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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐ 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)
| | | | | | | | | | | | | | | | | | | | | | | |
Federally chartered corporation | 52-0883107 | | 1100 15th Street, NW | 800 | 232-6643 |
| | | Washington, | DC | 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 |
Securities registered pursuant to Section 12(g) of the Act: | | |
Common Stock, without par value |
8.25% Non-Cumulative Preferred Stock, Series T, stated value $25 per share |
Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series S, stated value $25 per share |
7.625% Non-Cumulative Preferred Stock, Series R, stated value $25 per share |
6.75% Non-Cumulative Preferred Stock, Series Q, stated value $25 per share |
Variable Rate Non-Cumulative Preferred Stock, Series P, stated value $25 per share |
Variable Rate Non-Cumulative Preferred Stock, Series O, stated value $50 per share |
5.375% Non-Cumulative Convertible Series 2004-1 Preferred Stock, stated value $100,000 per share |
5.50% Non-Cumulative Preferred Stock, Series N, stated value $50 per share |
4.75% Non-Cumulative Preferred Stock, Series M, stated value $50 per share |
5.125% Non-Cumulative Preferred Stock, Series L, stated value $50 per share |
5.375% Non-Cumulative Preferred Stock, Series I, stated value $50 per share |
5.81% Non-Cumulative Preferred Stock, Series H, stated value $50 per share |
Variable Rate Non-Cumulative Preferred Stock, Series G, stated value $50 per share |
Variable Rate Non-Cumulative Preferred Stock, Series F, stated value $50 per share |
5.10% Non-Cumulative Preferred Stock, Series E, stated value $50 per share |
5.25% Non-Cumulative Preferred Stock, Series D, stated value $50 per share |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark 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. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The aggregate market value of the common stock held by non-affiliates computed by reference to the closing price of the common stock quoted on the OTCQB on June 30, 2021 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $1.8 billion.
As of February 1, 2022, there were 1,158,087,567 shares of common stock of the registrant outstanding.
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Table of Contents |
| | Page |
PART I | |
Item 1. | Business | |
| Introduction | |
| Executive Summary | |
| Summary of Our Financial Performance | |
| Liquidity Provided in 2021 | |
| Our Mission, Strategy and Charter | |
| Mortgage Securitizations | |
| Managing Mortgage Credit Risk | |
| Conservatorship, Treasury Agreements and Housing Finance Reform | |
| Legislation and Regulation | |
| Human Capital | |
| Where You Can Find Additional Information | |
| Forward-Looking Statements | |
Item 1A. | Risk Factors | |
| Risk Factors Summary | |
| GSE and Conservatorship Risk | |
| Credit Risk | |
| Operational Risk | |
| Liquidity and Funding Risk | |
| Market and Industry Risk | |
| Legal and Regulatory Risk | |
| General Risk | |
Item 1B. | Unresolved Staff Comments | |
Item 2. | Properties | |
Item 3. | Legal Proceedings | |
Item 4. | Mine Safety Disclosures | |
PART II | |
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
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Item 6. | [Reserved] | |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Key Market Economic Indicators | |
| Consolidated Results of Operations | |
| Consolidated Balance Sheet Analysis | |
| Retained Mortgage Portfolio | |
| Guaranty Book of Business | |
| Business Segments | |
| Single-Family Business | |
| Single-Family Mortgage Market | |
| Single-Family Market Activity | |
| Single-Family Business Metrics | |
| Single-Family Business Financial Results | |
| Single-Family Mortgage Credit Risk Management | |
| Multifamily Business | |
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Fannie Mae 2021 Form 10-K | | i |
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| Multifamily Mortgage Market | |
| Multifamily Market Activity | |
| Multifamily Business Metrics | |
| Multifamily Business Financial Results | |
| Multifamily Mortgage Credit Risk Management | |
| Liquidity and Capital Management | |
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| Risk Management | |
| Mortgage Credit Risk Management Overview | |
| Climate Change and Natural Disaster Risk Management | |
| Institutional Counterparty Credit Risk Management | |
| Market Risk Management, including Interest-Rate Risk Management | |
| Liquidity and Funding Risk Management | |
| Operational Risk Management | |
| Critical Accounting Estimates | |
| Impact of Future Adoption of New Accounting Guidance | |
| Glossary of Terms Used in This Report | |
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | |
Item 8. | Financial Statements and Supplementary Data | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
Item 9A. | Controls and Procedures | |
Item 9B. | Other Information | |
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | |
PART III | |
Item 10. | Directors, Executive Officers and Corporate Governance | |
| Directors | |
| Corporate Governance | |
| ESG Matters | |
| Report of the Audit Committee of the Board of Directors | |
| Executive Officers | |
Item 11. | Executive Compensation | |
| Compensation Discussion and Analysis | |
| Compensation Committee Report | |
| Compensation Risk Assessment | |
| Compensation Tables and Other Information | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
| Policies and Procedures Relating to Transactions with Related Persons | |
| Transactions with Related Persons | |
| Director Independence | |
Item 14. | Principal Accounting Fees and Services | |
PART IV | |
Item 15. | Exhibits, Financial Statement Schedules | |
Item 16. | Form 10-K Summary | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | |
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Fannie Mae 2021 Form 10-K | | ii |
PART I | | | | | | | | |
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| 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 functions and 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, and our agreements with Treasury, see “Business—Conservatorship, Treasury Agreements and Housing Finance Reform” and “Risk Factors—GSE and Conservatorship Risk.” | |
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Forward-looking statements in this report are based on management’s current expectations and are subject to significant uncertainties and changes in circumstances, as we describe in “Business—Forward-Looking Statements.” Future events and our future results may differ materially from those reflected in our forward-looking statements due to a variety of factors, including those discussed in “Risk Factors” and elsewhere in this report.
You can find a “Glossary of Terms Used in This Report” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (‘MD&A’).”
Item 1. Business
Fannie Mae is a leading source of financing for mortgages in the United States, with $4.2 trillion in assets as of December 31, 2021. Organized as a government-sponsored entity, Fannie Mae is a shareholder-owned corporation. Our charter is an act of Congress, which establishes that our purposes are 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 depends on the rates at which loans in our book of business turn over and new loans are added.
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Fannie Mae 2021 Form 10-K | | 1 |
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| | Business | Executive Summary |
Please read this summary together with our MD&A, our consolidated financial statements as of December 31, 2021 and the accompanying notes.
Summary of Our Financial Performance
2021 vs. 2020
•Net revenues increased $4.6 billion in 2021 compared with 2020, primarily due to higher base guaranty fee income as the size of our guaranty book of business grew along with higher average guaranty fees related to the loans in our book of business in 2021. This was coupled with an increase in net amortization income as a result of high prepayment volumes from loan refinancings as a result of the continued low interest-rate environment. The loans and associated debt of consolidated trusts that liquidated in 2021 had larger unamortized deferred fees than those that liquidated in 2020. The increase in net revenues in 2021 was partially offset by a decrease in net interest income from our portfolios compared with 2020 due to lower average balances and lower yields on our mortgage loans and assets offset by lower borrowing costs on our long-term funding debt.
•Net income increased $10.4 billion in 2021 compared with 2020, mainly due to higher net revenues as discussed above plus a shift from credit-related expense in 2020 to credit-related income in 2021. Credit-related income in 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. In addition, fair value gains in 2021 were primarily driven by declines in the fair value of risk management derivatives and trading securities, offset by the impact of hedge accounting. Fair value losses in 2020, before we implemented hedge accounting, were primarily driven by declines in the fair value of commitments to sell mortgage-related securities as prices increased during the commitment period. See “Consolidated Results of Operations—Hedge Accounting Impact” for further details on the impact of our fair value hedge accounting.
•Net worth increased by $22.1 billion in 2021 to $47.4 billion as of December 31, 2021. The increase is attributed to $22.1 billion of comprehensive income for the twelve months ended December 31, 2021.
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Fannie Mae 2021 Form 10-K | | 2 |
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| Business | Executive Summary |
2020 vs. 2019
•Net revenues increased $3.4 billion in 2020 compared with 2019, primarily driven by an increase in net amortization income as a result of interest rates declining to historically low levels, leading to record levels of refinancing activity in 2020.
•Net income decreased $2.4 billion in 2020 compared with 2019, primarily driven by a shift from credit-related income to credit-related expense, driven by the economic dislocation caused by the COVID-19 pandemic and lower loan redesignation activity, as well as a reduction in investment gains driven by a decrease in the volume of reperforming loan sales. This was partially offset by the increase in net revenues from higher net amortization income discussed above.
•Net worth increased by $10.7 billion to $25.3 billion in 2020. The increase is attributed to $11.8 billion of comprehensive income for the twelve months ended December 31, 2020 offset by a charge of $1.1 billion to retained earnings due to our implementation of Accounting Standards Update 2016-13, Financial Instruments—Credit Losses, Measurement of Credit Losses on Financial Instruments and related amendments (the “CECL standard”) on January 1, 2020. See “Note 1, Summary of Significant Accounting Policies—New Accounting Guidance—Adoption of the CECL Standard” for further details on our implementation of the CECL standard.
Financial Performance Outlook
Our financial results benefited significantly in 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 home price growth to moderate in 2022, and we have already seen a decline in the volume of refinancings beginning in the second half of 2021, as interest rates have risen. Specifically, we expect increases in mortgage interest rates and fewer refinancings as 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 the positive benefit to credit-related income (expense) from home price growth to decline in 2022 compared with 2021 as we expect home price growth to slow. See “MD&A—Key Market Economic Indicators” for a discussion of how home prices, interest rates and other macroeconomic factors can affect our financial results.
Our long-term financial performance will depend on many factors, including:
•the size of and our share of the U.S. mortgage market, which in turn will depend upon population growth, household formation and housing supply;
•borrower performance, the guaranty fees we receive, and changes in home prices, interest rates and other macroeconomic factors, including the impact of climate change on these factors; and
•the impact of actions by FHFA, the Administration and Congress relating to our business and housing finance reform, including our capital requirements, our ongoing financial obligations to Treasury, restrictions on our activities and our business footprint, our competitive environment and pricing, and actions we are required to take to support borrowers or the mortgage market.
For information about how we may be impacted by general economic conditions, see “Risk Factors—Market and Industry Risk.” For information about the potential impacts of climate change, see “Risk Factors—Credit Risk” and “MD&A—Risk Management—Climate Change and Natural Disaster Risk Management.” For information about the impact of actions by FHFA, the Administration and Congress, see “Risk Factors—GSE and Conservatorship Risk.”
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Fannie Mae 2021 Form 10-K | | 3 |
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| Business | Our Mission, Strategy and Charter |
Liquidity Provided in 2021
Through our single-family and multifamily business segments, we provided $1.4 trillion in liquidity to the mortgage market in 2021, which enabled the financing of approximately 5.5 million home purchases, refinancings and rental units.
Fannie Mae Provided $1.4 trillion in Liquidity in 2021 | | | | | | | | |
Unpaid Principal Balance | | Units |
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$451B | | 1.5M Single-Family Home Purchases |
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$904B | | 3.3M Single-Family Refinancings |
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$69B | | 694K Multifamily Rental Units |
For information about the financing we have provided through our green bonds and our Sustainable Bond Framework, see “Directors, Executive Officers and Corporate Governance—Corporate Governance—ESG Matters.”
Our Mission, Strategy and Charter Our Mission and Strategy
Our mission is to facilitate equitable and sustainable access to homeownership and quality affordable rental housing across America. We are pursuing this mission through our strategic objectives:
•Build on our mission-first culture to become a globally-recognized, top-performing environmental, social and governance (ESG) financial services company by delivering positive mission and community outcomes to serve homeowners and tenants.
•Ensure that Fannie Mae is a financially secure company that is able to attract private capital by managing risk to the firm and the housing finance system to fulfill its mission.
•Increase operational agility and efficiency, accelerating the digital transformation of the firm to deliver more value and reliable, modern platforms in support of the broader housing finance system.
Our Charter
The Federal National Mortgage Association Charter Act (the “Charter Act”) establishes the parameters under which we operate and our purposes, which are to:
•provide stability in the secondary market for residential mortgages;
•respond appropriately to the private capital market;
•provide ongoing assistance to the secondary market for residential mortgages (including activities relating to mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and
•promote access to mortgage credit throughout the nation (including central cities, rural areas and underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing.
The Charter Act specifies that our operations are to be financed by private capital to the maximum extent feasible. We are expected to earn reasonable economic returns on all our activities. However, we may accept lower returns on certain activities relating to mortgages on housing for low- and moderate-income families in order to support those segments of the market. We expect the lower returns to be offset by activities that yield higher returns.
Principal balance limitations. To meet our purposes, the Charter Act authorizes us to purchase and securitize mortgage loans secured by single-family and multifamily properties. Our acquisitions of single-family conventional mortgage loans are subject to maximum original principal balance limits, known as “conforming loan limits.” The conforming loan limits are adjusted each year based on FHFA’s housing price index. For 2021, the conforming loan limit for mortgages secured by one-family residences was set at $548,250, with higher limits for mortgages secured by two- to four-family residences and in four statutorily-designated states and territories (Alaska, Hawaii, Guam and the U.S. Virgin Islands).
