

Multifamily Rental Units

We continued our commitment to green financing in the first nine months of 2021, issuing a total of $10.6 billion in multifamily green MBS, $319 million in single-family green MBS and $2.4 billion in multifamily green resecuritizations. We also issued $8.2 billion in multifamily social MBS and $315 million in multifamily social resecuritizations in the first nine months of 2021. These green and social bonds were issued in alignment with our Sustainable Bond Framework, which guides our issuances of sustainable debt bonds and sustainable MBS that support energy and water efficiency and housing affordability. For information about our green bonds and our Sustainable Bond Framework, see “Directors, Executive Officers and Corporate Governance—ESG Matters” in our 2020 Form 10-K.

Legislation and Regulation

The information in this section updates and supplements information regarding legislative, regulatory, conservatorship and other developments affecting our business set forth in “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” and “Business—Legislation and Regulation” in our 2020 Form 10-K, as well as in “MD&A—Legislation and Regulation” in our Form 10-Q for the quarter ended March 31, 2021 (“First Quarter 2021 Form 10-Q”) and our Second Quarter 2021 Form 10-Q. Also see “Risk Factors” in our 2020 Form 10-K and in this report for discussions of risks relating to legislative and regulatory matters.

Letter Agreement with Treasury

On September 14, 2021, Fannie Mae, through FHFA acting in its capacity as Fannie Mae’s conservator, entered into a letter agreement with Treasury temporarily suspending certain provisions of the senior preferred stock purchase agreement. Specifically, the letter agreement temporarily suspends certain business restrictions that were added in the January 14, 2021 letter agreement amending the senior preferred stock purchase agreement. These restrictions include the following:

•Section 5.12(c)—Single Counterparty Volume Cap on Single-Family Acquisitions for Cash. Under this provision, beginning on January 1, 2022, we may not acquire more than $1.5 billion in single-family loans for cash consideration from any single seller (including its affiliates) during any period comprising four calendar quarters. Loan acquisitions through lender swap securitization transactions are not subject to this limitation.

•Section 5.13—Multifamily Volume Cap. Under this provision, we may not acquire more than $80 billion in multifamily mortgage assets calculated in any 52-week period. This multifamily volume cap must be adjusted up or down by FHFA at the end of each calendar year based on changes to the consumer price index. Additionally, at least 50% of our multifamily acquisitions in any calendar year must be classified as mission-driven at the time of acquisition, consistent with FHFA guidelines.

•Section 5.14(a)—Limit on Specified Higher-Risk Single-Family Acquisitions. Under this provision, we may not acquire a single-family mortgage loan if, following the acquisition, more than 3% of our single-family loans that result from a refinancing or 6% of our single-family loans that do not result from a refinancing would have two or


Fannie Mae Third Quarter 2021 Form 10-Q						4


			MD&A \| Legislation and Regulation

more of the higher-risk characteristics listed below at origination. The 3% and 6% measurements are each based on loans we have acquired during the preceding 52-week period. The higher-risk characteristics are:

•a combined loan-to-value ratio greater than 90%;

•a debt-to-income ratio greater than 45%; and

•a FICO credit score (or equivalent credit score) less than 680.

•Section 5.14(b)—Limit on Acquisitions of Single-Family Mortgage Loans Backed by Second Homes and Investment Properties. Under this provision, we must limit our acquisitions of single-family mortgage loans secured by either second homes or investment properties to not more than 7% of the single-family mortgage loans we have acquired during the preceding 52-week period.

The September 2021 letter agreement provides that the suspension of these provisions will terminate on the later of one year after the date of the agreement and six months after Treasury notifies us. While the September 2021 letter agreement temporarily suspended restrictions on these activities, in the ordinary course of business these and other business activities are subject to constraints from a variety of sources, including board- and management-approved risk limits, capital considerations and FHFA instructions. In addition, other restrictions in the senior preferred stock purchase agreement continue to apply.

We describe the terms of the senior preferred stock and the related senior preferred stock purchase agreement with Treasury, prior to the suspensions described above, in our 2020 Form 10-K under the heading “Business—Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements.”

Enterprise Regulatory Capital Framework Notice of Proposed Rulemaking

On September 15, 2021, FHFA published a notice of proposed rulemaking seeking comment on amendments to the enterprise regulatory capital framework. FHFA’s notice requests comments on possible amendments to the prescribed leverage buffers amount and the capital treatment of credit risk transfer transactions. Even if the amendments are adopted as proposed, the senior preferred stock purchase agreement with Treasury currently includes a covenant that requires us to comply with the terms of the enterprise regulatory capital framework as it became effective in February 2021, disregarding any subsequent amendments or modifications. Comments on the proposed rule are due in November 2021.

In our 2020 Form 10-K we stated that we measured our risk and returns on our current business against the conservatorship capital framework, and that we expected to cease using the conservatorship capital framework to make business and risk decisions sometime in 2021 and to use instead the new enterprise capital regulatory framework and certain risk measures. We now expect our transition to the enterprise regulatory capital framework will continue into 2022. For more information on the framework, see “Business—Legislation and Regulation—GSE Act and Other Legislative and Regulatory Matters—Capital—Enterprise Regulatory Capital Framework” in our 2020 Form 10-K and “Liquidity and Capital Management—Capital Management—Capital Requirements” in this report.

