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, 2011

Commission File No.: 0-50231

Federal National Mortgage Association

(Exact name of registrant as specified in its charter)

Fannie Mae

Federally chartered corporation 52-0883107

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

3900 Wisconsin Avenue, 20016

NW Washington, DC

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code:

(202) 752-7000

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

Title of Each Class Name of Each Exchange on Which Registered

None

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

Common Stock, without par value

(Title of class)

8.25% Non-Cumulative Preferred Stock, Series T, stated value $25 per share

(Title of class)

8.75% Non-Cumulative Mandatory Convertible Preferred Stock, Series 2008-1 stated value $50 per share

(Title of class)

Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series S, stated value $25 per share

(Title of class)

7.625% Non-Cumulative Preferred Stock, Series R, stated value $25 per share

(Title of class)

6.75% Non-Cumulative Preferred Stock, Series Q, stated value $25 per share

(Title of class)

Variable Rate Non-Cumulative Preferred Stock, Series P, stated value $25 per share

(Title of class)

Variable Rate Non-Cumulative Preferred Stock, Series O, stated value $50 per share

(Title of class)

5.375% Non-Cumulative Convertible Series 2004-1 Preferred Stock, stated value $100,000 per share

(Title of class)

5.50% Non-Cumulative Preferred Stock, Series N, stated value $50 per share

(Title of class)

4.75% Non-Cumulative Preferred Stock, Series M, stated value $50 per share

(Title of class)

5.125% Non-Cumulative Preferred Stock, Series L, stated value $50 per share

(Title of class)

5.375% Non-Cumulative Preferred Stock, Series I, stated value $50 per share

(Title of class)

5.81% Non-Cumulative Preferred Stock, Series H, stated value $50 per share

(Title of class)

Variable Rate Non-Cumulative Preferred Stock, Series G, stated value $50 per share

(Title of class)

Variable Rate Non-Cumulative Preferred Stock, Series F, stated value $50 per share

(Title of class)

5.10% Non-Cumulative Preferred Stock, Series E, stated value $50 per share

(Title of class)

5.25% Non-Cumulative Preferred Stock, Series D, stated value $50 per share

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No Í

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 Í

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 Í No ‘

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and

posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and

post such files). Yes Í No ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to

the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Í

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large

accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ‘ Accelerated filer Í Non-accelerated filer ‘

(Do not check if a smaller reporting company)

Smaller reporting company ‘

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

The aggregate market value of the common stock held by non-affiliates of the registrant computed by reference to the last reported sale price of the common stock quoted on the

OTC Bulletin Board on June 30, 2011 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $383 million.

As of January 31, 2012, there were 1,158,072,058 shares of common stock of the registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: The information required by Item 11 in Part III will be included in an amendment to this annual report on

Form 10-K filed on or before April 30, 2012.
TABLE OF CONTENTS

PART I .............................................................................. 1

Item 1. Business .................................................................... 1

Introduction ................................................................. 1

Residential Mortgage Market .................................................... 2

Executive Summary ........................................................... 5

Mortgage Securitizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Conservatorship and Treasury Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Legislative and Regulatory Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Our Charter and Regulation of Our Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Making Home Affordable Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Our Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Where You Can Find Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases

of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . 85

Critical Accounting Policies and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Consolidated Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Business Segment Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Consolidated Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

Supplemental Non-GAAP Information—Fair Value Balance Sheets . . . . . . . . . . . . . . . . . . . . . 129

Liquidity and Capital Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

Off-Balance Sheet Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

Impact of Future Adoption of New Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . 193

Glossary of Terms Used in This Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . 197

Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207

Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211

Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214

Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . 216

Policies and Procedures Relating to Transactions with Related Persons . . . . . . . . . . . . . . . . . . . 216

Transactions with Related Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222

Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226

PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
MD&A TABLE REFERENCE

Table Description Page

1 Treasury Dividend Payments and Draws ................................................ 9

2 Characteristics of Acquired Single-Family Conventional Loans by Acquisition Period . . . . . . . . . . . . 10

3 Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition

Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

4 Credit Statistics, Single-Family Guaranty Book of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

5 Level 3 Recurring Financial Assets at Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

6 Summary of Consolidated Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

7 Analysis of Net Interest Income and Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

8 Rate/Volume Analysis of Changes in Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

9 Impact of Nonaccrual Loans on Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

10 Fair Value Gains (Losses), Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

11 Total Loss Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

12 Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves) . . . . . . . . . 101

13 Loss Reserve Concentration Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

14 Nonperforming Single-Family and Multifamily Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

15 Credit Loss Performance Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

16 Credit Loss Concentration Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

17 Single-Family Credit Loss Sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

18 Business Segment Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

19 Business Segment Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

20 Single-Family Business Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

21 Multifamily Business Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

22 Capital Markets Group Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

23 Capital Markets Group’s Mortgage Portfolio Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

24 Capital Markets Group’s Mortgage Portfolio Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

25 Summary of Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

26 Summary of Mortgage-Related Securities at Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

27 Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities . . . . . . . . . . . 126

28 Credit Statistics of Loans Underlying Alt-A and Subprime Private-Label Mortgage-Related

Securities (Including Wraps) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

29 Changes in Risk Management Derivative Assets (Liabilities) at Fair Value, Net . . . . . . . . . . . . . . . . . 129

30 Comparative Measures—GAAP Change in Stockholders’ Deficit and Non-GAAP Change in Fair

Value of Net Assets (Net of Tax Effect) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

31 Supplemental Non-GAAP Consolidated Fair Value Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . 132

32 Activity in Debt of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

33 Outstanding Short-Term Borrowings and Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

34 Outstanding Short-Term Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

35 Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year . . . . . . . . . . . . . . . . 141

36 Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year . . . . . . . . . . . 141
Table Description Page

37 Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

38 Cash and Other Investments Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

39 Fannie Mae Credit Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

40 Composition of Mortgage Credit Book of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

41 Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business . . 155

42 Single-Family Adjustable-Rate Mortgage Resets by Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

43 Delinquency Status of Single-Family Conventional Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

44 Single-Family Serious Delinquency Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

45 Single-Family Conventional Serious Delinquency Rate Concentration Analysis . . . . . . . . . . . . . . . . . 164

46 Statistics on Single-Family Loan Workouts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

47 Single-Family Loan Modification Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166

48 Percentage of Loan Modifications That Were Current and Performing at One and Two Years PostModification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

49 Single-Family Foreclosed Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

50 Single-Family Acquired Property Concentration Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

51 Multifamily Lender Risk-Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

52 Multifamily Serious Delinquency Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

53 Multifamily Concentration Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

54 Multifamily Foreclosed Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

55 Outstanding Repurchase Requests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

56 Mortgage Insurance Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

57 Rescission Rates of Mortgage Insurance Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

58 Estimated Mortgage Insurance Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

59 Unpaid Principal Balance of Financial Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

60 Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield

Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

61 Derivative Impact on Interest Rate Risk (50 Basis Points) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

62 Interest Rate Sensitivity of Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
PART I

We have been under conservatorship, with the Federal Housing Finance Agency (“FHFA”) acting as

conservator, since September 6, 2008. As conservator, FHFA succeeded to all rights, titles, powers and

privileges of the company, and of any shareholder, officer or director of the company with respect to the

company and its assets. The conservator has since delegated specified authorities to our Board of Directors

and has delegated to management the authority to conduct our day-to-day operations. Our directors do not

have any duties to any person or entity except to the conservator and, accordingly, are not obligated to

consider the interests of the company, the holders of our equity or debt securities or the holders of Fannie

Mae MBS unless specifically directed to do so by the conservator. We describe the rights and powers of the

conservator, key provisions of our agreements with the U.S. Department of the Treasury (“Treasury”), and

their impact on shareholders in “Business—Conservatorship and Treasury Agreements.”

This report contains forward-looking statements, which are statements about matters that are not historical facts.

Forward-looking statements often include words like “expect,” “anticipate,” “intend,” “plan,” believe,”

“seek,” “estimate,” “would,” “should,” “could,” “may” or similar words. Actual outcomes may differ

materially from those reflected in our forward-looking statements due to a variety of factors including, but not

limited to, those discussed in “Risk Factors” and elsewhere in this report. Please review “Forward-Looking

Statements” for more information on the forward-looking statements 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

INTRODUCTION

Fannie Mae is a government-sponsored enterprise (“GSE”) that was chartered by Congress in 1938. Our public

mission is to support liquidity and stability in the secondary mortgage market, where existing mortgage-related

assets are purchased and sold, and increase the supply of affordable housing. Our charter does not permit us to

originate loans and lend money directly to consumers in the primary mortgage market. Our most significant

activity is securitizing mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we

guarantee, which we refer to as Fannie Mae MBS. We also purchase mortgage loans and mortgage-related

securities. We use the term “acquire” in this report to refer to both our securitizations and our purchases of

mortgage-related assets. We obtain funds to support our business activities by issuing a variety of debt securities

in the domestic and international capital markets. During 2011, we concentrated much of our efforts on providing

liquidity and support to the mortgage market, growing the strong new book of business we have been acquiring

since the beginning of 2009, and minimizing losses on loans we acquired prior to 2009. We describe our business

activities below.

We are a corporation chartered by the U.S. Congress. Our conservator, FHFA, is a U.S. government agency.

Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock. Moreover,

Treasury has made a commitment under a senior preferred stock purchase agreement to provide us with funds

under specified conditions and, after 2012, up to a maximum amount, to maintain a positive net worth. The

U.S. government does not guarantee our securities or other obligations.

As a federally chartered corporation, we are subject to extensive regulation, supervision and examination by

FHFA, and regulation by other federal agencies, including Treasury and the Department of Housing and Urban

Development (“HUD”).

The conservatorship we have been under since September 2008 has no specified termination date. There can be

no assurance as to when or how the conservatorship will be terminated, whether we will continue to exist

following conservatorship, or what changes to our business structure will be made during or following the

conservatorship.

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Uncertainty about the future of our company and surrounding the compensation of our executives and other

employees could jeopardize our ability to manage risks effectively, to operate our business in a safe and sound

manner, to support the mortgage market and to help delinquent borrowers avoid foreclosure. Congressional

action in 2011 and early 2012 included legislation that would place our employees on a government pay scale

and would forbid bonus payments for senior executives. Such debate elevates voluntary turnover and impairs our

ability to recruit qualified employees for critical roles in the company. A sudden and sharp decline in

compensation would likely cause significant and swift employee turnover, restrict recruitment of qualified

replacements and decrease engagement of remaining employees, which could have a material adverse effect on

our ability to conduct business. See “Risk Factors” for further discussion of the risks to our business and our

results of operations if we are unable to retain and hire qualified employees.

Our agreements with Treasury that provide for substantial U.S. government financial support also include

covenants that significantly restrict our business activities. We provide additional information on the

conservatorship, the provisions of our agreements with the Treasury, and its impact on our business below under

“Conservatorship and Treasury Agreements” and “Risk Factors.”

Our common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the

symbol “FNMA.” Our debt securities are actively traded in the over-the-counter market.

RESIDENTIAL MORTGAGE MARKET

The U.S. Residential Mortgage Market

We conduct business in the U.S. residential mortgage market and the global securities market. Total

U.S. residential mortgage debt outstanding, which includes $10.3 trillion of single-family mortgage debt

outstanding, was estimated to be approximately $11.2 trillion as of September 30, 2011, the latest date for which

information was available, according to the Federal Reserve. After increasing every quarter since record keeping

began in 1952 until the second quarter of 2008, single-family mortgage debt outstanding has been steadily

declining since then. We owned or guaranteed mortgage assets representing approximately 28.0% of total U.S.

residential mortgage debt outstanding as of September 30, 2011.

We operate our business solely in the United States and its territories, and accordingly, we generate no revenue

from and have no long-lived assets other than financial instruments in geographic locations other than the United

States and its territories.

Housing and Mortgage Market and Economic Conditions

Economic growth picked up in the fourth quarter of 2011. The inflation-adjusted U.S. gross domestic product, or

GDP, rose by 2.8% on an annualized basis during the quarter, according to the Bureau of Economic Analysis

advance estimate. The overall economy gained an estimated 472,000 jobs in the fourth quarter as a result of

employment growth in the private sector. According to the U.S. Bureau of Labor Statistics as of February

2012, the economy created 1.8 million non-farm jobs in 2011. The unemployment rate was 8.5% in December

2011, compared with 9.0% in September 2011. In January 2012, nonfarm payrolls posted a strong increase of

243,000 jobs, and the unemployment rate declined further to 8.3%. In spite of the downside risks from Europe

and elsewhere, we expect that housing will start to recover if the employment market continues to improve.

Total existing home sales rose 1.7% in 2011 from 2010, according to data available through January 2012,

following a 3.5% decline in 2010, despite low mortgage rates and reduced home prices. Weak demand for

homes, a weak labor market and elevated vacancy and foreclosure rates are the main obstacles to the housing

recovery. Sales of foreclosed homes and preforeclosure, or “short,” sales (together, “distressed sales”) accounted

for 32% of existing home sales in December 2011, compared to 36% in December 2010, according to the

National Association of REALTORS®. Faced with fierce competition from distressed sales, new home sales

declined in 2011 for the sixth consecutive year, falling 6.2% to a record low. Homebuilding activity was mixed in

2011, as single-family housing starts fell approximately 9% to a record low, while multifamily starts rose 54%.

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At the end of 2011, the number of months’ supply, or the inventory/sales ratio, was consistent with historical

averages for both new and existing homes. While the demand for new homes was quite weak in 2011, the

inventory was also very lean. The number of new homes available for sale reached an all-time low in December

2011, when, according to the Census’ December 2011 New Residential Sales Report, the months’ supply was 6.1

months. For existing homes, as a result of rising sales in the fourth quarter of 2011 and a persistent decline in the

number of existing homes available for sale in the second half of 2011, the months’ supply fell sharply in the

fourth quarter. According to the National Association of REALTORS® January 2012 Existing Home Sales

Report, the months’ supply of existing unsold homes was 6.2 months as of December 31, 2011, compared with

an 8.3 months’ supply as of September 30, 2011 and an 8.1 months’ supply as of December 31, 2010. Properties

that are vacant and held off the market, combined with a portion of properties backing seriously delinquent

mortgages not currently listed for sale, represent a significant shadow inventory putting downward pressure on

home prices. The overall mortgage market serious delinquency rate, which has trended down since peaking in the

fourth quarter of 2009, remained historically high at 7.7% as of December 31, 2011, according to the Mortgage

Bankers Association National Delinquency Survey. We provide information about Fannie Mae’s serious

delinquency rate, which also decreased during 2011, in “Executive Summary—Credit Performance.”

The table below presents several key indicators related to the total U.S. residential mortgage market.

Housing and Mortgage Market Indicators(1)

% Change

2011 2010 2009 2011 2010

Home sales (units in thousands) ............................... 4,562 4,513 4,715 1.1% (4.3)%

New home sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302 323 375 (6.5) (13.9)

Existing home sales ....................................... 4,260 4,190 4,340 1.7 (3.5)

Home price depreciation based on Fannie Mae Home Price Index

(“HPI”)(2) ................................................ (3.2)% (4.3)% (4.7)% — —

Annual average fixed-rate mortgage interest rate(3) ................. 4.5% 4.7% 5.0% — —

Single-family mortgage originations (in billions) .................. $ 1,362 $ 1,701 $ 1,884 (19.9) (9.7)

Type of single-family mortgage origination:

Refinance share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66% 68% 69% — —

Adjustable-rate mortgage share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6% 5% 4% — —

Total U.S. residential mortgage debt outstanding (in billions)(4) ....... $11,177 $11,360 $11,712 (1.6) (3.0)

(1) The sources of the housing and mortgage market data in this table are the Federal Reserve Board, the Bureau of the

Census, HUD, the National Association of Realtors, and the Mortgage Bankers Association. Homes sales data are based

on information available through January 2012. Single-family mortgage originations, as well as refinance shares, are

based on February 2012 estimates from Fannie Mae’s Economic & Strategic Research group. The adjustable-rate

mortgage share is based on mortgage applications data reported by the Mortgage Bankers Association. Certain previously

reported data may have been changed to reflect revised historical data from any or all of these organizations.

(2) Calculated internally using property data information on loans purchased by Fannie Mae, Freddie Mac and other thirdparty home sales data. Fannie Mae’s HPI is a weighted repeat transactions index, measuring average price changes in

repeat sales on the same properties. Fannie Mae’s HPI excludes prices on properties sold in foreclosure. The reported

home price depreciation reflects the percentage change in Fannie Mae’s HPI from the fourth quarter of the prior year to

the fourth quarter of the reported year.

(3) Based on the annual average 30-year fixed-rate mortgage interest rate reported by Freddie Mac.

(4) Information for 2011 is through September 30, 2011 and has been obtained from the Federal Reserve’s September 2011

mortgage debt outstanding release.

The decline in home prices slowed in 2011. We estimate that home prices on a national basis declined by 3.2%

overall in 2011, with a decline of 1.6% in the fourth quarter of 2011. We estimate that home prices have declined

by 23% from their peak in the third quarter of 2006. Our home price estimates are based on preliminary data and

are subject to change as additional data become available.

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We estimate that total single-family mortgage originations in 2011 decreased from 2010 levels by 20% to $1.4

trillion, with a purchase share of 34% and a refinance share of 66%.

Since the second quarter of 2008, single-family mortgage debt outstanding has been steadily declining due to a

number of factors including declining home sales and prices, rising foreclosures, increased cash sales, and

reduced home equity extraction. We anticipate another approximately 1.1% decline in single-family mortgage

debt outstanding in 2012. Total U.S. residential mortgage debt outstanding fell during the third quarter of 2011

by an annualized rate of 2.1%.

Despite signs of stabilization and improvement, one out of thirteen borrowers was delinquent or in foreclosure

during the fourth quarter of 2011, according to the Mortgage Bankers Association National Delinquency Survey.

The housing market remains under pressure due to the high level of unemployment, which was a primary driver

of the significant number of mortgage delinquencies and defaults in 2011. At the start of the recession in

December 2007, the unemployment rate was 5.0%, based on data from the U.S. Bureau of Labor Statistics. The

unemployment rate peaked at a 26-year high of 10.0% in October 2009, and remained as high as 8.3% in January

2012. We expect the unemployment rate to remain relatively flat in 2012.

The most comprehensive measure of the unemployment rate, which includes those working part-time who would

rather work full-time (part-time workers for economic reasons) and those not looking for work but who want to

work and are available for work (discouraged workers), was 15.1% in January 2012, substantially lower than the

record high of 17.2% in October 2009.

The decline in home prices has left many homeowners with “negative equity” in their homes, which means their

principal mortgage balance exceeds the current market value of their home. This increases the likelihood that

borrowers will walk away from their mortgage obligations and that the loans will become delinquent and proceed

to foreclosure. According to CoreLogic, approximately 11 million, or 22%, of all residential properties with

mortgages were in a negative equity position in the third quarter of 2011. This potential supply also weighs on

the supply/demand balance putting downward pressure on both home prices and rents. See “Risk Factors” for a

description of risks to our business associated with the weak economy and housing market.

National multifamily market fundamentals, which include factors such as rents and vacancy rates, saw a second

year of steady improvement during 2011, benefiting from increased rental demand coupled with limited new

apartment supply. Vacancy rates continued to decline throughout most of 2011, bringing the sector back to

pre-recession levels.

Based on preliminary third-party data, we estimate that the national multifamily vacancy rate fell to 6.25% in the

fourth quarter of 2011, from 6.50% in the third quarter of 2011 and 7.25% in the fourth quarter of 2010. In

addition, we estimate that average asking rents increased steadily for nearly two years, most recently increasing

by 0.5% in the fourth quarter of 2011 on a national basis. The increase in overall rental demand was also

reflected in an estimated increase of about 50,000 units in the net number of occupied rental units during the

fourth quarter of 2011, according to preliminary data from Reis, Inc. That brings the total estimated net

absorption for the year, (that is, the net change in the number of units occupied over the year), to 170,000 units.

Vacancy rates and rents are important to loan performance because multifamily loans are generally repaid from

the cash flows generated by the underlying property. The year-long strengthening of these fundamentals helped

boost property values and, in turn, spur apartment building sales during 2011 in most metropolitan areas.

While the strength of improving vacancy levels and rental rates will vary by metropolitan area, on a national

basis the multifamily sector should continue to see steady demand in 2012. With job growth slowly improving,

and, more importantly, the lack of new apartment supply becoming available over the next 12 to18 months, we

expect that rental demand will continue to outstrip supply, thereby maintaining stable vacancy levels and healthy

rent growth. As a result, the outlook remains steady for the multifamily sector over the coming year.

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EXECUTIVE SUMMARY

Please read this Executive Summary together with our MD&A and our consolidated financial statements as of

December 31, 2011 and related notes.

Our Business Objectives and Strategy

Our Board of Directors and management consult with and receive direction from our conservator in establishing

our business objectives and strategy, taking into consideration our role in addressing housing and mortgage

market conditions. We face a variety of different objectives that potentially conflict, which limits our ability to

fully achieve all of them. Our objectives include:

• providing liquidity, stability and affordability in the mortgage market;

• minimizing credit losses from delinquent mortgages;

• providing assistance to the mortgage market and to the struggling housing market;

• limiting the amount of the investment Treasury must make under our senior preferred stock purchase

agreement;

• returning to long-term profitability before taking into account the payment of dividends on our senior

preferred stock to Treasury; and

• protecting the interests of the taxpayers.

In addition to these objectives, our conservator recently announced strategic goals that we will pursue. On

February 21, 2012, the Acting Director of FHFA sent a letter to Congress in which he wrote, “With the

conservatorships [of Fannie Mae and Freddie Mac] operating for more than three years and no near-term

resolution in sight, it is time to update and extend the goals and directions of the conservatorships.” He

continued, “FHFA is contemplating next steps to build an infrastructure for the secondary mortgage market that

is consistent with existing policy proposals and will support any outcome of the leading legislative proposals.”

With his letter, Acting Director DeMarco provided a strategic plan for the next phase of Fannie Mae and Freddie

Mac’s conservatorships. The plan identifies three strategic goals for the next phase of the conservatorships:

• Build. Build a new infrastructure for the secondary mortgage market;

• Contract. Gradually contract [Fannie Mae and Freddie Mac’s] dominant presence in the marketplace while

simplifying and shrinking their operations; and

• Maintain. Maintain foreclosure prevention activities and credit availability for new and refinanced

mortgages.

As a result of our uncertain future and our status as a federally chartered corporation, we can be required to take

actions in pursuit of objectives other than, or that conflict with, our business objectives. For example, as we

discuss below in “Legislative and Regulatory Developments—Changes to Our Single-Family Guaranty Fee

Pricing” in December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 which,

among other provisions, requires that we increase our single-family guaranty fees by at least 10 basis points and

remit this increase to Treasury to fund extensions of employment tax reductions and unemployment benefits,

rather than retaining this incremental revenue. In accordance with the strategic goals recently announced by

FHFA, we also expect to increasingly focus on building a new infrastructure for the secondary mortgage market

and on actions that will gradually decrease our presence in the marketplace while simplifying and shrinking our

operations.

We are concentrating our efforts on providing liquidity and support to the mortgage market, growing the strong

new book of business we have been acquiring since the beginning of 2009, minimizing our losses on loans we

acquired prior to 2009, and, in support of minimizing our losses, providing assistance where feasible to

struggling homeowners.

We will continue to need funds from Treasury as a result of a number of factors, including the dividends we are

required to pay Treasury on the senior preferred stock, ongoing adverse conditions in the housing and mortgage

-5-
markets and the deteriorated credit performance of loans in our mortgage credit book of business that we

acquired prior to 2009. In his February 2012 letter to Congress, Acting Director DeMarco wrote, “[I]t is clear that

the draws [Fannie Mae and Freddie Mac] have taken from the Treasury are so large they cannot be repaid under

any foreseeable scenarios.” As a result of our draws, we do not expect to earn profits in excess of our annual

dividend obligation to Treasury for the indefinite future.

There is significant uncertainty regarding the future of our company, including how long the company will

continue to exist in its current form. The Administration, Congress and our regulators are considering options for

the future state of Fannie Mae, Freddie Mac and the U.S. government’s role in residential mortgage finance. In

February 2011, Treasury and HUD released a report to Congress on reforming America’s housing finance

market. The report provides that the Administration will work with FHFA to determine the best way to

responsibly reduce Fannie Mae’s and Freddie Mac’s role in the market and ultimately wind down both

institutions. The report emphasizes the importance of proceeding with a careful transition plan and providing the

necessary financial support to Fannie Mae and Freddie Mac during the transition period. On February 2, 2012,

Treasury Secretary Geithner stated that the Administration intended to release new details around approaches to

housing finance reform, including winding down Fannie Mae and Freddie Mac, in the spring of 2012 and to work

with Congressional leaders to explore options for legislation, but that he does not expect housing finance reform

legislation to be enacted in 2012. In his February 2012 letter to Congress, Acting Director DeMarco states that

achieving the strategic goals for the next phase of conservatorship will “prepare the foundation for a new,

stronger housing finance system in the future. Although that future may not include Fannie Mae and Freddie

Mac, at least as they are known today, this important work in conservatorship can be a lasting, positive legacy for

the country and its housing system.” We discuss efforts to reform the GSEs and the housing finance system in

more detail in “Legislative and Regulatory Developments—GSE Reform.”

In 2011 we refined and began implementing a plan designed to support the creation of a sustainable housing

finance system by improving our business processes, infrastructure and organizational structure. We expect to

continue implementing the plan in phases with goals of providing value to our customers, simplifying and

standardizing our operating model, and reducing our costs.

To provide context for analyzing our consolidated financial statements and understanding our MD&A, we

discuss the following topics in this executive summary:

• Our provision of liquidity and support to the mortgage market;

• Our 2011 financial performance;

• Our strong new book of business and expected losses on loans we acquired prior to 2009;

• Our efforts to reduce losses on single-family loans we acquired prior to 2009, which we refer to as our

“legacy book of business”;

• Credit statistics for our single-family book of business;

• Our liquidity position; and

• Our outlook.

Providing Liquidity and Support to the Mortgage Market

Our Liquidity and Support Activities

We provide liquidity and support to the U.S. mortgage market in a number of important ways:

• We serve as a stable source of liquidity for purchases of homes and financing of multifamily rental housing,

as well as for refinancing existing mortgages. We provided approximately $2.3 trillion in liquidity to the

mortgage market in 2009 through 2011 through our purchases and guarantees of loans, which enabled

homeowners to refinance 6.6 million mortgages, 1.9 million households to purchase a home, and financing

for over 1.1 million units of multifamily housing.

• We are a consistent market presence as we continue to provide liquidity to the mortgage market even when

other sources of capital have exited the market, as has been shown repeatedly over the last few years. We

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estimate Fannie Mae, Freddie Mac and Ginnie Mae collectively guaranteed more than 99% of new singlefamily mortgage-related securities issuances in 2009 through 2011, which accounted for more than 85% of

the single-family first-lien mortgages we currently estimate were originated in the United States in 2009

through 2011. Because our estimate of mortgage originations is subject to change as additional data become

available, our estimated share of single-family first-lien mortgages for prior periods may change in the

future, perhaps materially.

• We have strengthened our underwriting and eligibility standards to support sustainable homeownership. Our

support enables borrowers to have access to a variety of conforming mortgage products, including longterm, fixed-rate mortgages, such as the prepayable 30-year fixed-rate mortgage that protects homeowners

from interest rate swings.

• We helped over 900,000 homeowners retain their homes or otherwise avoid foreclosure in 2009 through

2011, which helped to support neighborhoods, home prices and the housing market. Moreover, borrowers’

ability to pay their modified loans has improved in recent periods as we have enhanced the structure of our

modifications. For loans modified outside of the Administration’s Home Affordable Modification Program

(“HAMP”), one year after modification, 67% of modifications we made in the fourth quarter of 2010 were

performing, compared with 50% of modifications in the fourth quarter of 2009. For loans modified under

HAMP, one year after modification, 74% of our HAMP modifications made in the fourth quarter of 2010

were performing, compared with 73% of our HAMP modifications in the fourth quarter of 2009.

• We helped borrowers refinance loans through our Refi PlusTM initiative, which provides expanded refinance

opportunities for eligible Fannie Mae borrowers. We acquired approximately 732,000 loans refinanced

under our Refi Plus initiative in 2011. Some borrowers may have increased their monthly payments as they

took advantage of lower interest rates to reduce the terms of their loans, to switch from adjustable rates to

fixed rates, or to switch from interest-only mortgages to fully amortizing mortgages. Even taking these

refinancings into account, our acquisitions under Refi Plus reduced our borrowers’ monthly mortgage

payments by an average of $166.

• We support affordability in the multifamily rental market. Over 85% of the multifamily units we financed

from 2009 through 2011 were affordable to families earning at or below the median income in their area.

• In addition to purchasing and guaranteeing loans, we provide funds to the mortgage market through shortterm financing and other activities. These activities are described in more detail in “Business Segments—

Capital Markets.”

2011 Acquisitions and Market Share

In 2011, we purchased or guaranteed approximately $653 billion in loans, measured by unpaid principal

balance, which includes approximately $67 billion in delinquent loans we purchased from our single-family MBS

trusts. These activities enabled our lender customers to finance approximately 2,680,000 single-family

conventional loans and loans for approximately 423,000 units in multifamily properties during 2011.

We currently estimate that our single-family market share was 41% in 2011, compared with 36% in 2010. These

amounts represent our single-family mortgage acquisitions for each year, excluding delinquent loans we

purchased from our MBS trusts, as a percentage of the single-family first-lien mortgages we currently estimate

were originated in the United States that year. Because our estimate of mortgage originations in prior periods is

subject to change as additional data become available, these market share estimates may change in the future,

perhaps materially.

We remained the largest single issuer of mortgage-related securities in the secondary market during the fourth

quarter of 2011, with an estimated market share of new single-family mortgage-related securities issuances of

54%. Our estimated market share of new single-family mortgage-related securities issuances was 43% in the

third quarter of 2011 and 49% in the fourth quarter of 2010. The estimated market share increase from the third

quarter of 2011 to the fourth quarter of 2011 is largely the result of increased investor demand for Fannie Mae

MBS.

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We remained a constant source of liquidity in the multifamily market. We owned or guaranteed approximately

21% of the outstanding debt on multifamily properties as of September 30, 2011 (the latest date for which

information was available).

Summary of Our Financial Performance for 2011

Our financial results for 2011 reflect the continued weakness in the housing and mortgage markets, which remain

under pressure from high levels of unemployment and underemployment, and the prolonged decline in home

prices since their peak in the third quarter of 2006. Our credit-related expenses continue to be a key driver of our

net losses for each period presented. The substantial majority of our credit-related expenses are from singlefamily loans we acquired prior to 2009, which decreased as a percentage of our single-family guaranty book of

business to 47% as of December 31, 2011 from 60% as of December 31, 2010. Our credit-related expenses vary

from period to period primarily based on changes in home prices, borrower payment behavior, the types and

volumes of loss mitigation activities completed, and actual and estimated recoveries from our lender and

mortgage insurer counterparties.

In addition, the decline in interest rates during 2011 resulted in significant fair value losses on our

derivatives. These fair value losses on our derivatives were offset by fair value gains during 2011 related to our

mortgage investments; however, only a portion of these investments is recorded at fair value in our financial

statements. Derivative instruments are an integral part of how we manage interest rate risk and an inherent part of

the cost of funding and hedging our mortgage investments. We expect high levels of period-to-period volatility in

our results because our derivatives are recorded at fair value in our financial statements while some of the

instruments they hedge are not recorded at fair value in our financial statements.

Total Comprehensive Loss

We recognized a total comprehensive loss of $16.4 billion for 2011, consisting of a net loss of $16.9 billion and

other comprehensive income of $447 million. In comparison, our total comprehensive loss for 2010 was $10.6

billion, consisting of a net loss of $14.0 billion and other comprehensive income of $3.4 billion.

The increase in our net loss in 2011, as compared with 2010, was primarily due to an increase in net fair value

losses and credit-related expenses, which were partially offset by an increase in net interest income. The primary

drivers of these changes were:

• a $6.1 billion increase in net fair value losses primarily driven by losses on our risk management derivatives

in 2011 due to a significant decline in swap rates during the period;

• a $2.9 billion increase in net interest income driven by lower interest expense on debt, which was partially

offset by lower interest income on loans and securities;

• an $884 million increase in credit-related expenses primarily driven by a decline in actual and projected

home prices.

The $3.0 billion decline in our other comprehensive income was primarily driven by lower gains on the fair value of

our available-for-sale securities due to widening credit spreads in 2011 compared with narrowing spreads in 2010.

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

Net Worth

Our net worth deficit of $4.6 billion as of December 31, 2011 reflects the recognition of our total comprehensive

loss of $1.9 billion and our payment to Treasury of $2.6 billion in senior preferred stock dividends during the

fourth quarter of 2011. The Acting Director of FHFA will submit a request to Treasury on our behalf for $4.6

billion to eliminate our net worth deficit.

In the fourth quarter of 2011, we received $7.8 billion in funds from Treasury to eliminate our net worth deficit

as of September 30, 2011. Upon receipt of the additional funds requested to eliminate our net worth deficit as of

-8-
December 31, 2011, the aggregate liquidation preference on the senior preferred stock will be $117.1 billion,

which will require an annualized dividend payment of $11.7 billion. The amount of this dividend payment

exceeds our reported annual net income for every year since our inception. Through December 31, 2011, we have

paid an aggregate of $19.8 billion to Treasury in dividends on the senior preferred stock.

Table 1 below displays our senior preferred stock dividend payments to Treasury and Treasury draws since

entering conservatorship in 2008.

Table 1: Treasury Dividend Payments and Draws

2008 2009 2010 2011

Cumulative

Total

(Dollars in billions)

Senior preferred stock dividends(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 2.5 $ 7.7 $ 9.6 $ 19.8

Treasury draws(2)(3) ............................................. 15.2 60.0 15.0 25.9(4) 116.1

Cumulative percentage of senior preferred stock dividends to Treasury

draws ...................................................... 0.2% 3.3% 11.3% 17.1% 17.1%

(1) Represents total quarterly cash dividends paid to Treasury, during the periods presented, based on an annual rate of

10% per year on the aggregate liquidation preference of the senior preferred stock.

(2) Represents the total draws received from Treasury and / or being requested based on our quarterly net worth deficits for

the periods presented. Draw requests are funded in the quarter following each quarterly net worth deficit.

(3) Treasury draws do not include the initial $1.0 billion liquidation preference of the senior preferred stock, for which we

did not receive any cash proceeds.

(4) The treasury draw to eliminate the 2011 fourth quarter net worth deficit was $4,571 million.

Total Loss Reserves

Our total loss reserves, which reflect our estimate of the probable losses we have incurred in our guaranty book

of business, including concessions we granted borrowers upon modification of their loans, increased to $76.9

billion as of December 31, 2011 from $75.6 billion as of September 30, 2011 and $66.3 billion as of

December 31, 2010. Our total loss reserve coverage to total nonperforming loans was 31% as of December 31,

2011, compared with 30% as of September 30, 2011 and 26% as of December 31, 2010. The continued stress on

a broad segment of borrowers from continued high levels of unemployment and underemployment and the

prolonged decline in home prices have caused our total loss reserves to remain high for the past few years. In

December 2011, we changed our definition of “total nonperforming loans.” Under our new definition, we no

longer reflect in this amount (1) our allowance for loan losses or (2) our allowance for accrued interest receivable

related to these individually impaired loans. The amounts we report for prior periods have been revised from

amounts we previously disclosed as a result of this change.

Our Strong New Book of Business and Expected Losses on Our Legacy Book of Business

We refer to the single-family loans we have acquired since the beginning of 2009 as our “new single-family book

of business” and the single-family loans we acquired prior to 2009 as our “legacy book of business.” In this

section, we discuss our expectations regarding the profitability of our new single-family book of business, as well

as the performance and credit profile of these loans to date. We also discuss our expectations regarding losses on

the loans in our legacy book of business.

Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations

We present a number of estimates and expectations in this executive summary regarding the profitability of

single-family loans we have acquired, our single-family credit losses and credit-related expenses, and our draws

from and dividends to be paid to Treasury. These estimates and expectations are forward-looking statements

based on our current assumptions regarding numerous factors, including future home prices and the future

performance of our loans. Home prices are a key factor affecting the amount of credit losses and profitability we

expect. As home prices decline, the loan-to-value ratios, or LTV ratios, on our loans shift higher, and both the

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probability of default and the severity of loss increase. Furthermore, the level of regional variation in home price

declines affects our results, as we will incur greater credit losses if home prices decline more significantly in

regions where we have a greater concentration of loans.

Our future estimates of our performance, as well as the actual amounts, may differ materially from our current

estimates and expectations as a result of the timing and level of, as well as regional variation in, home price

changes, changes in interest rates, unemployment, other macroeconomic variables, direct and indirect

consequences resulting from failures by servicers to follow proper procedures in the administration of foreclosure

cases, government policy, changes in generally accepted accounting principles (“GAAP”), credit availability,

social behaviors, the volume of loans we modify, the effectiveness of our loss mitigation strategies, management

of our real-estate owned (“REO”) inventory and pursuit of contractual remedies, changes in the fair value of our

assets and liabilities, impairments of our assets, and many other factors, including those discussed in “Risk

Factors,” “Forward-Looking Statements” and elsewhere in this report. For example, if the economy were to enter

a deep recession, we would expect actual outcomes to differ substantially from our current expectations.

Building a Strong New Single-Family Book of Business

In 2009, we began to see the effect of actions we took, beginning in 2008, to significantly strengthen our

underwriting and eligibility standards and change our pricing to promote sustainable homeownership and

stability in the housing market. As a result of these changes and other market dynamics, we reduced our

acquisitions of loans with higher-risk attributes. Compared with the loans we acquired in 2005 through 2008, the

loans in our new single-family book of business have had better overall credit risk profiles at the time we

acquired them and, based on their performance so far, we expect loans in our new single-family book of business

to perform well over their lifetime.

Table 2, which displays information about the credit risk profile of our single-family loan acquisitions according

to when we acquired the loans, illustrates the improvement in the credit risk profile of loans we acquired

beginning in 2009 compared with loans we acquired in 2005 through 2008. Based on our experience, we expect

that loans with characteristics such as higher FICO credit scores and lower original LTV ratios (that is, more

equity initially held by the borrowers in the underlying properties) will perform better than loans with risk

characteristics such as higher original LTV ratios, lower FICO credit scores or interest-only payment features,

and Alt-A loans. Table 2 also displays information about the percentage of our single-family loans that were

seriously delinquent (three or more months past due or in the foreclosure process) at the end of the first year

following their acquisition, as well as our current expectation for whether loans we acquired will be profitable

over their lifetime, by which we mean that we expect our fee income on these loans to exceed our credit losses

and administrative costs for them.

Table 2: Characteristics of Acquired Single-Family Conventional Loans by Acquisition Period(1)

Weighted

Average

FICO

Credit

Score at

Origination

FICO

Credit

Score at

Origination

< 620

Original

LTV

Ratio

Original

LTV

Ratio

>90(2)

Alt-A

Loans(3)

InterestOnly

Loans

SDQ Rate as of

4th quarter

following

Acquisition

year

Expectation

for

Profitability

Year of Acquisition:

New Single-Family Book of

Business Acquisitions:

2011 . . . . . . . . . . . . . . . . . . . . . . . 762 * 69% 9% 1% 1% Not applicable Profitable

2010 . . . . . . . . . . . . . . . . . . . . . . . 762 * 68% 7% 1% 1% 0.30% Profitable

2009 . . . . . . . . . . . . . . . . . . . . . . . 761 * 67% 4% * 1% 0.32% Profitable

Weighted Average New SingleFamily Book of Business

Acquisitions . . . . . . . . . . . . . . . . . 762 * 68% 6% 1% 1% 0.31% Profitable

Legacy Single-Family Book of

Business Acquisitions:(4)

2005-2008 . . . . . . . . . . . . . . . . . . 722 5% 73% 11% 14% 12% 3.04% Not Profitable

2001-2004(5) . . . . . . . . . . . . . . . . . 718 5% 71% 8% 9% 1% 0.53% Profitable

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* Represents less than 0.5% of the total acquisitions.

(1) Loans that meet more than one category are included in each applicable category.

(2) The majority of loans that we acquired in our new single-family book of business between 2009 and 2011 with original

LTV ratios over 90% were loans acquired under our Refi Plus initiative. See “Changes in the Credit Profile of our SingleFamily Acquisitions” for further information on Refi Plus.

(3) Newly originated Alt-A loans acquired in 2009 through 2011 consist of the refinance of existing loans.

(4) Loans acquired prior to 2001, which comprised approximately 1% of our single-family conventional guaranty book of

business as of December 31, 2011, are not included in this table. We expect loans we acquired prior to 2001, in the

aggregate, to be profitable over their lifetime.

(5) Although we do not expect loans we acquired in 2004 to be profitable over their lifetime, we expect loans we acquired in 2001

through 2004 will, in the aggregate, be profitable over their lifetime. We have combined loans acquired in 2004 with loans

from prior years because we made significant changes to our acquisition policies that affected the loans we acquired in 2005

through 2008. We expect our credit losses from loans we acquired in 2004, which are due to home price declines and

prolonged unemployment, will be significantly smaller than those generated by loans we acquired in 2005 through 2008.