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Fannie Mae 2021 Form 10-K | | 4 |
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| | Business | Our Mission, Strategy and Charter |
For 2022, FHFA increased the national conforming loan limit for one-family residences to $647,200. In addition, higher loan limits of up to 150% of the otherwise applicable loan limit apply in certain high-cost areas. Certain loans above the baseline conforming loan limit will be subject to a recently announced increase in upfront fees, which we discuss in “MD&A—Single-Family Business—Single-Family Business Metrics.” The Charter Act does not impose maximum original principal balance limits on loans we purchase or securitize that are insured by the Federal Housing Administration (“FHA”) or guaranteed by the Department of Veterans Affairs (“VA”).
The Charter Act also includes the following provisions:
•Credit enhancement requirements. The Charter Act generally requires credit enhancement on any single-family conventional mortgage loan that we purchase or securitize that has a loan-to-value (“LTV”) ratio over 80% at the time of purchase. The credit enhancement may take the form of one or more of the following: (1) insurance or a guaranty by a qualified insurer on the portion of the unpaid principal balance of a mortgage loan that exceeds 80% of the property value; (2) a seller’s agreement to repurchase or replace the loan in the event of default; or (3) retention by the seller of at least a 10% participation interest in the loan. Regardless of LTV ratio, the Charter Act does not require us to obtain credit enhancement to purchase or securitize loans insured by FHA or guaranteed by the VA.
•Issuances of our securities. We are authorized, upon the approval of the Secretary of the Treasury, to issue debt obligations and mortgage-related securities. Neither the U.S. government nor any of its agencies guarantees, directly or indirectly, our debt or mortgage-related securities.
•Authority of Treasury to purchase our debt obligations. At the discretion of the Secretary of the Treasury, Treasury may purchase our debt obligations up to a maximum of $2.25 billion outstanding at any one time.
•Exemption for our securities offerings. Our securities offerings are exempt from registration requirements under the federal securities laws. As a result, we do not file registration statements or prospectuses with the SEC with respect to our securities offerings. However, our equity securities are not treated as exempt securities for purposes of Sections 12, 13, 14 or 16 of the Securities Exchange Act of 1934 (the “Exchange Act”). Consequently, we are required to file periodic and current reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Our non-equity securities are exempt securities under the Exchange Act.
•Exemption from specified taxes. Fannie Mae is exempt from taxation by states, territories, counties, municipalities and local taxing authorities, except for taxation by those authorities on our real property. We are not exempt from the payment of federal corporate income taxes.
•Limitations. We may not originate mortgage loans or advance funds to a mortgage seller on an interim basis, using mortgage loans as collateral, pending the sale of the mortgages in the secondary market. We may purchase or securitize mortgage loans only on properties located in the United States and its territories.
We support market liquidity by issuing Fannie Mae MBS that are readily traded in the capital markets. We create Fannie Mae MBS by placing mortgage loans in a trust and issuing securities that are backed by those mortgage loans. Monthly payments received on the loans are the primary source of payments passed through to Fannie Mae MBS holders. We guarantee to the MBS trust that we will supplement amounts received by the MBS trust as required to permit timely payment of principal and interest on the trust certificates. In return for this guaranty, we receive guaranty fees.
Below we discuss the three broad categories of our securitization transactions and the uniform mortgage-backed securities we issue.
Securitization Transactions
We currently securitize a substantial majority of the single-family and multifamily mortgage loans we acquire. Our securitization transactions primarily fall within three broad categories: lender swap transactions, portfolio securitizations, and structured securitizations.
Lender Swap Transactions
In a single-family “lender swap transaction,” a mortgage lender that operates in the primary mortgage market generally delivers a pool of mortgage loans to us in exchange for Fannie Mae MBS backed by these mortgage loans. Lenders may hold the Fannie Mae MBS they receive from us or sell them to investors. A pool of mortgage loans is a group of mortgage loans with similar characteristics. After receiving the mortgage loans in a lender swap transaction, we place them in a trust for which we serve as trustee. This trust is established for the sole purpose of holding the mortgage
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Fannie Mae 2021 Form 10-K | | 5 |
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| | Business | Mortgage Securitizations |
loans separate and apart from our corporate assets. We guarantee to each MBS trust that we will supplement amounts received by the MBS trust as required to permit timely payment of principal and interest on the related Fannie Mae MBS. We are entitled to a portion of the interest payment as a fee for providing our guaranty. The mortgage servicer also retains a portion of the interest payment as a fee for servicing the loan. Then, on behalf of the trust, we make monthly distributions to the Fannie Mae MBS certificateholders from the principal and interest payments and other collections on the underlying mortgage loans.
Lender Swap Transaction
Our Multifamily business generally creates multifamily Fannie Mae MBS in lender swap transactions in a manner similar to our Single-Family business. Multifamily lenders typically deliver only one mortgage loan to back each multifamily Fannie Mae MBS. The characteristics of each mortgage loan are used to establish guaranty fees on a risk-adjusted basis. Securitizing a multifamily mortgage loan into a Fannie Mae MBS facilitates its sale into the secondary market.
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Fannie Mae 2021 Form 10-K | | 6 |
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| | Business | Mortgage Securitizations |
Portfolio Securitization Transactions
We also purchase mortgage loans and mortgage-related securities for securitization and sale at a later date through our “portfolio securitization transactions.” Most of our portfolio securitization transactions are driven by our single-family whole loan conduit activities, pursuant to which we purchase single-family whole loans from a large group of typically small to mid-sized lenders principally for the purpose of securitizing the loans into Fannie Mae MBS, which may then be sold to dealers and investors.
Portfolio Securitization Transaction
Structured Securitization Transactions
In a “structured securitization transaction,” we create structured Fannie Mae MBS, typically for lenders or securities dealers, in exchange for a transaction fee. In these transactions, the lender or dealer “swaps” a mortgage-related asset that it owns (typically a mortgage security) in exchange for a structured Fannie Mae MBS we issue. The process for issuing Fannie Mae MBS in a structured securitization is similar to the process involved in our lender swap securitizations described above.
We also issue structured transactions backed by multifamily Fannie Mae MBS through the Fannie Mae Guaranteed Multifamily Structures (“Fannie Mae GeMSTM”) program, which provides additional liquidity and stability to the multifamily market, while expanding the investor base for multifamily Fannie Mae MBS.
Uniform Mortgage-Backed Securities, or UMBS
Overview
Since 2019, we and Freddie Mac have each been issuing UMBS®, a uniform mortgage-backed security intended to maximize liquidity for both Fannie Mae and Freddie Mac mortgage-backed securities in the to-be-announced (“TBA”) market.
Certain aspects of the securitization process for our single-family Fannie Mae MBS issuances are performed by Common Securitization Solutions, LLC (“CSS”), which is a limited liability company we own jointly with Freddie Mac. CSS operates a common securitization platform, which was designed to allow for the potential integration of additional market participants in the future. 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 its role to serve a broader market.
UMBS and Structured Securities
Each of Fannie Mae and Freddie Mac (the “GSEs”) issues and guarantees UMBS and structured securities backed by UMBS and other securities, as described below.
•UMBS. Each of Fannie Mae and Freddie Mac issues and guarantees UMBS that are directly backed by the mortgage loans it has acquired, referred to as “first-level securities.” UMBS issued by Fannie Mae are backed only by mortgage loans that Fannie Mae has acquired, and similarly UMBS issued by Freddie Mac are backed
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Fannie Mae 2021 Form 10-K | | 7 |
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| | Business | Mortgage Securitizations |
only by mortgage loans that Freddie Mac has acquired. There is no commingling of Fannie Mae- and Freddie Mac-acquired loans within UMBS.
Mortgage loans backing UMBS are limited to fixed-rate mortgage loans eligible for financing through the TBA market. We continue to issue some types of Fannie Mae MBS that are not TBA-eligible and therefore are not issued as UMBS, such as single-family Fannie Mae MBS backed by adjustable-rate mortgages and all multifamily Fannie Mae MBS.
•Structured Securities. Each of Fannie Mae and Freddie Mac also issues and guarantees structured mortgage-backed securities, referred to as “second-level securities,” that are resecuritizations of UMBS or previously-issued structured securities. In contrast to UMBS, second-level securities can be commingled—that is, they can include both Fannie Mae securities and Freddie Mac securities as the underlying collateral for the security. These structured securities include Supers®, which are single-class resecuritizations, and Real Estate Mortgage Investment Conduits (“REMICs”), which are multi-class resecuritizations. While Supers are backed only by TBA-eligible securities, REMICs can be backed by TBA-eligible or non-TBA-eligible securities.
The key features of UMBS are the same as those of legacy single-family Fannie Mae MBS. Accordingly, all single-family Fannie Mae MBS that are directly backed by fixed-rate loans and generally eligible for trading in the TBA market are considered UMBS, whether issued before or after the introduction of UMBS. In this report, we use the term “Fannie Mae-issued UMBS” to refer to single-family Fannie Mae MBS that are directly backed by fixed-rate mortgage loans and generally eligible for trading in the TBA market. We use the term “Fannie Mae MBS” or “our MBS” to refer to any type of mortgage-backed security that we issue, including UMBS, Supers, REMICs and other types of single-family or multifamily mortgage-backed securities. References to our single-family guaranty book of business in this report exclude Freddie Mac-acquired mortgage loans underlying Freddie Mac mortgage-related securities that we have resecuritized.
Common Securitization Platform
We rely on the common securitization platform operated by CSS to securitize the single-family MBS we issue and for ongoing administrative functions for our single-family MBS. We do not use the common securitization platform for multifamily Fannie Mae MBS. See “Risk Factors—GSE and Conservatorship Risk” for a discussion of risks posed by our reliance on CSS.
Managing Mortgage Credit Risk Effectively pricing and managing credit risk is key to our business. Below we discuss key elements of how we are compensated for and manage the risk of credit losses through the life cycle of our loans and how we measure our credit risk.
Loan Acquisition Policies
Loans we acquire must be underwritten in accordance with our guidelines and standards.
•In Single-Family, the vast majority of loans we acquire are assessed by Desktop Underwriter® (DU®), our proprietary single-family automated underwriting system. DU performs a comprehensive evaluation of the primary risk factors of a mortgage. We regularly review DU’s underlying models to determine whether its risk analysis and eligibility assessment appropriately reflect current market conditions and loan performance data to ensure the loans we acquire are consistent with our risk appetite and FHFA guidance.
•In Multifamily, we acquire the vast majority of our loans through our Delegated Underwriting and Servicing (DUS®) Program. DUS lenders, who must be pre-approved by us, are delegated the authority to underwrite and service loans for delivery to us in accordance with our standards and requirements. Based on a given loan’s unique characteristics and our established delegation criteria, lenders assess whether a loan must be reviewed by us. If review is required, our internal credit team will assess the loan’s risk profile to determine if it meets our risk tolerances. DUS lenders also share with us the risk of loss on our multifamily loans, thereby aligning our interests throughout the life of the loan. FHFA has instructed us to limit the volume and nature of multifamily loans we acquire, and our senior preferred stock purchase agreement with Treasury also includes covenants with respect to our multifamily loan acquisition volume. We continue to closely monitor our multifamily loan acquisitions and market conditions and, as appropriate, make changes to our standards and requirements to
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Fannie Mae 2021 Form 10-K | | 8 |
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| | Business | Managing Mortgage Credit Risk |
ensure the multifamily loans we acquire are consistent with our risk appetite, the senior preferred stock purchase agreement, and FHFA guidance.
For more information about our mortgage acquisition policies and underwriting standards, see “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management” and “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management.” For information on the restrictions on our single-family and multifamily loan acquisitions, see “Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements—Covenants under Treasury Agreements” and “MD&A—Multifamily Business—Multifamily Business Metrics.”
In exchange for managing credit risk on the loans we acquire, we receive guaranty fees that take into account, among other factors, the credit risk characteristics of the loans we acquire. We provide information about our guaranty fees in “MD&A—Single-Family Business—Single-Family Business Metrics” and in “MD&A—Multifamily Business—Multifamily Business Metrics.”
Loan Performance Management
We closely monitor the performance of loans in our guaranty book of business and we work to reduce defaults and mitigate the severity of credit losses through our servicing policies and practices.
Single-Family Loans
•For single-family loans, the most important loan performance criteria we monitor are (1) serious delinquency rates, which are typically strong indicators of loans that are at a heightened risk of default, and (2) mark-to-market LTV ratios, which affect both the likelihood of losses and the potential severity of any losses we may ultimately realize. While mark-to-market LTV ratios are significantly impacted by changes in home prices, which are outside our control, we have an array of loss mitigation tools to try to reduce defaults on delinquent loans and to minimize the severity of the losses we do incur.
•We consider single-family loans to be seriously delinquent when they are 90 days or more past due or in the foreclosure process. Once a single-family loan becomes 36 days past due, the servicer is required to make weekly attempts, for the next six months, to contact the borrower to try to engage in steps to resolve the delinquency. Our loss mitigation tools include payment forbearance, repayment plans, payment deferrals and loan modifications. We describe these tools and discuss them further in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management—Loan Workout Metrics.” Successful loan reperformance is heavily influenced by the effective use of these tools and the amount of equity the borrower has in their home.
•Some loans that become seriously delinquent subsequently become current or repay in full without a modification or other loan workout. However, we modify a substantial portion of our seriously delinquent loans. When a loan does not cure on its own and we are not able to provide a workout for it, the likelihood of default increases. See “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management” for more information on the performance of our modified single-family loans.