Stress Testing

Pursuant to an FHFA rule implementing a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, each year we are required to conduct a stress test, based on our data as of the prior December 31, using two different scenarios of financial conditions provided by FHFA—baseline and severely adverse—and to publish a summary of our stress test results for the severely adverse scenario by August 15. We publish our stress test results on our website. In 2020, FHFA issued a waiver to delay publication of our 2020 stress test results so that we could include alternative scenarios in light of uncertainty posed by the COVID-19 pandemic. On August 13, 2021, we and FHFA published our 2020 and 2021 stress test results for the severely adverse scenario.

Credit Risk Transfers

In October 2021, we entered into new credit risk transfer transactions, transferring single-family mortgage credit risk via both our Connecticut Avenue Securities® (“CAS”) and Credit Insurance Risk Transfer™ (“CIRT™”) programs, and multifamily mortgage credit risk via our Multifamily CIRTTM (“MCIRT™”) program. These transactions were the first new credit risk transfer transactions we have entered into since the first quarter of 2020, when we stopped entering into them due to adverse market conditions. While market conditions subsequently improved, we did not enter into any new transactions until October 2021 as we evaluated their costs and benefits, including a reduction in the capital relief these transactions provide under FHFA’s enterprise regulatory capital framework. The structure of and extent to which we engage in any additional credit risk transfer transactions in the future may be affected by our capital requirements, the degree of regulatory capital relief provided by the transactions, our risk appetite, the strength of future market conditions, the cost of these transactions, FHFA guidance, and the review of our overall business and capital plan.


Fannie Mae Third Quarter 2021 Form 10-Q						5


			MD&A \| Legislation and Regulation

Fair Lending

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended, including by the Housing and Economic Recovery Act of 2008 (together, the “GSE Act”) requires the Secretary of the U.S. Department of Housing and Urban Development (“HUD”) to assure that Fannie Mae and Freddie Mac meet their fair lending obligations. In July 2021, FHFA issued a Policy Statement on Fair Lending describing its statutory authority and policies for supervisory oversight and enforcement of fair lending matters with respect to Fannie Mae and Freddie Mac. In August 2021, FHFA and HUD entered into a memorandum of understanding regarding fair housing and fair lending coordination. Among other things, the memorandum of understanding allows HUD and FHFA to coordinate on investigations, compliance reviews, and ongoing monitoring of Fannie Mae and Freddie Mac to ensure compliance with the Fair Housing Act.

Equitable Housing Finance Plan

On September 7, 2021, FHFA instructed Fannie Mae and Freddie Mac to submit Equitable Housing Finance Plans to FHFA by the end of 2021. In our plan, we must identify and address barriers to sustainable housing opportunities, including our goals and action plan to advance equity in housing finance for the next three years. FHFA is also requiring Fannie Mae and Freddie Mac to submit annual progress reports on the actions undertaken during the prior year to implement their plans.

As contemplated by the instruction, the goals and action plans established by the equitable housing plan should address identified sustainable housing barriers, including:

•Reducing the homeownership gap for a racial or ethnic group with a significant homeownership rate disparity; and

•Reducing underinvestment or undervaluation in racially or ethnically concentrated areas of poverty, areas with significant disparities in opportunity, or formerly redlined areas that remain racially or ethnically concentrated areas of poverty or otherwise underserved or undervalued.

Legislation Extending Guaranty Fee Payments to Treasury

As described in our 2020 Form 10-K, in December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) under which, at the direction of FHFA, we increased the guaranty fee on all single-family residential mortgages delivered to us by 10 basis points effective April 1, 2012. The revenue generated by this fee increase is paid to Treasury and helps offset the cost of a two-month extension of the payroll tax cut in early 2012. In 2012, FHFA advised us to remit this fee increase to Treasury with respect to all single-family loans acquired by us on or after April 1, 2012 and before January 1, 2022, and to continue to remit these amounts to Treasury on and after January 1, 2022 with respect to loans we acquired before this date until those loans are paid off or otherwise liquidated.

On August 10, 2021, the Senate passed legislation that would extend our obligation to pay these fees to Treasury beyond our current obligation. If enacted in the form already passed by the Senate, the Infrastructure Investment and Jobs Act would extend until October 1, 2032, the current requirement that we collect an additional 10 basis points in guaranty fees on single-family residential mortgages delivered to us and pay the associated revenue to Treasury. The revenue generated by this fee extension would help offset the cost of infrastructure spending by the federal government.

Housing Goals

Proposed Housing Goals for 2022-2024

We are subject to housing goals, which establish specified requirements for our mortgage acquisitions relating to affordability or location. Our housing goals are set by FHFA in accordance with the GSE Act. In August 2021, FHFA published a proposed rule that would establish new single-family and multifamily housing goals for Fannie Mae and Freddie Mac for 2022 through 2024. Comments on the proposed rule were due in October 2021. FHFA will issue a final rule after considering the comments.

Proposed Single-Family Housing Goals

Under FHFA’s proposed rule, FHFA would continue to evaluate our performance against the single-family housing goals using a two-part approach that compares the goals-qualifying share of our single-family mortgage acquisitions against both a benchmark level and a market level. To meet a single-family housing goal or subgoal, the percentage of our mortgage acquisitions that meet each goal or subgoal must equal or exceed either the benchmark level set in advance by FHFA or the market level for that year. The market level is determined retrospectively each year based on actual goals-qualifying originations in the primary mortgage market as measured by FHFA based on Home Mortgage Disclosure Act data for that year. Typically, this data is made available before the third quarter of the following year.