While Table 2 covers all of the single-family conventional loans we acquired in each period presented (or, in the

case of the serious delinquency rate, those still in our book of business four quarters after the end of the year they

were acquired), Table 3 displays information about loans that remained in our single-family conventional

guaranty book of business as of December 31, 2011.

Table 3: Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition Period

As of December 31, 2011

% of SingleFamily

Conventional

Guaranty

Book of

Business(1)

Current

Estimated

Mark-to-Market

LTV Ratio(1)

Current

Mark-to-Market

LTV Ratio

>100%(1)(2)

Serious

Delinquency

Rate(3)

Year of Acquisition:

New Single-Family Book of Business:

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19% 70% 4% 0.05%

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 72 5 0.30

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 73 6 0.62

Total New Single-Family Book of Business . . . . . . . . 53 71 5 0.31

Legacy Book of Business:

2005-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 103 45 9.39

2004 and prior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 60 8 3.32

Total Single-Family Book of Business . . . . . . . . . . . . 100 79 18 3.91

(1) Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the

aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business as of

December 31, 2011.

(2) The majority of loans in our new single-family book of business as of December 31, 2011 with mark-to-market LTV

ratios over 100% were loans acquired under our Refi Plus initiative. See “Changes in the Credit Profile of our SingleFamily Acquisitions” for further information on Refi Plus.

(3) The serious delinquency rates for loans acquired in more recent years will be higher after the loans have aged, but we do

not expect them to approach the levels of the December 31, 2011 serious delinquency rates of loans in our legacy book of

business.

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The performance we expect for our single-family loans

As Table 2 shows, we expect loans we have acquired since the beginning of 2009 to be profitable, in contrast to

loans we acquired in 2005 through 2008. Our expectations regarding the ultimate performance of our loans are

based on numerous expectations and assumptions, including those relating to expected changes in regional and

national home prices, borrower behavior, public policy and other macroeconomic factors. If future conditions are

more unfavorable than our expectations, loans we acquired in 2009, 2010 and 2011 could become unprofitable.

For example, we expect that credit losses on these loans would exceed guaranty fee revenue if home prices

declined nationally by approximately 10% from their December 2011 levels over the next five years, based on

our home price index. See “Outlook” for our expectations regarding home price declines.

In our experience, an early predictor of the ultimate performance of a portfolio of loans is the rate at which the

loans become seriously delinquent within a short period of time after acquisition. As Table 2 shows, the

percentage of our 2009 and 2010 acquisitions that were seriously delinquent as of the end of the fourth quarter

following their acquisition year was substantially lower than the average comparable serious delinquency rate for

loans acquired in 2005 through 2008. Table 3 displays the serious delinquency rate for our loans as of

December 31, 2011.

Changes in the Credit Profile of Our Single-Family Acquisitions

Single-family loans we purchased or guaranteed from 2005 through 2008 were acquired during a period when

home prices were rising rapidly, peaked, and then started to decline sharply, and underwriting and eligibility

standards were more relaxed than they are now. These loans were characterized by higher loan-to-value (“LTV”)

ratios and lower FICO credit scores than loans we have acquired since January 1, 2009. In addition, many of

these loans were Alt-A loans or had other higher-risk loan attributes such as interest-only payment features. As a

result of the sharp declines in home prices, 45% of loans we acquired from 2005 through 2008, measured by

unpaid principal balance, had mark-to-market LTV ratios that were greater than 100% as of December 31, 2011,

which means the principal balance of the borrower’s primary mortgage exceeded the current market value of the

borrower’s home. The percentage of borrowers who owed more than their home’s value is higher when secondlien loans are included. The sharp decline in home prices, the severe economic recession that began in December

2007 and continued through June 2009, and continuing high unemployment and underemployment have

significantly and adversely impacted the performance of loans we acquired from 2005 through 2008. Our 2005

through 2008 acquisitions are becoming a smaller percentage of our single-family guaranty book of business,

having decreased from 39% of our single-family guaranty book of business as of December 31, 2010 to 31% as

of December 31, 2011.

Improvements in the credit risk profile of our acquisitions since the beginning of 2009 over acquisitions in prior

years reflect changes that we made, beginning in 2008, to our pricing and eligibility standards and underwriting.

These changes were intended to more accurately reflect the risk in the housing market and to significantly reduce

our acquisitions of loans with higher-risk attributes. The improvements also reflect changes that mortgage

insurers made to their eligibility standards. We believe the strong early performance of loans in our new singlefamily book of business despite the home price declines and high unemployment of the last few years is

attributable to their strong credit risk profile.

The credit risk profile of loans in our new single-family book of business has been further influenced by the

inclusion of a significant percentage of refinanced loans. One effect has been that the original LTV ratios of

loans we acquired in each of 2010 and 2011 increased from the prior year as a result of our acquisition of loans

with higher LTV ratios under our Refi Plus initiative. Refi Plus includes loans refinanced under the Home

Affordable Refinance Program (“HARP”), which was established by the Administration to help borrowers who

may otherwise be unable to refinance the mortgage loan on their primary residence due to a decline in home

values. Original LTV ratios also increased in 2011 as a result of changes by mortgage insurers and the Federal

Housing Administration (“FHA”) that improved the economics of obtaining private mortgage insurance and

drove an increase in our market share of home purchase mortgages with LTV ratios greater than 80%. We

discuss refinancings and their impact on credit risk characteristics, as well as other changes in the credit risk

- 12 -
characteristics of our loan acquisitions, in more detail in “MD&A—Risk Management—Credit Risk

Management—Single-Family Mortgage Credit Risk Management.”

Whether the loans we acquire in the future will exhibit an overall credit profile similar to our more recent

acquisitions will depend on a number of factors, including our future pricing and eligibility standards and those

of mortgage insurers and FHA, the percentage of loan originations representing refinancings, our future

objectives, government policy, market and competitive conditions, and the volume and characteristics of loans

we acquire under the recently announced changes to the terms of HARP.

Expected Losses on Our Legacy Book of Business

The single-family credit losses we realized in 2009 through 2011, combined with the amounts we have reserved

for single-family credit losses as of December 31, 2011, as described below, total approximately $140 billion. A

substantial majority of these losses are attributable to single-family loans we purchased or guaranteed from 2005

through 2008.

While loans we acquired in 2005 through 2008 will give rise to additional credit losses that we will realize when

the loans are charged off (upon foreclosure or our acceptance of a short sale or deed-in-lieu of foreclosure), we

estimate that we have reserved for the substantial majority of the remaining losses on these loans. Even though

we believe a substantial majority of the credit losses we have yet to realize on these loans has already been

reflected in our results of operations as credit-related expenses, our credit-related expenses have remained high as

weakness in the housing and mortgage markets continues. We expect that our credit-related expenses will

continue to be high in 2012 but that, overall, our credit-related expenses will be lower in 2012 than in 2011. The

amount of credit-related expenses we incur each period will be affected by changes in expected and actual home

prices, modifications and foreclosure activity during the period.

We expect our loss reserves will remain significantly elevated relative to historical levels for an extended period

because (1) we expect future defaults on loans in our legacy book of business and the resulting charge-offs will

occur over a period of years and (2) a significant portion of our reserves represents concessions granted to

borrowers upon modification of their loans and will remain in our reserves until the loans are fully repaid or

default. In addition, given the large existing and anticipated supply of single-family homes in the market, we

anticipate that it will take years before our REO inventory is reduced to pre-2008 levels.

We show how we calculate our realized credit losses in “Table 15: Credit Loss Performance Metrics.” Our

reserves for credit losses described in this discussion consist of (1) our allowance for loan losses, (2) our

allowance for accrued interest receivable, (3) our allowance for preforeclosure property taxes and insurance

receivables, and (4) our reserve for guaranty losses (collectively, our “total loss reserves”), plus the portion of

fair value losses on loans purchased out of unconsolidated MBS trusts reflected in our consolidated balance

sheets that we estimate represents accelerated credit losses we expect to realize. For more information on our

reserves for credit losses, see “Table 11: Total Loss Reserves.”

The fair value losses that we consider part of our reserves are not included in our “total loss reserves.” We

recorded the majority of these fair value losses prior to our adoption in 2010 of accounting guidance on the

transfers of financial assets and the consolidation of variable interest entities. Before we adopted this guidance,

upon our acquisition of credit-impaired loans out of unconsolidated MBS trusts, we recorded fair value loss

charge-offs against our reserve for guaranty losses. The amount of these charge-offs was the amount by which

the acquisition cost of these loans exceeded their estimated fair value. We expect to realize a portion of these fair

value losses as credit losses in the future (for loans that eventually involve foreclosures, short sales or

deeds-in-lieu of foreclosure), yet these fair value losses have already reduced the mortgage loan balances

reflected in our consolidated balance sheets and have effectively been recognized in our consolidated statements

of operations and comprehensive loss through our provision for guaranty losses. We consider these fair value

losses as an “effective reserve,” apart from our total loss reserves, to the extent that we expect to realize these

amounts as credit losses on the acquired loans in the future.

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Reducing Credit Losses on Our Legacy Book of Business

To reduce the credit losses we ultimately incur on our legacy book of business, we have been focusing our efforts

on the following strategies:

• Reducing defaults by offering borrowers solutions that enable them to keep their homes (“home retention

solutions”);

• Pursuing “foreclosure alternatives,” which help borrowers avoid foreclosure and reduce the severity of the

losses we incur overall;

• Efficiently managing timelines for home retention solutions, foreclosure alternatives, and foreclosures;

• Improving servicing standards and servicers’ execution and consistency;

• Managing our REO inventory to minimize costs and maximize sales proceeds; and

• Pursuing contractual remedies from lenders, servicers and providers of credit enhancement.

As we work to reduce credit losses, we also seek to assist distressed borrowers, help stabilize communities, and

support the housing market. In dealing with distressed borrowers, we first seek home retention solutions before

turning to foreclosure alternatives. When there is no viable home retention solution or foreclosure alternative that

can be applied, we seek to move to foreclosure expeditiously. Prolonged delinquencies hurt local home values

and destabilize communities, as these homes often go into disrepair. As a general rule, the longer borrowers

remain delinquent, the greater our costs, and the more prices for surrounding homes deteriorate.

Reducing Defaults. Home retention solutions are a key element of our strategy to reduce defaults, and the

majority of our home retention solutions are loan modifications. Successful modifications allow borrowers who

were having problems making their pre-modification mortgage payments to remain in their homes. While loan

modifications contribute to higher credit-related expenses in the near term, we believe that successful

modifications (those that enable borrowers to remain current on their loans) will ultimately reduce our credit

losses over the long term from what they otherwise would have been if we had taken the loans to foreclosure. We

completed approximately 213,000 loan modifications in 2011, bringing the total number of loan modifications

we have completed since January 2009 to over 715,000. The substantial majority of these modifications involved

deferring or lowering borrowers’ monthly mortgage payments, which we believe increases the likelihood

borrowers will be able to remain current on their modified loans. Borrowers’ ability to pay their modified loans

has improved in recent periods as we have enhanced the structure of our modifications. For loans modified

outside of HAMP, one year after modification, 67% of modifications we made in the fourth quarter of 2010 were

performing, compared with 50% of our fourth quarter 2009 modifications. For loans modified under HAMP, one

year after modification, 74% of our HAMP modifications made in the fourth quarter of 2010 were performing,

compared with 73% of our HAMP modifications made in the fourth quarter of 2009. We began changing the

structure of our non-HAMP modifications in 2010 to lower borrowers’ monthly mortgage payments to a greater

extent, which improved the performance of our non-HAMP modifications overall. In addition, because postmodification performance was greater for our HAMP modifications than for our non-HAMP modifications, we

began in September 2010 to include trial periods for our non-HAMP modifications, similar to those for HAMP

modifications. Whether modifications are ultimately successful depends heavily on economic factors, such as

unemployment rates, household wealth and income, and home prices, as well as borrowers’ willingness to pay

their loans. See “Table 46: Statistics on Single-Family Loan Workouts” and the accompanying discussion for

additional information on our home retention efforts, as well as our foreclosure alternatives. For a description of

the impact of modifications on our credit-related expenses, see “Consolidated Results of Operations—CreditRelated Expenses—Provision for Credit Losses.”

Pursuing Foreclosure Alternatives. If we are unable to provide a viable home retention solution for a distressed

borrower, we seek to offer a foreclosure alternative and complete it in a timely manner. Our foreclosure

alternatives are primarily short sales, which are also known as preforeclosure sales, as well as deeds-in-lieu of

foreclosure. Overall, these alternatives reduce the severity of our loss resulting from a borrower’s default while

- 14 -
enabling the borrower to avoid going through a foreclosure. We provide information about the volume of

foreclosure alternatives we completed in 2011 in “Table 4: Credit Statistics, Single-Family Guaranty Book of

Business.”

Managing Timelines for Workouts and Foreclosures. We refer to home retention solutions and foreclosure

alternatives as “workouts.” We believe that home retention solutions are most effective in preventing defaults

when completed at an early stage of delinquency. Similarly, our foreclosure alternatives are more likely to be

successful in reducing our loss severity if they are executed expeditiously. Accordingly, it is important to us for

our servicers to work with delinquent borrowers early in the delinquency to determine whether home retention

solutions or foreclosure alternatives will be viable and, where no workout solution is viable, to reduce delays in

completing foreclosure.

Circumstances in the foreclosure environment have resulted in foreclosures proceeding at a slow pace. As a result of

the housing market downturn that began in 2006 and significantly worsened in 2008, the volume of foreclosures to

be processed by servicers and states significantly increased in 2009 and the first nine months of 2010. In October

2010, a number of single-family mortgage servicers temporarily halted some or all of the foreclosures they were

processing after discovering deficiencies in their foreclosure processes and the processes of their service providers.

In response to the foreclosure process deficiencies, some states changed their foreclosure processes to require

additional review and verification of the accuracy of pending and future foreclosure filings. Some states also added

requirements to the foreclosure process, including mediation processes and requirements to file new affidavits.

Further, some state courts have issued rulings calling into question the validity of some existing foreclosure

practices. These actions halted or significantly delayed not only existing, but new foreclosures. In addition to the

new legislative, regulatory, and judicial requirements applicable to servicers generally, five of the nation’s largest

mortgage servicers (Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup

Inc., and Ally Financial Inc. (formerly GMAC)) have agreed in principle to implement certain new servicing and

foreclosure practices as part of a settlement announced February 9, 2012, with the federal government and 49 state

attorneys general.

While servicers have generally ended their outright foreclosure halts, they continue to process foreclosures at a

slow pace as they update their procedures to remediate their process deficiencies and meet new legislative,

regulatory and judicial requirements. Servicers and states are also dealing with the backlog of foreclosures

resulting from these delays and from the elevated level of foreclosures resulting from the housing market

downturn.

Foreclosures generally take longer to complete in states where judicial foreclosures are required than in states

where non-judicial foreclosures are permitted. For foreclosures completed in 2011, measuring from the last

monthly period for which the borrowers fully paid their mortgages to when we added the related properties to our

REO inventory, the average number of days it took to ultimately foreclose ranged from a low of 391 days in

Missouri, a non-judicial foreclosure state, to a high of 890 days in Florida, a judicial foreclosure state. As of

December 31, 2011, Florida accounted for 30% of our loans that were in the foreclosure process.

The slow pace of foreclosures has significantly impacted our ability to reduce our serious delinquency rate. The

serious delinquency rate for our single-family conventional loans decreased from 5.38% as of December 31,

2009 to 3.91% as of December 31, 2011, driven by our home retention solutions, as well as foreclosure

alternatives and completed foreclosures. The decrease is also attributable to our acquisition of loans with stronger

credit profiles since the beginning of 2009, as these loans are now more than 50% of our single-family guaranty

book of business, resulting in a smaller percentage of our loans becoming seriously delinquent. While workouts

reduced our population of seriously delinquent loans, for some seriously delinquent loans no workout solution is

viable. Longer foreclosure timelines result in these loans remaining in our book of business for a longer time,

which has caused our serious delinquency rate to decrease more slowly in the last year than it would have if the

pace of foreclosures had been faster. Extended foreclosure timelines also increase our costs of holding loans in

the foreclosure process. In addition, to the extent home prices decline while foreclosure proceedings are drawn

out, the proceeds we ultimately receive from the sale of the foreclosed properties will be lower. We believe the

- 15 -
changes in the foreclosure environment discussed above will continue to negatively affect our single-family

serious delinquency rates, foreclosure timelines and credit-related expenses. Moreover, we believe these

conditions will delay the recovery of the housing market because it will take longer to clear the market’s supply

of distressed homes. Distressed homes typically sell at a discount compared to non-distressed homes and,

therefore, a lingering population of distressed homes will continue to negatively affect overall home prices. See

“Risk Factors” for further information about the potential impact of the foreclosure process deficiencies and

resulting changes in the foreclosure environment on our business, results of operations, financial condition and

net worth.

Improving Servicing Standards and Execution. The performance of our mortgage servicers is critical to our

success in reducing defaults, completing foreclosure alternatives and managing workout and foreclosure

timelines efficiently, because servicers are the primary point of contact with borrowers. Improving servicing

standards is therefore a key aspect of our strategy to reduce our credit losses. We are taking a number of steps to

improve the servicing of our delinquent loans.

• In June 2011, we issued new standards for mortgage servicers under FHFA’s Servicing Alignment

Initiative. The initiative is aimed at establishing consistency in the servicing of delinquent loans owned or

guaranteed by Fannie Mae and Freddie Mac. Among other things, the new servicing standards, which

became effective October 1, 2011, are designed to result in earlier, more frequent and more effective contact

with borrowers and to improve servicer performance by providing servicers monetary incentives for

exceeding loan workout benchmarks and by imposing fees on servicers for failing to meet loan workout

benchmarks or foreclosure timelines.

• In some cases, we transfer servicing on loan populations that include loans with higher-risk characteristics

to special servicers with whom we have worked to develop high-touch protocols for servicing these loans.

These protocols include lowering the ratio of loans per servicer employee, prescribing borrower outreach

strategies to be used at early stages of delinquency, and providing distressed borrowers a single point of

contact to resolve issues. Transferring servicing on higher-risk loans enables the borrowers (and loans) to

benefit from these high-touch protocols while increasing the original servicer’s capacity to service the

remaining loans, creating an opportunity to improve service to the remaining borrowers.

• In September 2011, we issued our first ratings of servicers’ performance under our Servicer Total

Achievement and Rewards (“STAR”) program. The STAR program is designed to encourage improvements

in customer service and foreclosure prevention outcomes for homeowners by rating servicers on their

performance in these areas.

While we believe these steps will improve the servicing of our loans, ultimately we are dependent on servicers’

willingness, efficiency and ability to implement our home retention solutions and foreclosure alternatives, and to

manage timelines for workouts and foreclosures.

Managing Our REO Inventory. Efficient management of our REO inventory of homes acquired through

deed-in-lieu of foreclosure or foreclosure is another critical element of our strategy for reducing credit losses.

Since January 2009, we have strengthened our REO sales capabilities by increasing resources, as we continue to

manage our REO inventory to minimize costs and maximize sales proceeds. As Table 4 shows, the volume of our

property dispositions increased in 2010 and 2011.

Neighborhood stabilization is a core principle in our approach to managing our REO inventory. As a result, we seek

to keep properties in good condition and, in some cases, repair them to make them more marketable. Our goal is to

obtain the highest price possible for the properties we sell. In 2011, we completed repairs to approximately 89,800

properties sold from our single-family REO inventory, at an average cost of approximately $6,200 per property.

Repairing REO properties increases sales to owner occupants and increases financing options for REO buyers. In

addition, we encourage homeownership through our “First Look” marketing period. During this “First Look”

period, owner occupants, some nonprofit organizations and public entities may submit offers and purchase

properties without competition from investors. Approximately 145,000 of the 244,000 single-family properties we

sold in 2011 were purchased by owner occupants, nonprofit organizations or public entities.

- 16 -
We currently lease properties to tenants who occupied the properties before we acquired them into our REO

inventory, which can minimize disruption by providing additional time to find alternate housing, help stabilize

local communities, provide us with rental income, and support our compliance with federal and state laws

protecting tenants in foreclosed properties. As of December 31, 2011, over 9,000 tenants leased our REO

properties.

The changing foreclosure environment discussed above has delayed our acquisitions of REO properties. Given

the large number of seriously delinquent loans in our single-family guaranty book of business and the large

existing and anticipated supply of single-family homes in the market, we expect it will take years before our

REO inventory approaches pre-2008 levels.

In February 2012, FHFA announced that it was beginning the pilot phase of an REO initiative that will allow

qualified investors to purchase pools of foreclosed properties from us with the requirement to rent the purchased

properties for a specified number of years. During the pilot phase, we will offer for sale pools of various types of

assets including rental properties, vacant properties and nonperforming loans with a focus on the hardest-hit areas.

The pilot transactions are expected to provide insight into how the participation of private investors can maximize

the value of foreclosed properties and stabilize communities. We do not yet know whether this initiative will have a

material impact on our future REO sales and REO inventory levels.

Pursuing Contractual Remedies. We conduct targeted reviews of our loans and, when we discover loans that do

not meet our underwriting or eligibility requirements, we may make demands for lenders to repurchase these

loans or compensate us for losses sustained on the loans. We also make demands for lenders to repurchase or

compensate us for loans for which the mortgage insurer rescinds coverage. The volume of our repurchase

requests remained high in 2011, and we expect it to continue to remain high.

We requested lenders to repurchase from us or reimburse us for losses associated with loans with an unpaid

principal balance of $23.8 billion during 2011. As of December 31, 2011, approximately 57% of these requests

had been successfully resolved through repurchase, reimbursement or other remedies, and approximately 40%

remained outstanding. Also as of December 31, 2011, approximately 90% of the $13.1 billion in repurchase

requests we made in 2010, as measured by unpaid principal balance, had been successfully resolved, and

approximately 5% remained outstanding. During 2011, lenders repurchased from us or reimbursed us for losses

on approximately $11.5 billion in loans, measured by unpaid principal balance, pursuant to their contractual

obligations. In addition, as of December 31, 2011, we had outstanding requests for lenders to repurchase from us

or reimburse us for losses on $10.4 billion in loans, of which 30% had been outstanding for more than 120 days.

These dollar amounts represent the unpaid principal balance of the loans underlying the repurchase requests, not

the actual amounts we have received or requested from the lenders. When lenders pay us for these requests, they

pay us either to repurchase the loans or else to make us whole for our losses in cases where we have acquired and

disposed of the property underlying the loans. Make-whole payments are typically for less than the unpaid

principal balance because we have already recovered some of the original unpaid loan balance through the sale of

the REO. As a result, our actual cash receipts relating to these outstanding repurchase requests are significantly

lower than the unpaid principal balance of the loans.

In cases where a lender fails to timely honor its repurchase obligations to us, we may take additional steps to

address the issue, including requiring the lender to post collateral, suspending all or a portion of our agreements

with the lender, or even terminating our arrangements to acquire new loans from them. We discuss our

repurchase requests and the steps we may take to address lenders’ failures to honor their repurchase obligations

in “MD&A—Risk Management—Institutional Counterparty Credit Risk Management—Mortgage Seller/

Servicers.”

We are also pursuing contractual remedies from providers of credit enhancement on our loans, including

mortgage insurers. We received proceeds under our mortgage insurance policies for single-family loans of $5.8

billion in 2011. See “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk

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Management” for a discussion of our repurchase and reimbursement requests and outstanding receivables from

mortgage insurers, as well as the risk that one or more of these counterparties fails to fulfill its obligations to us.

Impact of Our Actions to Reduce Our Credit Losses. We believe the actions we have taken to stabilize the

housing market and minimize our credit losses will reduce our future credit losses below what they otherwise

would have been. However, continuing change in broader market conditions makes it difficult to predict how

effective these actions ultimately will be in reducing our credit losses. Moreover, it will be difficult to measure

the ultimate impact of our actions, given that current conditions in the housing market are unprecedented.

For more information on the strategies and actions we are taking to minimize our credit losses, see “Risk

Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.”

Credit Performance

Table 4 presents information for each quarter of 2011 and for 2010 about the credit performance of mortgage

loans in our single-family guaranty book of business and our workouts. The workout information in Table 4 does

not reflect repayment plans and forbearances that have been initiated but not completed, nor does it reflect trial

modifications that have not become permanent.

Table 4: Credit Statistics, Single-Family Guaranty Book of Business(1)

2011 2010

Full Full

Year Q4 Q3 Q2 Q1 Year

(Dollars in millions)

As of the end of each period:

Serious delinquency rate(2) ................... 3.91% 3.91% 4.00% 4.08% 4.27% 4.48%

Seriously delinquent loan count ............... 690,911 690,911 708,847 729,772 767,161 801,640

Nonperforming loans(3) ...................... $ 248,379 $248,379 $248,134 $245,848 $248,444 $ 251,631

Foreclosed property inventory:

Number of properties ..................... 118,528 118,528 122,616 135,719 153,224 162,489

Carrying value .......................... $ 9,692 $ 9,692 $ 11,039 $ 12,480 $ 14,086 $ 14,955

Combined loss reserves(4) .................... $ 71,512 $ 71,512 $ 70,741 $ 68,887 $ 66,240 $ 60,163

Total loss reserves(5) ........................ $ 75,264 $ 75,264 $ 73,973 $ 73,116 $ 70,466 $ 64,469

During the period:

Foreclosed property (number of properties):

Acquisitions(6) ........................... 199,696 47,256 45,194 53,697 53,549 262,078

Dispositions ............................ (243,657) (51,344) (58,297) (71,202) (62,814) (185,744)

Credit-related expenses(7) .................... $ 27,218 $ 5,397 $ 4,782 $ 5,933 $ 11,106 $ 26,420

Credit losses(8) ............................. $ 18,346 $ 4,548 $ 4,384 $ 3,810 $ 5,604 $ 23,133

Loan workout activity (number of loans):

Home retention loan workouts(9) ............... 248,658 60,453 68,227 59,019 60,959 440,276

Short sales and deeds-in-lieu of foreclosure ..... 79,833 22,231 19,306 21,176 17,120 75,391

Total loan workouts ........................ 328,491 82,684 87,533 80,195 78,079 515,667

Loan workouts as a percentage of delinquent loans

in our guaranty book of business(10) .......... 27.05% 27.24% 28.39% 25.71% 25.01% 37.30%

(1) Our single-family guaranty book of business consists of (a) single-family mortgage loans held in our mortgage portfolio,

(b) single-family mortgage loans underlying Fannie Mae MBS, and (c) other credit enhancements that we provide on

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single-family mortgage assets, such as long-term standby commitments. It excludes non-Fannie Mae mortgage-related

securities held in our mortgage portfolio for which we do not provide a guaranty.

(2) Calculated based on the number of single-family conventional loans that are three or more months past due and loans that

have been referred to foreclosure but not yet foreclosed upon, divided by the number of loans in our single-family

conventional guaranty book of business. We include all of the single-family conventional loans that we own and those

that back Fannie Mae MBS in the calculation of the single-family serious delinquency rate.

(3) Represents the total amount of nonperforming loans including troubled debt restructurings and HomeSaver Advance

(“HSA”) first-lien loans. A troubled debt restructuring is a restructuring of a mortgage loan in which a concession is

granted to a borrower experiencing financial difficulty. HSA first-lien loans are unsecured personal loans in the amount of

past due payments used to bring mortgage loans current. We generally classify loans as nonperforming when the payment

of principal or interest on the loan is two months or more past due. In December 2011, we changed our definition of “total

nonperforming loans.” Under our new definition, we no longer reflect in this amount (1) our allowance for loan losses or

(2) our allowance for accrued interest receivable related to these individually impaired loans. The amounts we report for

prior periods have been revised from amounts we previously disclosed as a result of this change.

(4) Consists of the allowance for loan losses for loans recognized in our consolidated balance sheets and the reserve for

guaranty losses related to both single-family loans backing Fannie Mae MBS that we do not consolidate in our

consolidated balance sheets and single-family loans that we have guaranteed under long-term standby commitments. For

additional information on the change in our loss reserves see “Consolidated Results of Operations—Credit-Related

Expenses—Provision for Credit Losses.”

(5) Consists of (a) the combined loss reserves, (b) allowance for accrued interest receivable, and (c) allowance for

preforeclosure property taxes and insurance receivables.

(6) Includes acquisitions through deeds-in-lieu of foreclosure.

(7) Consists of the provision for loan losses, the provision (benefit) for guaranty losses and foreclosed property expense

(income).

(8) Consists of (a) charge-offs, net of recoveries and (b) foreclosed property expense; adjusted to exclude the impact of fair

value losses resulting from credit-impaired loans acquired from MBS trusts.

(9) Consists of (a) modifications, which do not include trial modifications or repayment plans or forbearances that have been

initiated but not completed; (b) repayment plans and forbearances completed and (c) HomeSaver Advance first-lien loans.

See “Table 46: Statistics on Single-Family Loan Workouts” in “Risk Management—Credit Risk Management” for

additional information on our various types of loan workouts.

(10) Calculated based on annualized problem loan workouts during the period as a percentage of delinquent loans in our

single-family guaranty book of business as of the end of the period.

Our single-family serious delinquency rate has decreased each quarter since the first quarter of 2010. The

decrease in our serious delinquency rate is the result of home retention solutions, as well as foreclosure

alternatives and completed foreclosures. The decrease is also attributable to our acquisition of loans with stronger

credit profiles since the beginning of 2009, as these loans are now more than 50% of our single-family guaranty

book of business, resulting in a smaller percentage of our loans becoming seriously delinquent.

Although our single-family serious delinquency rate has decreased significantly since the first quarter of 2010,

our serious delinquency rate and the period of time that loans remain seriously delinquent has been negatively

affected in recent periods by the increase in the average number of days it is taking to complete a foreclosure. As

described in “Reducing Credit Losses on Our Legacy Book of Business—Managing Timelines for Workouts and

Foreclosures,” high levels of foreclosures, continuing issues in the servicer foreclosure process and new

legislative, regulatory and judicial requirements have lengthened the time it takes to foreclose on a mortgage loan

in many states. We expect serious delinquency rates will continue to be affected in the future by home price

changes, changes in other macroeconomic conditions, the length of the foreclosure process, the volume of loan

modifications, and the extent to which borrowers with modified loans continue to make timely payments.

We provide additional information on our credit-related expenses in “Consolidated Results of Operations—

Credit-Related Expenses” and on the credit performance of mortgage loans in our single-family book of business

and our loan workouts in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk

Management.”

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Liquidity

During 2011, we issued a variety of non-callable and callable debt securities in a wide range of maturities to

achieve cost-efficient funding and to extend our debt maturity profile. We believe that our ready access to debt

funding since the beginning of 2009 has been primarily due to the actions taken by the federal government to

support us and the financial markets. Accordingly, we believe that continued federal government support of our

business and the financial markets, as well as our status as a GSE, are essential to maintaining our access to debt

funding. Changes or perceived changes in the government’s support could materially and adversely affect our

ability to refinance our debt as it becomes due, which could have a material adverse impact on our liquidity,

financial condition, results of operations and ability to continue as a going concern. Demand for our debt

securities could decline in the future, as the Administration, Congress and our regulators debate our future. See

“MD&A—Liquidity and Capital Management—Liquidity Management” for more information on our debt

funding activities and “Risk Factors” for a discussion of the risks to our business posed by our reliance on the

issuance of debt securities to fund our operations.

Outlook

Overall Market Conditions. We expect weakness in the housing and mortgage markets to continue in 2012. The

high level of delinquent mortgage loans will ultimately result in high levels of foreclosures, which is likely to add

to the excess housing inventory.

We expect that single-family default and severity rates, as well as the level of single-family foreclosures, will

remain high in 2012. Despite signs of multifamily sector improvement at the national level, we expect

multifamily charge-offs in 2012 to remain generally commensurate with 2011 levels as certain local markets and

properties continue to exhibit weak fundamentals. Conditions may worsen if the unemployment rate increases on

either a national or regional basis.

We expect that changes to HARP announced in October 2011, which we discuss in “Making Home Affordable

Program,” will result in our acquiring more refinancings in 2012 than we would have acquired in the absence of

the changes. However, we expect fewer refinancings overall in 2012 than in 2011 because a high number of

mortgages have already refinanced to low rates in recent years. As a result, we expect our loan acquisitions for

2012 will be lower than in 2011. Our loan acquisitions also could be negatively affected by the decrease in the

maximum size of loans we may acquire in specified high-cost areas from $729,750 to $625,500 beginning in the

fourth quarter of 2011. As our acquisitions decline, our future revenues will be negatively impacted.

We estimate that total originations in the U.S. single-family mortgage market in 2012 will decrease from 2011

levels by approximately 23%, from an estimated $1.4 trillion to an estimated $1.1 trillion, and that the amount of

originations in the U.S. single-family mortgage market that are refinancings will decline from approximately

$896 billion to approximately $568 billion. Refinancings comprised approximately 76% of our single-family

business volume in 2011, compared with 78% in 2010.

Home Price Declines. We estimate that U.S. home prices have declined by 23% from their peak in the third

quarter of 2006. While the rate of decline in home prices has moderated in recent quarters, we expect that home

prices on a national basis will decline further before stabilizing in 2013. We currently expect a peak-to-trough

home price decline on a national basis ranging from 23% to 30%, but believe that it would take the occurrence of

an additional adverse economic event to reach the high end of the range. Future home price changes may be very

different from our estimates as a result of significant inherent uncertainty in the current market environment,

including uncertainty about the effect of actions the federal government has taken and may take with respect to

tax policies, mortgage finance programs and policies and housing finance reform; the management of the Federal

Reserve’s MBS holdings; and the impact of those actions on home prices, unemployment and the general

economic and interest rate environment. Because of these uncertainties, the actual home price decline we

experience may differ significantly from these estimates. We also expect significant regional variation in home

price declines and stabilization.

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Our estimates of home price declines are based on our home price index, which is calculated differently from the

S&P/Case-Shiller U.S. National Home Price Index and therefore results in different percentages for comparable

declines. Our 23% to 30% peak-to-trough home price decline estimate corresponds to an approximate 32% to

40% peak-to-trough decline using the S&P/Case-Shiller index method. Our estimates differ from the S&P/CaseShiller index in two principal ways: (1) our estimates weight expectations by number of properties, whereas the

S&P/Case-Shiller index weights expectations based on property value, causing home price changes on higher

priced homes to have a greater effect on the overall result; and (2) the S&P/Case-Shiller index includes sales of

foreclosed homes while our estimates attempt to exclude foreclosed home sales, because we believe that differing

maintenance practices and the forced nature of the sales make foreclosed home prices less representative of

market values. We believe, however, that the impact of sales of foreclosed homes is indirectly reflected in our

estimates as a result of their impact on the pricing of non- distressed sales. We estimate S&P/Case-Shiller

comparison numbers by adjusting our internal home price estimates to compensate for the principal differences—

weighting based on property value and including foreclosed property sales. In addition to these differences, our

estimates are based on our own internally available data combined with publicly available data, and are therefore

based on data collected nationwide, whereas the S&P/Case-Shiller index is based on publicly available data,

which may be limited in certain geographic areas of the country. Our comparative calculations to the S&P/CaseShiller index provided above are not adjusted to compensate for this data pool difference.

Credit-Related Expenses and Credit Losses. Our credit-related expenses, which include our provision for credit

losses, reflect our recognition of losses on our loans. Through our provision for credit losses, we recognize

credit-related expenses on loans in the period in which we determine that we have incurred a probable loss on the

loans as of the end of the period, or in which we have granted concessions to the borrowers. Accordingly, our

credit-related expenses in each period are affected by changes in actual and expected home prices, borrower

payment behavior, the types and volumes of loss mitigation activities and foreclosures we complete, and

estimated recoveries from our lender and mortgage insurer counterparties. Our credit losses, which include our

charge-offs, net of recoveries, reflect our realization of losses on our loans. We realize losses on loans, through

our charge-offs, when foreclosure sales are completed or when we accept short sales or deeds-in-lieu of

foreclosure. We expect that our credit-related expenses will remain high in 2012 but that, overall, our creditrelated expenses will be lower in 2012 than in 2011. We expect our credit losses in 2012 to remain high. To the

extent delays in foreclosures continue in 2012, our realization of some credit losses will be delayed. We further

describe our credit loss outlook in “Our Strong New Book of Business and Expected Losses on our Legacy Book

of Business—Expected Losses on Our Legacy Book of Business.”

Uncertainty Regarding our Long-Term Financial Sustainability and Future Status. There is significant

uncertainty in the current market environment, and any changes in the trends in macroeconomic factors that we

currently anticipate, such as home prices and unemployment, may cause our future credit-related expenses and

credit losses to vary significantly from our current expectations. Although Treasury’s funds under the senior

preferred stock purchase agreement permit us to remain solvent and avoid receivership, the resulting dividend

payments are substantial. We do not expect to earn profits in excess of our annual dividend obligation to

Treasury for the indefinite future. In his February 2012 letter to Congress, the Acting Director of FHFA wrote,

“[I]t is clear that the draws [Fannie Mae and Freddie Mac] have taken from the Treasury are so large they cannot

be repaid under any foreseeable scenarios.” We expect to request additional draws under the senior preferred

stock purchase agreement in future periods, which will further increase the dividends we owe to Treasury on the

senior preferred stock. We expect that, over time, our dividend obligation to Treasury will constitute an

increasing portion of our future draws under the senior preferred stock purchase agreement. As a result of these

factors, there is significant uncertainty about our long-term financial sustainability.

In addition, there is significant uncertainty regarding the future of our company, including how long the company

will continue to be in its current form, the extent of our role in the market, what form we will have, and what

ownership interest, if any, our current common and preferred stockholders will hold in us after the

conservatorship is terminated. We expect this uncertainty to continue. In February 2011, Treasury and HUD

released a report to Congress on reforming America’s housing finance market. The report states that the

Administration will work with FHFA to determine the best way to responsibly wind down both Fannie Mae and

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Freddie Mac. The report emphasizes the importance of providing the necessary financial support to Fannie Mae

and Freddie Mac during the transition period. On February 2, 2012, Treasury Secretary Geithner stated that the

Administration intended to release new details around approaches to housing finance reform, including winding

down Fannie Mae and Freddie Mac, in the spring of 2012 and to work with Congressional leaders to explore

options for legislation, but that he does not expect housing finance reform legislation to be enacted in 2012.

We cannot predict the prospects for the enactment, timing or content of legislative proposals regarding long-term

reform of the GSEs. See “Legislative and Regulatory Developments” for a discussion of recent legislative reform

of the financial services industry and proposals for GSE reform that could affect our business. See “Risk Factors”

for a discussion of the risks to our business relating to the uncertain future of our company.

MORTGAGE SECURITIZATIONS

We support market liquidity by securitizing mortgage loans, which means we place loans in a trust and Fannie

Mae MBS backed by the mortgage loans are then issued. 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 (1) two broad categories of securitization transactions: lender swaps and portfolio

securitizations; (2) features of our MBS trusts; (3) circumstances under which we purchase loans from MBS

trusts; and (4) single-class and multi-class Fannie Mae MBS.

Lender Swaps and Portfolio Securitizations

We currently securitize a majority of the single-family and multifamily mortgage loans we acquire. Our

securitization transactions primarily fall within two broad categories: lender swap transactions and portfolio

securitizations.

Our most common type of securitization transaction is our “lender swap transaction.” Mortgage lenders that

operate in the primary mortgage market generally deliver pools of mortgage loans to us in exchange for Fannie

Mae MBS backed by these mortgage loans. 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 that is

established for the sole purpose of holding the mortgage loans separate and apart from our assets. We deliver to

the lender (or its designee) Fannie Mae MBS that are backed by the pool of mortgage loans in the trust and that

represent an undivided beneficial ownership interest in each of the mortgage loans. 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 retain a portion of the interest payment as the fee for

providing our guaranty. 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. The structured securitization transactions we describe below in “Business Segments—Capital Markets—

Securitization Activities” involve a process that is very similar to the process involved in our lender swap

securitizations.

In contrast to our lender swap securitizations, in which lenders deliver pools of mortgage loans to us that we

immediately place in a trust for securitization, our “portfolio securitization transactions” involve creating and

issuing Fannie Mae MBS using mortgage loans and mortgage-related securities that we hold in our mortgage

portfolio.

Features of Our MBS Trusts

We serve as trustee for our MBS trusts, each of which is established for the sole purpose of holding mortgage

loans separate and apart from our assets. Our MBS trusts hold either single-family or multifamily mortgage loans

or mortgage-related securities. Each trust operates in accordance with a trust agreement or a trust indenture. Each

MBS trust is also governed by an issue supplement documenting the formation of that MBS trust, the

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identification of its related assets and the issuance of the related Fannie Mae MBS. The trust agreement or the

trust indenture, together with the issue supplement and any amendments, are considered the “trust documents”

that govern an individual MBS trust.

Purchases of Loans from our MBS Trusts

Under the terms of our MBS trust documents, we have the option or, in some instances, the obligation, to

purchase mortgage loans that meet specific criteria from an MBS trust. For example, we have the option under

the terms of the trust documents to purchase a loan from an MBS trust if the loan is delinquent as to four or more

consecutive monthly payments. We generally have the obligation to purchase a mortgage loan from an MBS trust

when the mortgage loan is delinquent as to 24 consecutive monthly payments. Our acquisition cost for these

loans is the unpaid principal balance of the loan plus accrued interest.