•As a result of the COVID-19 pandemic, in 2020 our loss mitigation pivoted to payment forbearance, providing up to 18 months in some cases to borrowers affected by the pandemic. Forbearance is typically used in instances where the duration and impact of a borrower’s hardship are uncertain, such as disasters like hurricanes and flooding, to give the borrower time to understand whether, and to what extent, a loss mitigation solution will be needed to return to paying status. Because payments are not required during forbearance, our serious delinquency rate increased as a result of the large number of loans in forbearance. Most of the loans that entered forbearance as a result of the COVID-19 pandemic have since exited, resolving their delinquency in many cases through a payment deferral or other form of loan workout. We provide information about our single-family loans that received forbearance in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management—Single-Family Loans in Forbearance.”
•For delinquent loans that are unable to reperform, we use alternatives to foreclosure where possible, such as short sales, which reduce our credit losses while helping borrowers avoid foreclosure. We provide more information on short sales and our other foreclosure alternatives in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management—Loan Workout Metrics—Foreclosure Alternatives.” We work to obtain the highest price possible for the properties sold in short sales. When we acquire properties, including through foreclosure, our primary objectives are to facilitate equitable and sustainable access to homeownership, quality affordable rental housing, and housing for owner occupant and community-minded purchasers, while obtaining the highest price possible. The value of the underlying property relative to the loan’s unpaid principal balance has a significant impact on the severity of loss we incur as a
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result of loan default. We provide information on the mark-to-market LTV ratio of loans in our single-family conventional book of business in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring.”
•Our credit loss mitigation strategy also involves selling nonperforming and reperforming loans thereby removing them from our guaranty book of business. We discuss sales of nonperforming and reperforming single-family loans in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Nonperforming and Reperforming Loan Sales” and “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Other Single-Family Credit Information—Single-Family Credit Loss Metrics and Loan Sale Performance.”
•We present additional information on the credit characteristics and performance of our single-family loans in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring” and “Single-Family Problem Loan Management” and “Note 13, Concentrations of Credit Risk—Risk Characteristics of our Guaranty Book of Business.”
Multifamily Loans
•For multifamily loans, key indicators of heightened risk of default are debt service coverage ratios (“DSCRs”), particularly loans with an estimated current DSCR below 1.0, and serious delinquency rates. We consider a multifamily loan seriously delinquent when it is 60 days or more past due.
•For loans with indicators of heightened default risk, our DUS lenders, through their delegated authority, work with us to maintain the credit quality of the multifamily book of business and prevent foreclosures through loss mitigation strategies such as payment forbearance or loan modification.
•For loans that ultimately default, we work to minimize the severity of loss in several ways, including pursuing contractual remedies through our DUS loss-sharing arrangements and with providers of additional credit enhancements where available.
•Similar to single-family, we also offer forbearance for borrowers experiencing temporary challenges, like natural disasters and financial hardship, to help both borrowers and renters. During the COVID-19 pandemic, we delegated to our multifamily lenders the ability to provide forbearance for up to six monthly payments for most loan types. While FHFA extended the forbearance program indefinitely, the delegation to our lenders expired on September 30, 2021, and we determine whether to offer forbearance relief based on the borrower’s circumstances through our normal loss mitigation procedures. A majority of the loans that entered forbearance as a result of the COVID-19 pandemic have since exited through completion of their repayment plan or otherwise reinstating.
•We present information on the credit characteristics and performance of our multifamily loans in “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management—Multifamily Portfolio Diversification and Monitoring” and “Note 13, Concentrations of Credit Risk—Risk Characteristics of our Guaranty Book of Business.”
Sharing and Selling Credit Risk
In addition to managing credit risk through our selling and servicing practices, we also share and transfer credit risk to third parties through a variety of credit enhancement products and programs.
•For single-family loans we acquire with an LTV ratio over 80% our charter requires credit enhancement, which we typically meet through third-party primary mortgage insurance.
•Our Multifamily business uses a shared-risk business model that distributes credit risk to the private markets, primarily through our DUS program. Under DUS, our multifamily lenders typically share with us approximately one-third of the credit risk on these loans, aligning the interests of lenders and Fannie Mae. DUS lenders receive credit-risk-related compensation in exchange for sharing risk. The lender risk-sharing we obtain through our DUS program accompanies our multifamily loans at the time we acquire them.
•We use other types of credit enhancements, including pool mortgage insurance and credit risk transfer transactions. In our credit risk transfer transactions, we use risk-sharing capabilities we have developed to obtain credit enhancement by transferring portions of our single-family and multifamily mortgage credit risk on reference pools of mortgage loans to the private market. In most of our credit risk transfer transactions, investors receive payments, which effectively reduce the guaranty fee income we retain on the loans. Our credit risk transfer transactions are designed to transfer to the investors, in exchange for these payments, a portion of the losses we expect would be incurred in an economic downturn or a stressed credit environment.
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For more information about our loans with credit enhancement, see “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Credit Enhancement and Transfer of Mortgage Credit Risk” and “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management—Transfer of Multifamily Mortgage Credit Risk.”
Measuring Credit Risk and the Impact of Changes on Our Results
Our best estimate of future credit losses is reflected in our single-family and multifamily loss reserves, which for periods on or after January 1, 2020 are calculated using a lifetime credit loss methodology under the CECL standard. We update our estimate of credit losses quarterly based on the credit profile of our loans as well as certain actual and forecasted economic data. Changes in our estimate affect our benefit or provision for credit losses, which, combined with foreclosed property expense, comprises our credit-related income or expense.
We provide information on our loss reserves in “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management—Single-Family Problem Loan Management—Other Single-Family Credit information” and “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management—Multifamily Problem Loan Management and Foreclosure Prevention—Other Multifamily Credit information.” We provide information on our credit related income or expense in “MD&A—Consolidated Results of Operations—Credit-Related Income (Expense).”
Conservatorship, Treasury Agreements and Housing Finance Reform Conservatorship
On September 6, 2008, the Director of FHFA appointed FHFA as our conservator, pursuant to authority provided by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended, including by the Housing and Economic Recovery Act of 2008 (together, the “GSE Act”). The conservatorship is a statutory process designed to preserve and conserve our assets and property and put the company in a sound and solvent condition.
The conservatorship has no specified termination date. For more information on the risks to our business relating to the conservatorship and uncertainties regarding the future of our company and business, as well as the adverse effects of the conservatorship on the rights of holders of our common and preferred stock, see “Risk Factors—GSE and Conservatorship Risk.”
Our conservatorship could terminate through a receivership. For information on the circumstances under which FHFA is required or permitted to place us into receivership and the potential consequences of receivership, see “Legislation and Regulation—GSE-Focused Matters—Receivership” and “Risk Factors—GSE and Conservatorship Risk.”
Management of the Company during Conservatorship
Upon its appointment, the conservator immediately succeeded to (1) all rights, titles, powers and privileges of Fannie Mae, and of any shareholder, officer or director of Fannie Mae with respect to Fannie Mae and its assets, and (2) title to the books, records and assets of any other legal custodian of Fannie Mae. The conservator subsequently issued an order that provided for our Board of Directors to exercise specified functions and authorities. The conservator also provided instructions regarding matters for which conservator decision or notification is required. The conservator retains the authority to amend or withdraw its order and instructions at any time. For more information on the functions and authorities of our Board of Directors during conservatorship, see “Directors, Executive Officers and Corporate Governance—Corporate Governance—Conservatorship and Board Authorities.”
Our directors serve on behalf of the conservator and exercise their authority as directed by and with the approval, where required, of the conservator. Our directors have no fiduciary duties to any person or entity except to the conservator. Accordingly, our directors are not obligated to consider the interests of the company, the holders of our equity or debt securities, or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator.
Because we are in conservatorship, our common stockholders currently do not have the ability to elect directors or to vote on other matters. The conservator eliminated common and preferred stock dividends (other than dividends on the senior preferred stock issued to Treasury) during the conservatorship.
Powers of the Conservator under the GSE Act
FHFA has broad powers when acting as our conservator. As conservator, FHFA can direct us to enter into contracts or enter into contracts on our behalf. Further, FHFA may transfer or sell any of our assets or liabilities (subject to limitations and post-transfer notice provisions for transfers of certain types of financial contracts), without any approval, assignment of rights or consent of any party. However, mortgage loans and mortgage-related assets that have been transferred to a
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Fannie Mae MBS trust must be held by the conservator for the beneficial owners of the Fannie Mae MBS and cannot be used to satisfy the general creditors of the company. Neither the conservatorship nor the terms of our agreements with Treasury change our obligation to make required payments on our debt securities or perform under our mortgage guaranty obligations.
A Supreme Court decision in June 2021, in Collins et al. v. Yellen, Secretary of the Treasury, et al., held that the President has the power to remove the Director of FHFA for any reason, not just for cause. The Supreme Court’s opinion in Collins v. Yellen also included an expansive interpretation of FHFA’s authority as conservator under the Housing and Economic Recovery Act of 2008, noting that “when the FHFA acts as a conservator, it may aim to rehabilitate the regulated entity in a way that, while not in the best interests of the regulated entity, is beneficial to the Agency and, by extension, the public it serves.” With FHFA’s broad powers as conservator, changes in leadership at FHFA, including changes resulting from a change in Administration, could result in significant changes to the goals FHFA establishes for us and could have a material impact on our business and financial results. See “Risk Factors—GSE and Conservatorship Risk” for more information how conservatorship impacts us.
Treasury Agreements
On September 7, 2008, Fannie Mae, through FHFA in its capacity as conservator entered into a senior preferred stock purchase agreement with Treasury, pursuant to which we issued to Treasury one million shares of Variable Liquidation Preference Senior Preferred Stock, Series 2008-2, which we refer to as the “senior preferred stock,” and a warrant to purchase shares of common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis at the time the warrant is exercised for a nominal price. The senior preferred stock purchase agreement and the dividend and liquidation provisions of the senior preferred stock have been amended multiple times, most recently in January 2021, pursuant to a letter agreement between us, through FHFA in its capacity as conservator, and Treasury. Some provisions added to the agreement in January 2021 were subsequently temporarily suspended pursuant to a September 2021 letter agreement. Below we discuss the terms of the senior preferred stock purchase agreement and the senior preferred stock as they are currently in effect. See “Risk Factors—GSE and Conservatorship Risk” for a description of the risks to our business relating to the senior preferred stock purchase agreement, as well as the adverse effects of the senior preferred stock and the warrant on the rights of holders of our common stock and other series of preferred stock.
Senior Preferred Stock Purchase Agreement
Funds Available for Draw
The senior preferred stock purchase agreement provides that, on a quarterly basis, we may draw funds up to the amount, if any, by which our total liabilities exceed our total assets, as reflected in our consolidated balance sheet, prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), for the applicable fiscal quarter (referred to as the “deficiency amount”), up to the maximum amount of remaining funding under the agreement. As of the date of this filing, the maximum amount of remaining funding under the agreement is $113.9 billion. If we were to draw additional funds from Treasury under the agreement with respect to a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw. The senior preferred stock purchase agreement provides that the deficiency amount will be calculated differently if we become subject to receivership or other liquidation process.
Commitment Fee and “Capital Reserve End Date”
The senior preferred stock purchase agreement provides for the payment of an unspecified quarterly commitment fee to Treasury to compensate Treasury for its ongoing support under the senior preferred stock purchase agreement. The amount of this fee, as well as a number of the agreement’s other terms and the terms of the senior preferred stock, depend on whether we have reached the “capital reserve end date,” which is defined as the last day of the second consecutive fiscal quarter during which we have maintained capital equal to, or in excess of, all of the capital requirements and buffers under the enterprise regulatory capital framework discussed in “Legislation and Regulation—GSE-Focused Matters—Capital.” Under the agreement, (1) through and continuing until the capital reserve end date, the periodic commitment fee will not be set, accrue, or be payable, and (2) not later than the capital reserve end date, we and Treasury, in consultation with the Chair of the Federal Reserve, will agree to set the periodic commitment fee. Treasury’s funding commitment under the senior preferred stock purchase agreement has no expiration date. The agreement provides that Treasury’s funding commitment will terminate under any of the following circumstances: (1) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding commitment at that time; (2) the payment in full of, or reasonable provision for, all of our liabilities (whether or not contingent, including mortgage guaranty obligations); or (3) the funding by Treasury of the maximum amount that may be funded under the agreement. In addition, Treasury may terminate its funding commitment and declare the agreement null and void if a court vacates,
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modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of the conservator or otherwise curtails the conservator’s powers.
Debt and MBS Holders
In the event of our default on payments with respect to our debt securities or guaranteed Fannie Mae MBS, if Treasury fails to perform its obligations under its funding commitment and if we and/or the conservator are not diligently pursuing remedies with respect to that failure, the agreement provides that any holder of such defaulted debt securities or Fannie Mae MBS may file a claim in the United States Court of Federal Claims for relief requiring Treasury to fund us up to (1) the amount necessary to cure the payment defaults on our debt and Fannie Mae MBS, (2) the deficiency amount, or (3) the amount of remaining funding under the senior preferred stock purchase agreement, whichever is the least. Any payment that Treasury makes under those circumstances will be treated for all purposes as a draw under the agreement that will increase the liquidation preference of the senior preferred stock.
Most provisions of the senior preferred stock purchase agreement may be waived or amended by mutual agreement of the parties; however, no waiver or amendment of the agreement is permitted that would decrease Treasury’s aggregate funding commitment or add conditions to Treasury’s funding commitment if the waiver or amendment would adversely affect in any material respect the holders of our debt securities or guaranteed Fannie Mae MBS.