Fannie Mae Third Quarter 2021 Form 10-Q						6


			MD&A \| Legislation and Regulation

In the proposed rule, FHFA is proposing two new single-family home purchase subgoals to replace the existing low-income areas subgoal. The new minority census tracts subgoal would target borrowers with income at or below area median income (“AMI”) who reside in minority census tracts (defined as census tracts with a minority population of at least 30% and a median income below AMI). The new low-income census tracts subgoal would target (1) borrowers who reside in low-income census tracts that are not minority census tracts, regardless of income, and (2) borrowers with income greater than AMI who reside in low-income census tracts that are minority census tracts. Consistent with current practice, FHFA would continue to set the overall low-income areas goal on an annual basis to take account of mortgage loans made to borrowers who reside in designated disaster areas.


Current and Proposed Single-Family Goals
(percentage of overall qualified single-family purchases)
	Current Benchmark Level	Proposed Benchmark Level
Single-Family Goals	2018-2021	2022-2024
Low-Income Home Purchase Goal	24%	28%
Very Low-Income Home Purchase Goal	6%	7%
Minority Census Tracts Subgoal (New)	N/A	10%
Low-Income Census Tracts Subgoal (New)	N/A	4%
Low-Income Refinance Goal	21%	26%

Proposed Multifamily Housing Goals

Under FHFA's proposed rule, FHFA would evaluate our performance for 2022 through 2024 against the following multifamily goals and subgoals.


Current and Proposed Multifamily Goals
(number of multifamily units)
	Current Benchmark Level	Proposed Benchmark Level
Multifamily Goals	2018-2021	2022-2024
Low-Income Goal	315,000	415,000
Very Low-Income Subgoal	60,000	88,000
Small Multifamily (5-50 Units) Low-Income Subgoal	10,000	23,000

The 2022 to 2024 goals proposed by FHFA are at higher levels than our 2018 to 2021 goals, particularly for the small multifamily low-income subgoal. See “Risk Factors—GSE and Conservatorship Risk” in our 2020 Form 10-K for a discussion of how pursuing our housing goals may adversely affect our business or financial results or condition.

2020 Housing Goals Performance

In August 2021, FHFA notified us that it had preliminarily determined that we met all of our single-family and multifamily housing goals for 2020. See “Business—Legislation and Regulation—GSE Act and Other Legislative and Regulatory Matters—Housing Goals” in our 2020 Form 10-K for more information regarding our housing goals.

2021 Scorecard Update

In February 2021, FHFA released the 2021 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions (the “2021 Scorecard”), which establishes corporate performance objectives for Fannie Mae, Freddie Mac, and Common Securitization Solutions for 2021. In August 2021, FHFA notified us that it had removed the following two objectives from the 2021 Scorecard: (1) Roadmap Toward End of Conservatorships: Continue to provide support to FHFA as needed to develop a roadmap with milestones for exiting conservatorship, including the development of any capital restoration plans; and (2) Housing Market Reform and Alignment: Conduct such activities as directed by FHFA related to housing market reform. More information on the 2021 Scorecard is provided in our current report on Form 8-K filed on February 18, 2021.

Changes to Common Securitization Solutions Board Structure

We rely on the common securitization platform operated by Common Securitization Solutions, LLC (“CSS”), a limited liability company we own jointly with Freddie Mac, for the operation of a majority of our single-family securitization activities. In October 2021, FHFA announced its determination, after a nearly two-year review, that CSS should focus on maintaining the resiliency of Fannie Mae’s and Freddie Mac’s mortgage-backed securities platform instead of expanding


Fannie Mae Third Quarter 2021 Form 10-Q						7


			MD&A \| Legislation and Regulation

its role to serve a broader market. FHFA noted in the announcement that the decision allows CSS to stay focused on the safety and soundness of the housing finance market and reduce unnecessary expenses as Fannie Mae and Freddie Mac rebuild capital. As a result, the independent members of the CSS Board of Managers brought on as part of the CSS market expansion activity have left the CSS Board of Managers. In addition, FHFA appointed a new Chair to the CSS Board who serves with the remaining five Board members: CSS’s Chief Executive Officer, two members designated by Fannie Mae and two members designated by Freddie Mac. Under the limited liability agreement for CSS, while Fannie Mae and Freddie Mac remain in conservatorship, the Board may not take any actions absent the Chair’s consent. We discuss risks posed by our reliance on CSS in “Risk Factors—GSE and Conservatorship Risk” in our 2020 Form 10-K.

Transition from LIBOR and Alternative Reference Rates

We are actively seeking to facilitate an orderly transition from the London Inter-bank Offered Rate (“LIBOR”). During 2021, we transitioned our method of interest-rate discounting for our derivatives positions, which we use in measuring our future interest-rate risk, from LIBOR to the Secured Overnight Financing Rate (“SOFR”).

The transition from LIBOR will require action by many market participants and leadership from organizations such as the Alternative Reference Rates Committee (the “ARRC”) member firms, FHFA, our advisors, and other regulators and may involve action by one or more legislatures in the U.S and abroad. Federal legislation is currently being considered by Congress that is aimed at providing a fair and orderly transition from LIBOR to alternative rates. We cannot predict the likelihood that any legislation is passed or the impact thereof. In October 2021, the ARRC announced that it will develop any and all remaining final details of the ARRC’s recommended fallback rates for LIBOR consumer products no later than one year before the date when LIBOR is expected to cease (that is, by June 30, 2022). This timeline is meant to provide market participants sufficient time to prepare for an orderly transition. For additional information, see “Business—Legislation and Regulation—The Future of LIBOR and Alternative Reference Rates” in our 2020 Form 10-K.