In deciding whether and when to exercise our option to purchase a loan from a single-family MBS trust, we

consider a variety of factors, including: our legal ability to purchase loans under the terms of the trust documents;

whether we have agreed to modify the loan, which we cannot do while it remains in the trust; our mission and

public policy; our loss mitigation strategies and the exposure to credit losses we face under our guaranty; our cost

of funds; the impact on our results of operations; relevant market yields; the accounting impact; the

administrative costs associated with purchasing and holding the loans; counterparty exposure to lenders that have

agreed to cover losses associated with delinquent loans; and general market conditions. The weight we give to

these factors changes depending on market circumstances and other factors.

The cost of purchasing most delinquent loans from Fannie Mae MBS trusts and holding them in our portfolio is

currently less than the cost of advancing delinquent payments to security holders. We generally purchase loans from

MBS trusts as they become four or more consecutive monthly payments delinquent. During 2011, we purchased

approximately $67 billion in delinquent loans from our single-family MBS trusts. We expect to continue purchasing

loans from MBS trusts as they become four or more consecutive monthly payments delinquent subject to market

conditions, economic benefit, servicer capacity, and other constraints, including the limit on the amount of mortgage

assets that we may own pursuant to the senior preferred stock purchase agreement.

For our multifamily MBS trusts, we typically exercise our option to purchase a loan from the trust if the loan is

delinquent, in whole or in part, as to four or more consecutive monthly payments.

Single-Class and Multi-Class Fannie Mae MBS

Fannie Mae MBS trusts may be single-class or multi-class. Single-class MBS are MBS in which the investors

receive principal and interest payments in proportion to their percentage ownership of the MBS issuance. Multiclass MBS are MBS, including Real Estate Mortgage Investment Conduits (“REMICs”), in which the cash flows

on the underlying mortgage assets are divided, creating several classes of securities, each of which represents an

undivided beneficial ownership interest in the assets of the related MBS trust and entitles the related holder to a

specific portion of cash flows. Terms to maturity of some multi-class Fannie Mae MBS, particularly REMIC

classes, may match or be shorter than the maturity of the underlying mortgage loans and/or mortgage-related

securities. After these classes expire, cash flows received on the underlying mortgage assets are allocated to the

remaining classes in accordance with the terms of the securities’ structures. As a result, each of the classes in a

multi-class MBS may have a different coupon rate, average life, repayment sensitivity or final maturity.

Structured Fannie Mae MBS are either multi-class MBS or single-class MBS that are typically resecuritizations

of other single-class Fannie Mae MBS. In a resecuritization, pools of MBS are collected and securitized.

BUSINESS SEGMENTS

We have three business segments for management reporting purposes: Single-Family Credit Guaranty,

Multifamily, and Capital Markets. In this report we refer to our business groups that run these segments as our

“Single-Family business,” our “Multifamily business” and our “Capital Markets group.” These groups engage in

complementary business activities in pursuing our mission of providing liquidity, stability and affordability to the

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U.S. housing market. These activities are summarized in the table below and described in more detail following

this table. We also summarize in the table below the key sources of revenue for each of our segments and the

primary expenses.

Business

Segment Primary Business Activities Primary Revenues Primary Expenses

Single-Family

Credit

Guaranty, or

Single-Family

• Mortgage securitizations:

Works with our lender

customers to securitize

single-family mortgage loans

delivered to us by lenders into

Fannie Mae MBS in lender

swap transactions

• Mortgage acquisitions:

Works with our Capital

Markets group to facilitate the

purchase of single-family

mortgage loans

• Credit risk management:

Prices and manages the credit

risk on loans in our singlefamily guaranty book of

business

• Credit loss management:

Works to prevent foreclosures

and reduce costs of defaulted

loans through foreclosure

alternatives, through

management of foreclosures

and REO, and through

pursuing contractual remedies

from lenders, servicers and

providers of credit

enhancement

• Guaranty fees: Compensation

for assuming and managing

the credit risk on our singlefamily guaranty book of

business

• Interest income not

recognized: Consists of

reimbursement costs for

interest income not

recognized for loans on

nonaccrual status in our

mortgage portfolio or in

consolidated trusts, which are

recorded as a reduction to our

interest income

• Fee and other income:

Compensation received for

providing lender services

• Credit-related expenses:

Consists of provision for

single-family loan losses,

provision for single-family

guaranty losses and

foreclosed property expense

on loans underlying our

single-family guaranty book

of business

• Administrative expenses:

Consists of salaries and

benefits, occupancy costs,

professional services, and

other expenses associated

with the Single-Family

business operations

Multifamily • Mortgage securitizations:

Works with our lender

customers to securitize

multifamily mortgage loans

delivered to us by lenders into

Fannie Mae MBS in lender

swap transactions

• Mortgage acquisitions:

Works with our Capital

Markets group to facilitate the

purchase of multifamily

mortgage loans

• Credit risk management:

Prices and manages the credit

risk on loans in our

multifamily guaranty book of

business

• Credit loss management:

Works to prevent foreclosures

and reduce costs of defaulted

loans through foreclosure

alternatives, through

management of foreclosures

and REO, and through

pursuing contractual remedies

from lenders, servicers and

providers of credit

enhancement

• Guaranty fees: Compensation

for assuming and managing

the credit risk on our

multifamily guaranty book of

business

• Fee and other income:

Compensation received for

engaging in multifamily

transactions and bond credit

enhancements

• Credit-related expenses:

Consists of provision for

multifamily loan losses,

provision for multifamily

guaranty losses and

foreclosed property expense

on loans underlying our

multifamily guaranty book of

business

• Administrative expenses:

Consists of salaries and

benefits, occupancy costs,

professional services, and

other expenses associated

with our Multifamily business

operations

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Business

Segment Primary Business Activities Primary Revenues Primary Expenses

Capital Markets • Mortgage and other

investments: Purchases

mortgage assets and makes

investments in non-mortgage

interest-earning assets

• Mortgage securitizations:

Purchases loans from a large

group of lenders, securitizes

them, and may sell the

securities to dealers and

investors

• Structured mortgage

securitizations and other

customer services: Issues

structured Fannie Mae MBS

for customers in exchange for

a transaction fee and provides

other fee-related services to

our lender customers

• Interest rate risk

management: Manages the

interest rate risk on our

portfolio by issuing a variety

of debt securities in a wide

range of maturities and by

using derivatives

• Net interest income:

Generated from the difference

between the interest income

earned on our interest-earning

assets and the interest

expense associated with the

debt funding those assets

• Fee and other income:

Compensation received for

providing structured

transactions and other lender

services

• Fair value gains and losses:

Primarily consists of fair

value gains and losses on

derivatives and trading

securities

• Investment gains and losses:

Primarily consists of gains

and losses on the sale or

securitization of mortgage

assets

• Other-than-temporary

impairment: Consists of

impairment recognized on our

investments

• Administrative expenses:

Consists of salaries and

benefits, occupancy costs,

professional services, and

other expenses associated

with our Capital Markets

business operations

We are working on reorganizing our company by function rather than by business in order to improve our

operational efficiencies and effectiveness. In future periods, we may change some of our management reporting

and how we report our business segment results.

Revenues from our Business Segments

The following table displays the percentage of our total net revenues accounted for by our business segments for

each of the last three years. Our prospective adoption in 2010 of revised accounting guidance on the

consolidation of variable interest entities (“consolidation accounting guidance”) and transfers of financial assets

had a significant impact on our financial statements. Also effective in 2010, we changed the presentation of

segment financial information that is currently evaluated by management. As a result, our 2010 and 2011

segment results are not comparable to prior years’ segment results. We have not restated prior years’ results, nor

have we presented 2010 and 2011 results under the old presentation, because we determined that it was

impracticable to do so. For more information about changes in our segment reporting and the financial results

and performance of each of our segments, please see “MD&A—Business Segment Results” and “Note 14,

Segment Reporting.”

Business Segment Revenues(1)

For the Year Ended

December 31,

2011(2) 2010(2) 2009

Single-Family Credit Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28% 12% 39%

Multifamily(3) ......................................................... 5 5 3

Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 77 58

(1) Amounts presented represent the percentage of our total net revenues accounted for by each of our business segments.

(2) Segment results for 2011 and 2010 are not comparable with 2009 and prior years’ results. In addition, under our current

segment reporting structure, the sum of net revenues for our three business segments does not equal our consolidated total

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net revenues because we separate the activity related to our consolidated trusts from the results generated by our three

segments.

(3) These amounts do not include the net interest income we earn on our multifamily investments in our mortgage portfolio,

which is reflected in the revenues of our Capital Markets segment.

Under the terms of our intracompany guaranty arrangement, Capital Markets receives reimbursements primarily

from Single-Family for the contractual interest due on mortgage loans held in our portfolio when interest income

on the loans is no longer recognized in accordance with our nonaccrual accounting policy. As a result, the

substantial increase in the number of nonaccrual loans purchased from our consolidated MBS trusts beginning in

2010 significantly increased Capital Markets’ net revenue in 2010, while reducing the net revenues of SingleFamily.

Single-Family Business

Our Single-Family business works with our lender customers to provide funds to the mortgage market by

securitizing single-family mortgage loans into Fannie Mae MBS. Our Single-Family business also works with

our Capital Markets group to facilitate the purchase of single-family mortgage loans for our mortgage portfolio.

Our Single-Family business has primary responsibility for pricing and managing the credit risk on our singlefamily guaranty book of business, which consists of single-family mortgage loans underlying Fannie Mae MBS

and single-family loans held in our mortgage portfolio.

A single-family loan is secured by a property with four or fewer residential units. Our Single-Family business

and Capital Markets group securitize and purchase primarily conventional (not federally insured or guaranteed)

single-family fixed-rate or adjustable-rate, first-lien mortgage loans, or mortgage-related securities backed by

these types of loans. We also securitize or purchase loans insured by FHA, loans guaranteed by the Department

of Veterans Affairs (“VA”), loans guaranteed by the Rural Development Housing and Community Facilities

Program of the Department of Agriculture (the “Department of Agriculture”), manufactured housing loans,

subordinate-lien mortgage loans (for example, loans secured by second liens) and other mortgage-related

securities.

Revenues for our Single-Family business are derived primarily from guaranty fees received as compensation for

assuming the credit risk on the mortgage loans underlying single-family Fannie Mae MBS. We also allocate

guaranty fee revenues to the Single-Family business for assuming and managing the credit risk on the single-family

mortgage loans held in our portfolio. The aggregate amount of single-family guaranty fees we receive or that are

allocated to our Single-Family business in any period depends on the amount of single-family Fannie Mae MBS

outstanding and loans held in our mortgage portfolio during the period and the applicable guaranty fee rates. The

amount of Fannie Mae MBS outstanding at any time is primarily determined by the rate at which we issue new

Fannie Mae MBS and by the repayment rate for the loans underlying our outstanding Fannie Mae MBS. Other

factors affecting the amount of Fannie Mae MBS outstanding are the extent to which (1) we purchase loans from

our MBS trusts because of borrower defaults (with the amount of these purchases affected by the rate of borrower

defaults on the loans and the extent of loan modification programs in which we engage) and (2) sellers and servicers

repurchase loans from us upon our demand based on a breach in the selling representations and warranties provided

upon delivery of the loans.

We describe the credit risk management process employed by our Single-Family business, including its key

strategies in managing credit risk and key metrics used in measuring and evaluating our single-family credit risk

in “MD&A—Risk Management—Credit Risk Management—Single-Family Credit Risk Management.”

Single-Family Mortgage Securitizations and Acquisitions

Our Single-Family business securitizes single-family mortgage loans and issues single-class Fannie Mae MBS,

which are described above in “Mortgage Securitizations—Single-Class and Multi-Class Fannie Mae MBS,” for

our lender customers. Unlike our Capital Markets group, which securitizes loans from our portfolio, our SingleFamily business securitizes loans solely in lender swap transactions, in which lenders deliver to us pools of

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mortgage loans, which are placed immediately in a trust, in exchange for Fannie Mae MBS backed by these

loans. We describe lender swap transactions, and how they differ from portfolio securitizations, in “Mortgage

Securitizations—Lender Swaps and Portfolio Securitizations.”

Loans from our lender customers are delivered to us through either our “flow” or “bulk” transaction channels. In

our flow business, we enter into agreements that generally set agreed-upon guaranty fee prices for a lender’s

future delivery of individual loans to us over a specified time period. Our bulk business generally consists of

transactions in which a set of loans is delivered to us in bulk, typically with guaranty fees and other contract

terms negotiated individually for each transaction.

Single-Family Mortgage Servicing, REO Management, and Lender Repurchases

Servicing

Generally, the servicing of the mortgage loans held in our mortgage portfolio or that back our Fannie Mae MBS

is performed by mortgage servicers on our behalf. Typically, lenders who sell single-family mortgage loans to us

service these loans for us. For loans we own or guarantee, the lender or servicer must obtain our approval before

selling servicing rights to another servicer.

Our mortgage servicers typically collect and deliver principal and interest payments, administer escrow accounts,

monitor and report delinquencies, perform default prevention activities, evaluate transfers of ownership interests,

respond to requests for partial releases of security, and handle proceeds from casualty and condemnation losses.

Our mortgage servicers are the primary point of contact for borrowers and perform a key role in the effective

implementation of our homeownership assistance initiatives, negotiation of workouts of troubled loans, and loss

mitigation activities. If necessary, mortgage servicers inspect and preserve properties and process foreclosures

and bankruptcies. Because we generally delegate the servicing of our mortgage loans to mortgage servicers and

do not have our own servicing function, our ability to actively manage troubled loans that we own or guarantee is

limited. For more information on the risks of our reliance on servicers, refer to “Risk Factors” and “MD&A—

Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management.”

We compensate servicers primarily by permitting them to retain a specified portion of each interest payment on a

serviced mortgage loan as a servicing fee. Servicers also generally retain prepayment premiums, assumption fees,

late payment charges and other similar charges, to the extent they are collected from borrowers, as additional

servicing compensation. We also compensate servicers for negotiating workouts on problem loans.

We discuss steps we have taken in 2011 to improve the servicing of our delinquent loans in “MD&A—Risk

Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Single-Family

Acquisition and Servicing Policies and Underwriting and Servicing Standards.”

REO Management

In the event a loan defaults and we acquire a home through foreclosure or a deed-in-lieu of foreclosure, we

market and sell the home through local real estate professionals. Our primary objectives are both to minimize the

severity of loss to Fannie Mae by maximizing sales prices and also to stabilize neighborhoods—to prevent empty

homes from depressing home values. In cases where the property does not sell, we use alternative methods of

disposition, including selling homes to cities, municipalities and other public entities, and selling properties in

bulk or through public auctions.

Lender Repurchase Evaluations

We conduct post-purchase quality control file reviews to ensure that loans sold to and serviced for us meet our

guidelines. If we discover violations through reviews, we issue repurchase demands to the seller and seek to

collect on our repurchase claims.

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Multifamily Business

A core part of Fannie Mae’s mission is to support the U.S. multifamily housing market to help serve the nation’s

rental housing needs, focusing on low- to middle-income households and communities. Multifamily mortgage

loans relate to properties with five or more residential units, which may be apartment communities, cooperative

properties or manufactured housing communities.

Our Multifamily business works with our lender customers to provide funds to the mortgage market by

securitizing multifamily mortgage loans into Fannie Mae MBS. Through our Multifamily business, we provide

liquidity and support to the U.S. multifamily housing market principally by securitizing or purchasing loans that

finance multifamily rental housing properties. We also provide some limited debt financing for other

construction and rehabilitation activity related to projects that complement this business. Our Multifamily

business also works with our Capital Markets group to facilitate the purchase and securitization of multifamily

mortgage loans and securities for Fannie Mae’s portfolio, as well as to facilitate portfolio securitization and

resecuritization activities. Our multifamily guaranty book of business consists of multifamily mortgage loans

underlying Fannie Mae MBS and multifamily loans and securities held in our mortgage portfolio. Our

Multifamily business has primary responsibility for pricing the credit risk on our multifamily guaranty book of

business and for managing the credit risk on multifamily loans and Fannie Mae MBS backed by multifamily

loans that are held in our mortgage portfolio.

Revenues for our Multifamily business are derived from a variety of sources, including: (1) guaranty fees

received as compensation for assuming the credit risk on the mortgage loans underlying multifamily Fannie Mae

MBS and on the multifamily mortgage loans held in our portfolio and on other mortgage-related securities;

(2) transaction fees associated with the multifamily business and (3) other bond credit enhancement related fees.

Additionally, our Capital Markets group earns revenue that is related to our multifamily mortgage loans and

securities held in our portfolio.

We describe the credit risk management process employed by our Multifamily business, along with our

Multifamily Enterprise Risk Management group, including its key strategies in managing credit risk and key

metrics used in measuring and evaluating our multifamily credit risk, in “MD&A—Risk Management—Credit

Risk Management—Multifamily Mortgage Credit Risk Management.”

Key Characteristics of the Multifamily Mortgage Market and Multifamily Transactions

The multifamily mortgage market and our transactions in that market have a number of key characteristics that

affect our multifamily activities and distinguish them from our activities in the single-family residential mortgage

market.

• Funding sources: Unlike the single-family residential mortgage market in which the GSEs’ predominance

makes us a driver of market standards and rates, the multifamily market is made up of a wide variety of

lending sources, including commercial banks, life insurance companies, investment banks, small community

banks, FHA, state and local housing finance agencies and the GSEs.

• Number of lenders; lender relationships: In 2011, we executed multifamily transactions with 33 lenders.

Of these, 25 lenders delivered loans to us under our Delegated Underwriting and Servicing, or DUS®,

product line. In determining whether to do business with a multifamily lender, we consider the lender’s

financial strength, multifamily underwriting and servicing experience, portfolio performance and

willingness and ability to share in the risk of loss associated with the multifamily loans they originate.

• Loan size: On average, loans in our multifamily guaranty book of business are several million dollars in

size. A significant number of our multifamily loans are under $5 million, and some of our multifamily loans

are greater than $25 million.

• Collateral: Multifamily loans are collateralized by properties that generate cash flows and effectively

operate as businesses, such as garden and high-rise apartment complexes, seniors housing communities,

cooperatives, dedicated student housing and manufactured housing communities.

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• Borrower profile: Most multifamily borrowers are for-profit corporations, limited liability companies,

partnerships, real estate investment trusts and individuals who invest in real estate for cash flow and equity

returns in exchange for their original investment in the asset. Multifamily loans are generally non-recourse

to the borrower. When considering a multifamily borrower, creditworthiness is evaluated through a

combination of quantitative and qualitative data including liquid assets, net worth, number of units owned,

experience in a market and/or property type, multifamily portfolio performance, access to additional

liquidity, debt maturities, asset/property management platform, senior management experience, reputation

and lender exposure.

• Borrower and lender investment: Borrowers are required to contribute cash equity into multifamily

properties on which they borrow, while lenders generally share in any losses realized from the loans that we

purchase.

• Underwriting process: Multifamily loans require a detailed underwriting process due to factors that may

include the size of the loan, the market, or the complexity of the collateral or transaction.

• Term and lifecycle: In contrast to the standard 30-year single-family residential loan, multifamily loans

typically have terms of 5, 7 or 10 years, with balloon payments due at maturity.

• Prepayment terms: Multifamily Fannie Mae loans and MBS trade in a market in which investors expect

commercial investment terms, particularly limitations on prepayments of loans and the imposition of

prepayment premiums.

Multifamily Mortgage Securitizations and Acquisitions

Our Multifamily business generally creates multifamily Fannie Mae MBS and acquires multifamily mortgage

assets in the same manner as our Single-Family business, as described in “Single-Family Business—Mortgage

Securitizations and Acquisitions.”

Delegated Underwriting and Servicing (DUS)

In an effort to promote product standardization in the multifamily marketplace, in 1988 Fannie Mae initiated the

DUS product line for acquiring individual multifamily loans.

DUS is a unique business model in the commercial mortgage industry. The standard industry practice for a

multifamily loan requires the purchaser or guarantor to underwrite or re-underwrite each loan prior to deciding

whether to purchase or guaranty the loan. Under our model, DUS lenders are pre-approved and delegated the

authority to underwrite and service loans on behalf of Fannie Mae. In exchange for this authority, DUS lenders

are required to share with us the risk of loss over the life of the loan, generally retaining one-third of the

underlying credit risk on each loan sold to Fannie Mae. Since DUS lenders share in the credit risk, the servicing

fee to the lenders includes compensation for credit risk. Delegation permits lenders to respond to customers more

rapidly, as the lender generally has the authority to approve a loan within prescribed parameters, which provides

an important competitive advantage.

We believe our DUS model aligns the interests of the borrower, lender and Fannie Mae. Our current 25-member

DUS lender network, which is comprised of large financial institutions and independent mortgage lenders,

continues to be our principal source of multifamily loan deliveries.

Fannie Mae MBS secured by DUS loans are typically backed by a single mortgage loan, which is often a fixedrate loan. Structuring MBS to be backed by a single multifamily loan facilitates securitizations by our smaller

lenders.

Multifamily Mortgage Servicing

As with the servicing of single-family mortgages, multifamily mortgage servicing is typically performed by the

lenders who sell the mortgages to us. Many of our multifamily mortgage servicers have agreed, as part of the

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DUS relationship, to accept loss sharing, which we believe increases the alignment of interests between us and

our multifamily loan servicers. Because of our loss-sharing arrangements with our multifamily lenders, transfers

of multifamily servicing rights are infrequent, and we carefully monitor all our servicing relationships and

enforce our right to approve all servicing transfers. As a seller-servicer, the lender is responsible for evaluating

the financial condition of properties and property owners, administering various types of agreements (including

agreements regarding replacement reserves, completion or repair, and operations and maintenance), as well as

conducting routine property inspections.

The Multifamily Markets in which We Operate

In the multifamily mortgage market, we aim to address the rental housing needs of a wide range of the

population, from those at the lower end of the income range up through middle-income households. Our mission

requires us to serve the market steadily, rather than moving in and out depending on market conditions. Through

the secondary mortgage market, we support rental housing for the workforce, for senior citizens and students, and

for families with the greatest economic need. Our Multifamily business is organized and operated as an

integrated commercial real estate finance business, with dedicated teams that address the spectrum of multifamily

housing finance needs, including the teams described below.

• To meet the growing need for smaller multifamily property financing, we have a team that focuses on the

purchase and guarantee of multifamily loans up to $3 million ($5 million in high income areas). We

purchase these loans from DUS lenders as well as small community banks and nonprofits or similar entities.

Over the years, we have been an active purchaser of these loans from both DUS and non-DUS lenders and,

as of December 31, 2011, they represented 69% of our multifamily guaranty book of business by loan count

and 16% based on unpaid principal balance.

• To serve low- and very low-income households, we also have a team that focuses exclusively on

relationships with lenders financing privately-owned multifamily properties that receive public subsidies in

exchange for maintaining long-term affordable rents. We enable borrowers to leverage housing programs

and subsidies provided by local, state and federal agencies. These public subsidy programs are largely

targeted to providing housing to families earning less than 60% of area median income (as defined by HUD)

and are structured to ensure that the low and very low-income households who benefit from the subsidies

pay no more than 30% of their gross monthly income for rent and utilities. As of December 31, 2011, this

type of financing represented approximately 14% of our multifamily guaranty book of business, based on

unpaid principal balance, including $16.1 billion in bond credit enhancements.

Capital Markets

Our Capital Markets group manages our investment activity in mortgage-related assets and other interest-earning

non-mortgage investments. We fund our investments primarily through proceeds we receive from the issuance of

debt securities in the domestic and international capital markets. Our Capital Markets group has primary

responsibility for managing the interest rate risk associated with our investments in mortgage assets.

The business model for our Capital Markets group has evolved in recent years. Our business activity is now

focused on making short-term use of our balance sheet rather than long-term investments. As a result, our Capital

Markets group works with lender customers to provide funds to the mortgage market through short-term

financing and investing activities. Activities we are undertaking to provide liquidity to the mortgage market

include the following:

• Whole Loan Conduit. Whole loan conduit activities involve our purchase of both single-family and

multifamily loans principally for the purpose of securitizing them. We purchase loans from a large group of

lenders and then securitize them as Fannie Mae MBS, which may then be sold to dealers and investors.

• Early Funding. Lenders who deliver whole loans or pools of whole loans to us in exchange for MBS

typically must wait between 30 and 45 days from the closing and settlement of the loans or pools and the

issuance of the MBS. This delay may limit lenders’ ability to originate new loans. Under our early lender

funding programs, we purchase whole loans or pools of loans on an accelerated basis, allowing lenders to

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receive quicker payment for the whole loans and pools, which replenishes their funds and allows them to

originate more mortgage loans.

• REMICs and Other Structured Securitizations. We issue structured Fannie Mae MBS (including

REMICs), typically for our lender customers or securities dealer customers, in exchange for a transaction

fee.

• MBS Trading. We regularly enter into purchase and sale transactions with other market participants

involving mortgage-backed securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae, which we refer

to as “agency MBS”. These transactions can provide for the future delivery of mortgage-backed

securities with underlying loans that share certain general characteristics (often referred to as the “TBA

market”). These purchase and sale transactions also can provide for the future delivery of specifically

identified mortgage-backed securities with underlying loans that have other characteristics considered

desirable by some investors (often referred to as the “Specified Pools market”). Through our trading activity

in the TBA and Specified Pools markets, we provide significant liquidity to the agency MBS markets.

Securitization Activities

Our Capital Markets group is engaged in issuing both single-class and multi-class Fannie Mae MBS through both

portfolio securitizations and structured securitizations involving third party assets.

• Portfolio securitizations. Our Capital Markets group creates single-class and multi-class Fannie Mae MBS

from mortgage-related assets held in our mortgage portfolio. Our Capital Markets group may sell these

Fannie Mae MBS into the secondary market or may retain the Fannie Mae MBS in our investment portfolio.

• Structured securitizations: Our Capital Markets group creates single-class and multi-class structured

Fannie Mae MBS, typically for our lender customers or securities dealer customers, in exchange for a

transaction fee. In these transactions, the customer “swaps” a mortgage-related asset that it owns (typically a

mortgage security) in exchange for a structured Fannie Mae MBS we issue. Our Capital Markets group

earns transaction fees for creating structured Fannie Mae MBS for third parties. The process for issuing

Fannie Mae MBS in a structured securitization is similar to the process involved in our lender swap

securitizations. For more information about that process and how it differs from portfolio securitizations,

please see “Mortgage Securitizations—Lender Swaps and Portfolio Securitizations.”

For a description of single-class Fannie Mae MBS, please see “Mortgage Securitizations—Single-Class and

Multi-Class Fannie Mae MBS.”

Other Customer Services

Our Capital Markets group provides our lender customers with services that include offering to purchase a wide

variety of mortgage assets, including non-standard mortgage loan products; segregating customer portfolios to

obtain optimal pricing for their mortgage loans; and assisting customers with hedging their mortgage business.

These activities provide a significant flow of assets for our mortgage portfolio, help to create a broader market

for our customers and enhance liquidity in the secondary mortgage market.

Mortgage Asset Portfolio

Although our Capital Markets group’s business activities are focused on short-term financing and investing,

revenue from our Capital Markets group is derived primarily from the difference, or spread, between the interest

we earn on our mortgage and non-mortgage investments and the interest we incur on the debt we issue to fund

these assets. Our Capital Markets revenues are primarily derived from our mortgage asset portfolio. Over time,

we expect these revenues to decrease as the maximum allowable amount of mortgage assets we may own

decreases each year to 90% of the amount we were permitted to own the previous year under our senior preferred

stock purchase agreement with Treasury. See “Conservatorship and Treasury Agreements—Treasury

Agreements—Covenants under Treasury Agreements” for more information on the decreasing limits on the

amount of mortgage assets we are permitted to hold.

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We describe the interest rate risk management process employed by our Capital Markets group, including its key

strategies in managing interest rate risk and key metrics used in measuring and evaluating our interest rate risk, in

“MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk.”

Investment and Financing Activities

Our Capital Markets group seeks to increase the liquidity of the mortgage market by maintaining a presence as an

active investor in mortgage loans and mortgage-related securities and, in particular, supports the liquidity and

value of Fannie Mae MBS in a variety of market conditions.

Our Capital Markets group funds its investments primarily through the issuance of a variety of debt securities in

a wide range of maturities in the domestic and international capital markets. The most active investors in our debt

securities include commercial bank portfolios and trust departments, investment fund managers, insurance

companies, pension funds, state and local governments, and central banks. The approved dealers for underwriting

various types of Fannie Mae debt securities may differ by funding program. See “MD&A—Liquidity and Capital

Management—Liquidity Management” for information on the composition of our outstanding debt and a

discussion of our liquidity and debt activity.

Our Capital Markets group’s investment and financing activities are affected by market conditions and the target

rates of return that we expect to earn on the equity capital underlying our investments. Our investment activities

also are subject to contractual limitations, including the provisions of the senior preferred stock agreement with

Treasury, capital requirements (although our regulator has announced that these are not binding on us during

conservatorship) and other regulatory constraints, to the extent described below under “Conservatorship and

Treasury Agreements” and “Our Charter and Regulation of Our Activities.”

CONSERVATORSHIP AND TREASURY AGREEMENTS

Conservatorship

On September 6, 2008, the Director of FHFA appointed FHFA as our conservator, pursuant to its authority under

the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Federal

Housing Finance Regulatory Reform Act of 2008, or 2008 Reform Act (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 and there continues to be uncertainty regarding the future

of our company, including how long the company will continue to exist in its current form, the extent of our role

in the market, 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. 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 stock, please see “Risk

Factors.”

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 has

since delegated specified authorities to our Board of Directors and has delegated to management the authority to

conduct our day-to-day operations. The conservator retains the authority to withdraw its delegations at any time.

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 do not have any 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

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conservator. In addition, the conservator directed the Board to consult with and obtain the approval of the

conservator before taking action in specified areas, as described in “Directors, Executive Officers and Corporate

Governance—Corporate Governance—Conservatorship and Delegation of Authority to Board of Directors.”

Because we are in conservatorship, our common shareholders 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, and we are no longer

managed with a strategy to maximize shareholder returns. In a letter to Congress dated February 2, 2010, the

Acting Director of FHFA stated that we will be limited to continuing our existing core business activities and

taking actions necessary to advance the goals of the conservatorship. The Acting Director also stated that FHFA

does not expect that we will be a substantial buyer or seller of mortgages for our retained portfolio, except for

purchases of delinquent mortgages out of our guaranteed MBS pools. For additional information about our

business strategy and the goals of the conservatorship, please see “Executive Summary—Our Business

Objectives and Strategy.”

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. The GSE Act provides, however, that

mortgage loans and mortgage-related assets that have been transferred to a 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. As of February 29, 2012, FHFA has not exercised its power to transfer or sell our

assets or liabilities. For more information on FHFA’s powers as conservator and the rules governing

conservatorship and receivership operations for the GSEs, please see “Our Charter and Regulation of Our

Activities—Regulation and Oversight of Our Activities—Receivership.”

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.

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, in either case, for a period of 60 days. In addition, the Director of FHFA may place us in

receivership at his discretion at any time for other reasons, including conditions that FHFA has already asserted

existed at the time the Director of FHFA placed us into conservatorship. Placement into receivership would have

a material adverse effect on holders of our common stock, preferred stock, 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 conservatorship and uncertainties regarding the future of our business, see “Risk

Factors.”

Treasury Agreements

On September 7, 2008, we, through FHFA, in its capacity as conservator, and Treasury entered into a senior

preferred stock purchase agreement, which was subsequently amended on September 26, 2008, May 6, 2009 and

December 24, 2009. Unless the context indicates otherwise, references in this report to the senior preferred stock

purchase agreement refer to the agreement as amended through December 24, 2009. The terms of the senior

preferred stock purchase agreement, senior preferred stock and the warrant discussed below will continue to

apply to us even if we are released from the conservatorship. Please see “Risk Factors” for a description of the

risks to our business relating to the Treasury agreements, 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.

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Senior Preferred Stock Purchase Agreement and Related Issuance of Senior Preferred Stock and Common

Stock Warrant

Senior Preferred Stock Purchase Agreement

Under the senior preferred stock purchase agreement, we issued to Treasury (a) one million shares of Variable

Liquidation Preference Senior Preferred Stock, Series 2008-2, which we refer to as the “senior preferred stock,”

and (b) a warrant to purchase, for a nominal price, 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, which we

refer to as the “warrant.”

The senior preferred stock and warrant were issued to Treasury as an initial commitment fee in consideration of

the commitment from Treasury to provide funds to us under the terms and conditions set forth in the senior

preferred stock purchase agreement. The senior preferred stock purchase agreement provides that, on a quarterly

basis, we generally 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 GAAP, for the applicable fiscal

quarter (referred to as the “deficiency amount”).

On December 24, 2009, the maximum amount of Treasury’s funding commitment to us under the senior

preferred stock purchase agreement was increased pursuant to an amendment to the agreement. The amendment

provides that the $200 billion maximum amount of the commitment from Treasury will increase as necessary to

accommodate any net worth deficiencies attributable to periods during 2010, 2011 and 2012. If we do not have a

positive net worth as of December 31, 2012, then the amount of funding available under the senior preferred

stock purchase agreement after 2012 will be $124.8 billion ($200 billion less $75.2 billion in cumulative draws

for net worth deficiencies through December 31, 2009). In the event we have a positive net worth as of

December 31, 2012, then the amount of funding available after 2012 under the senior preferred stock purchase

agreement will depend on the size of that positive net worth relative to the cumulative draws for net worth

deficiencies attributable to periods during 2010, 2011 and 2012, as follows:

• If our positive net worth as of December 31, 2012 is less than the cumulative draws for net worth

deficiencies attributable to periods during 2010, 2011 and 2012, then the amount of available funding will

be $124.8 billion less our positive net worth as of December 31, 2012.

• If our positive net worth as of December 31, 2012 is greater than the cumulative draws for net worth

deficiencies attributable to periods during 2010, 2011 and 2012, then the amount of available funding will

be $124.8 billion less the cumulative draws attributable to periods during 2010, 2011 and 2012.

In announcing the December 24, 2009 amendments to the senior preferred stock purchase agreement and to

Treasury’s preferred stock purchase agreement with Freddie Mac, Treasury noted that the amendments “should

leave no uncertainty about the Treasury’s commitment to support [Fannie Mae and Freddie Mac] as they

continue to play a vital role in the housing market during this current crisis.” 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. We discuss our net worth deficits and FHFA’s requests on our behalf for funds from

Treasury in “Executive Summary—Summary of our Financial Performance for 2011.”

We were scheduled to begin paying a quarterly commitment fee to Treasury under the senior preferred stock

purchase agreement on March 31, 2011; however, Treasury waived the quarterly commitment fee for each

quarter of 2011 and the first quarter of 2012 due to the continued fragility of the mortgage market and Treasury’s

belief that the imposition of the quarterly commitment fee would not generate increased compensation for

taxpayers. In its notification to FHFA that it had waived the quarterly commitment fee for the first quarter of

2012, Treasury indicated that it will reevaluate the situation during the next calendar quarter to determine

whether the quarterly commitment fee should then be set. The agreement provides that Treasury may waive the

periodic commitment fee for up to one year at a time, in its sole discretion, based on adverse conditions in the

U.S. mortgage market.

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The senior preferred stock purchase agreement provides that the amount of the quarterly commitment fee is to be

set not later than December 31, 2010 with respect to the ensuing five-year period, is to be reset for every five

years thereafter, and is to be determined with reference to the market value of Treasury’s funding commitment to

Fannie Mae as then in effect. The agreement also provides that the amount of the quarterly commitment fee is to

be mutually agreed by Treasury and Fannie Mae, subject to their reasonable discretion and in consultation with

the Chairman of the Federal Reserve. As of February 29, 2012, the quarterly commitment fee for the initial fiveyear period had not yet been established.

The senior preferred stock purchase agreement provides that the 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 senior preferred stock purchase agreement null and void if a court

vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of the conservator or

otherwise curtails the conservator’s powers. Treasury may not terminate its funding commitment under the

agreement solely by reason of our being in conservatorship, receivership or other insolvency proceeding, or due

to our financial condition or any adverse change in our financial condition.

The senior preferred stock purchase agreement provides that most provisions of the agreement may be waived or

amended by mutual written 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.

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 in respect of that failure, the holders of our debt securities or Fannie Mae MBS may

file a claim in the United States Court of Federal Claims for relief requiring Treasury to fund to us the lesser of

(1) the amount necessary to cure the payment defaults on our debt and Fannie Mae MBS and (2) the lesser of

(a) the deficiency amount and (b) the maximum amount that may be funded under the agreement less the

aggregate amount of funding previously provided under the commitment. Any payment that Treasury makes

under those circumstances will be treated for all purposes as a draw under the senior preferred stock purchase

agreement that will increase the liquidation preference of the senior preferred stock.

Senior Preferred Stock

Pursuant to the senior preferred stock purchase agreement, we issued one million shares of senior preferred stock

to Treasury on September 8, 2008 with an aggregate initial liquidation preference of $1.0 billion. The stock’s

liquidation preference is subject to adjustment. Dividends that are not paid in cash for any dividend period will

accrue and be added to the liquidation preference. In addition, any amounts Treasury pays to us pursuant to its

funding commitment under the senior preferred stock purchase agreement and any quarterly commitment fees

that are either not paid in cash to Treasury or not waived by Treasury will be added to the liquidation preference.

Accordingly, the aggregate liquidation preference of the senior preferred stock was $112.6 billion as of

December 31, 2011 and will increase to $117.1 billion as a result of FHFA’s request on our behalf for funds to

eliminate our net worth deficit as of December 31, 2011.

Treasury, as holder of the senior preferred stock, is entitled to receive, when, as and if declared by our Board of

Directors, out of legally available funds, cumulative quarterly cash dividends at the annual rate of 10% per year

on the then-current liquidation preference of the senior preferred stock. If at any time we fail to pay cash

dividends in a timely manner, then immediately following such failure and for all dividend periods thereafter

until the dividend period following the date on which we have paid in cash full cumulative dividends (including

any unpaid dividends added to the liquidation preference), the dividend rate will be 12% per year.

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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. 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 following 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.

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) accrued

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, if we issue any shares of capital stock for cash while the senior preferred stock is outstanding, the net

proceeds of the issuance must be used to pay down the liquidation preference of the senior preferred stock;

however, 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.

Common Stock Warrant

Pursuant to the senior preferred stock purchase agreement, on September 7, 2008, we, through FHFA, in its

capacity as conservator, issued a warrant to purchase common stock to Treasury. The warrant gives Treasury the

right 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 of exercise, 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 and warrant contain covenants that significantly restrict our

business activities and require the prior written consent of Treasury before we can take certain actions. These

covenants prohibit us from:

• paying dividends or other distributions on or repurchasing our equity securities (other than the senior

preferred stock or warrant);

• issuing additional equity securities (except in limited instances);

• selling, transferring, leasing or otherwise disposing of any assets, other than dispositions for fair market

value, except in limited circumstances including if the transaction is in the ordinary course of business and

consistent with past practice;

• issuing subordinated debt; and

• entering into any new compensation arrangements or increasing amounts or benefits payable under existing

compensation arrangements for any of our executive officers (as defined by SEC rules) without the consent

of the Director of FHFA, in consultation with the Secretary of the Treasury.

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We also are subject to limits, which are described below, on the amount of mortgage assets that we may own and

the total amount of our indebtedness. As a result, we can no longer obtain additional equity financing (other than

pursuant to the senior preferred stock purchase agreement) and we are limited in the amount and type of debt

financing we may obtain.

• Mortgage Asset Limit. We are restricted in the amount of mortgage assets that we may own. The

maximum allowable amount was reduced by $81 billion to $729 billion on December 31, 2011. On each

December 31 thereafter, we are required to reduce our mortgage assets to 90% of the maximum allowable

amount that we were permitted to own as of December 31 of the immediately preceding calendar year, until

the amount of our mortgage assets reaches $250 billion. Accordingly, the maximum allowable amount of

mortgage assets we may own on December 31, 2012 is $656.1 billion. The definition of mortgage asset is

based on the unpaid principal balance of such assets and does not reflect market valuation adjustments,

allowance for loan losses, impairments, unamortized premiums and discounts and the impact of our

consolidation of variable interest entities. Under this definition, our mortgage assets on December 31, 2011

were $708.4 billion. We disclose the amount of our mortgage assets on a monthly basis under the caption

“Gross Mortgage Portfolio” in our Monthly Summaries, which are available on our Web site and announced

in a press release.

• Debt Limit. We are subject to a limit on the amount of our indebtedness. Our debt limit in 2011 was $972

billion and in 2012 is $874.8 billion. For every year thereafter, our debt cap will equal 120% of the amount

of mortgage assets we are allowed to own on December 31 of the immediately preceding calendar year. The

definition of indebtedness for purposes of our debt cap is based on the par value of each applicable loan and

does not reflect the impact of consolidation of variable interest entities. Under this definition, our

indebtedness as of December 31, 2011 was $742.3 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 Web site and announced in a press release.

LEGISLATIVE AND REGULATORY DEVELOPMENTS

GSE Reform

Policymakers and others have focused significant attention in recent years on how to reform the nation’s housing

finance system, including what role, if any, the GSEs should play. The Dodd-Frank Wall Street Reform and

Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law in July 2010, calls for enactment of

meaningful structural reforms of Fannie Mae and Freddie Mac. The Dodd-Frank Act also required the Treasury

Secretary to submit a report to Congress with recommendations for ending the conservatorships of Fannie Mae

and Freddie Mac.