Senior Preferred Stock
Dividend Provisions
Treasury, as the holder of the senior preferred stock, is entitled to receive, when, as and if declared, out of legally available funds, cumulative quarterly cash dividends. The dividends we have paid to Treasury on the senior preferred stock during conservatorship have been declared by, and paid at the direction of, our conservator, acting as successor to the rights, titles, powers and privileges of the Board of Directors. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the senior preferred stock purchase agreement.
The dividend provisions of the senior preferred stock were amended pursuant to the January 2021 letter agreement to permit us to retain increases in our net worth until our net worth exceeds the amount of adjusted total capital necessary for us to meet the capital requirements and buffers under the enterprise regulatory capital framework. As described more fully below, after the capital reserve end date, the amount of quarterly dividends to Treasury will be equal to the lesser of any quarterly increase in our net worth and a 10% annual rate on the then-current liquidation preference of the senior preferred stock. As a result of these provisions, our ability to retain earnings in excess of the capital requirements and buffers set forth in the enterprise regulatory capital framework will be limited.
Dividend Amount Prior to Capital Reserve End Date
The terms of the senior preferred stock provide for dividends each quarter in 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. The January 2021 letter agreement increased the applicable capital reserve amount, starting with the quarterly dividend period ending on December 31, 2020, from $25 billion to the amount of adjusted total capital necessary for us to meet the capital requirements and buffers set forth in enterprise regulatory capital framework. If our net worth does not exceed this amount as of the end of the immediately preceding fiscal quarter, then dividends will neither accumulate nor be payable for such period. Our net worth is defined as the amount, if any, by which our total assets (excluding Treasury’s funding commitment and any unfunded amounts related to the commitment) exceed our total liabilities (excluding any obligation with respect to capital stock), in each case as reflected on our balance sheet prepared in accordance with GAAP.
Dividend Amount Following Capital Reserve End Date
Beginning on the first dividend period following the capital reserve end date, the applicable quarterly dividend amount on the senior preferred stock will be the lesser of:
(1) a 10% annual rate on the then-current liquidation preference of the senior preferred stock; and
(2) an amount equal to the incremental increase in our net worth during the immediately prior fiscal quarter.
However, the applicable quarterly dividend amount will immediately increase to a 12% annual rate on the then-current liquidation preference of the senior preferred stock if we fail to timely pay dividends in cash to Treasury. This increased dividend amount will continue until the dividend period following the date we have paid, in cash, full cumulative dividends to Treasury (including any unpaid dividends), at which point the applicable quarterly dividend amount will revert to the prior calculation method.
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Liquidation Preference
Shares of the senior preferred stock have no par value and have a stated value and initial liquidation preference equal to $1,000 per share, for an aggregate initial liquidation preference of $1 billion.
Under the terms that currently govern the senior preferred stock, the aggregate liquidation preference will be increased by the following:
•any amounts Treasury pays to us pursuant to its funding commitment under the senior preferred stock purchase agreement (a total of $119.8 billion as of the date of this filing);
•any quarterly commitment fees that are payable but not paid in cash (no such fees have become payable, nor will they under the current terms of the senior preferred stock purchase agreement and the senior preferred stock);
•any dividends that are payable but not paid in cash to Treasury, regardless of whether or not they are declared; and
•at the end of each fiscal quarter through and including the capital reserve end date, an amount equal to the increase in our net worth, if any, during the immediately prior fiscal quarter.
The aggregate liquidation preference of the senior preferred stock was $163.7 billion as of December 31, 2021. It will increase to $168.9 billion as of March 31, 2022 due to the increase in our net worth during the fourth quarter of 2021.
The senior preferred stock ranks ahead of our common stock and all other outstanding series of our preferred stock, as well as any capital stock we issue in the future, as to both dividends and rights upon liquidation. As a result, if we are liquidated, the holder of the senior preferred stock is entitled to its then current liquidation preference before any distribution is made to the holders of our common stock or other preferred stock.
Limitations on Redemption and Paydown of Liquidation Preference; Requirement to Pay Net Proceeds of Capital Stock Issuances to Reduce Liquidation Preference
We are not permitted to redeem the senior preferred stock prior to the termination of Treasury’s funding commitment under the senior preferred stock purchase agreement. Moreover, we are not permitted to pay down the liquidation preference of the outstanding shares of senior preferred stock except to the extent of (1) accumulated and unpaid dividends previously added to the liquidation preference and not previously paid down; and (2) quarterly commitment fees previously added to the liquidation preference and not previously paid down. In addition to these exceptions, if we issue any shares of capital stock for cash while the senior preferred stock is outstanding, the net proceeds of the issuance, with the exception of up to $70 billion in aggregate gross cash proceeds from the issuance of common stock, must be used to pay down the liquidation preference of the senior preferred stock. The liquidation preference of each share of senior preferred stock may not be paid down below $1,000 per share prior to the termination of Treasury’s funding commitment. Following the termination of Treasury’s funding commitment, we may pay down the liquidation preference of all outstanding shares of senior preferred stock at any time, in whole or in part.
Additional Senior Preferred Stock Provisions
The senior preferred stock provides that we may not, at any time, declare or pay dividends on, make distributions with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any common stock or other securities ranking junior to the senior preferred stock unless (1) full cumulative dividends on the outstanding senior preferred stock (including any unpaid dividends added to the liquidation preference) have been declared and paid in cash, and (2) all amounts required to be paid with the net proceeds of any issuance of capital stock for cash (as described in the preceding paragraph) have been paid in cash. Shares of the senior preferred stock are not convertible. Shares of the senior preferred stock have no general or special voting rights, other than those set forth in the certificate of designation for the senior preferred stock or otherwise required by law. The consent of holders of at least two-thirds of all outstanding shares of senior preferred stock is generally required to amend the terms of the senior preferred stock or to create any class or series of stock that ranks prior to or on parity with the senior preferred stock.
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Net Worth, Treasury Funding and Senior Preferred Stock Dividends
The charts below show information about our net worth, the remaining amount of Treasury’s funding commitment to us, senior preferred stock dividends we have paid Treasury and funds we have drawn from Treasury pursuant to its funding commitment.
(1)Aggregate amount of dividends we have paid to Treasury on the senior preferred stock from 2008 through December 31, 2021. Under the terms of the senior preferred stock purchase agreement, dividend payments we make to Treasury do not offset our draws of funds from Treasury.
(2)Aggregate amount of funds we have drawn from Treasury pursuant to the senior preferred stock purchase agreement from 2008 through December 31, 2021.
Common Stock Warrant
Pursuant to the senior preferred stock purchase agreement, on September 7, 2008, we, through FHFA in its capacity as conservator, issued to Treasury a warrant to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis on the date the warrant is exercised, for an exercise price of $0.00001 per share. The warrant may be exercised in whole or in part at any time on or before September 7, 2028.
Covenants under Treasury Agreements
The senior preferred stock purchase agreement contains covenants that prohibit us from taking a number of actions without the prior written consent of Treasury, including:
•paying dividends or other distributions on or repurchasing our equity securities (other than the senior preferred stock or warrant);
•issuing equity securities, except for stock issuances made (1) to Treasury, (2) pursuant to obligations that existed at the time we entered conservatorship, and (3) as amended by the January 2021 letter agreement, for common stock ranking pari passu or junior to the common stock issued to Treasury in connection with the exercise of its warrant, provided that (i) Treasury has already exercised its warrant in full, and (ii) all currently pending significant litigation relating to the conservatorship and the August 2012 amendment to the senior preferred stock purchase agreement has been resolved, which may require Treasury’s assent. Net proceeds of the issuance of any shares of capital stock for cash while the senior preferred stock is outstanding, except for up to $70 billion in aggregate gross cash proceeds from the issuance of common stock, must be used to pay down the liquidation preference of the senior preferred stock;
•terminating or seeking to terminate our conservatorship, other than through a receivership, except that, as revised by the January 2021 letter agreement, FHFA can terminate our conservatorship without the prior consent of Treasury if several conditions are met, including (1) all currently pending significant litigation relating to the conservatorship and the August 2012 amendment to the senior preferred stock purchase agreement has been resolved, and (2) for two or more consecutive quarters, our common equity tier 1 capital (as defined in the enterprise regulatory capital framework), together with any stockholder equity that would result from a firm
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commitment public underwritten offering of common stock which is fully consummated concurrent with the termination of conservatorship, equals or exceeds at least 3% of our adjusted total assets (as defined in the enterprise regulatory capital framework);
•selling, transferring, leasing or otherwise disposing of any assets, except for dispositions for fair market value in limited circumstances including if (a) the transaction is in the ordinary course of business and consistent with past practice or (b) the assets have a fair market value individually or in the aggregate of less than $250 million; and
•issuing subordinated debt.
Covenants in the senior preferred stock purchase agreement also subject us to limits on the amount of mortgage assets that we may own and the total amount of our indebtedness.
•Mortgage Asset Limit. The amount of mortgage assets we are permitted to own is $250 billion and, as a result of the January 2021 letter agreement, will decrease to $225 billion on December 31, 2022. We are currently managing our business to a $225 billion cap pursuant to instructions from FHFA. Our mortgage assets as of December 31, 2021 were $111.2 billion. Our mortgage asset calculation also includes 10% of the notional value of interest-only securities we hold. We disclose the amount of our mortgage assets each month in the “Endnotes” to our Monthly Summaries, which are available on our website and announced in a press release.
•Debt Limit. Our debt limit under the senior preferred stock purchase agreement is set at 120% of the amount of mortgage assets we were allowed to own under the agreement on December 31 of the immediately preceding calendar year. This debt limit is currently $300 billion, and it will decrease to $270 billion as of December 31, 2022. As calculated for this purpose, our indebtedness as of December 31, 2021 was $202.5 billion. We disclose the amount of our indebtedness on a monthly basis under the caption “Total Debt Outstanding” in our Monthly Summaries, which are available on our website and announced in a press release.
Compensation. Another covenant prohibits us from entering into any new compensation arrangements or increasing amounts or benefits payable under existing compensation arrangements with any of our executive officers (as defined by Securities and Exchange Commission (“SEC”) rules) without the consent of the Director of FHFA, in consultation with the Secretary of the Treasury.
Annual Risk Management Plan Covenant. Each year we remain in conservatorship we are required to provide Treasury a risk management plan that sets out our strategy for reducing our risk profile, describes the actions we will take to reduce the financial and operational risk associated with each of our business segments, and includes an assessment of our performance against the planned actions described in the prior year’s plan. We submitted our most recent risk management plan to Treasury in December 2021.
Covenants Added in January 2021 and Currently in Effect
In addition to the changes described above to covenants already in the senior preferred stock purchase agreement, the January 2021 letter agreement added additional covenants:
•Enterprise Regulatory Capital Framework. We are required to comply with the terms of the enterprise regulatory capital framework as adopted by FHFA in November 2020 and published by FHFA in the Federal Register on December 17, 2020, disregarding any subsequent amendments or modifications to the framework.
•New Business Restrictions. Additional restrictive covenants impact our single-family business activities:
◦Requirement to Provide Equitable Access for Single-Family Acquisitions. We:
▪may not vary our pricing or acquisition terms for single-family loans based on the business characteristics of the seller, including the seller’s size, charter type, or volume of business with us; and
▪must offer to purchase at all times, for equivalent cash consideration and on substantially the same terms, any single-family mortgage loan that (1) is of a class of loans that we then offer to acquire for inclusion in our mortgage-backed securities or for other non-cash consideration, (2) is offered by a seller that has been approved to do business with us, and (3) has been originated and sold in compliance with our underwriting standards.
◦Single-Family Loan Eligibility Requirements Program. We are required to maintain a program, which we began implementing in the second quarter of 2021, reasonably designed to ensure that the single-family loans we acquire are limited to:
▪qualified mortgages, except government-backed loans;
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▪loans exempt from the Consumer Financial Protection Bureau’s (the “CFPB’s”) ability-to-repay and qualified mortgage rule, except timeshares and home equity lines of credit;
▪loans secured by an investment property;
▪refinancing loans with streamlined underwriting originated in accordance with our eligibility criteria for high loan-to-value refinancings;
▪loans originated with temporary underwriting flexibilities during times of exigent circumstances, as determined in consultation with FHFA;
▪loans secured by manufactured housing; and
▪such other loans that FHFA may designate that were eligible for purchase by us as of the date of the January 2021 letter agreement.
Covenants Added in January 2021 and Temporarily Suspended in September 2021
The business restrictions described below were added to the senior preferred stock purchase agreement as a result of the January 2021 letter agreement and subsequently temporarily suspended pursuant to a letter agreement dated September 14, 2021. 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. As a result, we do not know when these suspensions will end. Although the restrictions on these activities under the senior preferred stock purchase agreement are temporarily suspended, 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. These suspended restrictions are as follows:
•Single Counterparty Volume Cap on Single-Family Acquisitions for Cash. This suspended provision would require that we 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 would not be subject to this limitation.
•Limit on Multifamily Volume. This suspended provision would require that we not acquire more than $80 billion in multifamily mortgage assets in any 52-week period, with this multifamily volume cap to 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, at the time of acquisition, be classified as mission-driven, consistent with FHFA guidelines. Although this provision has been suspended, FHFA establishes a cap on our new multifamily business volume and requires that a minimum portion of our multifamily business volume be mission-driven, focused on certain affordable and underserved market segments. For more information on our multifamily volume cap, see “Legislation and Regulation—Multifamily Business Volume Cap” and “MD&A—Multifamily Business—Multifamily Business Metrics.”