Fannie Mae Third Quarter 2021 Form 10-Q						8


			MD&A \| Key Market Economic Indicators

Key Market Economic Indicators

Below we discuss how varying macroeconomic conditions can influence our financial results across different business and economic environments. Our forecasts and expectations are subject to many uncertainties, including the pace and nature of economic growth, and may change, perhaps substantially, from our current forecasts and expectations. For example, home price growth could be adversely affected if growth in gross domestic product (“GDP”) is weaker than we currently expect, if unemployment, particularly among existing homeowners and potential new home buyers, is higher than we expect, or if the housing market is more sensitive to economic and labor-market weaknesses than we expect. For further discussion on housing activity, see “Single-Family Business—Single-Family Mortgage Market” and “Multifamily Business—Multifamily Mortgage Market.”

Selected Benchmark Interest Rates

https://cdn.kscope.io/f5fb7ec7649f7274877862a8ad9a78e0-fnm-20210930_g3.jpg

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

(2)According to Bloomberg.

(3)Refers to the daily rate per the Federal Reserve Bank of New York.

How interest rates can affect our financial results

•Net interest income. In a rising interest-rate environment, our mortgage loans tend to prepay more slowly. We amortize various cost basis adjustments over the life of the mortgage loan, including those relating to loan-level pricing adjustments we receive as upfront fees at the time we acquire single-family loans. As a result, any prepayment of a loan results in an accelerated realization of those upfront fees as income. Therefore, as loan prepayments slow, the accelerated realization of amortization income also slows. Conversely, in a declining interest-rate environment, our mortgage loans tend to prepay faster, typically resulting in the opposite trend of higher net amortization income from cost basis adjustments on mortgage loans and related debt.

•Fair value gains (losses). We have exposure to fair value gains and losses resulting from changes in interest rates, primarily through our mortgage commitment derivatives and risk management derivatives, which we mark to market through earnings. Fair value gains and losses on our mortgage commitment derivatives fluctuate depending on how interest rates and prices move between the time a commitment is opened and when it settles. The net position and composition across the yield curve of our risk management derivatives changes over time. As a result, interest rate changes (increases or decreases) and yield curve changes (parallel, steepening or flattening shifts) will generate varying amounts of fair value gains or losses in a given period.


Fannie Mae Third Quarter 2021 Form 10-Q						9


			MD&A \| Key Market Economic Indicators

•Credit-related income (expense). Increases in mortgage interest rates tend to lengthen the expected lives of our loans, which generally increases the expected impairment and provision for credit losses on loans, particularly those modified in troubled debt restructuring arrangements. Decreases in mortgage interest rates tend to shorten the expected lives of our loans, which reduces the impairment and provision for credit losses on such loans.

•In January 2021, we began applying fair value hedge accounting to reduce the impact of changes in interest rates, or the interest-rate effect, on our financial results. For additional information on how hedge accounting supports our interest-rate risk management strategy and our fair value hedge accounting policy, see “Consolidated Results of Operations—Hedge Accounting Impact,” “Risk Management—Market Risk Management, including Interest-Rate Risk Management—Earnings Exposure to Interest-Rate Risk” and “Note 1, Summary of Significant Accounting Policies.”

Single-Family Quarterly Home Price Growth Rate(1)

https://cdn.kscope.io/f5fb7ec7649f7274877862a8ad9a78e0-fnm-20210930_g4.jpg

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

Home prices and how they can affect our financial results

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

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

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

•Home prices also impact the growth and size of our guaranty book of business. As home prices rise, the principal balance of loans associated with purchase money mortgages may increase, which affects the size of our book. Additionally, rising home prices can increase the amount of equity borrowers have in their home, which may lead to an increase in origination volumes for cash-out refinance loans with higher principal balances than the existing loan. Replacing existing loans with newly acquired cash-out refinances can affect the growth and size of our book.

•Home price growth in the first nine months of 2021 was 16.0% on a national basis, the highest nine-month home price growth rate in the history of the Fannie Mae national home price index, driven by continued low interest rates and low levels of housing supply relative to the level of demand.

•We currently expect home price growth on a national basis in 2021 of 18.4%, which exceeds our prior forecast for the year and home price growth realized in 2020 of 10.5%. We expect significant regional variation in the timing and rate of home price growth.

•The pace of rapid home price growth that we have experienced over the last year is not expected to continue. We expect home price growth to moderate to an annual growth rate of just below 8% in 2022, with slower growth expected thereafter. As home price growth slows, we expect the amount of positive benefit, if any, to our credit-related income (provision) to moderate as well.


Fannie Mae Third Quarter 2021 Form 10-Q						10


			MD&A \| Key Market Economic Indicators

New Housing Starts(1)

https://cdn.kscope.io/f5fb7ec7649f7274877862a8ad9a78e0-fnm-20210930_g5.jpg

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

How housing activity can affect our financial results

•Two key aspects of economic activity that can impact supply and demand for housing and thus mortgage lending are the rates of household formation and housing construction.