In February 2011, Treasury and HUD released their report to Congress on reforming America’s housing finance

market. The report provides that the Administration will work with FHFA to determine the best way to

responsibly reduce Fannie Mae’s and Freddie Mac’s role in the market and ultimately wind down both

institutions.

The report identifies a number of policy steps that could be used to wind down Fannie Mae and Freddie Mac,

reduce the government’s role in housing finance and help bring private capital back to the mortgage market.

These steps include (1) increasing guaranty fees, (2) gradually increasing the level of required down payments so

that any mortgages insured by Fannie Mae or Freddie Mac eventually have at least a 10% down payment,

(3) reducing conforming loan limits to those established in the 2008 Reform Act, (4) encouraging Fannie Mae

and Freddie Mac to pursue additional credit loss protection and (5) reducing Fannie Mae’s and Freddie Mac’s

portfolios, consistent with Treasury’s senior preferred stock purchase agreements with the companies.

In addition, the report outlines three potential options for a new long-term structure for the housing finance

system following the wind-down of Fannie Mae and Freddie Mac. The first option would privatize housing

finance almost entirely. The second option would add a government guaranty mechanism that could scale up

during times of crisis. The third option would involve the government offering catastrophic reinsurance behind

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private mortgage guarantors. Each of these options assumes the continued presence of programs operated by

FHA, the Department of Agriculture and the VA to assist targeted groups of borrowers. The report does not state

whether or how the existing infrastructure or human capital of Fannie Mae may be used in the establishment of

such a reformed system. The report emphasizes the importance of proceeding with a careful transition plan and

providing the necessary financial support to Fannie Mae and Freddie Mac during the transition period. A copy of

the report can be found on the Housing Finance Reform section of Treasury’s Web site, www.Treasury.gov. We

are providing Treasury’s Web site address solely for your information, and information appearing on Treasury’s

Web site is not incorporated into this annual report on Form 10-K.

On February 2, 2012, Treasury Secretary Geithner stated that the Administration intended to release new details

around approaches to housing finance reform, including winding down Fannie Mae and Freddie Mac, in the

spring of 2012 and to work with Congressional leaders to explore options for legislation, but that he does not

expect housing finance reform legislation to be enacted in 2012.

During 2011, Congress held hearings on the future status of Fannie Mae and Freddie Mac, and members of

Congress offered legislative proposals relating to the future status of the GSEs. We expect hearings on GSE

reform to continue in 2012 and additional legislation to be considered and proposals to be discussed, including

proposals that would result in a substantial change to our business structure or that involve Fannie Mae’s

liquidation or dissolution. Several bills have been introduced that would place the GSEs into receivership after a

period of time and either grant federal charters to new entities to engage in activities similar to those currently

engaged in by the GSEs or leave secondary mortgage market activities to entities in the private sector. For

example, legislation has been introduced in both the House of Representatives and the Senate that would require

FHFA to make a determination within two years of enactment regarding whether the GSEs were financially

viable and, if the GSEs were determined not to be financially viable, to place them into receivership. As drafted,

these bills may upon enactment impair our ability to issue securities in the capital markets and therefore our

ability to conduct our business, absent the federal government providing an explicit guarantee of our existing and

future liabilities.

In addition to bills that seek to resolve the status of the GSEs, numerous bills have been introduced and

considered that could constrain the current operations of the GSEs or alter the existing authority that FHFA or

Treasury has over the enterprises. For example, the Subcommittee on Capital Markets and Government

Sponsored Enterprises of the House Financial Services Committee has approved bills that would:

• suspend current compensation packages and apply a government pay scale for GSE employees;

• require the GSEs to increase guaranty fees;

• subject GSE loans to the risk retention standards in the Dodd-Frank Act;

• require a quicker reduction of GSE portfolios than required under the senior preferred stock purchase

agreement;

• require Treasury to pre-approve all GSE debt issuances;

• repeal the GSEs’ affordable housing goals;

• provide additional authority to FHFA’s Inspector General;

• prohibit FHFA from approving any new GSE products during conservatorship or receivership, with certain

exceptions;

• prevent Treasury from amending the senior preferred stock purchase agreement to reduce the current

dividend rate on our senior preferred stock;

• abolish the Affordable Housing Trust Fund that the GSEs are required to fund except when such

contributions have been temporarily suspended by FHFA;

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• require FHFA to identify mission critical assets of the GSEs and require the GSEs to dispose of non-mission

critical assets;

• cap the maximum aggregate amount of funds Treasury or any other agency or entity of the federal

government can provide to the GSEs subject to certain qualifications;

• grant FHFA the authority to revoke the enterprises’ charters following receivership under certain

circumstances; and

• subject the GSEs to the Freedom of Information Act.

Of these bills that passed at a subcommittee level, the only one that has passed the full committee is the bill that

would put GSE employees on a government pay scale. We expect additional legislation relating to the GSEs to

be introduced and considered by Congress in 2012. We cannot predict the prospects for the enactment, timing or

content of legislative proposals concerning the future status of the GSEs, their regulation or operations.

In sum, there continues to be uncertainty regarding the future of our company, including how long the company

will continue to exist in its current form, the extent of our role in the market, 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. See “Risk Factors” for a discussion of the risks to our business relating to the

uncertain future of our company. Also see “Risk Factors” for a discussion of how the uncertain future of our

company may adversely affect our ability to retain and recruit well-qualified employees, including senior

management.

Compensation

Legislation has been proposed in Congress that would alter the compensation programs for GSE employees. As

discussed in “GSE Reform,” in 2011 the House Financial Services Committee passed a bill that would place all

GSE employees on a pay scale similar to that provided for federal government employees. In addition, in 2012

the House and Senate passed separate versions of the STOCK Act to ban insider trading by members of Congress

and other government officials, which included a provision prohibiting senior executives at the GSEs from

receiving bonuses while the GSEs are in conservatorship. The two versions of the bill must now be reconciled

and passed by each chamber before they are sent to the President for signature.

If legislation is adopted that results in a significant reduction in compensation to GSE employees, it could cause a

substantial number of our most skilled and experienced employees to leave and further impair our ability to

retain and attract employees in a competitive marketplace, as we discuss in “Risk Factors—Our business and

results of operations may be materially adversely affected if we are unable to retain and hire qualified

employees.” Additional legislative proposals related to compensation for GSE employees may be considered by

Congress in 2012.

Financial Regulatory Reform Legislation: The Dodd-Frank Act

The Dodd-Frank Act is significantly changing the regulation of the financial services industry, including by its

creation of new standards related to regulatory oversight of systemically important financial companies,

derivatives transactions, asset-backed securitization, mortgage underwriting and consumer financial protection.

The Dodd-Frank Act will directly affect our business because new and additional regulatory oversight and

standards will apply to us. We may also be affected by provisions of the Dodd-Frank Act and implementing

regulations that impact the activities of our customers and counterparties in the financial services industry.

Extensive regulatory guidance is still needed to implement and clarify many of the provisions of the Dodd-Frank

Act and regulators have not completed the required administrative processes. It is therefore difficult to assess

fully the impact of this legislation on our business and industry at this time. We discuss the potential risks to our

business resulting from the Dodd-Frank Act in “Risk Factors.” Below we summarize some key provisions of the

legislation, as well as some rules that have been proposed by various government agencies to implement

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provisions of the Dodd-Frank Act. We are currently evaluating these proposed rules and how they may impact

our business and the housing finance industry.

Enhanced supervision and prudential standards. The Dodd-Frank Act established the Financial Stability

Oversight Council (the “FSOC”), chaired by the Secretary of the Treasury, to ensure that all financial companies

whose failure could pose a threat to the financial stability of the United States—not just banks—will be subject to

strong oversight. Under the Dodd-Frank Act, the FSOC is responsible for designating systemically important

nonbank financial companies, while the Federal Reserve is to establish stricter prudential standards that will

apply to certain bank holding companies and to systemically important nonbank financial companies. The

Federal Reserve must establish standards related to risk-based capital, leverage limits, liquidity, credit

concentrations, resolution plans, reporting credit exposures and other risk management measures. On

December 20, 2011, the Board of Governors of the Federal Reserve System issued proposed rules addressing a

number of these enhanced prudential standards. The Federal Reserve may also impose other standards related to

contingent capital, enhanced public disclosure, short-term debt limits and other requirements as appropriate.

The FSOC has issued two notices of proposed rulemaking, most recently on October 11, 2011, describing the

framework, process and criteria that will inform the FSOC’s designation of systemically important nonbank

financial companies. Under the proposed rule, the FSOC will make such a designation if it determines that

material financial distress at the nonbank financial company, or the nature, scope, size, scale, concentration,

interconnectedness, or mix of the activities of the company, could pose a threat to the financial stability of the

United States. FSOC action on the final designation criteria and process is expected this year. If we are

designated as a systemically important nonbank financial company, we may become subject to certain enhanced

prudential standards established by the Federal Reserve.

Depending on the scope and final form of these enhanced standards, and the extent to which they apply to our

customers and other counterparties, their adoption and application could increase our costs and may adversely

affect demand for our debt and Fannie Mae MBS.

Minimum Capital and Margin Requirements; Swap Transactions. The Dodd-Frank Act requires certain

institutions meeting the definition of “swap dealer” or “major swap participant” to register with the Commodity

Futures Trading Commission (the “CFTC”). The CFTC and SEC have issued a joint proposed rule that would,

among other things, establish the definition of “major swap participant.” If we are determined to be a major swap

participant, minimum capital and margin requirements would apply to our swap transactions, including

transactions that are not subject to clearing. On April 28, 2011, the CFTC proposed rules governing minimum

capital and margin requirements for swap dealers and major swap participants engaging in derivative trades that

are not submitted for clearing to a derivatives clearing organization (“uncleared trades”). On April 12, 2011, the

Federal Reserve Board, the Federal Deposit Insurance Corporation (“FDIC”), FHFA, the Farm Credit

Administration and the Office of the Comptroller of the Currency proposed rules under the Dodd-Frank Act

governing margin and capital requirements applicable to entities that are subject to their oversight. These

proposed rules would require that, for all uncleared trades, we collect from our counterparties and provide to our

counterparties collateral in excess of the amounts we have historically collected or provided, regardless of

whether we are deemed to be a major swap participant. In addition, even if we are not deemed to be a major swap

participant, the Dodd-Frank Act includes provisions that may require us to submit new swap transactions for

clearing to a derivatives clearing organization.

Ability to Repay. The Dodd-Frank Act requires creditors to determine that borrowers have a “reasonable ability

to repay” mortgage loans prior to making such loans. On April 19, 2011, the Federal Reserve Board issued a

proposed rule pursuant to the Dodd-Frank Act that, among others things, requires creditors to determine a

borrower’s “ability to repay” a mortgage loan under Regulation Z, which implements the Truth in Lending Act.

If a creditor fails to comply, a borrower may be able to offset amounts owed as part of a foreclosure or recoup

monetary damages. The proposed rule offers several options for complying with the ability to repay requirement,

including making loans that meet certain terms and characteristics (so-called “qualified mortgages”), which may

provide creditors with special protection from liability. As proposed, a loan is generally a qualified mortgage if,

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among other things, the borrower’s income and assets are verified, the loan term does not exceed 30 years, the

loan is fully amortizing with no negative amortization, interest-only or balloon features, and the loan is

underwritten at the maximum interest rate applicable in the first five years of the loan, taking into account all

mortgage-related obligations.

Risk Retention. The Dodd-Frank Act requires financial regulators to jointly prescribe regulations requiring

securitizers and/or originators to maintain a portion of the credit risk in assets transferred, sold or conveyed

through the issuance of asset-backed securities, with certain exceptions. On March 29, 2011, the Office of the

Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, the

U.S. Securities and Exchange Commission, FHFA and HUD issued a joint proposed rule implementing these risk

retention requirements. Under the proposed rule, securitizers would be required to retain at least 5% of the credit

risk with respect to the assets they securitize. The proposed rule offers several options for compliance by parties

with assets to securitize, one of which is to have either Fannie Mae or Freddie Mac securitize the assets. As long

as Fannie Mae or Freddie Mac (1) fully guarantees the assets, thereby taking on 100% of their credit risk, and

(2) is in conservatorship or receivership at the time the assets are securitized, no further retention of credit risk is

required. Certain mortgage loans meeting the definition of a “Qualified Residential Mortgage” are exempt from

the requirements of the rule. Only mortgage loans that are first-lien mortgages on primary residences with

loan-to-value ratios not exceeding 80% (75% for refinancings and 70% for cash-out refinancings) and that meet

certain other underwriting requirements, would meet the definition of “Qualified Residential Mortgage” under

the proposal.

Changes to Our Single-Family Guaranty Fee Pricing and Revenue

In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 which, among

other provisions, requires that we increase our single-family guaranty fees by at least 10 basis points and remit

this increase to Treasury, rather than retaining the incremental revenue. FHFA has announced that, effective

April 1, 2012, the guaranty fee on all single-family residential mortgages delivered to Fannie Mae and Freddie

Mac on or after that date for securitization will increase by 10 basis points. FHFA is analyzing whether

additional guaranty fee increases may be necessary to comply with the law.

Consistent with the recommendation in the Administration’s report on ending the conservatorships of Fannie

Mae and Freddie Mac and the February 21, 2012 letter from the Acting Director of FHFA to Congress, we expect

that our single-family guaranty fees will increase in the future. We expect our future guaranty fees will

incorporate private sector pricing considerations such as geographic pricing that contemplates differences in

foreclosure laws across the states, pricing indicative of higher required minimum capital levels, and more

significant pricing differentiation between higher-risk and lower-risk loans. These changes would be in addition

to increases required in the recently enacted law, although we do not know the timing, form or extent of all of

these changes.

Discontinuation of Our Retained Attorney Network

In October 2011, FHFA directed us to phase out the practice of requiring mortgage servicers to use our network

of retained attorneys to perform default- and foreclosure-related legal services for our loans. FHFA also directed

us to work with Freddie Mac, through FHFA’s Servicing Alignment Initiative, to develop and implement

consistent requirements, policies and processes for default- and foreclosure-related legal services. As set forth in

FHFA’s directive, we will conduct these activities over a transitional period and will seek to minimize disruption

to pending matters. During the transitional period, servicers will continue to be directly responsible for managing

the foreclosure process and monitoring network firm performance, in accordance with our current requirements

and contractual arrangements. Phasing out the use of our retained attorney network may make it more difficult

for us to oversee the performance of default- and foreclosure-related legal services for our loans, which may

adversely impact our efforts to reduce our credit losses.

For information on additional regulatory matters affecting us, refer to “Our Charter and Regulation of Our

Activities.”

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OUR CHARTER AND REGULATION OF OUR ACTIVITIES

Charter Act

We are a shareholder-owned corporation, originally established in 1938, organized and existing under the Federal

National Mortgage Association Charter Act, as amended, which we refer to as the Charter Act or our charter. The

Charter Act sets forth the activities that we are permitted to conduct, authorizes us to issue debt and equity

securities, and describes our general corporate powers. The Charter Act states that our purposes 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.

It is from these sections of the Charter Act that we derive our mission of providing liquidity, increasing stability

and promoting affordability in the residential mortgage market. In addition to the alignment of our overall

strategy with these purposes, all of our business activities must be permissible under the Charter Act. Our charter

authorizes us to: purchase, service, sell, lend on the security of, and otherwise deal in certain mortgage loans;

issue debt obligations and mortgage-related securities; and “do all things as are necessary or incidental to the

proper management of [our] affairs and the proper conduct of [our] business.”

Loan Standards

Mortgage loans we purchase or securitize must meet the following standards required by the Charter Act.

• Principal Balance Limitations. Our charter permits us to purchase and securitize mortgage loans secured

by either a single-family or multifamily property. Single-family conventional mortgage loans are subject to

maximum original principal balance limits, known as “conforming loan limits.” The conforming loan limits

are established each year based on the average prices of one-family residences.

The national conforming loan limit for mortgages that finance one-family residences is $417,000 in 2012, as

it was in 2011 and 2010, 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). Higher

loan limits also apply in high-cost areas (counties or county-equivalent areas) that are designated by FHFA

annually. Our charter sets permanent loan limits for high-cost areas up to 150% of the national loan limit

($625,500 for a one-family residence; higher for two- to four-family residences and in the four statutorilydesignated states and territories). A series of legislative acts temporarily increased our loan limits beginning

in early 2008 in high-cost areas to up to 175% of the national loan limit ($729,750 for a one-family

residence; higher for two- to four-family residences and in the four statutorily-designated states and

territories). This temporary increase, which is no longer in effect, applied to loans originated through

September 30, 2011.

No statutory limits apply to the maximum original principal balance of multifamily mortgage loans that we

purchase or securitize. In addition, the Charter Act imposes no maximum original principal balance limits

on loans we purchase or securitize that are insured by FHA or guaranteed by the VA.

• Loan-to-Value and Credit Enhancement Requirements. The Charter Act generally requires credit

enhancement on any single-family conventional mortgage loan that we purchase or securitize if it has a

loan-to-value ratio over 80% at the time of purchase. We also do not purchase or securitize second lien

single-family mortgage loans when the combined loan-to-value ratio exceeds 80%, unless the second lien

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mortgage loan has credit enhancement in accordance with the requirements of the Charter Act. The credit

enhancement required by our charter may take the form of one or more of the following: (1) insurance or a

guaranty by a qualified insurer of the over-80% portion of the unpaid principal balance of the mortgage;

(2) a seller’s agreement to repurchase or replace the mortgage in the event of default (for such period and

under such circumstances as we may require); or (3) retention by the seller of at least a 10% participation

interest in the mortgage. Regardless of loan-to-value 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.

Authority of U.S. Treasury to Purchase GSE Securities

Pursuant to our charter, at the discretion of the Secretary of the Treasury, Treasury may purchase our obligations

up to a maximum of $2.25 billion outstanding at any one time. Treasury temporarily received expanded

authority, which expired on December 31, 2009, to purchase our obligations and other securities in unlimited

amounts (up to the national debt limit) under the 2008 Reform Act. We describe Treasury’s investment in our

senior preferred stock and a common stock warrant pursuant to this expanded temporary authority under

“Conservatorship and Treasury Agreements—Treasury Agreements.”

Other Charter Act Provisions

The Charter Act has the following additional provisions.

• 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.

• Exemptions for Our Securities. The Charter Act generally provides that our securities are exempt under

the federal securities laws administered by the SEC. As a result, we are not required to file registration

statements with the SEC under the Securities Act of 1933 with respect to offerings of any of our securities.

Our non-equity securities are also exempt securities under the Securities Exchange Act of 1934 (the

“Exchange Act”). However, our equity securities are not treated as exempted securities for purposes of

Sections 12, 13, 14 or 16 of 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.

• Exemption from Specified Taxes. We are 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.

• Other Limitations and Requirements. 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. In addition, we may only purchase or securitize mortgages on properties located in

the United States and its territories.

Regulation and Oversight of Our Activities

As a federally chartered corporation, we are subject to government regulation and oversight. FHFA is an

independent agency of the federal government with general supervisory and regulatory authority over Fannie

Mae, Freddie Mac and the 12 Federal Home Loan Banks (“FHLBs”). FHFA was established in July 2008,

assuming the duties of our former safety and soundness regulator, the Office of Federal Housing Enterprise

Oversight (“OFHEO”), and our former mission regulator, HUD. HUD remains our regulator with respect to fair

lending matters. Our regulators also include the SEC and Treasury.

The GSE Act provides FHFA with safety and soundness authority that is comparable to and in some respects

broader than that of the federal banking agencies. Even if we were not in conservatorship, the GSE Act gives

FHFA the authority to raise capital levels above statutory minimum levels, regulate the size and content of our

portfolio and approve new mortgage products, among other things.

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FHFA is responsible for implementing the various provisions of the GSE Act. In general, we remain subject to

existing regulations, orders and determinations until new ones are issued or made.

Capital. The GSE Act provides FHFA with broad authority to increase the level of our required minimum capital

and to establish capital or reserve requirements for specific products and activities. FHFA also has broad authority

to establish risk-based capital requirements, to ensure that we operate in a safe and sound manner and maintain

sufficient capital and reserves. During the conservatorship, FHFA has suspended our capital classifications. We

continue to submit capital reports to FHFA during the conservatorship, and FHFA continues to monitor our capital

levels. We describe our capital requirements below under “Capital Adequacy Requirements.”

Portfolio. 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 published a final rule adopting, as the standard for our portfolio holdings, the portfolio limits

specified in the senior preferred stock purchase agreement described under “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.

New Products. The GSE Act requires us to obtain FHFA’s approval before initially offering any product,

subject to certain exceptions. The GSE Act also requires us to provide FHFA with written notice before

commencing any new activity. In July 2009, FHFA published an interim final rule implementing these provisions

of the GSE Act. Subsequently, the Acting Director of FHFA concluded that permitting us to offer new products

at this time is inconsistent with the goals of the conservatorship. He therefore instructed us not to submit requests

for approval of new products under the interim final rule. We cannot predict when or if FHFA will permit us to

submit new product requests under the rule.

Receivership. Under the GSE Act, FHFA must place us into receivership if it determines that our assets are less

than our obligations for 60 days, or we have not been paying our debts as they become due for 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.

In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other

reasons, including conditions that FHFA has already asserted existed at the time the then-Director of FHFA

placed us into conservatorship. 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; the

likelihood of losses that will deplete substantially all of our capital; or by consent.

In June 2011, FHFA issued a final rule establishing a framework for conservatorship and receivership operations

for the GSEs. The rule is part of FHFA’s implementation of the powers provided by the 2008 Reform Act, and

does not seek to anticipate or predict future conservatorships or receiverships. The final rule, which became

effective on July 20, 2011, establishes procedures for conservatorship and receivership, and priorities of claims

for contract parties and other claimants. For example, the final rule clarifies that:

• the powers of the conservator or receiver include continuing our mission and ensuring that our operations

foster liquid, efficient, competitive and resilient national housing finance markets;

• the conservator or receiver may disaffirm or repudiate any contract or lease to which we are a party for up to

18 months following the appointment of a conservator or receiver;

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• we are prohibited from making capital distributions while in conservatorship unless authorized by the

Director of FHFA; and

• claims by current or former shareholders (including securities litigation claims) would receive the lowest

priority in a receivership, behind: (1) administrative expenses of the receiver (or an immediately preceding

conservator), (2) our other general or senior liabilities, and (3) obligations subordinated to those of general

creditors.

The rule also provides that FHFA, as conservator, will not pay securities litigation claims against us during

conservatorship, unless the Director of FHFA determines it is in the interest of the conservatorship. An action,

which was brought by the Ohio Public Employees Retirement System and the State Teachers Retirement System

of Ohio, is currently pending in the U.S. District Court for the District of Columbia against FHFA and Acting

Director DeMarco challenging the rule’s provisions regarding nonpayment of securities litigation claims.

Prudential Management and Operational Standards. As required by the GSE Act, in June 2011, FHFA issued a

proposed rule establishing prudential standards relating to the management and operations of Fannie Mae,

Freddie Mac and the FHLBs in the following ten areas: (1) internal controls and information systems;

(2) independence and adequacy of internal audit systems; (3) management of market risk exposure;

(4) management of market risk—measurement systems, risk limits, stress testing, and monitoring and reporting;

(5) adequacy and maintenance of liquidity and reserves; (6) management of asset and investment portfolio

growth; (7) investments and acquisitions of assets; (8) overall risk management processes; (9) management of

credit and counterparty risk; and (10) maintenance of adequate records. These standards are proposed to be

adopted as guidelines, which the Director of FHFA may modify, revoke or add to at any time by order. The

proposed rule provides that FHFA may take specified remedial actions if a regulated entity fails to meet one or

more of the standards, such as requiring the entity to submit a corrective plan or increasing its capital

requirements.

Affordable Housing Goals and Duty to Serve. We discuss our affordable housing goals and our duty to serve

underserved markets below under “Housing Goals and Duty to Serve Underserved Markets.”

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 total new business acquisitions, and to

allocate such amount to certain government funds. The GSE Act also allows FHFA to suspend allocations on a

temporary basis. In November 2008, FHFA advised us that it was suspending our allocations until further notice.

Executive Compensation. The Charter Act requires that compensation of our executives be reasonable and

comparable with the compensation of executives performing similar duties in similar businesses, except that a

significant portion of potential compensation must be based on our performance. Further, the GSE Act directs

FHFA to prohibit us from providing unreasonable or non-comparable compensation to our executive officers.

FHFA may at any time review the reasonableness and comparability of an executive officer’s compensation and

may require us to withhold any payment to the officer during such review. FHFA is also authorized to prohibit or

limit certain golden parachute and indemnification payments to directors, officers and certain other parties.

FHFA has issued rules relating to golden parachute payments, setting forth factors to be considered by the

Director of FHFA in acting upon his authority to limit such payments.

Fair Lending. The GSE Act requires the Secretary of HUD to assure that the GSEs meet their fair lending

obligations. Among other things, HUD is required to periodically review and comment on the underwriting and

appraisal guidelines of each company to ensure consistency with the Fair Housing Act. HUD is currently

conducting such a review.

Capital Adequacy Requirements

The GSE Act establishes capital adequacy requirements. The statutory capital framework incorporates two

different quantitative assessments of capital—a minimum capital requirement and a risk-based capital

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requirement. The minimum capital requirement is ratio-based, while the risk-based capital requirement is based

on simulated stress test performance. The GSE Act requires us to maintain sufficient capital to meet both of these

requirements in order to be classified as “adequately capitalized.” However, during the conservatorship, FHFA

has suspended capital classification of us and announced that our existing statutory and FHFA-directed

regulatory capital requirements will not be binding. FHFA has advised us that, because we are under

conservatorship, we will not be subject to corrective action requirements that would ordinarily result from our

receiving a capital classification of “undercapitalized.”

Minimum Capital Requirement. Under the GSE Act, we must maintain an amount of core capital that equals or

exceeds our minimum capital requirement. The GSE Act defines core capital as the sum of the stated value of

outstanding common stock (common stock less treasury stock), the stated value of outstanding non-cumulative

perpetual preferred stock, paid-in capital, and retained earnings, as determined in accordance with GAAP. Our

minimum capital requirement is generally equal to the sum of 2.50% of on-balance sheet assets and 0.45% of

off-balance sheet obligations. For purposes of minimum capital, FHFA has directed us to continue reporting

loans backing Fannie Mae MBS held by third parties based on 0.45% of the unpaid principal balance regardless

of whether these loans have been consolidated pursuant to accounting rules. FHFA retains authority under the

GSE Act to raise the minimum capital requirement for any of our assets or activities.

Risk-Based Capital Requirement. The GSE Act requires FHFA to establish risk-based capital requirements for

Fannie Mae and Freddie Mac, to ensure that we operate in a safe and sound manner. Existing risk-based capital

regulation ties our capital requirements to the risk in our book of business, as measured by a stress test model.

The stress test simulates our financial performance over a ten-year period of severe economic conditions

characterized by both extreme interest rate movements and high mortgage default rates. FHFA has stated that it

does not intend to publish our risk-based capital level during the conservatorship and has discontinued stress test

simulations under the existing rule. We continue to submit detailed profiles of our books of business to FHFA to

support FHFA’s monitoring of our business activity and their research into future risk-based capital rules.

Critical Capital Requirement. The GSE Act also establishes a critical capital requirement, which is the amount

of core capital below which we would be classified as “critically undercapitalized.” Under the GSE Act, such

classification is a discretionary ground for appointing a conservator or receiver. Our critical capital requirement

is generally equal to the sum of 1.25% of on-balance sheet assets and 0.25% of off-balance sheet obligations.

FHFA has directed us, for purposes of critical capital, to continue reporting loans backing Fannie Mae MBS held

by third parties based on 0.25% of the unpaid principal balance, notwithstanding our consolidation of

substantially all of the loans backing these securities. FHFA has stated that it does not intend to publish our

critical capital level during the conservatorship.

Bank Capital and Other Supervisory Standards. In the wake of the financial crisis and as a result of the DoddFrank Act and of actions by international bank regulators, the capital regime for the banking industry is

undergoing major changes. The Basel Committee on Banking Supervision finalized a set of revisions (known as

Basel III) to the international capital requirements in December 2010. Basel III generally narrowed the definition

of capital that can be used to meet risk-based standards and raises the amount of capital that must be held. On

December 20, 2011, the Federal Reserve stated that it is working with the other U.S. banking regulators to

implement the Basel III capital reforms in the United States.

The Dodd-Frank Act requires stronger regulation of major bank holding companies and nonbank financial

companies designated for Federal Reserve supervision by the FSOC. The prudential standards for covered

companies must include enhanced risk-based capital and leverage requirements, enhanced liquidity requirements,

enhanced risk management and risk committee requirements, a requirement to submit a resolution plan, singlecounterparty credit limits, stress tests, and a debt-to-equity limit for covered companies that the FSOC has

determined pose a grave threat to financial stability.

Although the GSEs are not currently subject to bank capital requirements, any revised framework for GSE capital

standards may be based on bank requirements, particularly if the GSEs are deemed to be systemically important

financial companies subject to Federal Reserve oversight.

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Housing Goals and Duty to Serve Underserved Markets

Since 1993, we have been subject to housing goals. The structure of our housing goals changed in 2010 as a

result of the 2008 Reform Act. The 2008 Reform Act also created a new duty for us to serve three underserved

markets, which we discuss below.

Housing Goals

FHFA established the following single-family home purchase and refinance housing goal benchmarks for 2011

and 2010. A home purchase mortgage may be counted toward more than one home purchase benchmark.

• Low-Income Families Home Purchase Benchmark: At least 27% of our acquisitions of single-family

owner-occupied mortgage loans financing home purchases must be affordable to low-income families

(defined as families with income no higher than 80% of area median income).

• Very Low-Income Families Home Purchase Benchmark: At least 8% of our acquisitions of single-family

owner-occupied mortgage loans financing home purchases must be affordable to very low-income families

(defined as families with income no higher than 50% of area median income).

• Low-Income Areas Home Purchase Benchmarks: At least 24% of our acquisitions of single-family owneroccupied mortgage loans financing home purchases must be for families in low-income census tracts, for

moderate-income families (defined as families with income no higher than 100% of area median income) in

designated disaster areas or for moderate-income families in minority census tracts. In addition, at least 13%

of our acquisitions of single-family owner-occupied purchase money mortgage loans must be for families in

low-income census tracts or for moderate-income families in minority census tracts.

• Low-Income Families Refinancing Benchmark: At least 21% of our acquisitions of single-family owneroccupied refinance mortgage loans must be affordable to low-income families, which may include

qualifying permanent modifications of mortgages under HAMP completed during the year.

If we do not meet these benchmarks, we may still meet our goals. Our single-family housing goals performance

will be measured against these benchmarks and against goals-qualifying originations in the primary mortgage

market. We will be in compliance with the housing goals if we meet either the benchmarks or market share

measures.

FHFA also established a multifamily goal and subgoal. For each of 2011 and 2010, our multifamily mortgage

acquisitions must finance at least 177,750 units affordable to low-income families, and at least 42,750 units

affordable to very low-income families. There is no market-based alternative measurement for the multifamily

goals.

Under FHFA’s rule establishing our housing goals, which was finalized in September 2010, FHFA made

significant changes to prior housing goals regulations regarding the types of products that count towards the

housing goals. Private-label mortgage-related securities, second liens and single-family government loans do not

count towards the housing goals. In addition, only permanent modifications of mortgages under HAMP

completed during the year count towards the housing goals; trial modifications will not be counted. Moreover,

these modifications count only towards the single-family low-income families refinance goal, not any of the

home purchase goals.

In adopting the rule establishing our housing goals, FHFA indicated “FHFA does not intend for [Fannie Mae] to

undertake uneconomic or high-risk activities in support of the [housing] goals. However, the fact that [Fannie Mae

is] in conservatorship should not be a justification for withdrawing support from these market segments.” If our

efforts to meet our goals prove to be insufficient, FHFA determines whether the goals were feasible. If FHFA finds

that our goals were feasible, we may become subject to a housing plan that could require us to take additional steps

that could have an adverse effect on our results of operations and financial condition. The housing plan must

describe the actions we would take to meet the goal in the next calendar year and be approved by FHFA. The

potential penalties for failure to comply with housing plan requirements include a cease-and-desist order and civil

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money penalties. See “Risk Factors” for a description of how we may be unable to meet our housing goals and how

actions we may take to meet these goals and other regulatory requirements could adversely affect our business,

results of operations and financial condition.

The following table presents our performance against our single-family housing benchmarks and multifamily

housing goals for 2011 and 2010, as well as our performance against market share measures for 2010. Our 2011

performance results have not yet been validated by FHFA.

Housing Goals Performance

2011 2010

Result(1)

Benchmark(2) ResultBenchmarkSingle-Family

Market Level

Single-family housing goals:(3)

Low-income families home purchases ........................ 25.77% 27% 25.13% 27% 27.2%

Very low-income families home purchases .................... 7.56 8 7.24 8 8.1

Low-income areas home purchases .......................... 22.32 24 24.05 24 24.0

Low-income and high-minority areas home purchases ........... 11.60 13 12.37 13 12.1

Low-income families refinancing ............................ 23.05 21 20.90 21 20.2

Result(1) Goal Result Goal

(in units)

Multifamily housing goals:

Affordable to families with incomes no higher than 80% of area median

income ....................................................... 301,224 177,750 214,997 177,750

Affordable to families with incomes no higher than 50% of area median

income ....................................................... 84,244 42,750 53,908 42,750

(1) Our 2011 results have not been validated by FHFA, and after validation they may differ from the results reported above.

(2) Even if our results do not meet the 2011 benchmarks, we may still meet our goals. Our single-family housing goals

performance is measured not only against these benchmarks, but also against the share of goals-qualifying originations in

the primary mortgage market. We will be in compliance with the housing goals if we meet either the benchmarks or

market share measures. The amount of goals-qualifying originations in the market during 2011 will not be available until

the release of data reported by primary market originators under the Home Mortgage Disclosure Act in the fall of 2012.

(3) Our single-family results and benchmarks are expressed as a percentage of the total number of eligible mortgages

acquired during the period.

We believe we met our single-family low-income refinance benchmark for 2011, as well as our 2011 multifamily

goals. As discussed above, we can meet our single-family goals either by meeting an established benchmark or

by meeting a market share measure of goals-qualifying originations in the primary mortgage market. In

consultation with FHFA, we are currently analyzing our performance against our goals. We will file our

assessment of our 2011 housing goals performance with FHFA in mid-March.

To determine whether we ultimately met our 2011 single-family housing goals where our performance falls

below benchmark levels, we and FHFA will have to compare our performance with that of goals-qualifying

originations in the primary mortgage market after the release of data reported under the Home Mortgage

Disclosure Act (“HMDA”). This release will be made in the fall of 2012. At that time it will be determined

whether we met any additional goals based on the HMDA market data.

For 2010, FHFA has determined that we met our single-family low-income areas home purchase goals and our

single-family refinance goal, as well as our 2010 multifamily goals. FHFA determined that we did not meet our

single-family low-income home purchase goal or our single-family very low-income home purchase goal. Although

FHFA determined that we did not meet these two goals and that their achievement was feasible, FHFA is not

requiring us to submit a housing plan. FHFA stated that a housing plan is not required because of the significant

changes to the housing goals structure for 2010 and Fannie Mae’s continued operation under conservatorship.

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Duty to Serve

The 2008 Reform Act created the duty to serve underserved markets in order for us and Freddie Mac to “provide

leadership to the market in developing loan products and flexible underwriting guidelines to facilitate a

secondary market for very low-, low-, and moderate-income families” with respect to three underserved markets:

manufactured housing, affordable housing preservation, and rural areas.

The duty to serve is a new oversight responsibility for FHFA. The Director of FHFA is required to establish by

regulation a method for evaluating and rating the performance by us and Freddie Mac of the duty to serve

underserved markets. In June 2010, FHFA published its proposed rule to implement this duty. A final rule has

not been issued.

Under the proposed rule, we would be required to submit an underserved markets plan at least 90 days before the

plan’s effective date of January 1st of a particular year establishing benchmarks and objectives against which

FHFA would evaluate and rate our performance. The plan term is two years. We will likely need to submit a plan

as soon as practicable after the publication of the final rule that will be effective for the first plan period.

The 2008 Reform Act requires FHFA to separately evaluate the following four assessment factors:

• The loan product assessment factor requires evaluation of our “development of loan products, more flexible

underwriting guidelines, and other innovative approaches to providing financing to each” underserved

market.

• The outreach assessment factor requires evaluation of “the extent of outreach to qualified loan sellers and

other market participants.” We are expected to engage market participants and pursue relationships with

qualified sellers that serve each underserved market.

• The loan purchase assessment factor requires FHFA to consider the volume of loans acquired in each

underserved market relative to the market opportunities available to us. The 2008 Reform Act prohibits the

establishment of specific quantitative targets by FHFA. However, in its evaluation FHFA could consider the

volume of loans acquired in past years.

• The investment and grants assessment factor requires evaluation of the amount of investment and grants in

projects that assist in meeting the needs of underserved markets.

Under the proposed rule, FHFA would give the loan purchase and outreach assessment factors significant weight.

Because we are in conservatorship, the investment and grants assessment factor would receive little or no weight.

In addition, FHFA would consider the loan product assessment factor, even though we are currently prohibited

from entering into new lines of business and developing new products. The proposed rule states that acquisitions

and activities pursuant to the duty to serve should be profitable, even if less profitable than other activities.

FHFA would evaluate our performance on each assessment factor annually, and assign a rating of “satisfactory”

or “unsatisfactory” to each factor in each underserved market. The evaluation would be based on whether we

have substantially met our benchmarks and objectives as outlined in our underserved markets plan. FHFA would

also consider the impact of overall market conditions and other factors outside our control that could impact our

ability to meet our benchmarks and objectives. Based on the assessment factor findings, FHFA would assign a

rating of “in compliance” or “noncompliance” with the duty to serve each underserved market.

With some exceptions, the counting rules and other requirements would be similar to those established for the

housing goals. For the loan purchase assessment factor, FHFA proposes to measure performance in terms of units

rather than mortgages or unpaid principal balance. All single-family loans we acquire must meet the standards in

the Interagency Statement on Subprime Mortgage Lending and the Interagency Guidance on Nontraditional

Mortgage Product Risks. We are expected to review the operations of loan sellers to ensure compliance with

these standards.

If we fail to comply with, or there is a substantial probability that we will not comply with, our duty to serve a

particular underserved market in a given year, FHFA would determine whether the benchmarks and objectives in

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our underserved markets plan are or were feasible. If we fail to meet our duty to serve, and FHFA determines that

the benchmarks and objectives in our underserved markets plan are or were feasible, then, in the Director’s

discretion, we may be required to submit a housing plan. Under the proposed rule, the housing plan must describe

the activities that we will take to comply with the duty to serve a particular underserved market for the next

calendar year, or improvements and changes in operations that we will make during the remainder of the current

year.

Under the proposed rule, we would be required to provide quarterly and annual reports on our performance and

progress towards meeting our duty to serve.

See “Risk Factors” for a description of how changes we may make in our business strategies in order to meet our

housing goals and duty to serve requirement may increase our credit losses and adversely affect our results of

operations.

MAKING HOME AFFORDABLE PROGRAM

The Obama Administration’s Making Home Affordable Program, which was introduced in February 2009, is

intended to provide assistance to homeowners and prevent foreclosures. Working with our conservator, we have

devoted significant effort and resources to help distressed homeowners through initiatives that support the Making

Home Affordable Program. Below we describe key aspects of the Making Home Affordable Program and our role

in the program. For additional information about our activities under the program, please see “Business—Making

Home Affordable Program” in our Annual Report on Form 10-K for the year ended December 31, 2009. For

information about the program’s financial impact on us, please see “MD&A—Consolidated Results of

Operations—Financial Impact of the Making Home Affordable Program on Fannie Mae.”

The Making Home Affordable Program is comprised primarily of a Home Affordable Refinance Program

(“HARP”), under which we acquire or guarantee loans that are refinancings of mortgage loans we own or

guarantee, and Freddie Mac does the same, and a Home Affordable Modification Program (“HAMP”), which

provides for the modification of mortgage loans owned or guaranteed by us or Freddie Mac, as well as other

mortgage loans. These two programs were designed to expand the number of borrowers who can refinance or

modify their mortgages to achieve a monthly payment that is more affordable now and into the future or to obtain

a more stable loan product, such as a fixed-rate mortgage loan in lieu of an adjustable-rate mortgage loan. We

participate in the Making Home Affordable Program, and our sellers and servicers offer HARP and HAMP to

Fannie Mae borrowers. We also serve as Treasury’s program administrator for HAMP and other initiatives under

the Making Home Affordable Program.