•Limit on Specified Higher-Risk Single-Family Acquisitions. This suspended provision would prohibit our acquisition of 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 more of the higher-risk characteristics listed below at origination. The 3% and 6% measurements would each be based on loans we 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.
•Limit on Acquisitions of Single-Family Mortgage Loans Backed by Second Homes and Investment Properties. This suspended provision would require that we 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.
Equitable Housing Finance Plan
In September 2021, FHFA instructed Fannie Mae and Freddie Mac to submit Equitable Housing Finance Plans to FHFA by the end of 2021, which we have done. In our plan, we were required to 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.
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As contemplated by the instruction, the goals and action plans established by the Equitable Housing Finance Plan 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.
In connection with our Equitable Housing Finance Plan and in support of other efforts we may undertake to support equitable housing, we anticipate establishing and supporting special purpose credit programs. Under the Equal Credit Opportunity Act, creditors can create special purpose credit programs for groups that have been historically disadvantaged in obtaining credit; such programs benefit applicants who would otherwise be denied credit or receive it on less favorable terms. In response to uncertainty in the industry, in December 2021, the U.S. Department of Housing and Urban Development (“HUD”) issued guidance clarifying that these programs, if they conform with the Equal Credit Opportunity Act, generally do not violate the Fair Housing Act.
For more information on our initial Equitable Housing Finance Plan, see “Directors, Executive Officers and Corporate Governance—ESG Matters—Social—Racial Equity.”
Housing Finance Reform
After Fannie Mae was placed in conservatorship, policymakers and others focused significant attention 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. Despite this attention, efforts in Congress to enact meaningful reform have been limited, particularly in recent years. The Administration and Congress may consider housing finance reforms or legislation that could result in significant changes in our structure and role in the future, including proposals that would result in Fannie Mae’s liquidation or dissolution. There continues to be significant uncertainty regarding the timing, content and impact of future legislative and regulatory actions affecting us. See “Risk Factors—GSE and Conservatorship Risk” for a description of risks associated with our future and potential housing finance reform.
Legislation and Regulation As a federally chartered corporation and as a financial institution, we are subject to government regulation and oversight. FHFA, our primary regulator, regulates our safety and soundness and our mission, and also acts as our conservator. FHFA is an independent agency of the federal government with general supervisory and regulatory authority over Fannie Mae, Freddie Mac and the Federal Home Loan Banks (“FHLBs”). HUD and FHFA regulate us with respect to fair lending matters. Our regulators also include the SEC and Treasury. In addition, even if we are not directly subject to an agency’s regulation or oversight, regulations by that agency that affect mortgage lenders and servicers, debt investors, or the markets for our MBS or debt securities could have a significant impact on us.
GSE-Focused Matters
We describe below matters applicable specifically to Fannie Mae. These matters relate to legislation, regulation or, in some cases, conservatorship. In the following section, we describe matters that are applicable more broadly or to other mortgage or capital market participants and that may directly or indirectly affect us.
Capital
The GSE Act sets forth minimum and critical capital requirements for Fannie Mae and Freddie Mac and provides that the Director of FHFA shall establish risk-based capital requirements and may establish higher minimum capital requirements. FHFA has suspended the statute’s capital classifications during conservatorship. Although existing statutory and regulatory capital requirements are not binding during conservatorship, we continue to submit capital reports to FHFA and FHFA monitors our capital levels.
Conservatorship Capital Framework
In 2017, FHFA directed Fannie Mae and Freddie Mac to implement an aligned risk measurement framework for evaluating business decisions and performance during conservatorship. The conservatorship capital framework included specific requirements relating to the risk of our book of business and modeled returns on our new acquisitions. We discuss below our transition from the conservatorship capital framework to our new enterprise regulatory capital framework.
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Fannie Mae 2021 Form 10-K | | 18 |
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Enterprise Regulatory Capital Framework
In November 2020, FHFA adopted a final rule establishing a new regulatory capital framework for the GSEs. The new regulatory capital framework implements the statutory capital requirements and establishes supplemental risk-based and leverage-based capital requirements beyond what is expressly required in the GSE Act. The framework provides a granular assessment of credit risk specific to different mortgage loan categories, as well as components for market risk and operational risk. The regulatory capital framework set forth in the rule includes the following:
•Supplemental capital requirements relating to the amount and form of the capital we hold, based largely on definitions of capital used in U.S. banking regulators’ regulatory capital framework. The rule specifies complementary leverage-based and risk-based requirements, which together determine the requirements for each tier of capital;
•A requirement that we hold prescribed capital buffers that can be drawn down in periods of financial stress and then rebuilt over time as economic conditions improve. If we fall below the prescribed buffer amounts, we must restrict capital distributions such as stock repurchases and dividends, as well as discretionary bonus payments to executives, until the buffer amounts are restored. The prescribed capital buffers represent the amount of capital we are required to hold above the minimum risk-based and leverage-based capital requirements.
◦The risk-based capital buffers consist of three separate components: a stability capital buffer, a stress capital buffer, and a countercyclical capital buffer. Taken together, these risk-based buffers comprise the prescribed capital conservation buffer amount, or PCCBA. The PCCBA must be comprised entirely of common equity Tier 1 capital; and
◦Separately, the prescribed leverage-based buffer amount, or PLBA, represents the amount of Tier 1 capital we are required to hold above the minimum Tier 1 leverage-based capital requirement.
•A requirement to file quarterly public capital reports starting in 2022, regardless of our status in conservatorship;
•Specific minimum percentages, or “floors,” on the risk-weights applicable to single-family and multifamily exposures, which has the effect of increasing the capital required to be held for loans otherwise subject to lower risk weights;
•Specific floors on the risk-weights applicable to retained portions of credit risk transfer transactions, which has the effect of decreasing the capital relief obtained from these transactions; and
•Additional elements based on U.S. banking regulators’ regulatory capital framework, including the planned eventual introduction of an advanced approach to complement the standardized approach for measuring risk-weighted assets.
The enterprise regulatory capital framework went into effect in February 2021, but the dates on which we must comply with the requirements of the capital framework are staggered and largely dependent on whether we remain in conservatorship. Under the rule, our compliance with the capital buffers will be required upon exit from conservatorship, and our compliance with the base regulatory requirements will be required by the later of our exit from conservatorship or such later date as may be specified by FHFA. Further, the compliance date for advanced approaches of the rule will be January 1, 2025, or such later date as may be specified by FHFA. Reporting requirements under the enterprise regulatory capital framework took effect for periods beginning on January 1, 2022, including public reporting of our calculations of regulatory capital levels, buffers, adjusted total assets, and total risk-weighted assets.
When it is fully applicable to Fannie Mae, this framework will require us to hold significantly more capital than the statutory minimum capital requirement, and we currently have a $100.3 billion deficit of core capital relative to that statutory requirement. We believe that, if we were fully capitalized under the framework, our returns on our current business would not be sufficient to attract private investors. See “Risk Factors—GSE and Conservatorship Risk” for a discussion of Fannie Mae’s uncertain future and the potential impact of insufficient returns on capital. See “Note 12, Regulatory Capital Requirements” for more information about our statutory capital classification measures.
In 2021, FHFA sought comments on three proposed rulemakings that would amend the enterprise regulatory capital framework:
•In September 2021, FHFA proposed refining the prescribed leverage buffer 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. The comment period on the proposed rule closed in November 2021.
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Fannie Mae 2021 Form 10-K | | 19 |
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•In October 2021, FHFA proposed additional public disclosure requirements relating to our capital requirements under the framework, our available capital and our risk and capital management processes. The comment period on the proposed rule closed in January 2022.
•In December 2021, FHFA proposed amendments requiring us to submit annual capital plans to FHFA and provide prior notice for certain capital actions. The proposed amendments would also incorporate the determination of the stress capital buffer into the capital planning process. The comment period on the proposed amendments will close on February 25, 2022.
Since the enterprise regulatory capital framework went into effect, we have been reviewing our business decisions continuously as they relate to both the new capital requirements and the conservatorship capital framework, because we have measured our risk and returns on our business against the conservatorship capital framework, but the loans we have been acquiring and any related credit-risk sharing transactions we enter into will also impact our future capital requirements. We expect to complete in 2022 our transition from using the conservatorship capital framework to make business and risk decisions to using the new enterprise regulatory capital framework and certain risk measures. Managing our business to take into account our new capital requirements and measures of risk requires balancing potentially competing business objectives, including furthering our mission objectives, prudently managing risk, and earning a competitive return. We will need significantly more capital to meet the enterprise regulatory capital framework’s requirements, which may have a significant impact on our business, but we cannot measure the full impact at this time because the timing of when many of the provisions of the new framework will become applicable depends on factors outside our control. We are developing our ongoing business strategy to align our business activities with our new capital requirements and measures of risk.
Portfolio Standards
The GSE Act requires FHFA to establish standards governing our portfolio holdings, to ensure that they are backed by sufficient capital and consistent with our mission and safe and sound operations. FHFA is also required to monitor our portfolio and, in some circumstances, may require us to dispose of or acquire assets. In 2010, FHFA adopted, as the standard for our portfolio holdings, the portfolio limits specified in the senior preferred stock purchase agreement described under “Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements—Covenants under Treasury Agreements,” as it may be amended from time to time. The rule is effective for as long as we remain subject to the terms and obligations of the senior preferred stock purchase agreement.
Stress Testing
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires certain financial companies to conduct annual stress tests to determine whether the companies have the capital necessary to absorb losses as a result of adverse economic conditions. Under FHFA regulations implementing this requirement, each year we are required to conduct a stress test 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. We and FHFA published our most recent stress test results for the severely adverse scenario on August 13, 2021.
FHFA Proposed Liquidity Requirements
In June 2020, FHFA instructed us to meet prescriptive liquidity requirements. In December 2020, those requirements became effective and FHFA issued a proposed rule in line with the updated requirements. Liquidity requirements affect the amount of liquid assets we are required to hold, and to meet FHFA’s instructions and proposed rule, we hold more liquid assets than we were required to hold under our previous framework. For information about our liquidity requirements, see “MD&A—Liquidity and Capital Management—Liquidity Management—Liquidity and Funding Risk Management Practices and Contingency Planning.”
Receivership
Under the GSE Act, FHFA must place us into receivership if the Director of FHFA makes a written determination that our assets are less than our obligations (that is, we have a net worth deficit) or if we have not been paying our debts as they become due, in either case, for a period of 60 days. FHFA has notified us that the measurement period for any mandatory receivership determination with respect to our assets and liabilities would commence no earlier than the SEC public filing deadline for our quarterly or annual financial statements and would continue for 60 calendar days thereafter. FHFA has advised us that if, during that 60-day period, we receive funds from Treasury in an amount at least equal to the deficiency amount under the senior preferred stock purchase agreement, the Director of FHFA will not make a mandatory receivership determination.
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Fannie Mae 2021 Form 10-K | | 20 |
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In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other reasons set forth in the GSE Act. The statutory grounds for discretionary appointment of a receiver include: a substantial dissipation of assets or earnings due to unsafe or unsound practices; the existence of an unsafe or unsound condition to transact business; an inability to meet our obligations in the ordinary course of business; a weakening of our condition due to unsafe or unsound practices or conditions; critical undercapitalization; undercapitalization and no reasonable prospect of becoming adequately capitalized; the likelihood of losses that will deplete substantially all of our capital; or by consent.
The appointment of FHFA as receiver would immediately terminate the conservatorship. In the event of receivership, the GSE Act requires FHFA, as the receiver, to organize a limited-life regulated entity with respect to Fannie Mae. Among other requirements, the GSE Act provides that this limited-life regulated entity:
•would succeed to Fannie Mae’s charter and thereafter operate in accordance with and subject to such charter;
•would assume, acquire or succeed to our assets and liabilities to the extent that such assets and liabilities are transferred by FHFA to the entity; and
•would not be permitted to assume, acquire or succeed to any of our obligations to shareholders.
Placement into receivership would likely have a material adverse effect on holders of our common stock and preferred stock, and could have a material adverse effect on holders of our debt securities and Fannie Mae MBS. Should we be placed into receivership, different assumptions would be required to determine the carrying value of our assets, which could lead to substantially different financial results. For more information on the risks to our business relating to receivership and uncertainties regarding the future of our business, see “Risk Factors—GSE and Conservatorship Risk.”
Resolution Planning
In May 2021, FHFA issued a final rule requiring us to develop a plan for submission to FHFA that would assist FHFA in planning for the rapid and orderly resolution of the company if FHFA is appointed as our receiver. The stated goals in the rule for our resolution plan are to:
•minimize disruption in the national housing finance markets by providing for the continued operation of our core business lines in receivership by a newly constituted limited-life regulated entity;
•preserve the value of our franchise and assets;
•facilitate the division of assets and liabilities between the limited-life regulated entity and the receivership estate;
•ensure that investors in our guaranteed mortgage-backed securities and our unsecured debt bear losses in the order of their priority established under the GSE Act, while minimizing unnecessary losses and costs to these investors; and
•foster market discipline by making clear that no extraordinary government support will be available to indemnify investors against losses or fund the resolution of the company.