•Household formation is a key driver of demand for both single-family and multifamily housing. A newly formed household will either rent or purchase a home. Thus, changes in the pace of household formation can affect prices and credit performance as well as the degree of loss on defaulted loans.

•Growth of household formation stimulates homebuilding. Homebuilding has typically been a cyclical leader, weakening prior to a slowdown in U.S. economic activity and accelerating prior to a recovery, which contributes to the growth of GDP and employment. However, the housing sector’s performance may vary from its historical precedent due to the many uncertainties surrounding future economic or housing policy as well as the continued impact of the COVID-19 pandemic on the economy and the housing market.

•With regard to housing construction, a decline in housing starts results in fewer new homes being available for purchase and potentially a lower volume of mortgage originations. Construction activity can also affect credit losses through its impact on home prices. If the growth of demand exceeds the growth of supply, prices will appreciate and impact the risk profile of newly originated home purchase mortgages, depending on where in the housing cycle the market is. A reduced pace of construction is often associated with a broader economic slowdown and may signal expected increases in delinquency and losses on defaulted loans.

•We expect a continued lack of inventory for both new and existing homes will likely continue to constrain sales into the fourth quarter. Due to the current strength in housing demand and low supply of homes for sale, we expect single-family housing starts to be higher in 2021 than in 2020. Similarly, despite the constraints on home sales, we continue to expect housing activity to remain solid throughout the remainder of 2021 and into 2022.

•Construction demand in the multifamily sector strengthened in the first nine months of 2021, with multifamily starts posting a solid increase during the period. While we expect multifamily starts to moderate in the remainder of 2021, we expect that, on an annual basis, they will be higher overall in 2021 than in 2020.


Fannie Mae Third Quarter 2021 Form 10-Q						11


			MD&A \| Key Market Economic Indicators

GDP, Unemployment Rate and Personal Consumption

https://cdn.kscope.io/f5fb7ec7649f7274877862a8ad9a78e0-fnm-20210930_g6.jpg

(1)Real GDP growth (decline) and real personal consumption growth (decline) are based on the quarterly series calculated by the Bureau of Economic Analysis and are subject to revision.

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

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

•Changes in GDP, the unemployment rate and personal consumption can affect several mortgage market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies, which in turn can lead to credit losses.

•Economic growth is a key factor for the performance of mortgage-related assets. In a growing economy, employment and income are typically rising, thus allowing existing borrowers to meet payment requirements, existing homeowners to consider purchasing and moving to another home, and renters to consider becoming homeowners. Homebuilding typically increases to meet the rise in demand. Mortgage delinquencies typically fall in an expanding economy, thereby decreasing credit losses.

•In a slowing economy, employment, income growth and housing activity typically slow as an early indicator of reduced economic activity. Typically, as an economic slowdown intensifies, households reduce their spending. This reduction in consumption then accelerates the slowdown. An economic slowdown can lead to employment losses, impairing the ability of borrowers and renters to meet mortgage and rental payments, thus causing loan delinquencies to rise. Home sales and mortgage originations also typically fall in a slowing economy.

•The economic recovery from the impact of the COVID-19 pandemic began in the second half of 2020 and continued its momentum through the first nine months of 2021, with the second quarter 2021 GDP number pushing GDP above its pre-pandemic level. In the third quarter of 2021, GDP growth slowed due to reduced consumer spending, particularly driven by the Delta variant of the coronavirus, global supply chain disruptions and decreased service and travel sector spending. The pace and strength of economic expansion remains uncertain and will depend on a number of factors, including the continuance of supply chain disruptions and related inflationary pressures, recovery of economic activity outside the U.S., current labor market shortages, the impact of the emergence of new, more infectious variants of the coronavirus and COVID-19 vaccination


Fannie Mae Third Quarter 2021 Form 10-Q						12


			MD&A \| Key Market Economic Indicators

rates.

See “Risk Factors” in this report and in our 2020 Form 10-K for further discussion of risks to our business and financial results associated with interest rates, home prices, housing activity and economic conditions, as well as the COVID-19 pandemic.

Consolidated Results of Operations

This section discusses our condensed consolidated results of operations and should be read together with our condensed consolidated financial statements and the accompanying notes.


Summary of Condensed Consolidated Results of Operations
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,

	2021		2020		Variance		2021		2020		Variance
	(Dollars in millions)
Net interest income(1)	$	6,972	$	6,656	$	316	$	22,000	$	17,780	$	4,220
Fee and other income	111		93		18		301		303		(2)
Net revenues	7,083		6,749		334		22,301		18,083		4,218
Investment gains, net	243		653		(410)		934		644		290
Fair value gains (losses), net(1)	(17)		(327)		310		321		(1,621)		1,942
Administrative expenses	(745)		(762)		17		(2,239)		(2,265)		26
Credit-related income (expense):
Benefit (provision) for credit losses	937		501		436		4,290		(2,094)		6,384
Foreclosed property expense	(69)		(71)		2		(105)		(161)		56
Total credit-related income (expense)	868		430		438		4,185		(2,255)		6,440
TCCA fees	(781)		(679)		(102)		(2,270)		(1,976)		(294)
Credit enhancement expense(2)	(233)		(325)		92		(791)		(1,061)		270
Change in expected credit enhancement recoveries(3)	(42)		(48)		6		(117)		413		(530)
Other expenses, net(4)	(268)		(313)		45		(867)		(792)		(75)
Income before federal income taxes	6,108		5,378		730		21,457		9,170		12,287
Provision for federal income taxes	(1,266)		(1,149)		(117)		(4,470)		(1,935)		(2,535)
Net income	$	4,842	$	4,229	$	613	$	16,987	$	7,235	$	9,752
Total comprehensive income	$	4,828	$	4,216	$	612	$	16,914	$	7,224	$	9,690