Changes to the Home Affordable Refinance Program

In the fourth quarter of 2011, FHFA, Fannie Mae, and Freddie Mac announced changes to HARP aimed at

making refinancing under the program easier and potentially less expensive for qualifying homeowners and

encouraging lenders to participate in the program. While HARP previously limited eligibility to borrowers with

mortgage loans for their primary residence that had LTV ratios greater than 80% but no greater than 125%, the

new HARP guidelines remove that ceiling when a borrower refinances into a new fixed-rate mortgage. Other

changes to HARP include:

• eliminating risk-based fees for borrowers who refinance into loans with terms up to 20 years and lowering

fees for other borrowers to no more than 75 basis points;

• eliminating the need for a new property appraisal in many cases;

• extending the ending date for HARP from June 2012 to December 2013; and

• reducing the extent to which lenders will be liable for violations of representations and warranties in

connection with refinancings under HARP.

At this time, we do not know how many eligible borrowers are likely to refinance under the program and,

therefore, how many HARP loans we will acquire.

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Our Role as Program Administrator

Treasury has engaged us to serve as program administrator for HAMP and other initiatives under the Making

Home Affordable Program. Our principal activities as program administrator include the following:

• Implementing the guidelines and policies of the Treasury program;

• Preparing the requisite forms, tools and training to facilitate efficient loan modifications by servicers;

• Creating, making available and managing the process for servicers to report modification activity and

program performance;

• Calculating incentive compensation consistent with program guidelines;

• Acting as record-keeper for executed loan modifications and program administration;

• Coordinating with Treasury and other parties toward achievement of the program’s goals, including

assisting with development and implementation of updates to the program and initiatives expanding the

program’s reach; and

• Performing other tasks as directed by Treasury from time to time.

In our capacity as program administrator for the program, we support over 100 servicers that have signed up to

participate with respect to non-agency loans under the program. To help servicers implement the program, we

have provided information and resources through a Web site dedicated to servicers under the program. We have

also communicated information about the program to servicers and helped servicers implement and integrate the

program with new systems and processes. As program administrator, we have taken the following steps to help

servicers implement the program:

• dedicated Fannie Mae personnel to work closely with participating servicers;

• established a servicer support call center;

• conducted ongoing conference calls with the leadership of participating servicers;

• provided training through live Web seminars and recorded tutorials; and

• made checklists and job aids available on the program Web site.

On January 27, 2012, the Administration announced an extension of HAMP for an additional year through

December 31, 2013. The Acting Director of FHFA has directed us to continue modifying loans under HAMP

through that date, and our role as program administrator will be extended accordingly.

OUR CUSTOMERS

Our principal customers are lenders that operate within the primary mortgage market where mortgage loans are

originated and funds are loaned to borrowers. Our customers include mortgage banking companies, savings and

loan associations, savings banks, commercial banks, credit unions, community banks, insurance companies, and

state and local housing finance agencies. Lenders originating mortgages in the primary mortgage market often sell

them in the secondary mortgage market in the form of whole loans or in the form of mortgage-related securities.

During 2011, approximately 1,000 lenders delivered single-family mortgage loans to us, either for securitization

or for purchase. We acquire a significant portion of our single-family mortgage loans from several large

mortgage lenders. During 2011, our top five lender customers, in the aggregate, accounted for approximately

60% of our single-family business volume, while our top five lender customers accounted for approximately 62%

of our single-family business volume in 2010. Three lender customers, Wells Fargo Bank, N.A., JPMorgan

Chase Bank, NA and Bank of America, N.A., including their respective affiliates, in the aggregate accounted for

more than 48% of our single-family business volume for 2011. In this report, we may refer to Bank of America,

N.A. and its affiliates, collectively and individually, as “Bank of America.”

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Bank of America, which accounted for approximately 12% of our single-family business volume in 2011, is the

seller/servicer with whom we have the most repurchase requests outstanding. In the fourth quarter of 2011, Bank

of America slowed the pace of its repurchases. As a result, the already high volume of our outstanding

repurchase requests with Bank of America increased substantially. At this time, we do not know what impact

these issues will ultimately have on our future business with Bank of America. We discuss these developments in

“MD&A—Risk Management—Institutional Counterparty Credit Risk Management—Mortgage Seller/

Servicers.”

Due to ongoing consolidation within the mortgage industry, as well as the number of mortgage lenders that have

gone out of business since 2006, we, as well as our competitors, will obtain business from a decreasing number

of large mortgage lenders. We will seek to provide liquidity to a broader, more diverse set of mortgage lenders.

However, to the extent we become more reliant on a smaller number of lender customers, our negotiating

leverage with these customers could decrease. In addition, many of our lender customers are experiencing

financial and liquidity problems, which may affect the volume of business they are able to generate and their

ability to honor our repurchase requests. Several of our large lender customers have exited from correspondent or

broker lending, focusing instead on lending through their retail channels, which may also affect the volume of

business they are able to generate. We discuss the risks that customer concentration poses to our business in

“Risk Factors.”

COMPETITION

Historically, our competitors have included Freddie Mac, FHA, Ginnie Mae (which primarily guarantees

securities backed by FHA-insured loans), the twelve FHLBs, financial institutions, securities dealers, insurance

companies, pension funds, investment funds and other investors. During 2008, almost all of our competitors,

other than Freddie Mac, FHA, Ginnie Mae and the FHLBs, dramatically reduced or ceased their activities in the

residential mortgage finance business. We remained the largest single issuer of mortgage-related securities in the

secondary market in 2011. During 2011, our primary competitors for the issuance of mortgage-related securities

were Ginnie Mae and Freddie Mac. We currently estimate that our single-family market share was 41% in 2011,

compared with 36% in 2010. These amounts represent our single-family mortgage acquisitions for each year,

excluding delinquent loans we purchased from our MBS trusts, as a percentage of the single-family first-lien

mortgages we currently estimate were originated in the United States that year. Because our estimate of mortgage

originations in prior periods is subject to change as additional data become available, these market share

estimates may change in the future, perhaps materially.

We compete to acquire mortgage assets in the secondary market both for securitization into Fannie Mae MBS

and, to a significantly lesser extent, for our investment portfolio. We also compete for the issuance of mortgagerelated securities to investors. Competition in these areas is affected by many factors, including the amount of

residential mortgage loans offered for sale in the secondary market by loan originators and other market

participants, the nature of the residential mortgage loans offered for sale (for example, whether the loans

represent refinancings), the current demand for mortgage assets from mortgage investors, the interest rate risk

investors are willing to assume and the yields they will require as a result, and the credit risk and prices

associated with available mortgage investments.

Competition to acquire mortgage assets is significantly affected by pricing and eligibility standards. We compete

with Freddie Mac and, especially for loans with higher LTV ratios, with FHA. FHA is also able to acquire loans

with higher original principal balances than we are permitted to acquire, as a result of the September 30, 2011

expiration of a temporary increase in our loan limits. We expect our guaranty fees may increase in coming years,

which would likely affect our competitive environment. See “Our Charter and Regulation of Our Activities–Loan

Standards” for more information about our loan limits, and “Legislative and Regulatory Developments—Changes to

Our Single-Family Guaranty Fee Pricing and Revenue,” for a discussion of anticipated pricing increases.

We also compete for low-cost debt funding with institutions that hold mortgage portfolios, including Freddie

Mac and the FHLBs.

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Although we do not know the structure that long-term GSE reform will ultimately take, we expect that, if our

company continues, we will face more competition in the future. Please see “Legislative and Regulatory

Developments—GSE Reform” for discussions of GSE reform, recent legislative reform of the financial services

industry that is likely to affect our business and the role of private capital in the mortgage markets.

EMPLOYEES

As of January 31, 2012, we employed approximately 7,000 personnel, including full-time and part-time

employees, term employees and employees on leave.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We make available free of charge through our Web site 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 Web site

address is www.fanniemae.com. Materials that we file with the SEC are also available from the SEC’s Web site,

www.sec.gov. You may also request copies of any filing from us, at no cost, by calling the Fannie Mae FixedIncome Securities Helpline at (800) 237-8627 or (202) 752-7115 or by writing to Fannie Mae, Attention: FixedIncome Securities, 3900 Wisconsin Avenue, NW, Area 2H-3S, Washington, DC 20016.

All references in this report to our Web site addresses or the Web site address of the SEC are provided solely for

your information. Information appearing on our Web site or on the SEC’s Web site is not incorporated into this

annual report on Form 10-K.

FORWARD-LOOKING STATEMENTS

This report includes statements that constitute forward-looking statements within the meaning of Section 21E of

the Exchange Act. In addition, our senior management may from time to time make forward-looking statements

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,” “may,” “prospects,” or similar words.

Among the forward-looking statements in this report are statements relating to:

• Our expectation that housing will start to recover if the employment market continues to improve;

• Our anticipation of an approximately 1.1% decline in single-family mortgage debt outstanding in 2012;

• Our expectation that the unemployment rate will remain relatively flat in 2012;

• Our expectation that, while the strength of improving vacancy levels and rental rates will vary by

metropolitan area, on a national basis the multifamily sector should continue to see steady demand in 2012;

• Our expectation that rental demand for multifamily housing will continue to outstrip supply, thereby

maintaining stable vacancy levels and healthy rent growth, given job growth slowly improving, and, more

importantly, the lack of new apartment supply becoming available over the next 12 to 18 months;

• Our expectation that, as a result, the outlook remains steady for the multifamily sector at the national level

over the coming year;

• Our expectation that we will increasingly focus on building a new infrastructure for the secondary mortgage

market and on actions that will gradually decrease our presence in the marketplace while simplifying and

shrinking our operations;

• Our expectation that we will experience high levels of period-to-period volatility in our results because our

derivatives are recorded at fair value in our financial statements while some of the instruments they hedge

are not recorded at fair value in our financial statements;

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• Our expectation, based on their performance so far, that loans in our new single-family book of business

will perform well over their lifetime;

• Our expectation that the serious delinquency rates for single-family loans acquired in recent years will be

higher after the loans have aged, but not as high as the December 31, 2011 serious delinquency rates of

loans in our legacy book of business;

• Our expectations regarding whether loans we acquired in specific years, individually or aggregated by

ranges of years, will be profitable over their lifetime, by which we mean that we expect our fee income on

these loans to exceed our credit losses and administrative costs for them;

• Our belief that credit losses on loans we have acquired since 2009 would exceed guaranty fee revenue if

home prices declined nationally by approximately 10% from their December 2011 levels over the next five

years, based on our home price index;

• Our expectations regarding the credit profile of loans we acquire in the future, and the factors that will

influence their credit profile;

• Our estimate that, while single-family loans that we acquired from 2005 through 2008 will give rise to

additional credit losses that we will realize when the loans are charged off (upon foreclosure or our

acceptance of a short sale or deed-in-lieu of foreclosure), we have reserved for the substantial majority of

the remaining losses on these loans;

• Our expectation that our loss reserves will remain significantly elevated relative to historical levels for an

extended period because (1) we expect future defaults on loans in our legacy book of business and the

resulting charge-offs will occur over a period of years and (2) a significant portion of our reserves represents

concessions granted to borrowers upon modification of their loans and will remain in our reserves until the

loans are fully paid or default;

• Our expectation that it will take years before our REO inventory approaches pre-2008 levels;

• Our estimate that we will realize as credit losses over two-thirds of the fair value losses on loans purchased

out of unconsolidated MBS trusts that are reflected in our consolidated balance sheets, and eventually

recover the remaining nearly one-third, either through net interest income for loans that cure or through

foreclosed property income for loans where the sale of the collateral exceeds our recorded investment in the

loan;

• Our belief that successful modifications will ultimately reduce our credit losses over the long term from

what they otherwise would have been if we had taken the loans to foreclosure;

• Our belief that foreclosure delays resulting from changes in the foreclosure environment will continue to

negatively impact our foreclosure timelines, credit-related expenses and single-family serious delinquency

rates, and will delay the recovery of the housing market;

• Our expectation that serious delinquency rates will continue to be affected in the future by home price

changes, changes in other macroeconomic conditions, the length of the foreclosure process, the volume of

loan modifications and the extent to which borrowers with modified loans continue to make timely

payments;

• Our belief that continued federal government support of our business and the financial markets, as well as

our status as a GSE, are essential to maintaining our access to debt funding;

• Our expectation that changes or perceived changes in the government’s support could materially and

adversely affect our ability to refinance our debt as it becomes due, which could have a material adverse

impact on our liquidity, financial condition, results of operations and ability to continue as a going concern;

• Our expectation that weakness in the housing and mortgage markets will continue in 2012;

• Our expectation that the high level of delinquent mortgage loans will ultimately result in high levels of

foreclosures, which is likely to add to the excess housing inventory;

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• Our expectation that home sales are unlikely to rise until the unemployment rate improves further;

• Our expectation that single-family default and severity rates, as well as the level of single-family

foreclosures, will remain high in 2012;

• Our expectation that, despite signs of multifamily sector improvement at the national level, our multifamily

charge-offs in 2012 will remain generally commensurate with 2011 levels as certain local markets and

properties continue to exhibit weak fundamentals;

• Our expectations that changes to HARP announced in October 2011 will result in our acquiring more

refinancings in 2012 than we would have acquired in the absence of the changes, but that we will acquire

fewer refinancings overall in 2012 than in 2011 because a high number of mortgages have already

refinanced to low rates in recent years;

• Our expectation that our loan acquisitions overall for 2012 will be lower than in 2011;

• Our belief that our loan acquisitions could be negatively affected by the decrease in the fourth quarter of

2011in the maximum size loan we may acquire in specified high-cost areas;

• Our expectation that our future revenues will be negatively impacted to the extent our acquisitions decline;

• Our estimation that total originations in the U.S. single-family mortgage market in 2012 will decrease from

2011 levels by approximately 23%, from an estimated $1.4 trillion to an estimated $1.1 trillion, and that the

amount of originations in the U.S. single-family mortgage market that are refinancings will decline from

approximately $896 billion to approximately $568 billion;

• Our expectation that home prices on a national basis will decline further before stabilizing in 2013;

• Our expectation of a peak-to-trough home price decline on a national basis ranging from 23% to 30%, with

the occurrence of an additional adverse economic event needed to reach the high end of the range;

• Our expectations regarding regional variations in home price declines and stabilization;

• Our expectation that our credit-related expenses will continue to be high in 2012 but that, overall, our creditrelated expenses will be lower in 2012 than in 2011;

• Our expectation that our credit losses in 2012 will remain high;

• Our expectation that we will not earn profits in excess of our annual dividend obligation to Treasury for the

indefinite future;

• Our expectation that the Acting Director of FHFA will submit a request to Treasury on our behalf to

eliminate our net worth deficit as of December 31, 2011;

• Our expectation that we will request additional draws under the senior preferred stock purchase agreement

in future periods, which will further increase the dividends we owe to Treasury on the senior preferred

stock;

• Our expectation that over time our dividend obligation to Treasury will constitute an increasing portion of

our future draws under the senior preferred stock purchase agreement;

• Our expectation that uncertainty regarding the future of our company will continue;

• Our expectation that we will continue to purchase loans from MBS trusts as they become four or more

consecutive monthly payments delinquent subject to market conditions, economic benefit, servicer capacity,

and other factors, including the limit on mortgage assets that we may own pursuant to the senior preferred

stock purchase agreement;

• Our expectations that revenues derived from our mortgage asset portfolio will decrease over time as the

maximum allowable amount of mortgage assets we may own decreases each year to 90% of the amount we

were permitted to own the previous year under our senior preferred stock purchase agreement with

Treasury;

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• Our expectation that Congressional hearings on GSE reform will continue in 2012 and additional legislation

will be considered and proposals will be discussed, including proposals that would result in a substantial

change to our business structure or that involve Fannie Mae’s liquidation or dissolution;

• Our belief that, as drafted, bills introduced in Congress that would require FHFA to make a determination

within two years of enactment regarding whether the GSEs were financially viable and, if the GSEs were

determined to be not financially viable, to place them into receivership may upon enactment impair our

ability to issue securities in the capital markets and therefore our ability to conduct our business, absent the

federal government providing an explicit guarantee of our existing and future liabilities;

• Our expectation that the Dodd-Frank Act will directly affect our business because new and additional

regulatory oversight and standards will apply to us, and that we may also be affected by provisions of the

Dodd-Frank Act and implementing regulations that impact the activities of our customers and counterparties

in the financial services industry;

• Our expectation that, if we are designated as a systemically important nonbank financial company, we may

become subject to certain enhanced prudential standards established by the Federal Reserve;

• Our expectation that the adoption and application or enhanced supervision and prudential standards under

the Dodd-Frank Act could increase our costs and may adversely affect demand for our debt and MBS;

• Our expectation that our single-family guaranty fees may change in the future in addition to increases

required in the Temporary Payroll Tax Cut Continuation Act of 2011;

• Our expectation that our future guaranty fees will incorporate private sector pricing considerations such as

geographic pricing that contemplates differences in foreclosure laws across the states, pricing indicative of

higher required minimum capital levels, and more significant pricing differentiation between higher-risk and

lower-risk loans;

• Our expectations that increases in our single-family guaranty fees will affect our competitive environment;

• Our expectations regarding the impact of FHFA’s directive that we phase out the practice of requiring

mortgage servicers to use our network of retained attorneys to perform default- and foreclosure-related legal

services for our loans;

• Our expectations regarding a transitional period as we discontinue our retained attorney network;

• Our expectation that we will seek to provide liquidity to a broader, more diversified set of mortgage lenders;

• Our expectation that, although we do not know the structure that long-term GSE reform will ultimately take,

if our company continues we will face more competition in the future;

• Our expectation that we will continue to need funding from Treasury, and that FHFA will request additional

funds from Treasury on our behalf, to avoid triggering FHFA’s obligation to place us into receivership;

• Our expectations regarding compensation we will pay our executives in the future;

• Our expectation that deterioration in the credit performance of mortgage loans that we own or that back

Fannie Mae MBS will continue and result in additional credit-related expenses;

• Our expectation that we will experience additional other-than-temporary impairment write-downs of our

investments in private-label mortgage-related securities;

• Our expectation that our acquisitions of Alt-A mortgage loans (which are limited to refinancings of existing

Fannie Mae loans) will continue to be minimal in future periods and the percentage of the book of business

attributable to Alt-A will continue to decrease over time;

• Our expectation that Refi Plus loans will perform better than the loans they replace because Refi Plus loans

reduce the borrowers’ monthly payments or otherwise should provide more sustainability than the

borrowers’ old loans (for example, by having a fixed rate instead of an adjustable rate);

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• Our expectation that our mortgage portfolio will continue to decrease due to the restrictions on the amount

of mortgage assets we may own under the terms of our senior preferred stock purchase agreement with

Treasury;

• Our expectation that the current market premium portion of our current estimate of the fair value of our

book of business will not impact future Treasury draws, which is based on our intention generally not to

have other parties assume the credit risk inherent in our book of business;

• Our expectation that, although our funding needs may vary from quarter to quarter depending on market

conditions, our debt funding needs will decline in future periods as we reduce the size of our mortgage

portfolio in compliance with the requirement of the senior preferred stock purchase agreement;

• Our intention to repay our short-term and long-term debt obligations as they become due primarily through

proceeds from the issuance of additional debt securities;

• Our intention to use funds we receive from Treasury under the senior preferred stock purchase agreement to

pay our debt obligations and to pay dividends on the senior preferred stock;

• Our expectations regarding our credit ratings and their impact on us as set forth in “MD&A—Liquidity and

Capital Management—Liquidity Management—Credit Ratings”;

• Our expectation that the volume of our workouts and foreclosure alternatives will remain high throughout

2012;

• Our belief that the performance of our workouts will be highly dependent on economic factors, such as

unemployment rates, household wealth and income, and home prices;

• Our expectation that the amount of our outstanding repurchase requests to seller/servicers will remain high,

and that we may be unable to recover on all outstanding loan repurchase obligations resulting from seller/

servicers’ breaches of contractual obligations;

• Our expectation that the change in our agreement with Bank of America will not be material to our business

or results of operations;

• Our expectations regarding recoveries from our lenders under risk sharing arrangements, and the possibility

that we may require a lender to pledge collateral to secure its recourse obligations;

• Our beliefs regarding whether our financial guarantor counterparties will be able to fully meet their

obligations to us in the future;

• Our expectation that we will be required to submit certain interest rate swaps for clearing to a derivatives

clearing organization in the future and that our institutional credit risk exposure to the Chicago Mercantile

Exchange or other comparable exchanges or trading facilities and their members is likely to increase in the

future; and

• Our expectations regarding amounts we expect to receive from Treasury for our work as program

administrator, as well as amounts we expect to receive to be passed through to third-party vendors engaged

by us in connection with HAMP and other initiatives under the Making Home Affordable Program.

Forward-looking statements reflect our management’s expectations 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, as well as our business plans. They are not guarantees of future performance. By their

nature, forward-looking statements are subject to risks and uncertainties. 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 the forward-looking statements contained in this report, including, but

not limited to, the following: the uncertainty of our future; legislative and regulatory changes affecting us;

challenges we face in retaining and hiring qualified employees; the deteriorated credit performance of many

loans in our guaranty book of business; the conservatorship and its effect on our business; the investment by

Treasury and its effect on our business; adverse effects from activities we undertake to support the mortgage

market and help borrowers; limitations on our ability to access the debt capital markets; further disruptions in the

housing and credit markets; defaults by one or more institutional counterparties; our reliance on mortgage

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servicers; deficiencies in servicer and law firm foreclosure processes and the consequences of those deficiencies;

guidance by the Financial Accounting Standards Board (“FASB”); operational control weaknesses; our reliance

on models; the level and volatility of interest rates and credit spreads; changes in the structure and regulation of

the financial services industry; and those factors described in this report, including those factors described in

“Risk Factors.”

Readers are cautioned to place forward-looking statements in this report or that we make from time to time into

proper context by carefully considering the factors discussed in “Risk Factors.” These forward-looking

statements are representative only as of the date they are made, and we undertake no obligation to update any

forward-looking statement as a result of new information, future events or otherwise, except as required under

the federal securities laws.

Item 1A. Risk Factors

This section identifies specific risks that should be considered carefully in evaluating our business. The risks

described in “Risks Relating to Our Business” are specific to us and our business, while those described in “Risks

Relating to Our Industry” relate to the industry in which we operate. Refer to “MD&A—Risk Management” for a

more detailed description of the primary risks to our business and how we seek to manage those risks.

The risks we face could materially adversely affect our business, results of operations, financial condition,

liquidity and net worth, and could cause our actual results to differ materially from our past results or the results

contemplated by forward-looking statements contained in this report. In addition to the risks we discuss below,

we face risks and uncertainties not currently known to us or that we currently believe to be immaterial.

RISKS RELATING TO OUR BUSINESS

The future of our company is uncertain.

There is significant uncertainty regarding the future of our company, including how long the company will

continue to exist in its current form, the extent of our role in the market, 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.

In February 2011, Treasury and HUD released a report to Congress on ending the conservatorships of the GSEs

and reforming America’s housing finance market. The report provides that the Administration will work with

FHFA to determine the best way to responsibly reduce Fannie Mae’s and Freddie Mac’s role in the market and

ultimately wind down both institutions. The report also addresses three options for a reformed housing finance

system. The report does not state whether or how the existing infrastructure or human capital of Fannie Mae may

be used in the establishment of such a reformed system. The report emphasizes the importance of proceeding

with a careful transition plan and providing the necessary financial support to Fannie Mae and Freddie Mac

during the transition period. On February 2, 2012, Treasury Secretary Geithner stated that the Administration

intended to release new details around approaches to housing finance reform, including winding down Fannie

Mae and Freddie Mac, in the spring of 2012 and to work with Congressional leaders to explore options for

legislation, but that he does not expect housing finance reform legislation to be enacted in 2012. In his February

2012 letter to Congress, the Acting Director of FHFA wrote that, with “no near-term resolution [of Fannie Mae

and Freddie Mac’s conservatorships] in sight, it is time to update and extend the goals and directions of the

conservatorships.” He provided a strategic plan for the next phase of Fannie Mae and Freddie Mac’s

conservatorships that included, among its three strategic goals for the next phase of the conservatorships,

gradually contracting Fannie Mae and Freddie Mac’s dominant presence in the marketplace while simplifying

and shrinking their operations.

The Subcommittee on Capital Markets and Government Sponsored Enterprises of the House Financial Services

Committee has approved numerous bills that could constrain the current operations of the GSEs or alter the

existing authority that FHFA or Treasury has over the enterprises. In addition, several bills have been introduced

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in the Senate and House of Representatives that would place the GSEs into receivership after a period of time and

either grant federal charters to new entities to engage in activities similar to those currently engaged in by the

GSEs or leave secondary mortgage market activities to entities in the private sector. We expect that Congress

will continue to hold hearings and consider legislation in 2012 on the future status of Fannie Mae and Freddie

Mac, including proposals that would result in a substantial change to our business structure, our operations, or

that involve Fannie Mae’s liquidation or dissolution. We cannot predict the prospects for the enactment, timing

or content of legislative proposals regarding the future status of the GSEs. See “MD&A—Legislative and

Regulatory Developments—GSE Reform” for more information about the Treasury report and Congressional

proposals regarding reform of the GSEs.

We expect FHFA to request additional funds from Treasury on our behalf to ensure we maintain a positive

net worth and avoid mandatory receivership. The dividends we must pay or that accrue on Treasury’s

investments are substantial and are expected to increase, and we likely will not be able to fund them through

net income.

When Treasury provides the additional $4.6 billion FHFA is requesting on our behalf to cure our net worth

deficit as of December 31, 2011, the aggregate liquidation preference on the senior preferred stock will be

$117.1 billion, and will require an annualized dividend of $11.7 billion. The prospective $11.7 billion annual

dividend obligation exceeds our reported annual net income for every year since our inception. Our ability to

maintain a positive net worth has been and continues to be adversely affected by market conditions. To the extent

we have a negative net worth as of the end of future fiscal quarters, we expect that FHFA will request on our

behalf additional funds from Treasury under the senior preferred stock purchase agreement. Further funds from

Treasury under the senior preferred stock purchase agreement will increase the liquidation preference of and the

dividends we owe on our senior preferred stock and, therefore, we will need additional funds from Treasury in

order to meet our dividend obligation to Treasury.

In addition, we were scheduled to begin paying a quarterly commitment fee to Treasury under the senior

preferred stock purchase agreement beginning on March 31, 2011. Although Treasury has waived the quarterly

commitment fee for each quarter of 2011 and the first quarter of 2012 due to the continued fragility of the

mortgage market and Treasury’s belief that the imposition of the quarterly commitment fee would not generate

increased compensation for taxpayers, Treasury indicated that it will reevaluate the situation during the next

calendar quarter to determine whether the quarterly commitment fee should then be set. The aggregate

liquidation preference and dividend obligations relating to the preferred stock also will increase by the amount of

any required dividend on the senior preferred stock that we fail to pay in cash and by the amount of any required

quarterly commitment fee on the senior preferred stock that we fail to pay. The substantial dividend obligations

and potentially substantial quarterly commitment fees on the senior preferred stock, coupled with our effective

inability to pay down draws under the senior preferred stock purchase agreement, will continue to strain our

financial resources and have an adverse impact on our results of operations, financial condition, liquidity and net

worth, both in the short and long term.

Our regulator is authorized or required to place us into receivership under specified conditions, which would

result in the liquidation of our assets. Amounts recovered from the liquidation will likely be insufficient to

repay the liquidation preference of any series of our preferred stock or to provide any proceeds to common

shareholders.

FHFA has an obligation to place us into receivership if the Director of FHFA makes a written determination that

our assets are less than our obligations for a period of 60 days after the filing deadline for our Form 10-K or

Form 10-Q with the SEC. Because of the credit-related expenses we expect to incur on our legacy book of

business and our dividend obligation to Treasury, we will continue to need funding from Treasury to avoid

triggering FHFA’s obligation. Although Treasury committed to providing us funds in accordance with the terms

of the senior preferred stock purchase agreement, Treasury may not provide these funds to us within the required

60 days if it has exhausted its borrowing authority or if there is a government shutdown. In addition, we could be

put into receivership at the discretion of the Director of FHFA at any time for other reasons, including conditions

that FHFA has already asserted existed at the time the former Director of FHFA placed us into conservatorship.

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A receivership would terminate the conservatorship. In addition to the powers FHFA has as our conservator, the

appointment of FHFA as our receiver would terminate all rights and claims that our shareholders and creditors

may have against our assets or under our charter arising from their status as shareholders or creditors, except for

their right to payment, resolution or other satisfaction of their claims as permitted under the GSE Act. Unlike a

conservatorship, the purpose of which is to conserve our assets and return us to a sound and solvent condition,

the purpose of a receivership is to liquidate our assets and resolve claims against us.

To the extent we are placed into receivership and do not or cannot fulfill our guaranty to the holders of our

Fannie Mae MBS, the MBS holders could become unsecured creditors of ours with respect to claims made under

our guaranty.

In the event of a liquidation of our assets, only after payment of the administrative expenses of the receiver and

the immediately preceding conservator, the secured and unsecured claims against the company (including

repaying all outstanding debt obligations), and the liquidation preference of the senior preferred stock, would any

liquidation proceeds be available to repay the liquidation preference on any other series of preferred stock.

Finally, only after the liquidation preference on all series of preferred stock is repaid would any liquidation

proceeds be available for distribution to the holders of our common stock. It is unlikely that there would be

sufficient proceeds to repay the liquidation preference of any series of our preferred stock or to make any

distribution to the holders of our common stock.

Our business and results of operations may be materially adversely affected if we are unable to retain and hire

qualified employees.

Our business processes are highly dependent on the talents and efforts of our employees. The uncertainty of our

future, limitations on employee compensation, our inability to offer equity compensation, the heightened scrutiny

of our actions by Congress and regulators and the working environment created thereby, and our conservatorship

have had and are likely to continue to have an adverse effect on our ability to retain and recruit well-qualified

employees. We have already had significant departures by various members of executive management since

shortly before we entered into conservatorship in September 2008, including two Chief Executive Officers and

three Chief Financial Officers. In addition, in January 2012, our current Chief Executive Officer announced that

he will step down from his position when our Board of Directors names a successor. Further turnover in key

management positions and challenges in integrating new management could harm our ability to manage our

business effectively and ultimately adversely affect our financial performance.

A particular threat to employee retention and hiring is the possibility of new legislation limiting executive or

employee compensation. The Financial Services Committee of the House of Representatives approved a bill that

would put our employees on a federal government pay scale, and both the House and the Senate approved

legislation that would prohibit senior executives from receiving bonuses during conservatorship. If this or similar

legislation were to become law, our employees could experience a sudden and sharp decrease in compensation.

The Acting Director of FHFA stated on November 15, 2011 that this “would certainly risk a substantial exodus

of talent, the best leaving first in many instances. [Fannie Mae and Freddie Mac] likely would suffer a rapidly

growing vacancy list and replacements with lesser skills and no experience in their specific jobs. A significant

increase in safety and soundness risks and in costly operational failures would, in my opinion, be highly likely.”

The Acting Director observed, “Should the risks I fear materialize, FHFA might well be forced to limit [Fannie

Mae and Freddie Mac’s] business activities. Some of the business [Fannie Mae and Freddie Mac] would be

unable to undertake might simply not occur, with potential disruption in housing markets and the economy.” We

face competition from within the financial services industry and from businesses outside of the financial services

industry for qualified employees. Additionally, an improving economy is likely to put additional pressures on

turnover, as attractive opportunities become available to our employees. Our competitors for talent are able to

provide market-based compensation and to link employees’ pay to performance. The constraints on our

compensation could adversely affect our ability to attract qualified candidates. While we engage in succession

planning for our senior management and other critical positions and have been able to fill a number of important

positions internally, our inability to offer market-based compensation would jeopardize our ability to fill vacant

positions internally.

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If we are unable to retain, promote and attract employees with the necessary skills and talent, we would face

increased risks for operational failures. Our ability to conduct our business and our results of operations would

likely be materially adversely affected.

Since 2008, we have experienced substantial deterioration in the credit performance of mortgage loans that we

own or that back our guaranteed Fannie Mae MBS, and we expect this deterioration to continue and result in

additional credit-related expenses.

Deterioration in the credit performance of mortgage loans we own or that back our guaranteed Fannie Mae MBS

has increased our risk of incurring credit losses and credit-related expenses as a result of borrowers failing to

make required payments of principal and interest on their mortgage loans.

Conditions in the housing market continue to contribute to deterioration in the credit performance of our legacy

book of business, resulting in elevated serious delinquency rates and negatively impacting default rates and

average loan loss severity on the mortgage loans we hold or that back our guaranteed Fannie Mae MBS.

Increases in delinquencies, default rates and loss severity cause us to experience higher credit-related expenses.

The credit performance of our single-family book of business has also been negatively affected by the extent and

duration of the decline in home prices and high unemployment. Home price declines, adverse market conditions

and continuing high levels of unemployment also have affected and may continue to affect the credit

performance of and future results for our broader book of business. Further, home price declines have resulted in

a large number of borrowers with “negative equity” in their properties (that is, they owe more on their mortgage

loans than their houses are worth), which increases the likelihood that either these borrowers will strategically

default on their mortgage loans even if they have the ability to continue to pay the loans or that distressed

homeowners will sell their homes in a “short sale” for significantly less than the unpaid amount of the loans. We

present detailed information about the risk characteristics of our single-family conventional guaranty book of

business in “MD&A—Risk Management—Credit Risk Management—Mortgage Credit Risk Management,” and

we present detailed information on our 2011 credit-related expenses, credit losses and results of operations in

“MD&A—Consolidated Results of Operations.”

Adverse credit performance trends may increase, particularly if we experience further national and regional

declines in home prices, weak economic conditions and high unemployment.

We expect further losses and write-downs relating to our investment securities.

We have experienced significant fair value losses and other-than-temporary impairment write-downs relating to

our investment securities and recorded significant other-than-temporary impairment write-downs of some of our

available-for-sale securities. A substantial portion of these fair value losses and write-downs related to our

investments in private-label mortgage-related securities backed by Alt-A and subprime mortgage loans and, in

the case of fair value losses, our investments in commercial mortgage-backed securities (“CMBS”) due to the

decline in home prices and the weak economy. We expect to experience additional other-than-temporary

impairment write-downs of our investments in private-label mortgage-related securities. See “MD&A—

Consolidated Balance Sheet Analysis— Investments in Mortgage-Related Securities—Investments in PrivateLabel Mortgage-Related Securities” for detailed information on our investments in private-label mortgagerelated securities backed by Alt-A and subprime mortgage loans.

If the market for securities we hold in our investment portfolio is not liquid, we must use a greater amount of

management judgment to value these securities. Later valuations and any price we ultimately would realize if we

were to sell these securities could be materially lower than the estimated fair value at which we carry them on our

balance sheet.

Any of the above factors could require us to record additional write-downs in the value of our investment

portfolio, which could have a material adverse effect on our business, results of operations, financial condition,

liquidity and net worth.

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Our business activities are significantly affected by the conservatorship and the senior preferred stock

purchase agreement.

We are currently under the control of our conservator, FHFA, and we do not know when or how the

conservatorship will be terminated. As conservator, FHFA can direct us to enter into contracts or enter into

contracts on our behalf, and generally has the power to transfer or sell any of our assets or liabilities. In addition,

our directors do not have any 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 in making or approving a decision unless specifically directed to do so by the

conservator.

The conservator has determined that while we are in conservatorship, we will be limited to continuing our

existing core business activities and taking actions necessary to advance the goals of the conservatorship. In view

of the conservatorship and the reasons stated for its establishment, it is likely that our business model and

strategic objectives will continue to change, possibly significantly, including in pursuit of our public mission and

other non-financial objectives. Our conservator recently announced that one of the strategic goals for the next

phase of our and Freddie Mac’s conservatorships is to gradually contract our dominant presence in the

marketplace while simplifying and shrinking our operations. Among other things, we are likely to experience

significant changes in the size, growth and characteristics of our guarantor and investment activities, and we

could further change our operational objectives, including our pricing strategy in our core mortgage guaranty

business. Accordingly, our strategic and operational focus going forward may not be consistent with the

investment objectives of our investors. In addition, we may be directed to engage in activities that are

operationally difficult, costly to implement or unprofitable.

The senior preferred stock purchase agreement with Treasury includes a number of covenants that significantly

restrict our business activities. We cannot, without the prior written consent of Treasury: pay dividends (except

on the senior preferred stock); sell, issue, purchase or redeem Fannie Mae equity securities; sell, transfer, lease or

otherwise dispose of assets in specified situations; engage in transactions with affiliates other than on arm’slength terms or in the ordinary course of business; issue subordinated debt; or incur indebtedness that would

result in our aggregate indebtedness exceeding 120% of the amount of mortgage assets we are allowed to own. In

deciding whether to consent to any request for approval it receives from us under the agreement, Treasury has the

right to withhold its consent for any reason and is not required by the agreement to consider any particular

factors, including whether or not management believes that the transaction would benefit the company. For

example, in November 2009, Treasury withheld its consent under these covenants to our proposed transfer of

interests in low-income housing tax credit (“LIHTC”) investments, eliminating our ability to transfer the assets

for value and resulting in our recognizing a $5 billion loss in that quarter. Pursuant to the senior preferred stock

purchase agreement, the maximum allowable amount of mortgage assets we were permitted to own on

December 31, 2011 was $729 billion. (Our mortgage assets were approximately $708.4 billion as of that date.)

On December 31, 2012, and each December 31 thereafter, our mortgage assets may not exceed 90% of the

maximum allowable amount that we were permitted to own as of December 31 of the immediately preceding

calendar year. The maximum allowable amount is reduced annually until it reaches $250 billion. This limit on

the amount of mortgage assets we are permitted to hold could constrain the amount of delinquent loans we

purchase from single-family MBS trusts, which could increase our costs.

We discuss the powers of the conservator, the terms of the senior preferred stock purchase agreement, and their

impact on us and shareholders in “Business—Conservatorship and Treasury Agreements.” These factors may

adversely affect our business, results of operations, financial condition, liquidity and net worth.

The conservatorship and investment by Treasury have had, and will continue to have, a material adverse

effect on our common and preferred shareholders.

We do not know when or how the conservatorship will be terminated. Moreover, even if the conservatorship is

terminated, we remain subject to the terms of the senior preferred stock purchase agreement, senior preferred

stock and warrant, which can only be cancelled or modified by mutual consent of Treasury and the conservator.

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The conservatorship and investment by Treasury have had, and will continue to have, material adverse effects on

our common and preferred shareholders, including the following:

No voting rights during conservatorship. The rights and powers of our shareholders are suspended during the

conservatorship. The conservatorship has no specified termination date. During the conservatorship, our common

shareholders do not have the ability to elect directors or to vote on other matters unless the conservator delegates

this authority to them.

Dividends to common and preferred shareholders, other than to Treasury, have been eliminated. Under the

terms of the senior preferred stock purchase agreement, dividends may not be paid to common or preferred

shareholders (other than on the senior preferred stock) without the consent of Treasury, regardless of whether we

are in conservatorship.

Liquidation preference of senior preferred stock will increase, likely substantially. The senior preferred stock

ranks prior to our common stock and all other series of our preferred stock, as well as any capital stock we issue

in the future, as to both dividends and distributions upon liquidation. Accordingly, if we are liquidated, the senior

preferred stock is entitled to its then-current liquidation preference, plus any accrued but unpaid dividends,

before any distribution is made to the holders of our common stock or other preferred stock. The liquidation

preference on the senior preferred stock will increase to $117.1 billion when Treasury provides the additional

$4.6 billion FHFA is requesting on our behalf. The liquidation preference could increase substantially as we draw

on Treasury’s funding commitment, if we do not pay dividends owed on the senior preferred stock or if we do

not pay the quarterly commitment fee under the senior preferred stock purchase agreement. If we are liquidated,

it is unlikely that there would be sufficient funds remaining after payment of amounts to our creditors and to

Treasury as holder of the senior preferred stock to make any distribution to holders of our common stock and

other preferred stock.

Exercise of the Treasury warrant would substantially dilute investment of current shareholders. If Treasury

exercises its 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, the ownership interest in the company of our then existing

common shareholders will be substantially diluted, and we would thereafter have a controlling shareholder.

No longer managed for the benefit of shareholders. Because we are in conservatorship, we are no longer

managed with a strategy to maximize shareholder returns.

For additional description of the restrictions on us and the risks to our shareholders, see “Business—

Conservatorship and Treasury Agreements.”

We may undertake efforts that adversely affect our business, results of operations, financial condition,

liquidity and net worth.

In conservatorship our business is no longer managed with a strategy to maximize shareholder returns while

fulfilling our mission. Our conservator has directed us to focus primarily on minimizing our credit losses from

delinquent mortgages and providing assistance to struggling homeowners to help them remain in their homes.

More recently, our conservator has announced two additional strategic goals for the next phase of our

conservatorship—building a new infrastructure for the secondary mortgage market and gradually contracting our

dominant presence in the marketplace while simplifying and shrinking our operations. In pursuit of these or other

goals prescribed by our conservator, we may take a variety of actions that could adversely affect our economic

returns, possibly significantly, such as encouraging increased competition in our markets; reducing the risk-based

fees we charge for certain types of loans; modifying loans to defer principal, lower the interest rate or extend the

maturity; or engaging in principal reduction. We are already taking some of these actions. These activities may

have short- and long-term adverse effects on our business, results of operations, financial condition, liquidity and

net worth.