The rule requires that we submit our initial resolution plan to FHFA by April 6, 2023, and subsequent resolution plans not later than every two years thereafter unless otherwise notified by FHFA. The rule provides that, in developing our resolution plan, we must assume that receivership may occur under severely adverse economic conditions, and we may not assume the provision or continuation of extraordinary support by the U.S. government (including support under our senior preferred stock purchase agreement with Treasury).
Affordable Housing Allocations
The GSE Act requires us to set aside in each fiscal year an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of our new business purchases and to pay this amount to specified HUD and Treasury funds in support of affordable housing. New business purchases consist of single-family and multifamily whole mortgage loans purchased during the period and single-family and multifamily mortgage loans underlying Fannie Mae MBS issued during the period pursuant to lender swaps, which we describe in “Mortgage Securitizations.” We are prohibited from passing through the cost of these allocations to the originators of the mortgage loans that we purchase or securitize. For each year’s new business purchases since 2015, we have set aside amounts for these contributions and transferred the funds when directed by FHFA to do so. See “Certain Relationships and Related Transactions, and Director Independence—Transactions with Related Persons—Treasury Interest in Affordable Housing Allocations” for information on our contribution for 2021 new business purchases.
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Fannie Mae 2021 Form 10-K | | 21 |
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Fair Lending
The GSE Act requires the Secretary of HUD to assure that Fannie Mae and Freddie Mac meet their fair lending obligations. Among other things, HUD periodically reviews and comments on our underwriting and appraisal guidelines to ensure consistency with the Fair Housing Act. 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. In December 2021, FHFA released an advisory bulletin to provide FHFA's supervisory expectations and guidance to Fannie Mae and Freddie Mac on fair lending and fair housing compliance.
FHFA Rule on Credit Score Models
Under an FHFA rule that became effective in October 2019, we are required to validate and approve third-party credit score models and obtain FHFA’s approval of our determination. We must evaluate the models for factors such as accuracy, reliability and integrity, as well as impacts on fair lending and the mortgage industry. We have determined that the “classic FICO® Score” from Fair Isaac Corporation should be approved for our continued use as a credit score model and FHFA approved this determination. We continue to consider additional credit score model applications in accordance with the rule. Fannie Mae uses credit scores to establish a minimum credit threshold for mortgage lending, provide a foundation for risk-based pricing, and support disclosures to investors.
Housing Goals
In this and the following sections, we discuss our housing goals and our duty to serve obligations pursuant to the GSE Act, as well as FHFA’s requirement, as our conservator, that a portion of our new multifamily business be focused on affordable and underserved markets. In pursuit of our mission to facilitate equitable and sustainable access to homeownership and quality affordable rental housing across America, and at FHFA’s instruction, we are also looking at additional ways to help very low-, low- and moderate-income borrowers attain and sustain homeownership.
Our housing goals, which are established by FHFA in accordance with the GSE Act, require that a specified amount of mortgage loans we acquire meet standards relating to affordability or location. For single-family goals, our acquisitions are measured against the lower of benchmarks set by FHFA or the level of goals-qualifying originations in the primary mortgage market. Multifamily goals are established as a number of units to be financed.
Housing Goals for 2020 and 2021
In December 2021, FHFA determined that we met all of our 2020 single-family and multifamily housing goals. We believe we also met our 2021 single-family and multifamily housing goals, and FHFA will make a final determination regarding our 2021 performance later in the year, after data regarding the share of goals-qualifying originations in the primary mortgage market, reported under the Home Mortgage Disclosure Act, becomes available. The tables below display information about our housing goals for 2020 and 2021 and performance against our 2020 goals.
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Single-Family Housing Goals(1) |
| 2020 | | 2021 | |
| FHFA Benchmark | | Single-Family Market Level | | Result | | FHFA Benchmark | |
Low-income (≤80% of area median income) families home purchases | 24 | % | 27.6 | | % | 29.0 | | % | 24 | | % |
Very low-income (≤50% of area median income) families home purchases | 6 | | | 7.0 | | | 7.3 | | | 6 | | |
Low-income areas home purchases(2) | 18 | | | 22.4 | | | 23.6 | | | 18 | | |
Low-income and high-minority areas home purchases(3) | 14 | | | 17.6 | | | 18.3 | | | 14 | | |
Low-income families refinances | 21 | | | 21.0 | | | 21.2 | | | 21 | | |
(1) The FHFA benchmarks and our results are expressed as a percentage of the total number of eligible single-family mortgages acquired during the period. The Single-Family Market level is the percentage of eligible single-family mortgages originated in the primary mortgage market.
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(2) These mortgage loans must be secured by a property that is (a) in a low-income census tract, (b) in a high-minority census tract and affordable to moderate-income families (those with incomes less than or equal to 100% of area median income), or (c) in a designated disaster area and affordable to moderate-income families.
(3) These mortgage loans must be secured by a property that is (a) in a low-income census tract or (b) in a high-minority census tract and affordable to moderate-income families.
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Multifamily Housing Goals(1) |
| 2020 | | 2021 |
| Goal | | Result | | Goal |
| |
Low-income families | 315,000 | | | 441,773 | | | 315,000 | |
Very low-income families | 60,000 | | | 95,416 | | | 60,000 | |
Small affordable multifamily properties(2) | 10,000 | | | 21,797 | | | 10,000 | |
(1) FHFA goals and our results are expressed as number of units financed during the period.
(2) Small affordable multifamily properties are those with 5 to 50 units that are affordable to low-income families.
Housing goals for 2022 to 2024
In December 2021, FHFA published a final rule establishing new benchmark levels for our single-family housing goals for 2022 through 2024 and new multifamily housing goals for 2022.
Single-Family Housing Goals for 2022 to 2024
FHFA will 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.
The final rule establishes two new single-family home purchase subgoals to replace the prior low-income areas subgoal. The new minority census tracts subgoal targets 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 targets (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 will 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.
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| | Prior Benchmark Level | | Current 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% |
Multifamily Housing Goals for 2022
In response to comments on its rule proposal, FHFA's final rule established multifamily housing goals for 2022 only, rather than for 2022 through 2024. FHFA will evaluate our performance for 2022 against the following multifamily goals and subgoals.
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| | Prior Goal | | Current Goal |
Multifamily Goals | | 2018-2021 | | 2022 |
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 | | 17,000 |
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The 2022 goals proposed by FHFA are at significantly higher levels than our 2018 to 2021 goals, particularly for the small multifamily low-income subgoal.
As described in “Risk Factors—GSE and Conservatorship Risk,” actions we may take to meet our housing goals and duty to serve requirements described below may increase our credit losses and credit-related expense.
Multifamily Business Volume Cap
As our conservator, FHFA has established caps on our new multifamily business volume and requirements that a portion of our multifamily volume be focused on affordable and underserved markets. Our multifamily loan purchase cap for 2022 is $78 billion, and a minimum of 50% of loan purchases must be mission-driven, focused on specified affordable and underserved market segments. In addition, 25% of loan purchases must be affordable to residents earning 60% or less of area median income, up from the 20% requirement in 2021. Multifamily business that meets the minimum 25% requirement also counts as meeting the minimum 50% requirement. See “MD&A—Multifamily Business—Multifamily Business Metrics” for more information about our multifamily business volume cap, which is a requirement under the scorecard FHFA issued establishing 2022 corporate performance objectives for us. More information on FHFA’s 2022 Scorecard is provided in our current report on Form 8-K filed on November 18, 2021.
Duty to Serve Underserved Markets
The GSE Act requires that we serve very low-, low-, and moderate-income families in three specified underserved markets: manufactured housing, affordable housing preservation and rural housing. Under FHFA’s implementing “duty to serve” rule, we are required to adopt an underserved markets plan for each underserved market covering a three-year period that sets forth the activities and objectives we will undertake to meet our duty to serve that market.
The types of activities that are eligible for duty to serve credit in each underserved market are summarized below:
•Manufactured housing market. For the manufactured housing market, duty to serve credit is available for eligible activities relating to manufactured homes (whether titled as real property or personal property (known as chattel)) and loans for specified categories of manufactured housing communities.
•Affordable housing preservation market. For the affordable housing preservation market, duty to serve credit is available for eligible activities relating to preserving the affordability of housing for renters and buyers under specified programs enumerated in the GSE Act and other comparable affordable housing programs administered by state and local governments, subject to FHFA approval. Duty to serve credit also is available for activities related to small multifamily rental properties, energy efficiency improvements on existing multifamily rental and single-family first lien properties, certain shared equity homeownership programs, the purchase or rehabilitation of certain distressed properties, and activities under HUD’s Choice Neighborhoods Initiative and Rental Assistance Demonstration programs.
•Rural housing market. For the rural housing market, duty to serve credit is available for eligible activities related to housing in rural areas, including activities related to housing in high-needs rural regions and for high-needs rural populations.
FHFA reviews our draft underserved markets plans. In response to comments we received from FHFA on our initially proposed plans for 2022 to 2024, we have revised our draft plans for further FHFA consideration.
FHFA has also established an annual process for evaluating our achievements under the plans, with performance results to be reported to Congress annually. If FHFA determines that we failed to meet the requirements of an underserved markets plan, it may result in the imposition of a housing plan that could require us to take additional steps. In October 2021, FHFA reported its determination that we complied with our 2020 duty to serve requirements and its finding that we performed a satisfactory job of increasing the liquidity and distribution of available capital in each of the three underserved markets. We believe we also met our 2021 duty to serve obligations. FHFA will determine our performance with respect to our 2021 duty to serve obligations in 2022.
Guaranty Fees and Pricing
Our guaranty fees and pricing are subject to regulatory, legislative and conservatorship requirements:
•FHFA, in its capacity as conservator, can direct us to make changes to our guaranty fee pricing for new single-family acquisitions. FHFA has also provided guidance relating to our guaranty fee pricing. For new single-family acquisitions, FHFA has instructed us to meet a specified minimum return on equity target based on our capital requirements. In addition, FHFA has instructed us to establish a long-term target for returns at the enterprise level, which may impact our guaranty fees.
•FHFA in its regulatory capacity, has established minimum base guaranty fees that generally apply to our acquisitions of 30-year and 15-year single-family fixed-rate loans in lender swap transactions.
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•In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 (the “TCCA”) which, among other provisions, required that we increase our single-family guaranty fees by at least 10 basis points and remit this increase to Treasury. To meet our obligations under the TCCA and 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 resulting revenue is included in net interest income and the expense is recognized as “TCCA fees.” In November 2021, the Infrastructure Investment and Jobs Act was enacted, which extended to October 1, 2032 our obligation under the TCCA to collect 10 basis points in guaranty fees on single-family residential mortgages delivered to us and pay the associated revenue to Treasury. In January 2022, FHFA advised us to continue to pay these TCCA fees to Treasury with respect to all single-family loans acquired by us before October 1, 2032, and to continue to remit these amounts to Treasury on and after October 1, 2032 with respect to loans we acquired before this date until those loans are paid off or otherwise liquidated. As noted in “Glossary of Terms Used in This Report,” in this report we use the term “TCCA fees” to refer to the expense recognized as a result of the 10 basis point increase in guaranty fees on all single-family residential mortgages delivered to us on or after April 1, 2012 pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011 and as extended by the Infrastructure Investment and Jobs Act, which we remit to Treasury on a quarterly basis.
New Products and Activities
The GSE Act requires us to obtain prior approval from FHFA before initially offering new products and to provide advance notice to FHFA of new activities, subject to certain exceptions. FHFA adopted an interim final rule implementing these provisions in July 2009, but subsequently concluded that permitting us to engage in new products was inconsistent with the goals of the conservatorship and instructed us not to submit new product requests under the rule. In October 2020, FHFA issued a proposed rule that, if adopted as final, would replace the interim final rule. The proposed rule establishes a process for the review of new products and activities by FHFA, including providing for a public notice and comment period with respect to new products. The proposed rule also establishes revised criteria for determining what constitutes a new activity that requires notice to FHFA and describes the activities that are excluded from the requirements of the proposed rule. The proposed rule, if adopted as a final rule, would apply to Fannie Mae, and any affiliates of Fannie Mae, both during and after a transition from conservatorship. In January 2021, we submitted a comment letter recommending various modifications to the proposed rule to streamline FHFA’s review of new products and activities.
Executive Compensation
The amount of compensation we may pay our executives is subject to a number of legal and regulatory restrictions, particularly while we are in conservatorship. For a description of our executive compensation program and legal, regulatory and conservatorship requirements that affect our executive compensation, see “Executive Compensation.”
FHFA Rule on Uniform Mortgage-Backed Securities
We and Freddie Mac are required to align our programs, policies and practices that affect the prepayment rates of TBA-eligible MBS pursuant to an FHFA rule. The rule is intended to ensure that Fannie Mae and Freddie Mac programs, policies and practices that individually have a material effect on cash flows (including policies that affect prepayment speeds) are and will remain aligned regardless of whether we and Freddie Mac are in conservatorship. The rule provides a non-exhaustive list of covered programs, policies and practices, including management decisions or actions about: single-family guaranty fees; the spread between the note rate on the mortgage and the pass-through coupon on the MBS; eligibility standards for sellers, servicers, and private mortgage insurers; distressed loan servicing requirements; removal of mortgage loans from securities; servicer compensation; and proposals that could materially change the credit risk profile of the single-family mortgages securitized by a GSE. We believe that our policies and practices are generally aligned with the requirements specified by FHFA pursuant to the rule. However, FHFA may mandate alignment efforts in the future, and the impact of any such efforts on our business or our MBS is uncertain.