(1)In January 2021, we began applying fair value hedge accounting. For qualifying hedging relationships, fair value changes attributable to movements in the designated benchmark interest rates for hedged mortgage loans and funding debt and the fair value change of the designated portion of the paired interest-rate swaps are recognized in “Net interest income.” In prior years, all fair value changes for interest-rate swaps were recognized in “Fair value gains (losses), net.” See “Hedge Accounting Impact” below and “Note 1, Summary of Significant Accounting Policies” for more information about our hedge accounting program.

(2)Consists of costs associated with our freestanding credit enhancements, which primarily include our CAS and CIRTTM programs, enterprise-paid mortgage insurance (“EPMI”), and certain lender risk-sharing programs.

(3)Consists of increase (decrease) in benefits recognized from our freestanding credit enhancements, including any realized amounts.

(4)Consists of debt extinguishment gains and losses, housing trust fund expenses, loan subservicing costs, servicer fees paid in connection with certain loss mitigation activities, and gains and losses from partnership investments.

Hedge Accounting Impact

Our earnings can experience volatility due to interest-rate changes and differing accounting treatments that apply to certain financial instruments on our balance sheet. Specifically, we have exposure to earnings volatility that is driven by changes in interest rates in two primary areas: our net portfolio and our consolidated MBS trusts. The exposure in the net portfolio is primarily driven by changes in the fair value of risk management derivatives, mortgage commitments, and certain assets, primarily securities, that are carried at fair value. The exposure related to our consolidated MBS trusts relates to changes in our credit loss reserves driven by changes in interest rates.


Fannie Mae Third Quarter 2021 Form 10-Q						13


			MD&A \| Consolidated Results of Operations

To help address this volatility, we began applying fair value hedge accounting in January 2021 to reduce the current-period impact on our earnings related to changes in interest rates, particularly the London Inter-bank Offered Rate (“LIBOR”) and the Secured Overnight Financing Rate (“SOFR”). Hedge accounting aligns the timing of when we recognize fair value changes in hedged items attributable to these benchmark interest-rate movements with fair value changes in the hedging instrument.

Under our hedge accounting program, we establish fair value hedging relationships between risk management derivatives, specifically interest-rate swaps, and qualifying portfolios of mortgage loans or funding debt. For hedging relationships that are highly effective, we recognize changes in the fair value of the hedged mortgage loans or funding debt attributable to movements in the benchmark interest rate in net interest income. We then offset that impact with the changes in fair value of the designated interest-rate swap. This has the effect of deferring the recognition of gains and losses on the hedging instrument to future periods by recognizing the offsetting gain or loss on the hedged item as a cost basis adjustment on the underlying loans or funding debt at the end of the hedge term. The cost basis adjustment is then subsequently amortized back into earnings. Accordingly, we deferred $194 million and $1.1 billion in net fair value losses as cost basis adjustments in the third quarter and first nine months of 2021, respectively, on our hedged loans and funding debt that will be amortized through “Net interest income” over the contractual life of the respective hedged items.

Although hedge accounting reduces the earnings volatility related to benchmark interest rate movements in any given period, it does not impact the amount of interest-rate-driven gains or losses we will ultimately recognize through earnings.

While we expect the earnings volatility related to benchmark interest rate movements to be reduced as a result of our adoption of hedge accounting, earnings variability driven by other factors, such as spreads, remains. In addition, our hedge accounting program is not designed to address earnings volatility driven by changes in cost basis amortization recognized in net interest income, which can be influenced by interest rate changes.

See “Note 1, Summary of Significant Accounting Policies” and “Note 8, Derivative Instruments” for additional discussion of our fair value hedge accounting policy and related disclosures.

Net Interest Income

Our primary source of net interest income is guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties.

Guaranty fees consist of two primary components:

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

•upfront fees that we receive at the time of loan acquisition primarily related to single-family loan-level pricing adjustments and other fees we receive from lenders, which are amortized into net interest income as cost basis adjustments over the contractual life of the loan. We refer to this as amortization income.

We recognize almost all of our guaranty fee revenue in net interest income because we consolidate the substantial majority of loans underlying our Fannie Mae MBS in consolidated trusts in our condensed consolidated balance sheets. Guaranty fees from these loans account for nearly all of the difference between the interest income on loans in consolidated trusts and the interest expense on the debt of consolidated trusts.

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

We also recognize net interest income on the difference between interest income earned on the assets in our retained mortgage portfolio and our other investments portfolio (collectively, our “portfolios”) and the interest expense associated with the debt that funds those assets. See “Retained Mortgage Portfolio” and “Liquidity and Capital Management—Liquidity Management—Other Investments Portfolio” for more information about our portfolios.

Beginning in January 2021, we recognize fair value changes attributable to movements in benchmark interest rates for hedged mortgage loans and funding debt and total fair value changes for designated interest-rate swaps, as well as the amortization of hedge-related basis adjustments on the associated mortgage loans or funding debt and any related interest accrual on the swap, as a component of net interest income. The income or expense associated with this activity is presented in the “Income from hedge accounting” line item in the table below.