Other agencies of the U.S. government or Congress also may ask us to undertake significant efforts to support the

housing and mortgage markets, as well as struggling homeowners. They may also ask us to take actions in

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support of other goals. For example, as we discuss in “Business—Legislative and Regulatory Developments—

Changes to Our Single-Family Guaranty Fee Pricing” in December 2011, Congress enacted the Temporary

Payroll Tax Cut Continuation Act of 2011 which, among other provisions, requires that we increase our singlefamily guaranty fees by at least 10 basis points and remit this increase to Treasury to fund extensions of

employment tax reductions and unemployment benefits, rather than retaining this incremental revenue. We

anticipate that implementing this fee increase and remitting the increase to Treasury will involve operational

burden and could increase our operational risk.

We may be unable to meet our housing goals and duty to serve requirements, and actions we take to meet

those requirements may adversely affect our business, results of operations, financial condition, liquidity and

net worth.

To meet our housing goals obligations, a portion of the mortgage loans we acquire must be for low- and very-low

income families, families in low-income census tracts and moderate-income families in minority census tracts or

designated disaster areas. In addition, when a final duty-to-serve rule is issued, we will have a duty to serve three

underserved markets: manufactured housing, affordable housing preservation and rural areas. We may take

actions to meet these obligations that could increase our credit losses and credit-related expenses. If we fail to

meet our housing goals in a given year and FHFA finds that they were feasible, or if we fail to comply with our

duty to serve requirements, we may become subject to a housing plan that could require us to take additional

steps that could have an adverse effect on our financial condition. The housing plan must describe the actions we

would take to meet the goals and/or duty to serve in the next calendar year and be approved by FHFA. With

respect to our housing goals, the potential penalties for failure to comply with housing plan requirements are a

cease-and-desist order and civil money penalties.

Mortgage market conditions during 2011 negatively affected our ability to meet our single-family goals. These

conditions included reduced levels of single-family borrowing by low-income purchasers, an increase in the

share of mortgages made to moderate-income borrowers due to low interest rates, continuing high

unemployment, strengthened underwriting and eligibility standards, increased standards of private mortgage

insurers and the increased role of FHA in acquiring goals-qualifying mortgage loans. Some or all of these

conditions, which may continue in 2012, likely contributed to our failure to meet two of our single-family home

purchase goals for 2010. We cannot predict the impact that market conditions during 2012 will have on our

ability to meet our 2012 housing goals and duty to serve requirements.

For more information about our housing goals and duty to serve requirements, as well as our 2011 and 2010

housing goals performance, please see “Business—Our Charter and Regulation of Our Activities—Housing

Goals and Duty to Serve Underserved Markets.”

Limitations on our ability to access the debt capital markets could have a material adverse effect on our ability

to fund our operations and generate net interest income.

Our ability to fund our business depends primarily on our ongoing access to the debt capital markets. Our level of

net interest income depends on how much lower our cost of funds is compared to what we earn on our mortgage

assets. Market concerns about matters such as the extent of government support for our business, the future of

our business (including future profitability, future structure, regulatory actions and GSE status) and the

creditworthiness of the U.S. government could cause a severe negative effect on our access to the unsecured debt

markets, particularly for long-term debt. We believe that our ability in 2010 and 2011 to issue debt of varying

maturities at attractive pricing resulted from federal government support of us and the financial markets. As a

result, we believe that our status as a GSE and continued federal government support is essential to maintaining

our access to debt funding. Changes or perceived changes in the government’s support of us or the markets could

have a material adverse effect on our ability to fund our operations. As recently as September 2011, the Federal

Reserve announced that, to help support conditions in mortgage markets, it will reinvest principal payments from

its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

However, there can be no assurance that the government will continue to support us or the markets, or that our

current level of access to debt funding will continue. In addition, due to our reliance on the U.S. government’s

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support, our access to debt funding also could be materially adversely affected by a change or perceived change

in the creditworthiness of the U.S. government.

Future changes or disruptions in the financial markets could significantly change the amount, mix and cost of

funds we obtain, as well as our liquidity position. If we are unable to issue both short- and long-term debt

securities at attractive rates and in amounts sufficient to operate our business and meet our obligations, it likely

would interfere with the operation of our business and have a material adverse effect on our liquidity, results of

operations, financial condition and net worth.

Our liquidity contingency plans may be difficult or impossible to execute during a liquidity crisis.

We believe that our liquidity contingency plans may be difficult or impossible to execute during a liquidity crisis.

If we cannot access the unsecured debt markets, our ability to repay maturing indebtedness and fund our

operations could be eliminated or significantly impaired. In this event, our alternative sources of liquidity—

consisting of our cash and other investments portfolio and the unencumbered mortgage assets in our mortgage

portfolio—may not be sufficient to meet our liquidity needs.

We believe that the amount of mortgage-related assets that we could successfully sell or borrow against in the

event of a liquidity crisis or significant market disruption is substantially lower than the amount of mortgagerelated assets we hold. Due to the large size of our portfolio of mortgage assets, current market conditions and

the significant amount of distressed assets in our mortgage portfolio, there would likely be insufficient market

demand for large amounts of these assets over a prolonged period of time, which would limit our ability to

borrow against or sell these assets.

To the extent that we are able to obtain funding by pledging or selling mortgage-related securities as collateral,

we anticipate that a discount would be applied that would reduce the value assigned to those securities.

Depending on market conditions at the time, this discount could result in proceeds significantly lower than the

current market value of these securities and could thereby reduce the amount of financing we obtain. In addition,

our primary source of collateral is Fannie Mae MBS that we own. In the event of a liquidity crisis in which the

future of our company is uncertain, counterparties may be unwilling to accept Fannie Mae MBS as collateral. As

a result, we may not be able to sell or borrow against these securities in sufficient amounts to meet our liquidity

needs.

A decrease in the credit ratings on our senior unsecured debt could have an adverse effect on our ability to

issue debt on reasonable terms and trigger additional collateral requirements, and would likely do so if such a

decrease were not based on a similar action on the credit ratings of the U.S. government.

Credit ratings on our senior unsecured debt, as well as the credit ratings of the U.S. government, are primary factors

that could affect our borrowing costs and our access to the debt capital markets. Credit ratings on our debt are

subject to revision or withdrawal at any time by the rating agencies. Actions by governmental entities impacting the

support we receive from Treasury could adversely affect the credit ratings on our senior unsecured debt.

On August 5, 2011, Standard & Poor’s Ratings Services (“S&P”) lowered the long-term sovereign credit rating

on the U.S. to “AA+.” As a result of this action, and because we directly rely on the U.S. government for capital

support, on August 8, 2011, S&P lowered our long-term senior debt rating to “AA+” with a negative outlook.

Previously, our long-term senior debt had been rated by S&P as “AAA” and had been on CreditWatch Negative.

S&P affirmed our short-term senior debt rating of “A-1+” and removed it from CreditWatch Negative. In

assigning a negative outlook on the U.S. government’s long-term debt rating, S&P noted that it may lower the

U.S. government’s long-term debt rating to “AA” within the next two years if it sees less reduction in spending

than agreed to or higher interest rates, or if new fiscal pressures during the period result in a higher general

government debt trajectory than S&P currently assumes. If S&P further lowers the U.S. government’s long-term

debt rating, we expect that S&P would lower our long-term debt rating correspondingly.

After the U.S. government’s statutory debt limit was raised on August 2, 2011, Moody’s Investors Service

(“Moody’s”) confirmed the U.S. government’s rating and our long-term debt ratings. Moody’s also removed the

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designation that these ratings were under review for possible downgrade. Moody’s revised the outlook for both

the U.S. government’s rating and our long-term debt ratings to negative. In assigning the negative outlook to the

U.S. government’s rating, Moody’s indicated there would be a risk of a downgrade if (1) there is a weakening in

fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the

economic outlook deteriorates significantly; or (4) there is an appreciable rise in the U.S. government’s funding

costs over and above what is currently expected. On November 28, 2011, Fitch Ratings Limited (“Fitch”)

affirmed the long-term issuer default rating and senior unsecured debt rating of Fannie Mae at “AAA,” but

revised its ratings outlook on Fannie Mae’s long-term issuer default rating to Negative from Stable. This action

followed a similar action by Fitch on the United States sovereign rating. As of February 23, 2012 our long-term

debt continued to be rated “Aaa” by Moody’s and “AAA” by Fitch.

S&P, Moody’s and Fitch have all indicated that they would likely lower their ratings on the debt of Fannie Mae

and certain other government-related entities if they were to lower their ratings on the U.S. government.

We currently cannot predict whether one or more of these rating agencies will downgrade our debt ratings in the

future, nor can we predict the potential impact. Although S&P’s downgrade of our credit rating has not increased

our borrowing costs or limited our access to the debt capital markets to date, an additional reduction in our credit

ratings could have a material adverse impact on our access to debt funding or on the cost of our debt funding, and

would likely do so if it were not based on a similar action on the credit ratings of the U.S. government. An

additional reduction in our credit ratings may also trigger additional collateral requirements under our derivatives

contracts and other borrowing arrangements and materially adversely affect our liquidity, our ability to conduct

our normal business operations, our financial condition and our results of operations. Our credit ratings and

ratings outlook are included in “MD&A—Liquidity and Capital Management—Liquidity Management—Credit

Ratings.”

Deterioration in the credit quality of, or defaults by, one or more of our institutional counterparties could

result in financial losses, business disruption and decreased ability to manage risk.

We face the risk that one or more of our institutional counterparties may fail to fulfill their contractual

obligations to us. Unfavorable market conditions since 2008 have adversely affected the liquidity and financial

condition of our institutional counterparties. Our primary exposures to institutional counterparty risk are with

mortgage seller/servicers that service the loans we hold in our mortgage portfolio or that back our Fannie Mae

MBS; seller/servicers that are obligated to repurchase loans from us or reimburse us for losses in certain

circumstances; third-party providers of credit enhancement on the mortgage assets that we hold in our mortgage

portfolio or that back our Fannie Mae MBS, including mortgage insurers, lenders with risk sharing arrangements

and financial guarantors; issuers of securities held in our cash and other investments portfolio; and derivatives

counterparties.

We may have multiple exposures to one counterparty as many of our counterparties provide several types of

services to us. For example, our lender customers or their affiliates also act as derivatives counterparties,

mortgage servicers, custodial depository institutions or document custodians. Accordingly, if one of these

counterparties were to become insolvent or otherwise default on its obligations to us, it could harm our business

and financial results in a variety of ways.

An institutional counterparty may default in its obligations to us for a number of reasons, such as changes in

financial condition that affect its credit rating, a reduction in liquidity, operational failures or insolvency. A

number of our institutional counterparties are currently experiencing financial difficulties that may negatively

affect the ability of these counterparties to meet their obligations to us and the amount or quality of the products

or services they provide to us. Counterparty defaults or limitations on their ability to do business with us could

result in significant financial losses or hamper our ability to do business, which would adversely affect our

business, results of operations, financial condition, liquidity and net worth. For example, failure by a significant

seller/servicer counterparty, or a number of seller/servicers, to fulfill repurchase obligations to us could result in

a significant increase in our credit losses and have a material adverse effect on our results of operations and

financial condition.

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We routinely execute a high volume of transactions with counterparties in the financial services industry. Many

of the transactions we engage in with these counterparties expose us to credit risk relating to the possibility of a

default by our counterparties. In addition, to the extent these transactions are secured, our credit risk may be

exacerbated to the extent that the collateral we hold cannot be realized or can be liquidated only at prices too low

to recover the full amount of the loan or derivative exposure. We have exposure to these financial institutions in

the form of unsecured debt instruments and derivatives transactions. As a result, we could incur losses relating to

defaults under these instruments or relating to impairments to the carrying value of our assets represented by

these instruments. These losses could materially and adversely affect our business, results of operations, financial

condition, liquidity and net worth.

We depend on our ability to enter into derivatives transactions in order to manage the duration and prepayment

risk of our mortgage portfolio. If we lose access to our derivatives counterparties, it could adversely affect our

ability to manage these risks, which could have a material adverse effect on our business, results of operations,

financial condition, liquidity and net worth.

Given the deteriorated credit quality of many of our mortgage insurer counterparties, we may incur losses as a

result of claims under our mortgage insurance policies not being paid in full or at all, and we may face

business disruptions and increased concentration risk.

We rely heavily on mortgage insurers to provide insurance against borrower defaults on single-family

conventional mortgage loans with LTV ratios over 80% at the time of acquisition. The already weak financial

condition of many of our mortgage insurer counterparties deteriorated at an accelerated pace during the second

half of 2011, which increased the significant risk that these counterparties will fail to fulfill their obligations to

pay our claims under insurance policies.

As of February 29, 2012, three of our mortgage insurance counterparties—Triad Guaranty Insurance Corporation

(“Triad”), Republic Mortgage Insurance Company (“RMIC”), and PMI Mortgage Insurance Co. (“PMI”)—have

publicly disclosed that they are in run-off. A mortgage insurer that is in run-off continues to collect premiums on

its existing insurance business, but no longer writes new insurance. This increases the risk that the mortgage

insurer will fail to pay our claims under insurance policies, and could also cause the quality and speed of its

claims processing to deteriorate. In 2008, Triad ceased issuing commitments for new mortgage insurance and,

under an order received from its regulator, is now paying 60% of claims under its mortgage guaranty insurance

policies and deferring the remaining 40% by the creation of deferred payment obligations, which may be paid in

the future. In October 2011, PMI began partially deferring claims payments, and in January 2012, RMIC began

partially deferring claims payments. Both PMI and RMIC are paying 50% of claims, with the remaining 50%

deferred as policyholder claims. It is uncertain when, and if, regulators for Triad, RMIC or PMI will allow

deferred policyholder claims to be paid or increase the amount paid on claims.

In addition to our three mortgage insurers in run-off, one mortgage insurer, Genworth Mortgage Insurance

Corporation, disclosed that, absent a waiver, it estimated that it would not meet state regulatory capital

requirements for its main insurance writing entity as of December 31, 2011. An additional two of our mortgage

insurance counterparties (Mortgage Guaranty Insurance Corporation and Radian Guaranty Inc.) have disclosed

that, in the absence of additional capital contributions to their insurance writing entity, their capital might fall

below state regulatory capital requirements in the future. These three mortgage insurers, together with our three

mortgage insurers in run-off, provided a combined $74.1 billion, or 81%, of our risk in force mortgage insurance

coverage of our single-family guaranty book of business as of December 31, 2011. We do not know how long

certain of our mortgage insurer counterparties will remain below their state-imposed risk-to-capital limits. If

mortgage insurers are not able to raise capital and they exceed their risk-to-capital limits, they will likely be

forced into run-off or receivership unless they can secure and maintain waivers from their state regulators.

Some mortgage insurers have explored corporate restructurings, which are intended to provide relief from

risk-to-capital limits in certain states. A restructuring plan that would involve contributing capital to a subsidiary

would result in less liquidity available to its parent company to pay claims on its existing book of business and an

increased risk that its parent company will not pay its claims in full in the future.

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Our loss reserves take into account our assessment of our mortgage insurer counterparties’ ability to fulfill their

obligations to us. If our assessment of their claims-paying abilities worsens significantly, it could result in a

significant increase in our loss reserves and our credit losses.

Many mortgage insurers stopped insuring new mortgages with higher loan-to-value ratios or with lower borrower

credit scores or on select property types, which contributed to the reduction in our business volumes for high

loan-to-value ratio loans. As our charter generally requires us to obtain credit enhancement on single-family

conventional mortgage loans with loan-to-value ratios over 80% at the time of purchase, an inability to find

suitable credit enhancement may inhibit our ability to pursue new business opportunities, meet our housing goals

and otherwise support the housing and mortgage markets. For example, where mortgage insurance or other credit

enhancement is not available, we may be hindered in our ability to refinance loans into more affordable loans. In

addition, access to fewer mortgage insurer counterparties will increase our concentration risk with the remaining

mortgage insurers in the industry.

The loss of business volume from a key lender customer could adversely affect our business and result in a

decrease in our revenues.

Our ability to generate revenue from the purchase and securitization of mortgage loans depends on our ability to

acquire a steady flow of mortgage loans from the originators of those loans. We acquire most of our mortgage

loans through mortgage purchase volume commitments that are negotiated annually or semiannually with lender

customers and that establish a minimum level of mortgage volume that these customers will deliver to us. We

acquire a significant portion of our mortgage loans from several large mortgage lenders. During 2011, our top

five lender customers, in the aggregate, accounted for approximately 60% of our single-family business volume,

with three of our customers accounting for greater than 48% of our single-family business volume. Accordingly,

maintaining our current business relationships and business volumes with our top lender customers is important

to our business.

The mortgage industry has been consolidating and a decreasing number of large lenders originate most singlefamily mortgages. The loss of business from any one of our major lender customers could adversely affect our

revenues and the liquidity of Fannie Mae MBS, which in turn could have an adverse effect on their market value.

In addition, as we become more reliant on a smaller number of lender customers, our negotiating leverage with

these customers could decrease, which could diminish our ability to price our products optimally. Decreased

liquidity in the housing finance market in general increases the risk that a shock to the availability of mortgage

credit could occur, which could materially, adversely affect our business and results of operations.

In addition, the volume of business generated by our customers has been or may be affected by a number of

factors, including (1) financial and liquidity problems that many of our lender customers are experiencing or may

experience in the future, (2) our lender customers’ strengthening of their lending criteria, and (3) departures by

several large lender customers from correspondent or broker lending. To the extent our key lender customers

significantly reduce the volume or quality of mortgage loans that the lender delivers to us or that we are willing

to buy from them, we could lose significant business volume that we might be unable to replace, which could

adversely affect our business and result in a decrease in our revenues. Our demands that our lender customers

repurchase or compensate us for losses on loans that do not meet our underwriting and eligibility standards may

strain our relationships with our lender customers and may also result in our customers reducing the volume of

loans they provide us. A significant reduction in the volume of mortgage loans that we securitize could reduce

the liquidity of Fannie Mae MBS, which in turn could have an adverse effect on their market value.

Our reliance on third parties to service our mortgage loans may impede our efforts to keep people in their

homes and adversely affect the re-performance rate of loans we modify.

Mortgage servicers, or their agents and contractors, typically are the primary point of contact for borrowers as we

delegate servicing responsibilities to them. We rely on these mortgage servicers to identify and contact troubled

borrowers as early as possible, to assess the situation and offer appropriate options for resolving the problem and

to successfully implement a solution. The demands placed on experienced mortgage loan servicers to service

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delinquent loans, including loans eligible for the Making Home Affordable Program, have increased significantly

across the industry, straining servicer capacity. To the extent that mortgage servicers are hampered by limited

resources or other factors, they may not be successful in conducting their servicing activities in a manner that

fully accomplishes our objectives within the timeframe we desire. Further, our servicers have advised us that they

have not been able to reach many of the borrowers who may need help with their mortgage loans even when

repeated efforts have been made to contact the borrower.

For these reasons, our ability to actively manage the troubled loans that we own or guarantee, and to implement

our homeownership assistance and foreclosure prevention efforts quickly and effectively, may be limited by our

reliance on our mortgage servicers. Our inability to effectively manage these loans and implement these efforts

could have a material adverse effect on our business, results of operations and financial condition.

Changes in the foreclosure environment and our reliance on servicers and their counsel and other service

providers to complete foreclosures could continue to have a material adverse effect on our business, results of

operations, financial condition and net worth.

Circumstances in the foreclosure environment over the last few years have resulted in foreclosures proceeding at

a slow pace. As a result of the housing market downturn that began in 2006 and significantly worsened in 2008,

servicers and states faced significant increases in the volume of foreclosures in 2009 and the first nine months of

2010. In October 2010, a number of single-family mortgage servicers temporarily halted some or all of the

foreclosures they were processing after discovering deficiencies in their own and their service providers’

foreclosure processes. The servicer foreclosure process deficiencies have generated significant concern and have

been reviewed by various government agencies and the various state attorneys general. On February 9, 2012, a

settlement was announced between five of the nation’s largest mortgage servicers (Bank of America Corporation,

JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc., and Ally Financial Inc. (formerly GMAC))

and the federal government and 49 state attorneys general. The announced settlement, among other things, will

require implementation by those mortgage servicers of certain new servicing and foreclosure practices. Although

servicers have generally ended their outright foreclosure halts, the processing of foreclosures continues to be

slow in many states due to continuing issues in the servicer foreclosure process, including efforts by servicers to

comply with regulatory consent orders and requirements, recent changes in state foreclosure laws, court rules and

proceedings, and the pipeline of foreclosures resulting from these delays and the elevated level of foreclosures

caused by the housing market downturn. In addition, court budget cuts in Florida and other states could further

delay the processing of foreclosures.

These changes in the foreclosure environment have negatively affected our foreclosure timelines, credit-related

expenses and single-family serious delinquency rates, and we expect they will continue to do so. We believe

these changes will also delay the recovery of the housing market. These changes could also negatively affect the

value of the private-label securities we hold and result in additional impairments on these securities. In addition,

the failure of our servicers or their service providers to apply prudent and effective process controls and to

comply with legal and other requirements in the foreclosure process poses operational, reputational and legal

risks for us.

In addition, FHFA directed us in October 2011 to phase out the practice of requiring mortgage servicers to use

our network of retained attorneys to perform default- and foreclosure-related legal services for our loans. Phasing

out the requirement that servicers use our retained attorney network may negatively impact the performance of

default- and foreclosure-related legal services for our loans, which may adversely impact our efforts to reduce

our credit losses.

Challenges to the MERS® company, system and processes could pose operational, reputational and legal risks

for us.

MERSCORP, Inc. (“MERSCORP”) is a privately held company that maintains an electronic registry (the

“MERS System”) that tracks servicing rights and ownership of loans in the United States. Mortgage Electronic

Registration Systems, Inc. (“MERS”), a wholly owned subsidiary of MERSCORP, Inc., can serve as a nominee

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for the owner of a mortgage loan and, in that role, become the mortgagee of record for the loan in local land

records. Fannie Mae seller/servicers may choose to use MERS as a nominee; however, we have prohibited

servicers from initiating foreclosures on Fannie Mae loans in MERS’s name. Approximately half of the loans we

own or guarantee are registered in MERS’s name and the related servicing rights are tracked in the MERS

System. The MERS System is widely used by participants in the mortgage finance industry. Along with a

number of other organizations in the mortgage finance industry, we are a shareholder of MERSCORP.

Several legal challenges have been made disputing MERS’s ability to initiate foreclosures, act as nominee in

local land records, and/or assign mortgages or take other action on behalf of the loan owner. These challenges

seek judicial relief ranging from money damages to injunctive/declaratory relief seeking the prevention of

mortgage assignments by MERS and/or the voiding of completed foreclosures in which MERS appeared in the

chain of title. These challenges have focused public attention on MERS and on how loans are recorded in local

land records. As a result, these challenges could negatively affect MERS’s ability to serve as the mortgagee of

record in some jurisdictions, which could cause additional costs and time in the recordation process. These

challenges also could result in court decisions that substantially delay new or pending foreclosures, or void

completed foreclosures in certain jurisdictions, which would require that we re-foreclose on the affected

properties, thereby increasing our costs and lengthening the time it takes for us to foreclose on and dispose of the

properties.

In addition, where MERS is the mortgagee of record, it must execute assignments of mortgages, affidavits and

other legal documents in connection with foreclosure proceedings. As a result, investigations by governmental

authorities and others into the servicer foreclosure process deficiencies discussed above may impact MERS. In

April 2011, federal banking regulators and FHFA announced that they were taking enforcement action against

MERS and MERSCORP to address significant weaknesses in, among other things, oversight, management

supervision and corporate governance at MERS and MERSCORP that were uncovered as part of the regulators’

review of mortgage servicers’ foreclosure processing. Failures by MERS or MERSCORP to apply prudent and

effective process controls and to comply with legal and other requirements could pose counterparty, operational,

reputational and legal risks for us. If investigations or new regulation or legislation restricts servicers’ use of

MERS, our counterparties may be required to record all mortgage transfers in land records, incurring additional

costs and time in the recordation process. At this time, we cannot predict the ultimate outcome of these legal

challenges to, or the enforcement action against, MERS and MERSCORP or the impact on our business, results

of operations and financial condition.

Changes in accounting standards can be difficult to predict and can materially impact how we record and

report our financial results.

Our accounting policies and methods are fundamental to how we record and report our financial condition and

results of operations. From time to time, FASB changes the financial accounting and reporting standards that

govern the preparation of our financial statements. In addition, those who set or interpret accounting guidance

may amend or even reverse their previous interpretations or positions on how this guidance should be applied.

These changes can be difficult to predict and expensive to implement, can divert management’s attention from

other matters, and can materially impact how we record and report our financial condition and results of

operations.

Material weaknesses in our internal control over financial reporting could result in errors in our reported

results or disclosures that are not complete or accurate.

Management has determined that, as of the date of this filing, we have ineffective disclosure controls and

procedures and a material weakness in our internal control over financial reporting. In addition, our independent

registered public accounting firm, Deloitte & Touche LLP, has expressed an adverse opinion on our internal

control over financial reporting because of the material weakness. Our ineffective disclosure controls and

procedures and material weakness could result in errors in our reported results or disclosures that are not

complete or accurate, which could have a material adverse effect on our business and operations.

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Our material weakness relates specifically to the impact of the conservatorship on our disclosure controls and

procedures. Because we are under the control of FHFA, some of the information that we may need to meet our

disclosure obligations may be solely within the knowledge of FHFA. As our conservator, FHFA has the power to

take actions without our knowledge that could be material to our shareholders and other stakeholders, and could

significantly affect our financial performance or our continued existence as an ongoing business. Because FHFA

currently functions as both our regulator and our conservator, there are inherent structural limitations on our

ability to design, implement, test or operate effective disclosure controls and procedures relating to information

within FHFA’s knowledge. As a result, we have not been able to update our disclosure controls and procedures

in a manner that adequately ensures the accumulation and communication to management of information known

to FHFA that is needed to meet our disclosure obligations under the federal securities laws, including disclosures

affecting our financial statements. Given the structural nature of this material weakness, it is likely that we will

not remediate this weakness while we are under conservatorship. See “Controls and Procedures” for further

discussion of management’s conclusions on our disclosure controls and procedures and internal control over

financial reporting.

A failure in our operational systems or infrastructure, or those of third parties, could materially adversely

affect our business, impair our liquidity, cause financial losses and harm our reputation.

Shortcomings or failures in our internal processes, people or systems could have a material adverse effect on our

risk management, liquidity, financial statement reliability, financial condition and results of operations; disrupt

our business; and result in legislative or regulatory intervention, liability to customers, financial losses and

damage to our reputation. For example, our business is highly dependent on our ability to manage and process,

on a daily basis, an extremely large number of transactions, many of which are highly complex, across numerous

and diverse markets and in an environment in which we must make frequent changes to our core processes in

response to changing external conditions. These transactions are subject to various legal, accounting and

regulatory standards. Our financial, accounting, data processing or other operating systems and facilities may fail

to operate properly or become disabled, adversely affecting our ability to process these transactions. In addition,

we rely on information provided by third parties in processing many of our transactions, and that information

may be incorrect or we may fail to properly manage or analyze it.

We rely upon business processes that are highly dependent on people, legacy technology and the use of

numerous complex systems and models to manage our business and produce books and records upon which our

financial statements are prepared. This reliance increases the risk that we may be exposed to financial,

reputational or other losses as a result of inadequately designed internal processes or systems, or failed execution

of our systems. While we continue to enhance our technology, operational controls and organizational structure

in order to reduce our operational risk, these actions may not be effective to manage these risks and may create

additional operational risk as we execute these enhancements. In addition, our increased use of third-party

service providers for some of our business functions increases the risk that an operational failure by a third party

will adversely affect us.

We also face the risk of operational failure, termination or capacity constraints of any of the clearing agents,

exchanges, clearinghouses or other financial intermediaries we use to facilitate our securities and derivatives

transactions. Any such failure, termination or constraint could adversely affect our ability to effect transactions or

manage our exposure to risk, and could have a significant adverse impact on our business, liquidity, financial

condition, net worth and results of operations.

Our operations rely on the secure processing, storage and transmission of confidential and other information in our

computer systems and networks. Our computer systems, software and networks may be vulnerable to breaches,

unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security

impact. If one or more such events occurs, this could jeopardize our or our customers’ or counterparties’

confidential and other information processed and stored in, and transmitted through, our computer systems and

networks, or otherwise cause interruptions or malfunctions in our, our customers’, our counterparties’ or third

parties’ operations, which could result in significant losses, reputational damage, litigation, regulatory fines or

penalties, or adversely affect our business, financial condition or results of operations. In addition, we may be

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required to expend significant additional resources to modify our protective measures or to investigate and

remediate vulnerabilities or other exposures arising from operational and security risks.

Since the conservatorship began, we have experienced, and we expect we may continue to experience, substantial

changes in our management, employees and business structure and practices. These changes could increase our

operational risk and result in business interruptions and financial losses. In addition, due to events that are wholly

or partially beyond our control, our systems could fail to operate properly, which could lead to financial losses,

business disruptions, legal and regulatory sanctions and reputational damage.

In many cases, our accounting policies and methods, which are fundamental to how we report our financial

condition and results of operations, require management to make judgments and estimates about matters that

are inherently uncertain. Management also relies on models in making these estimates.

Our accounting policies and methods are fundamental to how we record and report our financial condition and

results of operations. Our management must exercise judgment in applying many of these accounting policies and

methods so that these policies and methods comply with GAAP and reflect management’s judgment of the most

appropriate manner to report our financial condition and results of operations. In some cases, management must

select the appropriate accounting policy or method from two or more alternatives, any of which might be reasonable

under the circumstances but might affect the amounts of assets, liabilities, revenues and expenses that we report. See

“Note 1, Summary of Significant Accounting Policies” for a description of our significant accounting policies.

We have identified three accounting policies as critical to the presentation of our financial condition and results

of operations. These accounting policies are described in “MD&A—Critical Accounting Policies and Estimates.”

We believe these policies are critical because they require management to make particularly subjective or

complex judgments about matters that are inherently uncertain and because of the likelihood that materially

different amounts would be reported under different conditions or using different assumptions.

Because our financial statements involve estimates for amounts that are very large, even a small change in the

estimate can have a significant impact for the reporting period. For example, because our total loss reserves are

so large, even a change that has a small impact relative to the size of our loss reserves can have a meaningful

impact on our results for the quarter in which we make the change.

Due to the complexity of the critical accounting policies we have identified, our accounting methods relating to

these policies involve substantial use of models. Models are inherently imperfect predictors of actual results

because they are based on assumptions, including assumptions about future events. Our models may not include

assumptions that reflect very positive or very negative market conditions and, accordingly, our actual results

could differ significantly from those generated by our models. As a result of the above factors, the estimates that

we use to prepare our financial statements, as well as our estimates of our future results of operations, may be

inaccurate, perhaps significantly.

Failure of our models to produce reliable results may adversely affect our ability to manage risk and make

effective business decisions.

We make significant use of quantitative models to measure and monitor our risk exposures and to manage our

business. For example, we use models to measure and monitor our exposures to interest rate, credit and market

risks, and to forecast credit losses. The information provided by these models is used in making business

decisions relating to strategies, initiatives, transactions, pricing and products.

Models are inherently imperfect predictors of actual results because they are based on historical data and

assumptions regarding factors such as future loan demand, borrower behavior, creditworthiness and home price

trends. Other potential sources of inaccurate or inappropriate model results include errors in computer code, bad

data, misuse of data, or use of a model for a purpose outside the scope of the model’s design. Modeling often

assumes that historical data or experience can be relied upon as a basis for forecasting future events, an

assumption that may be especially tenuous in the face of unprecedented events.

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Given the challenges of predicting future behavior, management judgment is used at every stage of the modeling

process, from model design decisions regarding core underlying assumptions, to interpreting and applying final

model output. To control for these inherent imperfections, our primary models are vetted by an independent

model risk oversight team within our Enterprise Risk Division.

When market conditions change quickly and in unforeseen ways, there is an increased risk that the model

assumptions and data inputs for our models are not representative of the most recent market conditions. Under

such circumstances, we must rely on management judgment to make adjustments or overrides to our models. A

formal model update is typically an extensive process that involves basic research, testing, independent

validation and production implementation. In a rapidly changing environment, it may not be possible to update

existing models quickly enough to properly account for the most recently available data and events. Management

adjustments to modeled results are applied within the confines of the governance structure provided by a

combination of our model risk oversight team and our business, finance, and risk committees.

If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk management

decisions, including decisions affecting loan purchases, management of credit losses, guaranty fee pricing, asset

and liability management and the management of our net worth. Any of these decisions could adversely affect

our businesses, results of operations, liquidity, net worth and financial condition. Furthermore, strategies we

employ to manage and govern the risks associated with our use of models may not be effective or fully reliable.

Changes in interest rates or our loss of the ability to manage interest rate risk successfully could adversely

affect our net interest income and increase interest rate risk.

We fund our operations primarily through the issuance of debt and invest our funds primarily in mortgage-related

assets that permit mortgage borrowers to prepay their mortgages at any time. These business activities expose us

to market risk, which is the risk of adverse changes in the fair value of financial instruments resulting from

changes in market conditions. Our most significant market risks are interest rate risk and prepayment risk. We

describe these risks in more detail in “MD&A—Risk Management—Market Risk Management, Including

Interest Rate Risk Management.” Changes in interest rates affect both the value of our mortgage assets and

prepayment rates on our mortgage loans.

Changes in interest rates could have a material adverse effect on our business, results of operations, financial

condition, liquidity and net worth. Our ability to manage interest rate risk depends on our ability to issue debt

instruments with a range of maturities and other features, including call provisions, at attractive rates and to

engage in derivatives transactions. We must exercise judgment in selecting the amount, type and mix of debt and

derivatives instruments that will most effectively manage our interest rate risk. The amount, type and mix of

financial instruments that are available to us may not offset possible future changes in the spread between our

borrowing costs and the interest we earn on our mortgage assets.

Our business is subject to laws and regulations that restrict our activities and operations, which may prohibit

us from undertaking activities that management believes would benefit our business and limit our ability to

diversify our business.

As a federally chartered corporation, we are subject to the limitations imposed by the Charter Act, extensive

regulation, supervision and examination by FHFA and regulation by other federal agencies, including Treasury,

HUD and the SEC. As a company under conservatorship, our primary regulator has management authority over

us in its role as our conservator. We are also subject to other laws and regulations that affect our business,

including those regarding taxation and privacy.

The Charter Act defines our permissible business activities. For example, we may not originate mortgage loans

or purchase single-family loans in excess of the conforming loan limits, and our business is limited to the

U.S. housing finance sector. In addition, our conservator has determined that, while in conservatorship, we will

not be permitted to engage in new products and will be limited to continuing our existing business activities and

taking actions necessary to advance the goals of the conservatorship. As a result of these limitations on our

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ability to diversify our operations, our financial condition and results of operations depend almost entirely on

conditions in a single sector of the U.S. economy, specifically, the U.S. housing market. The weak and unstable

condition of the U.S. housing market in recent years has therefore had a significant adverse effect on our results

of operations, financial condition and net worth, which is likely to continue.

We could be required to pay substantial judgments, settlements or other penalties as a result of civil litigation.

We are a party to a number of lawsuits. We are unable at this time to estimate our potential liability in these

matters, but may be required to pay substantial judgments, settlements or other penalties and incur significant

expenses in connection with these lawsuits, which could have a material adverse effect on our business, results of

operations, financial condition, liquidity and net worth. In addition, responding to these lawsuits may divert

significant internal resources away from managing our business. More information regarding these lawsuits is

included in “Legal Proceedings” and “Note 19, Commitments and Contingencies.”

An active trading market in our equity securities may cease to exist, which would adversely affect the market

price and liquidity of our common and preferred stock.

Our common stock and preferred stock are now traded exclusively in the over-the-counter market. We cannot

predict the actions of market makers, investors or other market participants, and can offer no assurances that the

market for our securities will be stable. If there is no active trading market in our equity securities, the market

price and liquidity of the securities will be adversely affected.

Mortgage fraud could result in significant financial losses and harm to our reputation.

We use a process of delegated underwriting in which lenders make specific representations and warranties about

the characteristics of the mortgage loans we purchase and securitize. As a result, we do not independently verify

most borrower information that is provided to us. This exposes us to the risk that one or more of the parties

involved in a transaction (the borrower, seller, broker, appraiser, title agent, lender or servicer) will engage in

fraud by misrepresenting facts about a mortgage loan. Similarly, we rely on delegated servicing of loans and use

of a variety of external resources to manage our REO. We have experienced financial losses resulting from

mortgage fraud, including institutional fraud perpetrated by counterparties. In the future, we may experience

additional financial losses or reputational damage as a result of mortgage fraud.

RISKS RELATING TO OUR INDUSTRY

A further decline in U.S. home prices or activity in the U.S. housing market would likely cause higher credit

losses and credit-related expenses, and lower business volumes.

We expect weakness in the real estate financial markets to continue in 2012. The deterioration in the credit

condition of outstanding mortgages will result in the foreclosure of some troubled loans, which is likely to add to

excess inventory of unsold homes. We also expect heightened default and severity rates to continue during this

period, and home prices, particularly in some geographic areas, may decline further. Any resulting increase in

delinquencies or defaults, or in loss severity, will likely result in a higher level of credit losses and credit-related

expenses, which in turn will adversely affect our results of operations, net worth and financial condition.

Our business volume is affected by the rate of growth in total U.S. residential mortgage debt outstanding and the

size of the U.S. residential mortgage market. The rate of growth in total U.S. residential mortgage debt

outstanding has declined substantially in response to the reduced activity in the housing market and declines in

home prices, and we expect single-family mortgage debt outstanding to decrease by approximately 1.1% in 2012.

A decline in the rate of growth in mortgage debt outstanding reduces the unpaid principal balance of mortgage

loans available for us to purchase or securitize, which in turn could reduce our net interest income and guaranty

fee income. Even if we are able to increase our share of the secondary mortgage market, it may not be sufficient

to make up for the decline in the rate of growth in mortgage originations, which could adversely affect our results

of operations and financial condition.

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The Dodd-Frank Act and regulatory changes in the financial services industry may negatively impact our

business.

The Dodd-Frank Act is significantly changing the regulation of the financial services industry, including by the

creation of new standards related to regulatory oversight of systemically important financial companies,

derivatives transactions, asset-backed securitization, mortgage underwriting and consumer financial protection.

This legislation will directly and indirectly affect many aspects of our business and could have a material adverse

effect on our business, results of operations, financial condition, liquidity and net worth. The Dodd-Frank Act

and related regulatory changes could require us to change certain business practices, cause us to incur significant

additional costs, limit the products we offer, require us to increase our regulatory capital or otherwise adversely

affect our business. Additionally, implementation of this legislation will result in increased supervision and more

comprehensive regulation of our customers and counterparties in the financial services industry, which may have

a significant impact on the business practices of our customers and counterparties, as well as on our counterparty

credit risk.

Examples of aspects of the Dodd-Frank Act and related future regulatory changes that, if applicable, may

significantly affect us include mandatory clearing of certain derivatives transactions, which could impose

significant additional costs on us; minimum standards for residential mortgage loans, which could subject us to

increased legal risk for loans we purchase or guarantee; and the development of credit risk retention regulations

applicable to residential mortgage loan securitizations, which could impact the types and volume of loans sold to

us. Enhanced prudential standards that become applicable to certain bank holding companies and nonbank

financial companies could affect investor demand for our debt and MBS securities. We could also be designated

as a systemically important nonbank financial company subject to supervision and regulation by the Federal

Reserve. If this were to occur, the Federal Reserve would have the authority to examine us and could impose

stricter prudential standards on us, including risk-based capital requirements, leverage limits, liquidity

requirements, credit concentration limits, resolution plan and credit exposure reporting requirements, overall risk

management requirements, contingent capital requirements, enhanced public disclosures and short-term debt

limits. Regulators have been seeking public comment regarding the criteria for designating nonbank financial

companies for heightened supervision.

Because federal agencies have not completed the extensive rulemaking processes needed to implement and

clarify many of the provisions of the Dodd-Frank Act, it is difficult to assess fully the impact of this legislation

on our business and industry at this time, nor can we predict what similar changes to statutes or regulations will

occur in the future.

Revisions by the Basel Committee on Banking Supervision to international capital requirements, referred to as

Basel III, may also have a significant impact on us or on the business practices of our customers and

counterparties. Depending on how they are implemented by regulators, the Basel III rules could be the basis for a

revised framework for GSE capital standards that could increase our capital requirements. The Basel III capital

and liquidity rules could also affect investor demand for our debt and MBS securities, and could limit some

lenders’ ability to count their rights to service mortgage loans toward meeting their regulatory capital

requirements, which may reduce the economic value of mortgage servicing rights. As a result, a number of our

customers and counterparties may change their business practices.

In addition, the actions of Treasury, the CFTC, the SEC, the Federal Deposit Insurance Corporation, the Federal

Reserve and international central banking authorities directly or indirectly impact financial institutions’ cost of

funds for lending, capital-raising and investment activities, which could increase our borrowing costs or make

borrowing more difficult for us. Changes in monetary policy are beyond our control and difficult to anticipate.

Legislative and regulatory changes could affect us in substantial and unforeseeable ways and could have a

material adverse effect on our business, results of operations, financial condition, liquidity and net worth. In

particular, these changes could affect our ability to issue debt and may reduce our customer base.

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Structural changes in the financial services industry may negatively impact our business.

The financial market crisis resulted in mergers of some of our most significant institutional counterparties.