Industry and General Matters
The CARES Act and other Relief
In response to the COVID-19 pandemic, a number of legislative and executive actions were taken by the federal government and state and local governments to assist affected borrowers and renters and to slow the spread of the pandemic. While many of the provisions described below are no longer in effect, the pandemic continues, and new requirements and prohibitions may be imposed in the future that could, depending on their scope and the extent they apply to our business, have a material adverse effect on our business and financial results.
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Fannie Mae 2021 Form 10-K | | 25 |
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The Coronavirus Aid, Relief, and Economic Security Act, referred to as the CARES Act, which was enacted in March 2020, contained a number of provisions aimed at providing relief for individuals and businesses that applied to the loans we guarantee. The CARES Act included a requirement that our servicers provide forbearance (that is, a temporary suspension of the borrower’s monthly mortgage payments) for up to 360 days upon the request of any single-family borrower experiencing a financial hardship caused by the COVID-19 pandemic. The CARES Act also temporarily suspended certain foreclosures and foreclosure-related evictions for single-family properties, and the act instituted a temporary moratorium on tenant evictions for nonpayment of rent that applied to any single-family or multifamily property that secured a mortgage loan we own or guarantee. The Centers for Disease Control and Prevention (the “CDC”) issued orders establishing a temporary prohibition on certain residential evictions for nonpayment of rent, which the U.S. Supreme Court ultimately invalidated in August 2021. The CFPB issued a rule that prohibited servicers from initiating new foreclosures, with limited exceptions, on certain mortgage loans secured by the borrower’s principal residence until after December 31, 2021. Many states and localities also issued executive orders or enacted legislation requiring mortgage forbearance, foreclosure and eviction moratoriums, and rent flexibilities.
See “MD&A—Single-Family Business—Single-Family Mortgage Credit Risk Management” and “MD&A—Multifamily Business—Multifamily Mortgage Credit Risk Management” for more information on the actions we have taken and are taking to support borrowers affected by the impacts of the COVID-19 pandemic and the current status of loans that received COVID-19-related forbearance.
Risk Retention
Under a rule implementing the Dodd-Frank Act’s credit risk retention requirement, sponsors of securitization transactions are generally required to retain a 5% economic interest in the credit risk of the securitized assets. The rule offers several compliance options, one of which is to have either Fannie Mae or Freddie Mac (so long as they remain in conservatorship or receivership with capital support from the United States) securitize and fully guarantee the assets, in which case no further retention of credit risk is required. A potential exit from conservatorship, or changes we make in our business upon any potential exit from conservatorship to comply with the rule, could reduce our market share or adversely impact our business. Securities backed solely by mortgage loans meeting the definition of a “qualified residential mortgage” are exempt from the risk retention requirements of the rule. The rule currently defines “qualified residential mortgage” to have the same meaning as the term “qualified mortgage” as defined by the CFPB in connection with its ability-to-repay rule discussed below.
Ability-to-Repay Rule and the Qualified Mortgage Patch
The Dodd-Frank Act amended the Truth in Lending Act (“TILA”) to require creditors to determine that borrowers have a “reasonable ability to repay” most mortgage loans prior to making such loans. In 2013, the CFPB issued a rule that, among other things, requires creditors to determine a borrower’s “ability to repay” a mortgage loan. If a creditor fails to comply, a borrower may be able to offset a portion of the amount owed in a foreclosure proceeding or recoup monetary damages. The rule offers several options for complying with the ability-to-repay requirement, including making loans that meet certain terms and characteristics (referred to as “qualified mortgages”), which may provide creditors and their assignees with special protection from liability. A loan will be a standard qualified mortgage under the rule if, among other things, (1) the points and fees paid in connection with the loan do not exceed 3% of the total loan amount, (2) the loan term does not exceed 30 years, (3) the loan is fully amortizing with no negative amortization, interest-only or balloon features and (4) the debt-to-income (“DTI”) ratio on the loan does not exceed 43% at origination and is underwritten according to Appendix Q in the rule. The CFPB also created the qualified mortgage “patch,” pursuant to which a special class of conventional mortgage loans are considered qualified mortgages if they (1) meet the points and fees, term and amortization requirements of qualified mortgages generally and (2) are eligible for sale to Fannie Mae or Freddie Mac. In 2013, FHFA directed Fannie Mae and Freddie Mac to limit our acquisition of single-family loans to those loans that meet the points and fees, term and amortization requirements for qualified mortgages, or to loans that are exempt from the ability-to-repay rule, such as loans made to investors.
In December 2020, the CFPB published a rule amendment that eliminated the qualified mortgage patch and replaced the 43% DTI ratio limit and certain other requirements for a standard qualified mortgage with a pricing and underwriting framework. The final qualified mortgage rule went into effect in March 2021, with lenders initially required to comply beginning in July 2021. In April 2021, the CFPB published a final rule extending the mandatory compliance date to October 2022 and thereby also extending the qualified mortgage patch. The CFPB has indicated that it will consider changes to the final rule during the extended implementation timeframe. Although the rule’s implementation is delayed, the terms of our senior preferred stock purchase agreement with Treasury require that most single-family loans we purchase be qualified mortgages under the terms of the final rule that went into effect in March 2021. We do not expect the final qualified mortgage rule, as published, to impact our business significantly. See “Risk Factors—GSE and Conservatorship Risk” and “Risk Factors—Legal and Regulatory Risk” for more information on risks presented by regulatory changes in the financial services industry.
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Fannie Mae 2021 Form 10-K | | 26 |
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| Business | Legislation and Regulation |
TILA-RESPA Integrated Disclosure (“TRID”)
The Dodd-Frank Act required the CFPB to streamline and simplify the disclosures required under TILA and the Real Estate Settlement Procedures Act. In October 2015, the CFPB’s final rule implementing these changes went into effect. Although this rule applies to mortgage originators and is not directly applicable to us, we could face potential liability for certain errors in the required disclosures in connection with the loans we acquire from lenders. It remains unclear what sorts of errors will give rise to liability. Consistent with a 2015 directive from FHFA, we do not conduct post-purchase loan file reviews for technical compliance with TRID, and we currently do not exercise our contractual remedies, including requiring the lender to repurchase the loan, for noncompliance with the provisions of TRID, except in two limited circumstances: if the required form is not used; or if a particular practice would impair enforcement of the note or mortgage or would result in assignee liability, and a court of law, regulator or other authoritative body has determined that such practice violates TRID.
Single-Counterparty Credit Limit
The Federal Reserve Board has adopted rules to restrict the counterparty credit exposures of U.S.-based global systemically important banks (“U.S. GSIBs”) and certain large bank holding companies, large savings and loan holding companies, and U.S. intermediate holding companies that are subsidiaries of foreign banking organizations. These rules generally limit the exposure of a covered organization to any counterparty and its affiliates to no more than 25% of the covered organization’s tier 1 capital. U.S. GSIBs must adhere to a stricter limit of 15% of their tier 1 capital for exposures to any other U.S. GSIB or non-bank entity supervised by the Federal Reserve.
While Fannie Mae is in conservatorship, a covered organization’s exposures involving claims on or directly and fully guaranteed by Fannie Mae are exempt from these restrictions and Fannie Mae MBS and debt can be used as collateral to reduce a banking organization’s counterparty exposure. We do not know what impact, if any, these rules may have on our lenders’ or counterparties’ business practices, or whether and to what extent this rule may adversely affect demand for or the liquidity of securities we issue. The Federal Reserve Board has indicated that a change in the conservatorship status of the GSEs could affect aspects of the Federal Reserve Board’s regulatory framework, and that it “will continue to monitor and take into consideration any future changes to the conservatorship status of the GSEs, including the extent and type of support received by the GSEs.”
Transition from LIBOR and Alternative Reference Rates
In 2017, the United Kingdom’s Financial Conduct Authority, which regulates the London Inter-bank Offered Rate (“LIBOR”), announced its intention to stop persuading or compelling the group of major banks that sustains LIBOR to submit rate quotations after 2021. ICE Benchmark Administration (“IBA”), the administrator of LIBOR, ceased publication of one-week and two-month U.S. dollar LIBOR after December 2021 and has stated its intention to cease publication of the remaining U.S. dollar LIBOR tenors, including one-month, three-month, six-month and one-year LIBOR, after June 2023. We are exposed to LIBOR-based financial instruments, primarily relating to our acquisitions of loans and securities, sales of securities, and derivative transactions, that have been entered into previously and mature after June 2023. However, we no longer acquire LIBOR loans or securities, issue LIBOR securities or enter into LIBOR derivatives transactions that increase our LIBOR risk exposure, so our exposure to LIBOR continues to diminish.
We have been actively seeking to facilitate an orderly transition from LIBOR to emerging alternative rates. We established an internal office focused on LIBOR transition issues that is overseen by our LIBOR Enterprise Steering Council, which includes members of senior management. We also coordinate with FHFA on our LIBOR transition efforts. As part of these efforts, we have sought to identify the risks inherent in this transition and engaged external business and legal consultants focused on LIBOR and alternative indices. We continue to analyze potential risks associated with the LIBOR transition, including financial, operational, legal, reputational and compliance risks.
In addition to the work we are doing on an enterprise level to facilitate an orderly transition from LIBOR, we also are a voting member of the Alternative Reference Rates Committee (the “ARRC”) and participate in its working groups. The ARRC is a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York to identify a set of alternative U.S. dollar reference interest rates and an adoption plan for those alternative rates. Banking and financial regulators, including FHFA, also participate in the ARRC as ex-officio members. In 2017, the ARRC recommended an alternative reference rate, referred to as the Secured Overnight Financing Rate (“SOFR”). The Federal Reserve Bank of New York began publishing SOFR in 2018.
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Fannie Mae 2021 Form 10-K | | 27 |
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| Business | Legislation and Regulation |
In support of the ARRC’s efforts to develop SOFR as a key market index, we issued the market’s first SOFR securities in 2018, and through December 31, 2021 we have issued a total of $136.1 billion in SOFR-indexed floating-rate corporate debt. Since 2020, we have taken numerous steps to transition our financial instruments away from LIBOR; including using SOFR-indexed adjustable-rate mortgage products for new originations for our single-family business and our multifamily business, ceasing our purchase of any LIBOR adjustable-rate mortgage loans, issuing SOFR-indexed REMIC securities, and ceasing the issuance of new LIBOR REMIC securities. We supported the initial development of SOFR-indexed interest rate swaps and futures transactions and continue to execute these SOFR trades on a frequent basis. We have not issued LIBOR debt securities since 2017, and we no longer enter into new LIBOR derivatives trades that increase our LIBOR risk exposure.
Our LIBOR-indexed derivative contracts historically represented the single largest category (measured by notional amount) of our LIBOR exposure. During 2021, we terminated the vast majority of our LIBOR derivatives transactions (and, where appropriate, entered into new SOFR derivatives trades). While we have a small amount of remaining legacy LIBOR derivatives trades that will mature after June 2023, the related contracts provide that LIBOR will be replaced with SOFR once LIBOR ceases to be published.
Given that our derivatives LIBOR exposure has been significantly decreased and the transition to SOFR has been addressed, our three principal sources of continued exposure to LIBOR arise from (1) single-family and multifamily LIBOR-based adjustable-rate mortgage loans that we have securitized or own; (2) LIBOR-indexed REMIC structured securities that we have issued; and (3) LIBOR indexed credit risk transfer securities. Each of those products allow us to select a replacement index if LIBOR ceases to be published or, for products issued in 2020 or after, uses fallback language based on the recommendations of the ARRC. In coordination with Freddie Mac, and in consultation with FHFA, we have been providing frequent public updates about these LIBOR products by means of a publicly-available LIBOR transition playbook.
While we have the ability to select the replacement index for many of these LIBOR products, the transition from LIBOR will require action by many market participants and leadership from organizations such as the ARRC member firms, FHFA, our advisors, and other regulators. 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. Such an announcement will allow us to announce our transition plans for our LIBOR-indexed consumer products shortly thereafter.
In addition, federal legislation is being considered by Congress that is aimed at providing a fair and orderly transition from LIBOR to alternative rates. In December 2021, the House of Representatives passed the Adjustable Interest Rate (LIBOR) Act of 2021 by an overwhelming vote. The goal of this bill is to facilitate a smooth transition from LIBOR to alternative rates, provide a transparent and fair process, and provide a litigation safe harbor for market participants that act in accordance with such legislation, and related federal agency rulemakings for their contracts associated with their LIBOR financial instruments. We cannot predict the likelihood that any legislation is passed, related rulemakings or decisions are made, or the impact of those actions and decisions. See “Risk Factors—Market and Industry Risk” for a discussion of the risks to our results of operations, financial condition, liquidity and net worth posed by the discontinuance of LIBOR.