Fannie Mae Third Quarter 2021 Form 10-Q						14


			MD&A \| Consolidated Results of Operations

The table below displays the components of our net interest income from our guaranty book of business, which we discuss in “Guaranty Book of Business,” and from our portfolios, as well as from hedge accounting.


Components of Net Interest Income
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2021		2020		Variance		2021		2020		Variance
	(Dollars in millions)
Net interest income from guaranty book of business:
Base guaranty fee income(1)	$	3,643	$	2,842	$	801	$	10,260	$	8,119	$	2,141
Base guaranty fee income related to TCCA(2)	781		679		102		2,270		1,976		294
Net amortization income(3)	2,338		2,713		(375)		8,600		6,174		2,426
Total net interest income from guaranty book of business	6,762		6,234		528		21,130		16,269		4,861
Net interest income from portfolios	170		422		(252)		742		1,511		(769)
Income from hedge accounting(4)	40		—		40		128		—		128
Total net interest income	$	6,972	$	6,656	$	316	$	22,000	$	17,780	$	4,220

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

(2)Represents revenues generated by the 10 basis point guaranty fee increase we implemented pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us. See “Note 1, Summary of Significant Accounting Policies” for more information on guidance we received from FHFA regarding TCCA fee amounts that we are not required to accrue or remit to Treasury with respect to delinquent loans backing MBS trusts.

(3)Net amortization income refers to the amortization of premiums and discounts on mortgage loans and debt of consolidated trusts. These cost basis adjustments represent the difference between the initial fair value and the carrying value of these instruments as well upfront fees we receive at the time of loan acquisition. It does not include the amortization of cost basis adjustments resulting from hedge accounting, which is included in income from hedge accounting.

(4)Consists of gains and losses from fair value hedging relationships that have been presented in net interest income. See “Note 8, Derivative Instruments” for additional information on the effect of our fair value hedge accounting program and related disclosures.

Net interest income increased modestly in the third quarter of 2021 compared with the third quarter of 2020, primarily driven by higher base guaranty fee income, partially offset by lower net amortization income and lower income from portfolios. The increase in net interest income for the first nine months of 2021 compared with the first nine months of 2020 was primarily driven by higher net amortization income and higher base guaranty fee income, partially offset by lower income from portfolios.

•Higher base guaranty fee income. An increase in the size of our guaranty book of business over the prior year was the primary driver of the increase in base guaranty fee income in the third quarter and first nine months of 2021.

•Net amortization income. Throughout the first nine months of 2021 we continued to be in a low interest-rate environment and observed higher volumes of refinancings compared to the first nine months of 2020, during which refinancing volumes did not increase sharply until the second quarter when mortgage rates began to decline to historical lows. As a result, in the first nine months of 2021 we had higher prepayment volumes, which accelerated the amortization of cost basis adjustments, including upfront fees we recognize over the contractual life of the loans, on mortgage loans of consolidated trusts and the related debt.

Although interest rates remained low in the third quarter of 2021, amortization income was lower as there were fewer borrowers who could benefit from refinancing compared with the third quarter of 2020, contributing to a decline in net amortization income.

•Lower income from portfolios. Lower income from portfolios for the first nine months of 2021 was primarily due to lower yields on our mortgage loans and assets in our other investments portfolio as a result of a lower interest-rate environment throughout the first nine months of 2021. This was partially offset by a decrease in interest expense on our funding debt due to a decrease in average borrowing costs.

Lower income from portfolios in the third quarter of 2021 was primarily due to a decrease in the average balance of our lender liquidity portfolio driven by a decline in mortgage refinance activity, primarily in the second and third quarters of 2021, leading to lower acquisition volumes through the whole loan conduit. See “Retained Mortgage Portfolio” for more information.


Fannie Mae Third Quarter 2021 Form 10-Q						15


			MD&A \| Consolidated Results of Operations

Over half of our single-family guaranty book of business has been originated since the beginning of 2020, as borrowers took advantage of the historically low rate environment. However, refinancing activity began to taper in the second quarter of 2021 and declined further in the third quarter of 2021. We expect refinancing activity to be significantly lower in 2022 compared to 2021 levels as fewer borrowers may benefit from refinancing. We expect that lower levels of refinancing in the future will continue to slow the rate at which we amortize cost basis adjustments. Slower turnover in our book of business will likely result in lower amortization income as the average life of our outstanding book of business may extend. In addition, a slower turnover rate would limit the impact that changes in our guaranty fees have on our future revenues as any changes would take longer to meaningfully impact the average charged guaranty fee on our total book of business.

For loans negatively impacted by the COVID-19 pandemic, we continue to recognize interest for up to six months of delinquency provided that the loans were either current at March 1, 2020 or originated after March 1, 2020. We continue to accrue interest income beyond six months of delinquency provided that the collection of principal and interest continues to be reasonably assured. This resulted in a large portion of delinquent loans, including those in a forbearance arrangement, remaining on accrual status as of September 30, 2021 and September 30, 2020. See “Note 3, Mortgage Loans” for more information about our nonaccrual accounting policy and “Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management” and “Multifamily Business—Multifamily Mortgage Credit Risk Management—Multifamily Problem Loan Management and Foreclosure Prevention” for details about loans in forbearance, as well as on-balance sheet loans past due 90 days or more and continuing to accrue interest.