Consolidation within the financial services industry has increased and may continue to increase our concentration

risk to counterparties in this industry, and we are and may become more reliant on a smaller number of

institutional counterparties. This both increases our risk exposure to any individual counterparty and decreases

our negotiating leverage with these counterparties. The structural changes in the financial services industry could

affect us in substantial and unforeseeable ways and could have a material adverse effect on our business, results

of operations, financial condition, liquidity and net worth.

The occurrence of a major natural or other disaster in the United States could negatively impact our credit

losses and credit-related expenses or disrupt our business operations in the affected geographic area.

We conduct our business in the residential and multifamily mortgage markets and own or guarantee the

performance of mortgage loans throughout the United States. The occurrence of a major natural or environmental

disaster, terrorist attack, pandemic, or similar event (a “major disruptive event”) in a regional geographic area of

the United States could negatively impact our credit losses and credit-related expenses in the affected area.

The occurrence of a major disruptive event could negatively impact a geographic area in a number of different

ways, depending on the nature of the event. A major disruptive event that either damages or destroys residential

or multifamily real estate securing mortgage loans in our book of business or negatively impacts the ability of

borrowers to continue to make principal and interest payments on mortgage loans in our book of business could

increase our delinquency rates, default rates and average loan loss severity of our book of business in the affected

region or regions, which could have a material adverse effect on our business, results of operations, financial

condition, liquidity and net worth. While we attempt to create a geographically diverse mortgage credit book of

business, there can be no assurance that a major disruptive event, depending on its magnitude, scope and nature,

will not generate significant credit losses and credit-related expenses.

Additionally, the contingency plans and facilities that we have in place may be insufficient to prevent an adverse

effect on our ability to conduct business, which could lead to financial losses. If a disruption occurs and our

senior management or other employees are unable to occupy our offices, communicate with other personnel or

travel to other locations, our ability to interact with each other and with our customers may suffer, and we may

not be successful in implementing contingency plans that depend on communication or travel.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We own our principal office, which is located at 3900 Wisconsin Avenue, NW, Washington, DC, as well as

additional Washington, DC facilities at 3939 Wisconsin Avenue, NW and 4250 Connecticut Avenue, NW. We

also own two office facilities in Herndon, Virginia, as well as two additional facilities located in Reston,

Virginia; and Urbana, Maryland. These owned facilities contain a total of approximately 1,459,000 square feet of

space. We lease the land underlying the 4250 Connecticut Avenue building pursuant to a ground lease that

automatically renews on July 1, 2029 for an additional 49 years unless we elect to terminate the lease by

providing notice to the landlord of our decision to terminate at least one year prior to the automatic renewal date.

In addition, we lease approximately 429,000 square feet of office space, including a conference center, at 4000

Wisconsin Avenue, NW, which is adjacent to our principal office. The present lease term for the office space at

4000 Wisconsin Avenue expires in April 2013 and we have one additional 5-year renewal option remaining

under the original lease. The lease term for the conference center at 4000 Wisconsin Avenue expires in April

2018. We also lease an additional approximately 317,000 square feet of office space at three other locations in

Washington, DC and Virginia. We maintain approximately 723,000 square feet of office space in leased premises

in Pasadena, California; Irvine, California; Atlanta, Georgia; Chicago, Illinois; Philadelphia, Pennsylvania; and

three facilities in Dallas, Texas.

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Item 3. Legal Proceedings

This item describes our material legal proceedings. We describe additional material legal proceedings in

“Note 19, Commitments and Contingencies,” which is incorporated herein by reference. In addition to the

matters specifically described or incorporated by reference in this item, we are involved in a number of legal and

regulatory proceedings that arise in the ordinary course of business that do not have a material impact on our

business. Litigation claims and proceedings of all types are subject to many factors that generally cannot be

predicted accurately.

We record reserves for legal claims when losses associated with the claims become probable and the amounts

can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than

the amounts reserved for those claims. For matters where the likelihood or extent of a loss is not probable or

cannot be reasonably estimated, we do not recognize in our consolidated financial statements the potential

liability that may result from these matters. We presently cannot determine the ultimate resolution of the matters

described below or incorporated by reference into this discussion. We have recorded a reserve for legal claims

related to those matters when we were able to determine a loss was both probable and reasonably estimable. If

certain of these matters are determined against us, it could have a material adverse effect on our results of

operations, liquidity and financial condition, including our net worth.

Shareholder Derivative Litigation

Three shareholder derivative cases, filed at various times between June 2007 and June 2008, naming certain of

our current and former directors and officers as defendants, and Fannie Mae as a nominal defendant, are

currently pending before the U.S. Court of Appeals for the District of Columbia Circuit: Kellmer v. Raines, et al.

(filed June 29, 2007); Middleton v. Raines, et al. (filed July 6, 2007); and Agnes v. Raines, et al. (filed June 25,

2008). The cases rely on factual allegations that Fannie Mae’s accounting statements were inconsistent with the

GAAP requirements relating to hedge accounting and the amortization of premiums and discounts. Agnes relies

on factual allegations that defendants wrongfully failed to disclose our exposure to the subprime mortgage crisis

and that the Board improperly authorized the company to buy back $100 million in shares while the stock price

was artificially inflated. Plaintiffs seek, on behalf of Fannie Mae, various forms of monetary and non-monetary

relief, including unspecified money damages (including restitution, legal fees and expenses, disgorgement and

punitive damages); corporate governance changes; an accounting; and attaching, impounding or imposing a

constructive trust on the individual defendants’ assets. Pursuant to a June 25, 2009 order, FHFA, as our

conservator, substituted itself for shareholder plaintiffs in all of these actions. On July 27, 2010, the U.S. District

Court for the District of Columbia dismissed Kellmer and Middleton with prejudice and Agnes without prejudice.

FHFA filed motions to reconsider the decisions dismissing Kellmer and Middleton with prejudice, and those

motions were denied on October 22, 2010. FHFA appealed that denial on November 22, 2010. Plaintiffs Kellmer

and Agnes also appealed the substitution and the dismissal orders. On January 20, 2011, the U.S. Court of

Appeals for the District of Columbia Circuit issued an order in the Kellmer appeal granting FHFA’s motions for

the voluntary dismissal of defendants Kenneth M. Duberstein, Frederic Malek and Patrick Swygert. On that same

day, in the Middleton appeal, the Court of Appeals for the District of Columbia issued an order granting FHFA’s

motions for the voluntary dismissal of defendants Stephen Ashley, Kenneth Duberstein, Thomas Gerrity, Ann

Korologos, Frederic Malek, Donald Marron, Anne Mulcahy, Joe Pickett, Leslie Rahl, Patrick Swygert, and John

Wulff. The remaining parties have fully briefed the appeals and the D.C. Circuit heard oral argument on the

appeals on February 16, 2012.

FHFA Private-Label Mortgage-Related Securities Litigation

In the third quarter of 2011, FHFA, as conservator for us and for Freddie Mac, filed 16 lawsuits on behalf of us

and Freddie Mac against various financial institutions, their officers and affiliated and unaffiliated underwriters

who were responsible for marketing and selling private-label mortgage-related securities to us. The lawsuits seek

to recover losses we and Freddie Mac incurred on the securities. FHFA filed 13 of these lawsuits in the

U.S. District Court for the Southern District of New York—against Bank of America Corp.; Barclays Bank PLC;

Citigroup, Inc.; Credit Suisse Holdings (USA), Inc.; Deutsche Bank AG; First Horizon National Corporation;

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Goldman, Sachs & Co.; HSBC North America Holdings Inc.; JPMorgan Chase & Co.; Merrill Lynch & Co.;

Nomura Holding America Inc.; SG Americas, Inc.; and UBS Americas Inc. (“UBS”) and against certain related

entities and individuals. Two lawsuits—against Countrywide Financial Corporation (“Countrywide”) and

Morgan Stanley—were filed in the Supreme Court of the State of New York for the County of New York, and

one—against The Royal Bank of Scotland Group PLC (“RBS”)—was filed in the U.S. District Court for the

District of Connecticut. The lawsuit against UBS was filed on July 27, 2011, and all the others were filed on

September 2, 2011. The lawsuits allege that the defendants violated federal securities laws and state common law

by making material misstatements and omissions in the offering documents for the securities that were sold to

Fannie Mae and Freddie Mac regarding the characteristics of the loans underlying the securities. The complaints

also allege state securities law violations and some allege common law fraud. The complaints seek, among other

things, rescission and recovery of consideration paid for the securities at issue in the lawsuits, monetary damages

and, in certain cases, punitive damages for common law fraud.

Defendants in the two cases filed in New York state court removed those cases to the U.S. District Court for the

Southern District of New York and FHFA filed motions to remand the cases back to state court. On February 7,

2012, the Joint Panel on Multidistrict Litigation transferred the Countrywide case to the U.S. District Court for

the Central District of California for inclusion in a multidistrict proceeding involving other actions pending

against Countrywide.

On November 16, 2011, all of the cases pending in the Southern District of New York were transferred to one

judge in the district, Judge Cote. Judge Cote stayed the time to answer or move to dismiss all of the cases except

the UBS case. On December 2, 2011, defendants in the UBS case filed a motion to dismiss. On December 21,

2011, FHFA filed an amended complaint in the UBS case. On December 2, 2011, defendants in the RBS case

pending in the District of Connecticut filed a motion to dismiss. On February 1, 2012, FHFA filed an amended

complaint in the RBS case.

Investigation by the Office of Inspector General of FHFA and the U.S. Attorney for the Eastern District of

Virginia

In October 2011, we received notice of an ongoing investigation by the Office of Inspector General of FHFA

(“FHFA OIG”) and the U.S. Attorney for the Eastern District of Virginia with regard to a multifamily agreement

with The Related Companies, L.P. The financial impact of the agreement was not material to our financial

statements. In connection with the investigation, we have received subpoenas for documents from the FHFA

OIG. We are cooperating with this investigation.

Item 4. Mine Safety Disclosures

None.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities

Our common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the

ticker symbol “FNMA.” The transfer agent and registrar for our common stock is Computershare,

P.O. Box 43078, Providence, Rhode Island 02940.

Common Stock Data

The following table displays, for the periods indicated, the high and low prices per share of our common stock as

reported in the Bloomberg Financial Markets service. For periods prior to our stock’s delisting from the NYSE

on July 8, 2010, these are high and low sales prices reported in the consolidated transaction reporting system. For

periods on or after July 8, 2010, these prices represent high and low trade prices. No dividends were declared on

shares of our common stock during the periods indicated.

Quarter High Low

2010

First Quarter ....................................................................... $1.23 $0.91

Second Quarter .................................................................... 1.36 0.34

Third Quarter ...................................................................... 0.42 0.19

Fourth Quarter ..................................................................... 0.47 0.27

2011

First Quarter ....................................................................... $0.96 $0.30

Second Quarter .................................................................... 0.50 0.32

Third Quarter ...................................................................... 0.39 0.23

Fourth Quarter ..................................................................... 0.27 0.19

Dividends

Our payment of dividends is subject to the following restrictions:

Restrictions Relating to Conservatorship. Our conservator announced on September 7, 2008 that we would not

pay any dividends on the common stock or on any series of preferred stock, other than the senior preferred stock.

Restrictions Under Senior Preferred Stock Purchase Agreement. The senior preferred stock purchase

agreement prohibits us from declaring or paying any dividends on Fannie Mae equity securities without the prior

written consent of Treasury.

Statutory Restrictions. Under the GSE Act, FHFA has authority to prohibit capital distributions, including

payment of dividends, if we fail to meet our capital requirements. If FHFA classifies us as significantly

undercapitalized, approval of the Director of FHFA is required for any dividend payment. Under the GSE Act,

we are not permitted to make a capital distribution if, after making the distribution, we would be

undercapitalized, except the Director of FHFA may permit us to repurchase shares if the repurchase is made in

connection with the issuance of additional shares or obligations in at least an equivalent amount and will reduce

our financial obligations or otherwise improve our financial condition.

Restrictions Relating to Subordinated Debt. During any period in which we defer payment of interest on

qualifying subordinated debt, we may not declare or pay dividends on, or redeem, purchase or acquire, our

common stock or preferred stock.

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Restrictions Relating to Preferred Stock. Payment of dividends on our common stock is also subject to the prior

payment of dividends on our preferred stock and our senior preferred stock. Payment of dividends on all

outstanding preferred stock, other than the senior preferred stock, is also subject to the prior payment of

dividends on the senior preferred stock.

See “MD&A—Liquidity and Capital Management” for information on dividends declared and paid to Treasury

on the senior preferred stock.

Holders

As of January 31, 2012, we had approximately 15,000 registered holders of record of our common stock,

including holders of our restricted stock. In addition, as of January 31, 2012, Treasury held a warrant giving it the

right 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 of exercise.

Recent Sales of Unregistered Securities

Under the terms of our senior preferred stock purchase agreement with Treasury, we are prohibited from selling

or issuing our equity interests, other than as required by (and pursuant to) the terms of a binding agreement in

effect on September 7, 2008, without the prior written consent of Treasury.

We previously provided stock compensation to employees and members of the Board of Directors under the

Fannie Mae Stock Compensation Plan of 1993 and the Fannie Mae Stock Compensation Plan of 2003 (the “Stock

Compensation Plans”). During the quarter ended December 31, 2011, 1,157 restricted stock units vested, as a

result of which 786 shares of common stock were issued, and 371 shares of common stock that otherwise would

have been issued were withheld by us in lieu of requiring the recipients to pay us the withholding taxes due upon

vesting. All of these restricted stock units were granted prior to our entering into conservatorship. Restricted

stock units granted under the Plans typically vest in equal annual installments over three or four years beginning

on the first anniversary of the date of grant. Each restricted stock unit represents the right to receive a share of

common stock at the time of vesting. As a result, restricted stock units are generally similar to restricted stock,

except that restricted stock units do not confer voting rights on their holders. All restricted stock units were

granted to persons who were employees or members of the Board of Directors of Fannie Mae.

The securities we issue are “exempted securities” under laws administered by the SEC to the same extent as

securities that are obligations of, or are guaranteed as to principal and interest by, the United States, except that,

under the GSE Act, our equity securities are not treated as exempted securities for purposes of Section 12, 13, 14

or 16 of the Exchange Act. As a result, our securities offerings are exempt from SEC registration requirements

and we do not file registration statements or prospectuses with the SEC under the Securities Act with respect to

our securities offerings.

Information about Certain Securities Issuances by Fannie Mae

Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a

material direct financial obligation or become directly or contingently liable for a material obligation under an

off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03 or,

if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for that

offering that are filed with the SEC.

Because the securities we issue are exempted securities, we do not file registration statements or prospectuses

with the SEC with respect to our securities offerings. To comply with the disclosure requirements of Form 8-K

relating to the incurrence of material financial obligations, we report our incurrence of these types of obligations

either in offering circulars or prospectuses (or supplements thereto) that we post on our Web site or in a current

report on Form 8-K that we file with the SEC, in accordance with a “no-action” letter we received from the SEC

staff in 2004. In cases where the information is disclosed in a prospectus or offering circular posted on our Web

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site, the document will be posted on our Web site within the same time period that a prospectus for a non-exempt

securities offering would be required to be filed with the SEC.

The Web site address for disclosure about our debt securities is www.fanniemae.com/debtsearch. From this

address, investors can access the offering circular and related supplements for debt securities offerings under

Fannie Mae’s universal debt facility, including pricing supplements for individual issuances of debt securities.

Disclosure about our obligations pursuant to some of the MBS we issue, some of which may be off-balance sheet

obligations, can be found at www.fanniemae.com/mbsdisclosure. From this address, investors can access

information and documents about our MBS, including prospectuses and related prospectus supplements.

We are providing our Web site address solely for your information. Information appearing on our Web site is not

incorporated into this annual report on Form 10-K.

Purchases of Equity Securities by the Issuer

The following table displays shares of our common stock we repurchased during the fourth quarter of 2011.

Total

Number of

Shares

Purchased(1)

Average

Price Paid

per Share

Total Number of

Shares Purchased as

Part of Publicly

Announced

Program(2)

Maximum Number of

Shares that

May Yet be

Purchased Under

the Program(2)

(Shares in thousands)

2011

October 1-31 ................................ — $ — — —

November 1-30 .............................. 2 0.22 — —

December 1-31 .............................. 3 0.21 — —

Total .................................... 5

(1) Consists of shares of common stock reacquired from employees to pay an aggregate of approximately $950 in

withholding taxes due upon the vesting of previously issued restricted stock.

(2) We do not have any publicly announced share repurchase program under which we could purchase our common stock.

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Item 6. Selected Financial Data

The selected consolidated financial data displayed below are summarized from our results of operations for the

five-year period ended December 31, 2011, as well as selected consolidated balance sheet data as of the end of

each year within this five-year period. Certain prior period amounts have been reclassified to conform to the

current period presentation. This data should be reviewed in conjunction with the audited consolidated financial

statements and related notes and with the MD&A included in this annual report on Form 10-K.

As discussed in “MD&A—Consolidated Results of Operations,” prospectively adopting the consolidation

accounting guidance on January 1, 2010 had a significant impact on the presentation and comparability of our

consolidated financial statements due to the consolidation of the substantial majority of our single-class

securitization trusts and the elimination of previously recorded deferred revenue from our guaranty arrangements.

While some line items in our consolidated financial statements were not impacted, others were impacted

significantly, which reduces the comparability of our results for 2011 and 2010 with the results for prior years.

For the Year Ended December 31,

2011 2010 2009 2008 2007

(Dollars and shares in millions, except per share amounts)

Statement of operations data:

Net revenues(1) ...................................... $ 20,444 $ 17,493 $ 22,494 $ 17,436 $ 11,205

Net other-than-temporary impairments ................... (308) (722) (9,861) (6,974) (814)

Investment gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . 506 346 1,458 (246) (53)

Fair value losses, net(2) ................................ (6,621) (511) (2,811) (20,129) (4,668)

Administrative expenses .............................. (2,370) (2,597) (2,207) (1,979) (2,669)

Credit-related expenses(3) .............................. (27,498) (26,614) (73,536) (29,809) (5,012)

Other expenses, net(4) ................................. (151) (642) (7,060) (1,776) (2,476)

(Benefit) provision for federal income taxes ............... (90) (82) (985) 13,749 (3,091)

Net loss attributable to Fannie Mae ...................... (16,855) (14,014) (71,969) (58,707) (2,050)

Preferred stock dividends and issuance costs at redemption . . . (9,614) (7,704) (2,474) (1,069) (513)

Net loss attributable to common stockholders ............. (26,469) (21,718) (74,443) (59,776) (2,563)

Common share data:

Loss per share:

Basic and Diluted ................................. $ (4.61) $ (3.81) $ (13.11) $ (24.04) $ (2.63)

Weighted-average common shares outstanding:(5)

Basic and Diluted ................................. 5,737 5,694 5,680 2,487 973

Cash dividends declared per share ...................... $ — $ — $ — $ 0.75 $ 1.90

New business acquisition data:

Fannie Mae MBS issues acquired by third parties(6) ......... $478,870 $497,975 $496,067 $434,711 $563,648

Mortgage portfolio purchases(7) ......................... 173,978 357,573 327,578 196,645 182,471

New business acquisitions ........................... $652,848 $855,548 $823,645 $631,356 $746,119

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As of December 31,

2011 2010 2009 2008 2007

(Dollars in millions)

Balance sheet data:

Investments in securities:

Fannie Mae MBS .......................... $ 24,274 $ 30,226 $ 229,169 $ 234,250 $ 179,401

Other agency MBS ......................... 16,744 19,951 43,905 35,440 32,957

Mortgage revenue bonds .................... 10,978 11,650 13,446 13,183 16,213

Other mortgage-related securities ............. 49,936 56,668 54,265 56,781 90,827

Non-mortgage-related securities .............. 49,848 32,753 8,882 17,640 38,115

Mortgage loans:(8)

Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . 311 915 18,462 13,270 7,008

Loans held for investment, net of allowance ..... 2,898,310 2,922,805 376,099 412,142 396,516

Total assets ................................. 3,211,484 3,221,972 869,141 912,404 879,389

Short-term debt .............................. 151,725 157,243 200,437 330,991 234,160

Long-term debt .............................. 3,038,147 3,039,757 574,117 539,402 562,139

Total liabilities .............................. 3,216,055 3,224,489 884,422 927,561 835,271

Senior preferred stock ........................ 112,578 88,600 60,900 1,000 —

Preferred stock .............................. 19,130 20,204 20,348 21,222 16,913

Total Fannie Mae stockholders’ (deficit) equity .... (4,624) (2,599) (15,372) (15,314) 44,011

Net worth (deficit) surplus(9) .................... (4,571) (2,517) (15,281) (15,157) 44,118

Book of business data:

Total mortgage assets(10) ....................... $3,065,616 $3,099,250 $ 769,252 $ 792,196 $ 727,903

Unconsolidated Fannie Mae MBS, held by third

parties(11) ................................. 19,612 21,323 2,432,789 2,289,459 2,118,909

Other guarantees(12) ........................... 42,406 35,619 27,624 27,809 41,588

Mortgage credit book of business ............. $3,127,634 $3,156,192 $3,229,665 $3,109,464 $2,888,400

Guaranty book of business(13) ................. $3,037,549 $3,054,488 $3,097,201 $2,975,710 $2,744,237

Credit quality:

Total nonperforming loans(14)(15) ................. $ 251,949 $ 253,579 $ 222,064 $ 119,955 $ 27,254

Total loss reserves ........................... 76,938 66,251 64,891 24,753 3,391

Total loss reserves as a percentage of total guaranty

book of business ........................... 2.53% 2.17% 2.10% 0.83% 0.12%

Total loss reserves as a percentage of total

nonperforming loans(15) ..................... 30.54 26.13 29.22 20.64 12.44

For the Year Ended December 31,

2011 2010 2009 2008 2007

Performance ratios:

Net interest yield(16) ........................... 0.60% 0.51% 1.65% 1.03% 0.57%

Average effective guaranty fee rate (in basis

points)(17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A N/A 27.6 bp 31.0 bp 23.7 bp

Credit loss ratio (in basis points)(18) .............. 61.3 bp 77.4 bp 44.6 bp 22.7 bp 5.3 bp

Return on assets(19) ........................... (0.82)% (0.67)% (8.27)% (6.77)% (0.30)%

(1) Consists of net interest income and fee and other income.

(2) Consists of the following: (a) derivatives fair value gains (losses), net; (b) trading securities gains (losses), net; (c) hedged

mortgage assets gains (losses), net; (d) debt foreign exchange gains (losses), net; (e) debt fair value gains (losses), net;

and (f) mortgage loans fair value losses, net.

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(3) Consists of provision for loan losses, provision for guaranty losses and foreclosed property expense.

(4) Consists of the following: (a) debt extinguishment gains (losses), net; (b) gains (losses) from partnership investments; and

(c) losses on certain guaranty contracts.

(5) Includes the weighted-average shares of common stock that would be issuable upon the full exercise of the warrant issued

to Treasury from the date of conservatorship through the end of the period for 2008 and for the full year for 2009, 2010,

and 2011. Because the warrant’s exercise price of $0.00001 per share is considered non-substantive (compared to the

market price of our common stock), the warrant was evaluated based on its substance over form. It was determined to

have characteristics of non-voting common stock, and thus is included in the computation of basic and diluted loss per

share.

(6) Reflects unpaid principal balance of Fannie Mae MBS issued and guaranteed by us during the reporting period less:

(a) securitizations of mortgage loans held in our mortgage portfolio during the reporting period and (b) Fannie Mae MBS

purchased for our mortgage portfolio during the reporting period.

(7) Reflects unpaid principal balance of mortgage loans and mortgage-related securities we purchased for our mortgage

portfolio during the reporting period. Includes acquisition of mortgage-related securities accounted for as the

extinguishment of debt because the entity underlying the mortgage-related securities has been consolidated in our

consolidated balance sheets. For 2011 and 2010, includes unpaid principal balance of approximately $67 billion and $217

billion, respectively, of delinquent loans purchased from our single-family MBS trusts. Under our MBS trust documents,

we have the option to purchase from MBS trusts loans that are delinquent as to four or more consecutive monthly

payments.

(8) Mortgage loans consist solely of domestic residential real-estate mortgages.

(9) Total assets less total liabilities.

(10) Reflects unpaid principal balance of mortgage loans and mortgage-related securities reported in our consolidated balance

sheets. The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount. As a result

of our adoption of the consolidation accounting guidance as of January 1, 2010, we reflect a substantial majority of our

Fannie Mae MBS as mortgage assets and the balance as unconsolidated Fannie Mae MBS.

(11) Reflects unpaid principal balance of unconsolidated Fannie Mae MBS, held by third-party investors. The principal

balance of resecuritized Fannie Mae MBS is included only once in the reported amount.

(12) Primarily includes long-term standby commitments we have issued and single-family and multifamily credit

enhancements we have provided that are not otherwise reflected in the table.

(13) Reflects mortgage credit book of business less non-Fannie Mae mortgage-related securities held in our investment

portfolio for which we do not provide a guaranty.

(14) Consists of on-balance sheet nonperforming loans held in our mortgage assets and off-balance sheet nonperforming loans

in unconsolidated Fannie Mae MBS trusts held by third parties. Includes all nonaccrual loans, as well as troubled debt

restructurings (“TDR”) and HomeSaver Advance first-lien loans on accrual status. See “MD&A-Consolidated Results of

Operations-Credit-Related Expenses-Nonperforming Loans” for a discussion of our nonperforming loans.

(15) In December 2011, we changed our definition of “total nonperforming loans.” Under our new definition, we no longer

reflect in this amount (1) our allowance for loan losses or (2) our allowance for accrued interest receivable related to these

individually impaired loans. The amounts we report for prior periods have been revised from amounts we previously

disclosed as a result of this change.

(16) Calculated based on net interest income for the reporting period divided by the average balance of total interest-earning

assets during the period, expressed as a percentage.

(17) Calculated based on guaranty fee income for the reporting period divided by average outstanding Fannie Mae MBS and

other guarantees during the period, expressed in basis points. After the adoption of consolidation accounting guidance on

January 1, 2010, guaranty fee income is significantly less than prior years, making average effective guarantee fee rate an

inconsequential performance ratio after 2009.

(18) Consists of (a) charge-offs, net of recoveries and (b) foreclosed property expense for the reporting period (adjusted to

exclude the impact of fair value losses resulting from credit-impaired loans acquired from MBS trusts and HomeSaver

Advance loans) divided by the average guaranty book of business during the period, expressed in basis points. See

“MD&A-Consolidated Results of Operations-Credit-Related Expenses-Credit Loss Performance Metrics” for a

discussion of how our credit loss metrics are calculated.

(19) Calculated based on net loss available to common stockholders for the reporting period divided by average total assets

during the period, expressed as a percentage. Average balances for purposes of ratio calculations are based on balances at

the beginning of the year and at the end of each quarter for each year shown.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read this MD&A in conjunction with our consolidated financial statements as of December 31, 2011

and related notes, and with “Business—Executive Summary.”

This report contains forward-looking statements that are based upon management’s current expectations and are

subject to significant uncertainties and changes in circumstances. Please review “Business—Forward-Looking

Statements” for more information on the forward-looking statements in this report and “Risk Factors” for a

discussion of factors that could cause our actual results to differ, perhaps materially, from our forward-looking

statements. Please also see “Glossary of Terms Used in This Report.”

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of

judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses

in the consolidated financial statements. Understanding our accounting policies and the extent to which we use

management judgment and estimates in applying these policies is integral to understanding our financial

statements. We describe our most significant accounting policies in “Note 1, Summary of Significant Accounting

Policies.”

We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and

update them as necessary based on changing conditions. Management has discussed any significant changes in

judgments and assumptions in applying our critical accounting policies with the Audit Committee of our Board

of Directors. See “Risk Factors” for a discussion of the risk associated with the use of models. We have

identified three of our accounting policies as critical because they involve significant judgments and assumptions

about highly complex and inherently uncertain matters, and the use of reasonably different estimates and

assumptions could have a material impact on our reported results of operations or financial condition. These

critical accounting policies and estimates are as follows:

• Fair Value Measurement

• Other-Than-Temporary Impairment of Investment Securities

• Total Loss Reserves

Fair Value Measurement

The use of fair value to measure our assets and liabilities is fundamental to our financial statements and is a

critical accounting estimate because we account for and record a portion of our assets and liabilities at fair value.

In determining fair value, we use various valuation techniques. We describe the valuation techniques and inputs

used to determine the fair value of our assets and liabilities and disclose their carrying value and fair value in

“Note 18, Fair Value.”

The fair value accounting rules provide a three-level fair value hierarchy for classifying financial instruments.

This hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are

observable or unobservable. Each asset or liability is assigned to a level based on the lowest level of any input

that is significant to its fair value measurement. The three levels of the fair value hierarchy are described below:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets or

liabilities.

Level 3: Unobservable inputs.

The majority of the financial instruments that we report at fair value in our consolidated financial statements fall

within the Level 2 category and are valued primarily utilizing inputs and assumptions that are observable in the

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marketplace, that can be derived from observable market data or that can be corroborated by recent trading

activity of similar instruments with similar characteristics. For example, we generally request non-binding prices

from at least three independent pricing services to estimate the fair value of our trading and available-for-sale

securities at an individual security level. We use the average of these prices to determine the fair value.

In the absence of such information or if we are not able to corroborate these prices by other available, relevant

market information, we estimate their fair values based on single source quotations from brokers or dealers or by

using internal calculations or discounted cash flow techniques that incorporate inputs, such as prepayment rates,

discount rates and delinquency, default and cumulative loss expectations, that are implied by market prices for

similar securities and collateral structure types. Because this valuation technique relies on significant

unobservable inputs, the fair value estimation is classified as Level 3. The process for determining fair value

using unobservable inputs is generally more subjective and involves a high degree of management judgment and

assumptions. These assumptions may have a significant effect on our estimates of fair value, and the use of

different assumptions as well as changes in market conditions could have a material effect on our results of

operations or financial condition.

Fair Value Hierarchy—Level 3 Assets and Liabilities

The assets and liabilities that we have classified as Level 3 consist primarily of financial instruments for which

there is limited market activity and therefore little or no price transparency. As a result, the valuation techniques

that we use to estimate the fair value of Level 3 instruments involve significant unobservable inputs, which

generally are more subjective and involve a high degree of management judgment and assumptions. Our Level 3

assets and liabilities consist of certain mortgage securities and residual interests, certain mortgage loans, acquired

property, partnership investments, our guaranty assets and buy-ups, our master servicing assets, certain long-term

debt arrangements and certain highly structured, complex derivative instruments.

Table 5 displays a comparison, by balance sheet category, of the amount of financial assets carried in our

consolidated balance sheets at fair value on a recurring basis (“recurring asset”) that were classified as Level 3 as

of December 31, 2011 and 2010. The availability of observable market inputs to measure fair value varies based

on changes in market conditions, such as liquidity. As a result, we expect the amount of financial instruments

carried at fair value on a recurring basis and classified as Level 3 to vary each period.

Table 5: Level 3 Recurring Financial Assets at Fair Value

As of December 31,

2011 2010

(Dollars in millions)

Trading securities ................................................................ $ 4,238 $ 4,576

Available-for-sale securities ........................................................ 29,492 31,934

Mortgage loans .................................................................. 2,319 2,207

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 247

Level 3 recurring assets ........................................................... $ 36,287 $ 38,964

Total assets ..................................................................... $3,211,484 $3,221,972

Total recurring assets measured at fair value ........................................... $ 156,552 $ 161,696

Level 3 recurring assets as a percentage of total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1% 1%

Level 3 recurring assets as a percentage of total recurring assets measured at fair value . . . . . . . . . 23% 24%

Total recurring assets measured at fair value as a percentage of total assets . . . . . . . . . . . . . . . . . . . 5% 5%

Assets measured at fair value on a nonrecurring basis and classified as Level 3, which are not presented in the table

above, primarily include mortgage loans and acquired property. The fair value of Level 3 nonrecurring assets totaled

$69.0 billion for the year ended December 31, 2011 and $63.0 billion for the year ended December 31, 2010.

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Financial liabilities measured at fair value on a recurring basis and classified as Level 3 consisted of long-term

debt with a fair value of $1.2 billion as of December 31, 2011 and $1.0 billion as of December 31, 2010, and

other liabilities with a fair value of $173 million as of December 31, 2011 and $143 million as of December 31,

2010.

Fair Value Control Processes

We have control processes that are designed to ensure that our fair value measurements are appropriate and

reliable, that they are based on observable inputs wherever possible and that our valuation approaches are

consistently applied and the assumptions used are reasonable. Our control processes consist of a framework that

provides for a segregation of duties and oversight of our fair value methodologies and valuations and validation

procedures.

Our Valuation Oversight Committee includes senior representation from our Capital Markets segment, our

Enterprise Risk Office and our Finance division. The composition of the Committee is determined by the

committee chair, our Chief Financial Officer, with the objective of obtaining appropriate representation from

finance, risk and select business units within Fannie Mae. The Committee is responsible for advising the

committee chair based on its review of valuation methodologies and results for various financial instruments,

including significant asset or liability valuations used for financial reporting. Our Price Verification Group,

which is an independent control group separate from the group responsible for obtaining prices, is responsible for

performing monthly independent price verification. The Price Verification Group also performs independent

reviews of the assumptions used in determining the fair value of products we hold that have material estimation

risk because observable market-based inputs do not exist.

Our validation procedures are intended to ensure that the individual prices we receive are consistent with our

observations of the marketplace and prices that are provided to us by pricing services or dealers. We verify

selected prices using a variety of methods, including comparing the prices to secondary pricing services and

corroborating the prices by reference to other independent market data, such as non-binding broker or dealer

quotations, relevant benchmark indices, and prices of similar instruments. We review prices for reasonableness

based on variations from prices provided in previous periods, comparing prices to internally calculated expected

prices and conducting relative value comparisons based on specific characteristics of securities. In addition, we

compare our derivatives valuations to counterparty valuations as part of the collateral exchange process. We have

formal discussions with the pricing services as part of our due diligence process in order to maintain a current

understanding of the models and related assumptions and inputs that these vendors use in developing prices. The

prices provided to us by independent pricing services reflect the existence of credit enhancements, including

monoline insurance coverage, and the current lack of liquidity in the marketplace. If we determine that a price

provided to us is outside established parameters, we will further examine the price, including having follow-up

discussions with the pricing service or dealer. If we conclude that a price is not valid, we will adjust the price for

various factors, such as liquidity, bid-ask spreads and credit considerations. These adjustments are generally

based on available market evidence. In the absence of such evidence, management’s best estimate is used. All of

these processes are executed before we use the prices in preparing our financial statements.

We continually refine our valuation methodologies as markets and products develop and the pricing for certain

products becomes more or less transparent. While we believe our valuation methods are appropriate and

consistent with those of other market participants, using different methodologies or assumptions to determine fair

value could result in a materially different estimate of the fair value of some of our financial instruments.

The dislocation of historical pricing relationships between certain financial instruments persisted during 2011

due to the housing and financial market crisis. These conditions, which have resulted in greater market volatility,

wider credit spreads and a lack of price transparency, made the measurement of fair value more difficult and

complex for some financial instruments, particularly for financial instruments for which there is no active

market, such as our guaranty contracts and loans purchased with evidence of credit deterioration.

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Other-Than-Temporary Impairment of Investment Securities

We evaluate available-for-sale securities in an unrealized loss position as of the end of each quarter for otherthan-temporary impairment. A debt security is evaluated for other-than-temporary impairment if its fair value is

less than its amortized cost basis. We recognize other-than-temporary impairment in earnings if one of the

following conditions exists: (1) our intent is to sell the security; (2) it is more likely than not that we will be

required to sell the security before the impairment is recovered; or (3) we do not expect to recover our amortized

cost basis. If, by contrast, we do not intend to sell the security and will not be required to sell prior to recovery of

the amortized cost basis, we recognize only the credit component of other-than-temporary impairment in

earnings. We record the noncredit component in other comprehensive income. The credit component is the

difference between the security’s amortized cost basis and the present value of its expected future cash flows,

while the noncredit component is the remaining difference between the security’s fair value and the present value

of expected future cash flows. If, subsequent to recognizing other-than-temporary impairment, our estimates of

future cash flows improve, we recognize the change in estimate prospectively over the remaining life of

securities as a component of interest income.

Our evaluation requires significant management judgment and consideration of various factors to determine if we

will receive the amortized cost basis of our investment securities. We evaluate a debt security for other-thantemporary impairment using an econometric model that estimates the present value of cash flows given multiple

factors. These factors include: the severity and duration of the impairment; recent events specific to the issuer

and/or industry to which the issuer belongs; the payment structure of the security; external credit ratings and the

failure of the issuer to make scheduled interest or principal payments. We rely on expected future cash flow

projections to determine if we will recover the amortized cost basis of our available-for-sale securities.

We provide more detailed information on our accounting for other-than-temporary impairment in “Note 1,

Summary of Significant Accounting Policies” and “Note 5, Investments in Securities.” Also refer to

“Consolidated Balance Sheet Analysis—Investments in Mortgage-Related Securities—Investments in PrivateLabel Mortgage-Related Securities” for a discussion of other-than-temporary impairment recognized on our

investments in Alt-A and subprime private-label securities. See “Risk Factors” for a discussion of the risks

associated with possible future write-downs of our investment securities.

Total Loss Reserves

Our total loss reserves consist of the following components:

• Allowance for loan losses;

• Allowance for accrued interest receivable;

• Reserve for guaranty losses; and

• Allowance for preforeclosure property tax and insurance receivable.

These components can be further divided into single-family portions, which collectively make up our singlefamily loss reserves, and multifamily portions, which collectively make up our multifamily loss reserves.

We maintain an allowance for loan losses and an allowance for accrued interest receivable for loans classified as

held for investment, including both loans we hold in our portfolio and loans held in consolidated Fannie Mae

MBS trusts. We maintain a reserve for guaranty losses for loans held in unconsolidated Fannie Mae MBS trusts

we guarantee and loans we have guaranteed under long-term standby commitments and other credit

enhancements we have provided. We also maintain an allowance for preforeclosure property tax and insurance

receivable on delinquent loans that is included in “Other assets” in our consolidated balance sheets. These

amounts, which we collectively refer to as our total loss reserves, represent probable losses incurred related to

loans in our guaranty book of business, including concessions granted to borrowers upon modifications of their

loans, as of the balance sheet date.

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The allowance for loan losses, allowance for accrued interest receivable and allowance for preforeclosure

property tax and insurance receivable are valuation allowances that reflect an estimate of incurred credit losses

related to our recorded investment in loans held for investment. The reserve for guaranty losses is a liability

account in our consolidated balance sheets that reflects an estimate of incurred credit losses related to our

guaranty to each unconsolidated Fannie Mae MBS trust that we will supplement amounts received by the Fannie

Mae MBS trust as required to permit timely payments of principal and interest on the related Fannie Mae MBS.

As a result, the guaranty reserve considers not only the principal and interest due on the loan at the current

balance sheet date, but also an estimate of any additional interest payments due to the trust from the current

balance sheet date until the point of loan acquisition or foreclosure. Our loss reserves consist of a specific loss

reserve for individually impaired loans and a collective loss reserve for all other loans.

We have an established process, using analytical tools, benchmarks and management judgment, to determine our

loss reserves. Although our loss reserve process benefits from extensive historical loan performance data, this

process is subject to risks and uncertainties, including a reliance on historical loss information that may not be

representative of current conditions. We continually monitor delinquency and default trends and make changes in

our historically developed assumptions and estimates as necessary to better reflect present conditions, including

current trends in borrower risk and/or general economic trends, changes in risk management practices, and

changes in public policy and the regulatory environment. We also consider the recoveries that we expect to

receive on mortgage insurance and other loan-specific credit enhancements entered into contemporaneously with

and in contemplation of a guaranty or loan purchase transaction, as such recoveries reduce the severity of the loss

associated with defaulted loans. Due to the stress in the housing and credit markets and the extent of deterioration

in these markets, our process for determining our loss reserves has become significantly more complex and

involves a greater degree of management judgment than prior to this period of housing and mortgage market

stress.

Single-Family Loss Reserves

We establish a specific single-family loss reserve for individually impaired loans, which includes loans we

restructure in troubled debt restructurings, certain nonperforming loans in MBS trusts and acquired creditimpaired loans that have been further impaired subsequent to acquisition. The single-family loss reserve for

individually impaired loans has grown as a proportion of the total single-family loss reserves in recent periods

due to increases in the population of restructured loans. We typically measure impairment based on the

difference between our recorded investment in the loan and the present value of the estimated cash flows we

expect to receive, which we calculate using the effective interest rate of the original loan or the effective interest

rate at acquisition for an acquired credit-impaired loan. However, when foreclosure is probable on an

individually impaired loan, we measure impairment based on the difference between our recorded investment in

the loan and the fair value of the underlying property, adjusted for the estimated discounted costs to sell the

property and estimated insurance or other proceeds we expect to receive. We then allocate a portion of the

reserve to interest accrued on the loans as of the balance sheet date.