Our employees are key to ensuring our long-term success and meeting our strategic objectives. We had approximately 7,400 employees as of December 18, 2021, our final pay-period end date in 2021. Because we design, build and maintain complex systems to support our specialized role in the secondary mortgage market, approximately 39% of our employees work in technology-related jobs. An improving economy and increased remote work opportunities have increased the competition we face from other companies in hiring new employees, as well as in retaining our employees. Competition is especially high for employees with technology skills. Voluntary attrition of our employees has increased over the past year, consistent with a national trend. In addition to attrition rates, our vacancy rate at any given point in time can be affected by other factors such as hiring priorities, labor market conditions, headcount growth rates, and the timing of onboarding new employees. As of December 18, 2021, approximately 9% of positions across the company were vacant, and approximately 12% of our technology-related positions were vacant. We discuss how restrictions on our compensation and uncertainty with respect to our future negatively affect our ability to retain and recruit employees in “Risk Factors—GSE and Conservatorship Risk.” Despite conservatorship, an uncertain future, and limitations on the compensation we are able to offer, we believe many employees and potential recruits are attracted by our mission and the compelling nature of our work.
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Fannie Mae 2021 Form 10-K | | 28 |
Employee Engagement
We are committed to maintaining an engaged workforce as we believe engagement is critical to the ongoing achievement of the company’s and the conservator’s goals. We monitor employee engagement through regular surveys. In 2021, the vast majority of our employees agreed with statements such as whether they would recommend Fannie Mae as a great place to work, which we consider to be strong indicators of their engagement. We believe our ability to recruit and retain employees and keep them engaged is influenced by the opportunity to do interesting work that supports our mission. We also offer employee benefits to encourage involvement in socially positive efforts, including those that echo our mission. Specifically, we offer employees up to $5,000 per year in matching charitable gifts (subject to overall available funding) and 10 hours of paid leave each month to engage in volunteer activities. We have also established a relief fund to which our employees can make charitable donations to assist employees who have suffered losses as a result of a natural disaster or other catastrophic event.
Employee Development
We invest in our employees’ development to support the success of the company as well as our employees. We seek to provide training and opportunities that enable employees to develop digital, leadership and other critical skills we need to achieve our strategic objectives and fulfill our mission. In recent years, we have worked on instilling lean management techniques, practices and behaviors throughout our workforce and Agile development principles for employees engaged in product development. We also emphasize to our employees their responsibility for and role in managing risk through our risk-assessment and monitoring activities, training and corporate messaging. In 2021, these efforts enabled us to respond to demands created by the continued high business volumes and impacts from the COVID-19 pandemic with commercial speed and agility, as well as to respond to a high volume of regulatory and conservatorship developments and demands, including our new capital framework.
Safety and Resiliency
In 2021, we continued to prioritize the safety and resiliency of our workforce. Recognizing that our employees are balancing a number of competing obligations, we seek to provide an environment that supports our business needs while helping employees better meet their personal obligations. While most of our employees currently work remotely, depending on COVID-19 transmission rates, we permit employees who choose to do so to work at our office locations, upon compliance with established COVID-19 safety protocols. We plan to operate in a hybrid work model in the future, with office space where teams come together when it makes sense, but with flexibility regarding when employees will be in the office. We currently expect that a significant majority of our employees will continue to work remotely for the foreseeable future. To date, our business resiliency plans and technology systems have effectively supported this remote work arrangement. To support our employees in their remote work environment, we have offered technology stipends. We have also taken a number of steps to support employee resiliency, including extending our summertime practice of half-day flexible Fridays through the balance of 2021 and, more recently, through 2022.
Diversity and Inclusion
We seek to foster an environment in which all employees are treated with dignity and respect, have the opportunity to contribute to meaningful work, and perform that work in an inclusive environment free from discrimination, harassment, and retaliation. We believe this commitment helps us attract and retain a skilled, diverse workforce. As of December 18, 2021, racial or ethnic minorities constituted 57% of our overall workforce and 24% of our officer-level employees, and women constituted 44% of our overall workforce and 35% of our officer-level employees. Supporting our role in the secondary mortgage market requires employees with specialized technology skills. As a result, we consider our workforce diversity in the context of fintech companies, whose operations are based on a blend of financial services products and technology platforms, rather than financial services firms or other companies that have significant retail operations or a large number of administrative roles. We sponsor programs and activities to cultivate a diverse and inclusive work environment by focusing on inclusive leadership principles, talent development, enterprise accessibility, team and group dynamics, and a consistent communications strategy that reinforces the practice of driving inclusion to achieve innovative solutions. We established an Employee Inclusive Culture Council in 2021, composed of employees representing a broad cross-section of the diversity at Fannie Mae, to support culture initiatives relating to our mission and values. We also support ten voluntary, grassroots employee resource groups that are open to all employees, support diversity and inclusion, and provide a forum for members to come together for professional growth and development, cultural awareness, education, community service, and networking across the organization. In 2021, we engaged leaders to continue championing diversity and inclusion through our officer-led Diversity Advisory Council to ensure the integration of our diversity and inclusion strategy throughout the company. We also leveraged our leader-led “Courageous Conversations” to promote inclusion and understanding by raising awareness of employees' diverse experiences and perspectives.
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Fannie Mae 2021 Form 10-K | | 29 |
See “Directors, Executive Officers and Corporate Governance—Corporate Governance—Human Capital Management Oversight” for information on oversight of human capital management by our Board of Directors’ Compensation and Human Capital Committee and see “Directors, Executive Officers and Corporate Governance—ESG Matters—Diversity and Inclusion—Diverse Workforce and Inclusive Workplace” for additional information.
Where You Can Find Additional Information We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10‑Q, current reports on Form 8-K and all other SEC reports and amendments to those reports as soon as reasonably practicable after we electronically file the material with, or furnish it to, the SEC. Our website address is www.fanniemae.com. Materials that we file with the SEC are also available from the SEC’s website, www.sec.gov. You may also request copies of any filing from us, at no cost, by calling the Fannie Mae Investor Relations & Marketing Helpline at 1-800-2FANNIE (1-800-232-6643). The availability of printed copies of these materials may be delayed at times when our COVID safety protocols require employees to work remotely.
References in this report to our website or to the SEC’s website do not incorporate information appearing on those websites unless we explicitly state that we are incorporating the information.
Forward-Looking Statements This report includes statements that constitute forward-looking statements within the meaning of Section 21E of the Exchange Act. In addition, we and our senior management may from time to time make forward-looking statements in our other filings with the SEC, our other publicly available written statements and orally to analysts, investors, the news media and others. Forward-looking statements often include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “forecast,” “project,” “would,” “should,” “could,” “likely,” “may,” “will” or similar words. Examples of forward-looking statements in this report include, among others, statements relating to our expectations regarding the following matters:
•our future financial performance, financial condition and net worth, and the factors that will affect them, including our expectations regarding our future net revenues, amortization income and guaranty fees;
•economic, mortgage market and housing market conditions (including expectations regarding home price growth, refinance volumes and interest rates), the factors that will affect those conditions, and the impact of those conditions on our business and financial results;
•our business plans and strategies, and their impact;
•our expectations relating to the enterprise regulatory capital framework;
•our plans relating to and the effects of our credit risk transfer transactions, as well as the factors that will affect our engagement in future transactions;
•the impact of the CFPB’s final rule eliminating the qualified mortgage patch on our business;
•volatility in our future financial results and the impact of our adoption of hedge accounting on such volatility;
•the size and composition of our retained mortgage portfolio;
•the amount and timing of our purchases of loans from MBS trusts;
•the impact of legislation and regulation on our business or financial results;
•the impact of the COVID-19 pandemic on our business;
•our payments to HUD and Treasury funds under the GSE Act;
•our future off-balance sheet exposure to Freddie Mac-issued securities;
•the risks to our business;
•future delinquency rates, defaults, forbearances, modifications and other loss mitigation activity, foreclosures, and credit losses relating to the loans in our guaranty book of business and the factors that will affect them, including the impact of the COVID-19 pandemic;
•the performance of loans in our book of business, including loans in trial modifications or forbearance, and the factors that will affect such performance;
•our expectations regarding our employees’ remote work arrangements;
•the amount of our outstanding debt and how we will meet our debt obligations; and
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Fannie Mae 2021 Form 10-K | | 30 |
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| Business | Forward-Looking Statements |
•our response to legal and regulatory proceedings and their impact on our business or financial condition.
Forward-looking statements reflect our management’s current expectations, forecasts or predictions of future conditions, events or results based on various assumptions and management’s estimates of trends and economic factors in the markets in which we are active and that otherwise impact our business plans. Forward-looking statements are not guarantees of future performance. By their nature, forward-looking statements are subject to significant risks and uncertainties and changes in circumstances. Our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.
There are a number of factors that could cause actual conditions, events or results to differ materially from those described in our forward-looking statements, including, among others, the following:
•uncertainty regarding our future, our exit from conservatorship and our ability to raise or earn the capital needed to meet our capital requirements;
•significant challenges we face in retaining and hiring qualified executives and other employees;
•the duration, spread and severity of the COVID-19 pandemic; the actions taken to contain the virus or treat its impact, including government actions to mitigate the economic impact of the pandemic and COVID-19 vaccination rates; the effectiveness of available COVID-19 vaccines over time and against variants of the coronavirus; the nature, extent and success of the forbearance, payment deferrals, modifications and other loss mitigation options we provide to borrowers affected by the pandemic; accounting elections and estimates relating to the impact of the COVID-19 pandemic; borrower and renter behavior in response to the pandemic and its economic impact; the extent to which current economic and operating conditions continue, including whether any future outbreaks or increases in new COVID-19 cases interrupt economic recovery; and how quickly and to what extent affected borrowers, renters and counterparties recover from the negative economic impact of the pandemic;
•the impact of the senior preferred stock purchase agreement and the enterprise regulatory capital framework, as well as future legislative and regulatory requirements or changes, governmental initiatives, or executive orders affecting us, such as the enactment of housing finance reform legislation, including changes that limit our business activities or our footprint or impose new mandates on us;
•actions by FHFA, Treasury, HUD, the CFPB or other regulators, Congress, the Executive Branch, or state or local governments that affect our business;
•changes in the structure and regulation of the financial services industry;
•the potential impact of a change in the corporate income tax rate, which we expect would affect our capital requirements and net income in the quarter of enactment as a result of a change in our measurement of our deferred tax assets and our net income in subsequent quarters as a result of the change in our effective federal income tax rate;
•the timing and level of, as well as regional variation in, home price changes;
•future interest rates and credit spreads;
•developments that may be difficult to predict, including: market conditions that result in changes in our net amortization income from our guaranty book of business, fluctuations in the estimated fair value of our derivatives and other financial instruments that we mark to market through our earnings; and developments that affect our loss reserves, such as changes in interest rates, home prices or accounting standards, or events such as natural or other disasters, the emergence of widespread health emergencies or pandemics, or other disruptive or catastrophic events;
•uncertainties relating to the discontinuance of LIBOR, or other market changes that could impact the loans we own or guarantee or our MBS;
•disruptions or instability in the housing and credit markets;
•the size and our share of the U.S. mortgage market and the factors that affect them, including population growth and household formation;
•growth, deterioration and the overall health and stability of the U.S. economy, including U.S. GDP, unemployment rates, personal income, inflation and other indicators thereof;
•changes in fiscal or monetary policy;
•our and our competitors’ future guaranty fee pricing and the impact of that pricing on our competitive environment and guaranty fee revenues;
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Fannie Mae 2021 Form 10-K | | 31 |
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| Business | Forward-Looking Statements |
•the volume of mortgage originations;
•the size, composition, quality and performance of our guaranty book of business and retained mortgage portfolio;
•the competitive environment in which we operate, including the impact of legislative, regulatory or other developments on levels of competition in our industry and other factors affecting our market share;
•how long loans in our guaranty book of business remain outstanding;
•the effectiveness of our business resiliency plans and systems;
•changes in the demand for Fannie Mae MBS, in general or from one or more major groups of investors;
•our conservatorship, including any changes to or termination (by receivership or otherwise) of the conservatorship and its effect on our business;
•the investment by Treasury, including the impact of recent changes or potential future changes to the terms of the senior preferred stock purchase agreement, and its and their effect on our business, including restrictions imposed on us by the terms of the senior preferred stock purchase agreement, the senior preferred stock, and Treasury’s warrant, as well as the extent that these or other restrictions on our business and activities are applied to us through other mechanisms even if we cease to be subject to these agreements and instruments;
•adverse effects from activities we undertake to support the mortgage market and help borrowers, renters, lenders and servicers;
•actions we may be required to take by FHFA, in its role as our conservator or as our regulator, such as actions in response to the COVID-19 pandemic, changes in the type of business we do, or actions relating to UMBS or our resecuritization of Freddie Mac-issued securities;
•limitations on our business imposed by FHFA, in its role as our conservator or as our regulator;
•our current and future objectives and activities in support of those objectives, including actions we may take to reach additional underserved borrowers or address barriers to sustainable housing opportunities and advance equity in housing finance;
•the possibility that changes in leadership at FHFA or the Administration may result in changes that affect our company or our business;
•our reliance on CSS and the common securitization platform for a majority of our single-family securitization activities, our reduced influence over CSS as a result of changes made in 2020 to the CSS limited liability company agreement, and any additional changes FHFA may require in our relationship with or in our support of CSS;
•a decrease in our credit ratings;
•limitations on our ability to access the debt capital markets;
•constraints on our entry into new credit risk transfer transactions;
•significant changes in forbearance, modification and foreclosure activity;
•the volume and pace of future nonperforming and reperforming loan sales and their impact on our results and serious delinquency rates;
•changes in borrower behavior;
•actions we may take to mitigate losses, and the effectiveness of our loss mitigation strategies, management of our REO inventory and pursuit of contractual remedies;
•defaults by one or more institutional counterparties;