Fannie Mae Third Quarter 2021 Form 10-Q						16


			MD&A \| Consolidated Results of Operations

Analysis of Net Interest Income

The table below displays an analysis of our net interest income, average balances, and related yields earned on assets and incurred on liabilities. For most components of the average balances, we use a daily weighted average of unpaid principal balance net of unamortized cost basis adjustments. When daily average balance information is not available, such as for mortgage loans, we use monthly averages. For the third quarter and first nine months of 2021, net interest income was impacted by the application of fair value hedge accounting beginning in January 2021.


Analysis of Net Interest Income and Yield(1)
	For the Three Months Ended September 30,
	2021						2020
	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(2)	$	81,999	$	673	3.28	%	$	118,270	$	959	3.24	%
Mortgage loans of consolidated trusts(2)	3,800,970		24,125		2.54		3,401,660		24,851		2.92
Total mortgage loans(3)	3,882,969		24,798		2.55		3,519,930		25,810		2.93
Mortgage-related securities	5,975		34		2.28		9,582		63		2.63
Non-mortgage-related securities(4)	184,325		111		0.24		152,229		133		0.34
Federal funds sold and securities purchased under agreements to resell or similar arrangements	36,839		5		0.05		47,200		14		0.12
Advances to lenders	8,522		33		1.55		8,845		33		1.46
Total interest-earning assets	$	4,118,630	24,981		2.43	%	$	3,737,786	26,053		2.79	%
Interest-bearing liabilities:
Short-term funding debt	$	4,324	*		*		$	33,349	(19)		0.22	%
Long-term funding debt(2)	225,568		(659)		1.17	%	237,020		(806)		1.36
CAS debt	13,855		(144)		4.16		16,932		(188)		4.44
Total debt of Fannie Mae	243,747		(803)		1.32		287,301		(1,013)		1.41
Debt securities of consolidated trusts held by third parties	3,829,882		(17,206)		1.80		3,439,484		(18,384)		2.14
Total interest-bearing liabilities	$	4,073,629	(18,009)		1.77	%	$	3,726,785	(19,397)		2.08	%
Net interest income/net interest yield			$	6,972	0.66	%			$	6,656	0.71	%


Fannie Mae Third Quarter 2021 Form 10-Q						17


			MD&A \| Consolidated Results of Operations



	For the Nine Months Ended September 30,
	2021						2020
	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(2)	$	96,249	$	2,280	3.16	%	$	111,752	$	3,003	3.58	%
Mortgage loans of consolidated trusts(2)	3,704,361		70,803		2.55		3,326,312		78,752		3.16
Total mortgage loans(3)	3,800,610		73,083		2.56		3,438,064		81,755		3.17
Mortgage-related securities	6,667		118		2.36		10,474		278		3.54
Non-mortgage-related securities(4)	160,623		326		0.27		107,155		510		0.63
Federal funds sold and securities purchased under agreements to resell or similar arrangements	52,705		17		0.04		41,030		135		0.43
Advances to lenders	9,135		106		1.53		7,726		92		1.56
Total interest-earning assets	$	4,029,740	73,650		2.44	%	$	3,604,449	82,770		3.06	%
Interest-bearing liabilities:
Short-term funding debt	$	5,944	(4)		0.09	%	$	38,637	(175)		0.60	%
Long-term funding debt(2)	243,659		(2,092)		1.14		187,628		(2,370)		1.68
CAS debt	14,323		(446)		4.15		18,813		(696)		4.93
Total debt of Fannie Mae	263,926		(2,542)		1.28		245,078		(3,241)		1.76
Debt securities of consolidated trusts held by third parties	3,739,575		(49,108)		1.75		3,357,411		(61,749)		2.45
Total interest-bearing liabilities	$	4,003,501	(51,650)		1.72	%	$	3,602,489	(64,990)		2.41	%
Net interest income/net interest yield			$	22,000	0.73	%			$	17,780	0.66	%

* Represents less than $0.5 million of interest expense and less than 0.005% of average yield.

(1)Includes the effects of discounts, premiums and other cost basis adjustments. For the third quarter and first nine months of 2021, includes cost basis adjustments related to hedge accounting.

(2)Includes income of $40 million and $128 million from hedged funding debt, hedged mortgage loans and paired interest-rate swaps for the third quarter and first nine months of 2021, respectively. Substantially all of this amount is related to the hedged funding debt and paired interest-rate swaps. There was no income or expense from hedge accounting for the third quarter or first nine months of 2020.

(3)Average balance includes mortgage loans on nonaccrual status. Interest income from the amortization of loan fees, primarily consisting of upfront cash fees and yield maintenance fees, was $2.5 billion and $7.3 billion, respectively, for the third quarter and first nine months of 2021, compared to $2.6 billion and $6.6 billion, respectively, for the third quarter and first nine months of 2020.

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


Fannie Mae Third Quarter 2021 Form 10-Q						18


			MD&A \| Consolidated Results of Operations

Analysis of Deferred Amortization Income

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

Deferred Income Represented by Net Premium Position

on Debt of Consolidated Trusts

(Dollars in billions)

https://cdn.kscope.io/f5fb7ec7649f7274877862a8ad9a78e0-fnm-20210930_g7.jpg

Investment Gains, Net

Investment gains, net primarily includes gains and losses recognized from the sale of available-for-sale (“AFS”) securities, sale of loans, gains and losses recognized on the consolidation and deconsolidation of securities, and lower of cost or fair value adjustments on held-for-sale (“HFS”