We establish a collective single-family loss reserve for all other single-family loans in our single-family guaranty

book of business using a model that estimates the probability of default of loans to derive an overall loss reserve

estimate given multiple factors such as: origination year, mark-to-market LTV ratio, delinquency status and loan

product type. We believe that the loss severity estimates we use in determining our loss reserves reflect current

available information on actual events and conditions as of each balance sheet date, including current home

prices. Our loss severity estimates do not incorporate assumptions about future changes in home prices. We do,

however, use a look back period to develop our loss severity estimates for all loan categories. We then allocate a

portion of the reserve to interest accrued on the loans as of the balance sheet date.

In the fourth quarter of 2011, we updated the estimated probability, based on historical trends, of a trial modification

becoming a permanent modification. Permanent modifications are a better indicator of a loan’s performance than

loans that do not complete a trial modification period. The impact of applying a higher probability of success to our

trial modifications reduced our allowance for loan losses and credit-related expenses by approximately $700

million. Additionally, we enhanced our process to estimate the recovery amount incorporated in our allowance for

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loan losses related to repurchase requests. The recovery estimate takes into account individual loan attributes such

as the probability of default and severity on our individually impaired loans and resulted in a reduction in our

allowance for loan losses and our credit-related expenses of approximately $800 million.

In the third quarter of 2011, we updated our allowance for loan loss models for individually impaired loans to

incorporate more home price data at the regional level rather than at the national level. We believe this approach

provides a better estimation of possible home price paths and related default expectations; it has resulted in a

decrease to our allowance for loan losses and a reduction in our provision for loan losses of approximately $800

million.

In the second quarter of 2011, we updated our loan loss models to incorporate more recent data on prepayments of

modified loans, which contributed to an increase in our allowance for loan losses and an increase in credit-related

expenses of approximately $1.5 billion. The change resulted in slower expected prepayment speeds, which extended

the expected lives of modified loans and lowered the present value of cash flows on those loans. Also in the second

quarter of 2011, we updated our estimate of the reserve for guaranty losses related to private-label mortgage-related

securities that we have guaranteed to increase our focus on earlier stage delinquency, rather than foreclosure trends,

as the primary driver in estimating incurred losses. We believe delinquencies are a better indicator of incurred losses

compared to foreclosure trends because the recent delays in the foreclosure process have interrupted the normal

flow of delinquent mortgages into foreclosure. This update resulted in an increase in our reserve for guaranty losses

included within “Other liabilities” and an increase in credit related-expenses of approximately $700 million.

Multifamily Loss Reserves

We establish a specific multifamily loss reserve for multifamily loans that we determine are individually

impaired. We identify multifamily loans for evaluation for impairment through a credit risk assessment process.

As part of this assessment process, we stratify multifamily loans into different internal risk categories based on

the credit risk inherent in each individual loan and management judgment. We categorize loan credit risk, taking

into consideration available operating statements and expected cash flows from the underlying property, the

estimated value of the property, the historical loan payment experience and current relevant market conditions

that may impact credit quality. If we conclude that a multifamily loan is impaired, we measure the impairment

based on the difference between our recorded investment in the loan and the fair value of the underlying property

less the estimated discounted costs to sell the property and any lender loss sharing or other proceeds we expect to

receive. When a modified loan is deemed individually impaired, we measure the impairment based on the

difference between our recorded investment in the loan and the present value of expected cash flows discounted

at the loan’s original interest rate. However, when foreclosure is probable on an individually impaired loan, we

measure impairment based on the difference between our recorded investment in the loan and the fair value of

the underlying property, less the estimated costs to sell the property and any lender loss sharing or other proceeds

we expect to receive. We generally obtain property appraisals from independent third-parties to determine the

fair value of multifamily loans that we consider to be individually impaired. We also obtain property appraisals

and broker price opinions when we foreclose on a multifamily property. We then allocate a portion of the reserve

to interest accrued on the loans as of the balance sheet date.

The collective multifamily loss reserve for all other loans in our multifamily guaranty book of business is

established using an internal model that applies loss factors to loans in similar risk categories. Our loss factors

are developed based on our historical default and loss severity experience. Management may also apply judgment

to adjust the loss factors derived from our models, taking into consideration model imprecision and specifically

known events, such as current credit conditions, that may affect the credit quality of our multifamily loan

portfolio but are not yet reflected in our model-generated loss factors. We then allocate a portion of the reserve to

interest accrued on the loans as of the balance sheet date.

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CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a discussion of our consolidated results of operations for the periods indicated and

should be read together with our consolidated financial statements, including the accompanying notes.

In 2009, the FASB concurrently revised the accounting guidance related to the consolidation of variable interest

entities (the “consolidation accounting guidance”) and the accounting guidance related to transfers of financial

assets. The revisions to the accounting guidance for these topics replaced the previous accounting model with a

qualitative model for determining the primary beneficiary of a VIE and also increased the population of entities that

are subject to assessment under the consolidation accounting guidance by removing the scope exception for

qualifying special purpose entities. On January 1, 2010, we prospectively adopted the revised guidance for these

topics, which had a significant impact on the presentation and comparability of our consolidated financial

statements. We consolidate the substantial majority of our single-class securitization trusts and upon adoption of the

consolidation accounting guidance, eliminated previously recorded deferred revenue from our guaranty

arrangements. While some line items in our consolidated statements of operations were not impacted, others were

impacted significantly, which reduces the comparability of our results for 2011 and 2010 with our results for 2009.

The following table provides a summary of the line items that were impacted significantly as a result of our

adoption of the consolidation accounting standards.

Item Accounting Treatment

Net interest

income • We recognize the underlying assets and liabilities of the substantial majority of our MBS trusts in our

consolidated balance sheets, which increases both our interest-earning assets and interest-bearing

liabilities and related interest income and interest expense.

• Contractual guaranty fees and the amortization of deferred cash fees received after December 31, 2009

are recognized into interest income.

• We include nonaccrual loans from the majority of our MBS trusts in our consolidated financial

statements, which decreases our net interest income as we do not recognize interest income on these

loans while we continue to recognize interest expense for amounts owed to MBS certificateholders.

Guaranty fee

income

(included in

Fee and other

income)

• Substantially all of our guaranty-related assets and liabilities in our consolidated balance sheets are

eliminated. We do not recognize income or loss from amortizing these assets and liabilities nor do we

recognize changes in their fair value. We recognize both contractual guaranty fees and the

amortization of deferred cash fees received after December 31, 2009 through guaranty fee income only

on those amounts related to unconsolidated trusts and other credit enhancement arrangements, such as

our long-term standby commitments.

Credit-related

expenses • As the majority of our trusts are consolidated, we do not record fair value losses on credit-impaired

loans acquired from the substantial majority of our trusts.

• The substantial majority of our combined loss reserves are recognized in our allowance for loan losses

to reflect the loss allowance against the consolidated mortgage loans. We use a different methodology

to estimate incurred losses for our allowance for loan losses as compared with our reserve for guaranty

losses, which reduces our credit-related expenses.

Investment

gains

(losses), net

• Our portfolio securitization transactions that reflect transfers of assets to consolidated trusts do not

qualify as sales. Accordingly, we do not designate the substantial majority of our loans held for

securitization as held-for-sale, thereby reducing the amount we recognize as portfolio securitization

gains and losses and our lower of cost or fair value adjustments.

• We do not record gains or losses on the sale from our portfolio of the substantial majority of our

available-for-sale MBS because these securities are eliminated in consolidation.

Fair value

gains

(losses), net

• We do not record fair value gains or losses on the majority of our trading MBS, which reduces the

amount of securities subject to recognition of changes in fair value in our consolidated statement of

operations.

See “Note 1, Summary of Significant Accounting Policies” for a further discussion of the impacts of the

consolidation accounting guidance on our consolidated financial statements.

Additionally, we expect high levels of period-to-period volatility in our results of operations and financial

condition, principally due to changes in market conditions that result in periodic fluctuations in the estimated fair

- 91 -
value of financial instruments that we mark to market through our earnings. These instruments include trading

securities and derivatives. The estimated fair value of our trading securities and derivatives may fluctuate

substantially from period-to-period because of changes in interest rates, credit spreads and interest rate volatility,

as well as activity related to these financial instruments. While the estimated fair value of our

derivatives may fluctuate, some of the financial instruments that the derivatives hedge are not recorded at fair

value in our consolidated financial statements.

Table 6 displays our consolidated results of operations for the periods indicated.

Table 6: Summary of Consolidated Results of Operations

For the Year Ended

December 31, Variance

2011 2010 2009 2011 vs. 2010 2010 vs. 2009

(Dollars in millions)

Net interest income ................................ $ 19,281 $ 16,409 $ 14,510 $ 2,872 $ 1,899

Fee and other income .............................. 1,163 1,084 7,984 79 (6,900)

Net revenues ..................................... $ 20,444 $ 17,493 $ 22,494 $ 2,951 $ (5,001)

Investment gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506 346 1,458 160 (1,112)

Net other-than-temporary impairments ................. (308) (722) (9,861) 414 9,139

Fair value losses, net ............................... (6,621) (511) (2,811) (6,110) 2,300

Administrative expenses ............................ (2,370) (2,597) (2,207) 227 (390)

Credit-related expenses(1) ............................ (27,498) (26,614) (73,536) (884) 46,922

Other non-interest expenses(2) ........................ (1,098) (1,495) (8,544) 397 7,049

Loss before federal income taxes ..................... (16,945) (14,100) (73,007) (2,845) 58,907

Benefit for federal income taxes ...................... (90) (82) (985) (8) 903

Net loss ......................................... (16,855) (14,018) (72,022) (2,837) 58,004

Less: Net loss attributable to the noncontrolling interest . . . . — 4 53 (4) (49)

Net loss attributable to Fannie Mae .................. $(16,855) $(14,014) $(71,969) $(2,841) $57,955

Total comprehensive loss attributable to Fannie Mae ...... $(16,408) $(10,570) $(60,472) $(5,838) $49,902

(1) Consists of provision for loan losses, provision for guaranty losses, and foreclosed property expense.

(2) Consists of debt extinguishment losses, net and other expenses.

Net Interest Income

Net interest income represents the difference between interest income and interest expense and is a primary

source of our revenue. The amount of interest income and interest expense we recognize in the consolidated

statements of operations and comprehensive loss is affected by our investment and debt activity, asset yields and

our funding costs.

Table 7 displays an analysis of our net interest income, average balances, and related yields earned on assets and

incurred on liabilities for the periods indicated. For most components of the average balances, we use a daily

weighted average of amortized cost. When daily average balance information is not available, such as for

mortgage loans, we use monthly averages. Table 8 displays the change in our net interest income between

periods and the extent to which that variance is attributable to: (1) changes in the volume of our interest-earning

assets and interest-bearing liabilities or (2) changes in the interest rates of these assets and liabilities.

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Table 7: Analysis of Net Interest Income and Yield

For the Year Ended December 31,

2011 2010 2009

Average

Balance

Interest

Income/

Expense

Average

Rates

Earned/

Paid

Average

Balance

Interest

Income/

Expense

Average

Rates

Earned/

Paid

Average

Balance

Interest

Income/

Expense

Average

Rates

Earned/Paid

(Dollars in millions)

Interest-earning assets:

Mortgage loans of Fannie Mae(1) .......... $ 392,719 $ 14,829 3.78% $ 362,785 $ 14,992 4.13% $321,394 $15,378 4.78%

Mortgage loans of consolidated trusts(1) .... 2,596,816 123,633 4.76 2,619,258 132,591 5.06 104,385 6,143 5.88

Total mortgage loans ................ 2,989,535 138,462 4.63 2,982,043 147,583 4.95 425,779 21,521 5.05

Mortgage-related securities .............. 316,963 14,607 4.61 387,798 19,552 5.04

Elimination of Fannie Mae MBS held in

portfolio .......................... (202,806) (10,360) 5.11 (250,748) (13,232) 5.28

Total mortgage-related securities, net(2) . . . 114,157 4,247 3.72 137,050 6,320 4.61 347,467 17,230 4.96

Non-mortgage securities(3) ............... 71,713 117 0.16 91,613 221 0.24 53,724 247 0.46

Federal funds sold and securities purchased

under agreements to resell or similar

arrangements ....................... 26,045 32 0.12 28,685 62 0.22 46,073 260 0.56

Advances to lenders ................... 3,943 85 2.16 3,523 84 2.38 4,580 97 2.12

Total interest-earning assets ............... $3,205,393 $142,943 4.46% $3,242,914 $154,270 4.76% $877,623 $39,355 4.48%

Interest-bearing liabilities:

Short-term debt(4) ...................... $ 160,704 $ 301 0.19% $ 212,784 $ 619 0.29% $280,260 $ 2,306 0.82%

Long-term debt ....................... 585,362 14,711 2.51 583,369 18,857 3.23 561,907 22,195 3.95

Total short-term and long-term funding

debt ............................ 746,066 15,012 2.01 796,153 19,476 2.45 842,167 24,501 2.91

Debt securities of consolidated trusts ...... 2,651,121 119,010 4.49 2,682,434 131,617 4.91

Elimination of Fannie Mae MBS held in

portfolio .......................... (202,806) (10,360) 5.11 (250,748) (13,232) 5.28

Total debt securities of consolidated trusts

held by third parties ............... 2,448,315 108,650 4.44 2,431,686 118,385 4.87 6,033 344 5.70

Total interest-bearing liabilities ............ $3,194,381 $123,662 3.87% $3,227,839 $137,861 4.27% $848,200 $24,845 2.93%

Impact of net non-interest bearing

funding ............................. $ 11,012 0.01% $ 15,075 0.02% $ 29,423 0.10%

Net interest income/net interest yield(2) ....... $ 19,281 0.60% $ 16,409 0.51% $14,510 1.65%

Net interest income/net interest yield of

consolidated trusts(5) ................... $ 4,623 0.18% $ 974 0.04%

As of December 31,

2011 2010 2009

Selected benchmark interest rates(6)

3-month LIBOR ...................................................................... 0.58% 0.30% 0.25%

2-year swap rate ...................................................................... 0.73 0.80 1.42

5-year swap rate ...................................................................... 1.22 2.17 2.98

30-year Fannie Mae MBS par coupon rate ................................................. 2.88 4.13 4.56

(1) Interest income includes interest income on acquired credit-impaired loans of $2.1 billion, $2.2 billion and $619 million for the years

ended December 31, 2011, 2010 and 2009, respectively. These amounts include accretion income of $1.0 billion, $1.0 billion and

$405 million for the years ended December 31, 2011, 2010 and 2009, respectively, relating to a portion of the fair value losses

recorded upon the acquisition of the loans. Average balance includes loans on nonaccrual status, for which interest income is

recognized when collected.

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(2) Includes an out-of-period adjustment of $727 million to reduce “Interest income: Available-for-sale securities” in our

consolidated statements of operations and comprehensive loss for the year ended December 31, 2011. Without this

adjustment the average interest rate earned on total mortgage-related securities would have been 4.36% and the total net

interest yield would have been 0.62%.

(3) Includes cash equivalents.

(4) Includes federal funds purchased and securities sold under agreements to repurchase.

(5) Net interest income of consolidated trusts represents interest income from mortgage loans of consolidated trusts less

interest expense from debt securities of consolidated trusts. Net interest yield is calculated based on net interest income

from consolidated trusts divided by average balance of mortgage loans of consolidated trusts.

(6) Data from British Bankers’ Association, Thomson Reuters Indices and Bloomberg L.P.

Table 8: Rate/Volume Analysis of Changes in Net Interest Income

2011 vs. 2010 2010 vs. 2009

Total

Variance

Variance Due to:(1)

Total

Variance

Variance Due to:(1)

Volume Rate Volume Rate

(Dollars in millions)

Interest income:

Mortgage loans of Fannie Mae ................... $ (163) $ 1,185 $ (1,348) $ (386) $ 1,849 $(2,235)

Mortgage loans of consolidated trusts ............. (8,958) (1,128) (7,830) 126,448 127,426 (978)

Total mortgage loans ........................ (9,121) 57 (9,178) 126,062 129,275 (3,213)

Total mortgage-related securities, net(2) ............ (1,346) (902) (444) (10,910) (9,779) (1,131)

Non-mortgage securities(3) ...................... (104) (42) (62) (26) 125 (151)

Federal funds sold and securities purchased under

agreements to resell or similar arrangements ...... (30) (5) (25) (198) (75) (123)

Advances to lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9 (8) (13) (24) 11

Total interest income ............................ (10,600) (883) (9,717) 114,915 119,522 (4,607)

Interest expense:

Short-term debt(4) .............................. (318) (130) (188) (1,687) (458) (1,229)

Long-term debt ............................... (4,146) 64 (4,210) (3,338) 821 (4,159)

Total short-term and long-term funding debt ...... (4,464) (66) (4,398) (5,025) 363 (5,388)

Total debt securities of consolidated trusts held by

third parties .............................. (9,735) 940 (10,675) 118,041 118,099 (58)

Total interest expense ............................ (14,199) 874 (15,073) 113,016 118,462 (5,446)

Net interest income(2) ............................. $ 3,599 $(1,757) $ 5,356 $ 1,899 $ 1,060 $ 839

(1) Combined rate/volume variances are allocated to both rate and volume based on the relative size of each variance.

(2) Excludes an out-of-period adjustment of $727 million that reduced the interest income on mortgage related securities for

the year ended December 31, 2011.

(3) Includes cash equivalents.

(4) Includes federal funds purchased and securities sold under agreements to repurchase.

Net interest income increased during 2011, as compared with 2010, due to lower interest expense on debt, which

was partially offset by lower interest income on loans and securities. The primary drivers of these changes were:

• a reduction in the interest expense of debt of consolidated trusts driven by a decrease in rates. The rate on

debt of consolidated trusts is generally driven by mortgage rates of loans securitized in MBS, and these

mortgage rates declined in 2011;

• lower interest expense on funding debt due to lower borrowing rates, which allowed us to continue to

replace higher-cost debt with lower-cost debt;

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• lower interest income on mortgage securities due to a decrease in the balance of our mortgage securities, as

we continue to manage our portfolio requirements; and

• lower yields on mortgage loans as new business acquisitions continue to replace higher-yielding loans with

loans issued at lower mortgage rates. The reduction in interest income on loans due to lower yields was

partially offset by a reduction in the amount of interest income not recognized for nonaccrual mortgage

loans, due to a decline in the balance of nonaccrual loans in our consolidated balance sheets as we continue

to complete a high number of loan modifications and foreclosures.

In the three month period ended December 31, 2011, we identified an error in the rate used to calculate interest

income on available-for-sale securities, which resulted in an overstatement of interest income. To correct the error,

we recorded an out-of-period adjustment of $727 million to reduce “Interest Income: Available-for-sale securities”

in our consolidated statement of operations and comprehensive loss for the year ended December 31, 2011.

Net interest income increased during 2010 compared with 2009 primarily as a result of an increase in interest

income due to the recognition of contractual guaranty fees in interest income upon adoption of the consolidation

accounting guidance and a reduction in the interest expense on debt that we have issued as lower borrowing rates

allowed us to replace higher-cost debt with lower-cost debt. Partially offsetting these positive effects for 2010

was lower interest income from the interest-earning assets that we own due to lower yields on our mortgage and

non-mortgage assets. The increase in net interest income was further offset by a significant increase in the

number of loans on nonaccrual status in our consolidated balance sheets, because we do not recognize interest

income on loans that have been placed on nonaccrual status, except when cash payments are received. The

increase in loans on nonaccrual status in 2010 was due to our adoption of the consolidation accounting guidance.

Net interest yield significantly decreased for 2010 compared with 2009. We recognize the contractual guaranty

fee and the amortization of deferred cash fees received after December 31, 2009 on the underlying mortgage

loans of consolidated trusts as interest income, which represents the spread between the net interest yield on the

underlying mortgage assets and the rate on the debt of the consolidated trusts. Upon adoption of the consolidation

accounting guidance, our interest-earning assets and interest-bearing liabilities both increased by approximately

$2.4 trillion. The lower spread on these interest-earning assets and liabilities reduced our net interest yield for

2010 as compared with 2009.

Additionally, our net interest income and net interest yield were higher than they would have otherwise been in

2011 and 2010 because our debt funding needs were lower than they would otherwise have been required as a

result of funds we received from Treasury under the senior preferred stock purchase agreement. Further,

dividends paid to Treasury are not recognized in interest expense.

Table 9 displays the interest income not recognized for loans on nonaccrual status and the resulting reduction in

our net interest yield from mortgage loans.

Table 9: Impact of Nonaccrual Loans on Net Interest Income

For the Year Ended December 31,

2011 2010 2009

Interest

Income not

Recognized

for

Nonaccrual

Loans(1)

Reduction

in Net

Interest

Yield(2)

Interest

Income not

Recognized

for

Nonaccrual

Loans(1)

Reduction

in Net

Interest

Yield(2)

Interest

Income not

Recognized

for

Nonaccrual

Loans(1)

Reduction

in Net

Interest

Yield(2)

(Dollars in millions)

Mortgage loans of Fannie Mae ............. $(4,666) $(4,721)

Mortgage loans of consolidated trusts ........ (896) (3,692)

Total mortgage loans ..................... $(5,562) (18) bp $(8,413) (26) bp $(1,238) (14) bp

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(1) Amount includes cash received for loans on nonaccrual status.

(2) Calculated based on annualized interest income not recognized divided by total interest-earning assets, expressed in basis

points.

For a discussion of the interest income from the assets we have purchased and the interest expense from the debt we

have issued, see the discussion of our Capital Markets group’s net interest income in “Business Segment Results.”

Net Other-Than-Temporary Impairment

The net other-than-temporary impairment charges recorded in 2011 and 2010 were primarily driven by a net decline

in forecasted home prices for certain geographic regions, which resulted in a decrease in the present value of our

cash flow projections on Alt-A and subprime securities. The charges recorded in 2011 were partially offset by an

out-of-period adjustment, which reduced “Other-than-temporary-impairments” in our consolidated statements of

operations and comprehensive loss for the year ended December 31, 2011. Net other-than-temporary impairment

decreased in 2010 compared with 2009 due to slower deterioration of the estimated credit component of the fair

value losses of these securities. In addition, net other-than-temporary impairment decreased in 2010 compared with

2009 because, effective beginning in the second quarter of 2009, we recognize only the credit portion of other-thantemporary impairment in our consolidated statements of operations due to the adoption of new other-than-temporary

impairment accounting guidance. The net other-than-temporary impairment charge recorded prior to April 1, 2009

included both the credit and non-credit components of the loss in fair value. Approximately 57% of the impairment

recorded in 2009 was recorded in the first quarter of 2009 prior to the change in accounting guidance.

See “Note 5, Investments in Securities” for additional information regarding the net other-than-temporary impairment

recognized in 2011, 2010 and 2009, including a discussion of an out-of-period adjustment we recorded in 2011.

Fair Value Gains (Losses), Net

Table 10 displays the components of our fair value gains and losses.

Table 10: Fair Value Gains (Losses), Net

For the Year Ended

December 31,

2011 2010 2009

(Dollars in millions)

Risk management derivatives fair value losses attributable to:

Net contractual interest expense accruals on interest rate swaps ....................... $(2,185) $(2,895) $(3,359)

Net change in fair value during the period ........................................ (3,954) 1,088 (1,337)

Total risk management derivatives fair value losses, net ........................... (6,139) (1,807) (4,696)

Mortgage commitment derivatives fair value losses, net ............................... (423) (1,193) (1,654)

Total derivatives fair value losses, net ............................................. (6,562) (3,000) (6,350)

Trading securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266 2,692 3,744

Other, net(1) .................................................................. (325) (203) (205)

Fair value losses, net ........................................................ $(6,621) $ (511) $(2,811)

2011 2010 2009

5-year swap rate:

As of March 31 ............................................................. 2.47% 2.73% 2.22%

As of June 30 .............................................................. 2.03 2.06 2.97

As of September 30 ......................................................... 1.26 1.51 2.65

As of December 31 .......................................................... 1.22 2.18 2.98

(1) Consists of the following: debt fair value gains (losses), net, debt foreign exchange gains (losses), net, and mortgage loans

fair value gains (losses), net.

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Risk Management Derivatives Fair Value (Losses) Gains, Net

Risk management derivative instruments are an integral part of our management of interest rate risk. We

supplement our issuance of debt securities with derivative instruments to further reduce duration risk, which

includes prepayment risk. We purchase option-based risk management derivatives to economically hedge

prepayment risk. In cases where options obtained through callable debt issuances are not needed for risk

management derivative purposes, we may sell options in the over-the-counter derivatives market in order to

offset the options obtained in the callable debt. Our principal purpose in using derivatives is to manage our

aggregate interest rate risk profile within prescribed risk parameters. We generally use only derivatives that are

relatively liquid and straightforward to value. We consider the cost of derivatives used in our management of

interest rate risk to be an inherent part of the cost of funding and hedging our mortgage investments and

economically similar to the interest expense that we recognize on the debt we issue to fund our mortgage

investments.

We present, by derivative instrument type, the fair value gains and losses on our derivatives for the years ended

December 31, 2011, 2010 and 2009 in “Note 9, Derivative Instruments.”

The primary factors affecting the fair value of our risk management derivatives include the following:

• Changes in interest rates: Our derivatives, in combination with our issuances of debt securities, are

intended to offset changes in the fair value of our mortgage assets. Mortgage assets tend to increase in value

when interest rates decrease and, conversely, decrease in value when interest rates rise. Pay-fixed swaps

decrease in value and receive-fixed swaps increase in value as swap rates decrease (with the opposite being

true when swap rates increase). Because the composition of our pay-fixed and receive-fixed derivatives

varies across the yield curve, the overall fair value gains and losses of our derivatives are sensitive to

flattening and steepening of the yield curve.

• Implied interest rate volatility: Our derivatives portfolio includes option-based derivatives, which we

purchase to economically hedge the prepayment option embedded in our mortgage investments and sell to

offset the options obtained through callable debt issuances when those options are not needed for risk

management purposes. A key variable in estimating the fair value of option-based derivatives is implied

volatility, which reflects the market’s expectation of the magnitude of future changes in interest rates.

Assuming all other factors are held equal, including interest rates, a decrease in implied volatility would

reduce the fair value of our purchased options and an increase in implied volatility would increase the fair

value of our purchased options, while having the opposite effect on the options that we have sold.

• Changes in our derivative activity: As interest rates change, we are likely to rebalance our portfolio to

manage our interest rate exposure. As interest rates decrease, expected mortgage prepayments are likely to

increase, which reduces the duration of our mortgage investments. In this scenario, we generally will

rebalance our existing portfolio to manage this risk by adding receive-fixed swaps, which shortens the

duration of our liabilities. Conversely, when interest rates increase and the duration of our mortgage assets

increases, we are likely to add pay-fixed swaps, which have the effect of extending the duration of our

liabilities. We use derivatives to rebalance our portfolio when the duration of our mortgage assets changes

as the result of mortgage purchases or sales. We also use foreign-currency swaps to manage the foreign

exchange impact of our foreign currency-denominated debt issuances.

• Time value of purchased options: Intrinsic value and time value are the two primary components of an

option’s price. The intrinsic value is determined by the amount by which the market rate exceeds or is below

the exercise, or strike rate, such that the option is in-the-money. The time value of an option is the amount

by which the price of an option exceeds its intrinsic value. Time decay refers to the diminishing value of an

option over time as less time remains to exercise the option.

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We recorded risk management derivative fair value losses in 2011 primarily as a result of a decrease in the fair

value of our pay-fixed derivatives due to a significant decline in swap rates during the period.

We recorded risk management derivative fair value losses in 2010 primarily as a result of time decay on our

purchased options; a decrease in the fair value of our pay-fixed derivatives during the first quarter of 2010 due to

a decline in swap rates during that period; and a decrease in implied interest rate volatility, which reduced the fair

value of our purchased options.

Risk management derivative losses in 2009 were driven by losses on our receive-fixed swaps and receive-fixed

option-based derivatives due to an increase in swap rates and by time decay on our purchased options, partially

offset by gains on our net-pay fixed book due to higher swap rates.

Because risk management derivatives are an important part of our interest rate risk management strategy, it is

important to evaluate the impact of our derivatives in the context of our overall interest rate risk profile and in

conjunction with the other offsetting mark-to-market gains and losses presented in Table 10. For additional

information on our use of derivatives to manage interest rate risk, including the economic objective of our use of

various types of derivative instruments, changes in our derivatives activity and the outstanding notional amounts,

see “Risk Management—Market Risk Management, Including Interest Rate Risk Management—Interest Rate

Risk Management.” See “Consolidated Balance Sheet Analysis—Derivative Instruments” for a discussion of the

effect of derivatives on our consolidated balance sheets.

Mortgage Commitment Derivatives Fair Value Losses, Net

Commitments to purchase or sell some mortgage-related securities and to purchase single-family mortgage loans

are generally accounted for as derivatives. For open mortgage commitment derivatives, we include changes in

their fair value in our consolidated statements of operations and comprehensive loss. When derivative purchase

commitments settle, we include the fair value of the commitment on the settlement date in the cost basis of the

loan or security we purchase. When derivative commitments to sell securities settle, we include the fair value of

the commitment on the settlement date in the cost basis of the security we sell. Purchases of securities issued by

our consolidated MBS trusts are treated as extinguishments of debt; we recognize the fair value of the

commitment on the settlement date as a component of debt extinguishment gains and losses. Sales of securities

issued by our consolidated MBS trusts are treated as issuances of consolidated debt; we recognize the fair value

of the commitment on the settlement date as a component of debt in the cost basis of the debt issued.

We recognized losses on our mortgage commitments in 2011, 2010 and 2009 primarily due to losses on

commitments to sell mortgage-related securities as a result of a decline in interest rates during the commitment

period. Additionally, mortgage commitment losses in 2009 were associated with a large volume of dollar roll

transactions.

Trading Securities Gains (Losses), Net

We recognized fair value gains on our trading securities in 2011, 2010 and 2009. The estimated fair value of our

trading securities may fluctuate substantially from period-to-period primarily due to changes in interest rates and

credit spreads. Gains from our trading securities in 2011 were primarily driven by higher prices on our CMBS as

a result of significant narrowing of the U.S. Treasury yield curve and swap yield curve spreads offset by

widening credit spreads. Gains from trading securities in 2010 were primarily driven by a decrease in interest

rates and narrowing of credit spreads, primarily on CMBS. Gains from trading securities in 2009 were primarily

attributable to the narrowing of spreads on CMBS, agency MBS and non-mortgage related securities, partially

offset by an increase in interest rates.

We provide additional information on our trading and available-for-sale securities in “Consolidated Balance

Sheet Analysis—Investments in Mortgage-Related Securities.” We disclose the sensitivity of changes in the fair

value of our trading securities to changes in interest rates in “Risk Management—Market Risk Management,

Including Interest Rate Risk Management—Measurement of Interest Rate Risk.”

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Administrative Expenses

Administrative expenses decreased in 2011 compared with 2010 due to ongoing operating cost reduction efforts

we are undertaking to increase productivity and lower our administrative costs. We have taken recent steps to

realign our organization, personnel and resources to focus on our most critical priorities, which include providing

liquidity, stability and affordability to the mortgage market. Administrative expenses increased in 2010 compared

with 2009 due to an increase in employees and third-party services primarily related to our foreclosure

prevention and credit loss mitigation efforts.

Credit-Related Expenses

We refer to our provision for loan losses and our provision for guaranty losses collectively as our “provision for

credit losses.” Credit-related expenses consist of our provision for credit losses and foreclosed property expense.

Provision for Credit Losses

Our total loss reserves provide for an estimate of credit losses incurred in our guaranty book of business,

including concessions we granted borrowers upon modification of their loans, as of each balance sheet date. We

establish our loss reserves through our provision for credit losses for losses that we believe have been incurred

and will eventually be reflected over time in our charge-offs. When we determine that a loan is uncollectible,

typically upon foreclosure, we record a charge-off against our loss reserves. We record recoveries of previously

charged-off amounts as a reduction to charge-offs.

Table 11 displays the components of our total loss reserves and our total fair value losses previously recognized

on loans purchased out of unconsolidated MBS trusts reflected in our consolidated balance sheets. Because these

fair value losses lowered our recorded loan balances, we have fewer inherent losses in our guaranty book of

business and consequently require lower total loss reserves. For these reasons, we consider these fair value losses

as an “effective reserve,” apart from our total loss reserves, to the extent that we expect to realize these amounts

as credit losses on the acquired loans in the future. As of December 31, 2011 and 2010, we estimate that over

two-thirds of this amount represents credit losses we expect to realize in the future and nearly one-third will

eventually be recovered, either through net interest income for loans that cure or through foreclosed property

income for loans where the sale of the collateral exceeds our recorded investment in the loan. We exclude these

fair value losses from our credit loss calculation as described in “Credit Loss Performance Metrics.”

Table 11: Total Loss Reserves

As of December 31,

2011 2010

(Dollars in millions)

Allowance for loan losses ............................................................ $72,156 $61,556

Reserve for guaranty losses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 994 323

Combined loss reserves ............................................................ 73,150 61,879

Allowance for accrued interest receivable ................................................ 2,496 3,414

Allowance for preforeclosure property taxes and insurance receivable(2) ........................ 1,292 958

Total loss reserves ................................................................ 76,938 66,251

Fair value losses previously recognized on acquired credit impaired loans(3) ..................... 16,273 19,171

Total loss reserves and fair value losses previously recognized on acquired credit-impaired

loans ......................................................................... $93,211 $85,422

(1) Amount included in “Other liabilities” in our consolidated balance sheets.

(2) Amount included in “Other assets” in our consolidated balance sheets.

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(3) Represents the fair value losses on loans purchased out of unconsolidated MBS trusts reflected in our consolidated

balance sheets.

We refer to our allowance for loan losses and reserve for guaranty losses collectively as our combined loss

reserves. We summarize the changes in our combined loss reserves in Table 12. Because we recognized

mortgage loans held by newly consolidated trusts upon adoption of the consolidation accounting guidance on

January 1, 2010, we increased our “Allowance for loan losses” and decreased our “Reserve for guaranty losses.”

The impact at the transition date is reported as “Adoption of consolidation accounting guidance.” The decrease in

the combined loss reserves on the adoption date represents a difference in the methodology used to estimate

incurred losses for our allowance for loan losses as compared with our reserve for guaranty losses and our

separate presentation of the portion of the allowance related to accrued interest as our “Allowance for accrued

interest receivable.”

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Table 12: Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)

For the Year Ended December 31,

2011 2010

2009 2008 2007

Of

Fannie

Mae

Of

Consolidated

Trusts Total

Of

Fannie

Mae

Of

Consolidated

Trusts Total

(Dollars in millions)

Changes in combined loss reserves:

Allowance for loan losses:

Beginning balance, January 1 .......$ 48,530 $13,026 $ 61,556 $ 8,078 $ 1,847 $ 9,925 $ 2,772 $ 629 $ 284

Adoption of consolidation

accounting guidance .......... — — — — 43,576 43,576 — — —

Provision for loan losses ......... 14,080 11,834 25,914 13,067 11,635 24,702 9,569 4,022 658

Charge-offs(1)(2) ................. (19,398) (1,772) (21,170) (15,852) (7,026) (22,878) (2,245) (1,987) (407)

Recoveries .................... 3,636 1,636 5,272 1,913 1,164 3,077 214 190 107

Transfers(3) .................... 9,980 (9,980) — 44,714 (44,714) — — — —

Other(4) . . . . . . . . . . . . . . . . . . . . . . . 481 103 584 (3,390) 6,544 3,154 (385) (82) (13)

Ending balance, December 31(5) .....$ 57,309 $14,847 $ 72,156 $ 48,530 $ 13,026 $ 61,556 $ 9,925 $ 2,772 $ 629

Reserve for guaranty losses:

Beginning balance, January 1 . . . . . . . $ 323 $ — $ 323 $ 54,430 $ — $ 54,430 $ 21,830 $ 2,693 $ 519

Adoption of consolidation

accounting guidance .......... — — — (54,103) — (54,103) — — —

Provision for guaranty losses . . . . . 804 — 804 194 — 194 63,057 23,929 3,906

Charge-offs ................... (138) — (138) (203) — (203) (31,142) (4,986) (1,782)

Recoveries . . . . . . . . . . . . . . . . . . . . 5 — 5 5 — 5 685 194 50

Ending balance, December 31 . . . . . . . $ 994 $ — $ 994 $ 323 $ — $ 323 $ 54,430 $21,830 $ 2,693

Combined loss reserves:

Beginning balance, January 1 .......$ 48,853 $13,026 $ 61,879 $ 62,508 $ 1,847 $ 64,355 $ 24,602 $ 3,322 $ 803

Adoption of consolidation

accounting guidance .......... — — — (54,103) 43,576 (10,527) — — —

Total provision for credit losses . . . 14,884 11,834 26,718 13,261 11,635 24,896 72,626 27,951 4,564

Charge-offs(1)(2) ................. (19,536) (1,772) (21,308) (16,055) (7,026) (23,081) (33,387) (6,973) (2,189)

Recoveries .................... 3,641 1,636 5,277 1,918 1,164 3,082 899 384 157

Transfers(3) .................... 9,980 (9,980) — 44,714 (44,714) — — — —

Other(4) . . . . . . . . . . . . . . . . . . . . . . . 481 103 584 (3,390) 6,544 3,154 (385) (82) (13)

Ending balance, December 31(5) .....$ 58,303 $14,847 $ 73,150 $ 48,853 $ 13,026 $ 61,879 $ 64,355 $24,602 $ 3,322

Attribution of charge-offs:

Charge-offs attributable to guaranty

book of business ............... $(21,192) $(22,901) $(12,832) $ (4,544) $ (825)

Charge-offs attributable to fair value

losses on:

Acquired credit-impaired loans

......................... (116) (180) (20,327) (2,096) (1,364)

HomeSaver Advance loans ..... — — (228) (333) —

Total charge-offs ................. $(21,308) $(23,081) $(33,387) $ (6,973) $(2,189)

Allocation of combined loss reserves:

Balance at end of each period attributable

to:

Single-family .................... $ 71,512 $ 60,163 $ 62,312 $24,498 $ 3,249

Multifamily ..................... 1,638 1,716 2,043 104 73

Total .......................... $ 73,150 $ 61,879 $ 64,355 $24,602 $ 3,322

Single-family and multifamily

combined loss reserves as a

percentage of applicable guaranty

book of business:

Single-family .................... 2.52% 2.10% 2.14% 0.87% 0.13%

Multifamily ..................... 0.84 0.91 1.10 0.06 0.05

Combined loss reserves as a percentage

of:

Total guaranty book of business ..... 2.41% 2.03% 2.08% 0.83% 0.12%

Total nonperforming loans(6) ........ 29.03 24.40 28.98 20.51 12.19

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(1) Includes accrued interest of $1.4 billion, $2.4 billion, $1.5 billion, $642 million and $128 million for the years ended

December 31, 2011, 2010, 2009, 2008 and 2007, respectively.

(2) While we purchase the substantial majority of loans that are four or more months delinquent from our MBS trusts, we do

not exercise this option to purchase loans during a forbearance period. Accordingly, charge-offs of consolidated trusts

generally represent loans that remained in our consolidated trusts at the time of default.

(3) Includes transfers from trusts for delinquent loan purchases.

(4) Amounts represent the net activity recorded in our allowances for accrued interest receivable and preforeclosure property

taxes and insurance receivable from borrowers. The provision for credit losses, charge-offs, recoveries and transfer

activity included in this table reflects all changes for both the allowance for loan losses and the valuation allowances for

accrued interest and preforeclosure property taxes and insurance receivable that relate to the mortgage loans.

(5) Includes $375 million, $385 million, $726 million, $150 million, and $39 million as of December 31, 2011, 2010, 2009,

2008 and 2007, respectively, for acquired credit-impaired loans.

(6) In December 2011, we changed our definition of “total nonperforming loans.” Under our new definition, we no longer

reflect in this amount (1) our allowance for loan losses or (2) our allowance for accrued interest receivable related to these

individually impaired loans. The amounts we report for prior periods have been revised from amounts we previously

disclosed as a result of this change.

The prolonged decline in home prices and the continued stress on a broad segment of borrowers from continued

high levels of unemployment and underemployment have caused our total loss reserves to remain high for the past

few years. We expect our loss reserves will remain significantly elevated relative to historical levels for an extended

period because: (1) we expect future defaults on loans from our legacy book of business and the resulting chargeoffs will occur over a period of years; and (2) a significant portion of our reserves represents concessions granted to

borrowers upon modification of their loans and will remain in our reserves until the loans are fully repaid or default.

Our provision for credit losses continues to be a key driver of our net losses for each period presented. The amount

of our provision for credit losses varies from period to period based on changes in home prices, borrower payment

behavior, the types and volumes of loss mitigation activities completed, and actual and estimated recoveries from

our lender and mortgage insurer counterparties. In addition, our provision for credit losses and our loss reserves can

be impacted by updates to our allowance for loan loss models that we use to estimate our loss reserves. For further

information on estimates and assumptions that are used to calculate our loan loss reserves and the impact of specific

changes in estimates during 2011 see “Critical Accounting Policies and Estimates.”

Our provision for credit losses increased in 2011 compared with 2010 primarily due to: (1) a decline in actual

and projected home prices, which led to an increase in projected defaults and higher loss severity rates; (2) a

decrease in the estimated recovery amount from mortgage insurance coverage; and (3) the implementation of

new accounting guidance that increased our troubled debt restructuring (“TDR”) population, which increased the

number of loans that are individually impaired. A TDR is a loan restructuring that grants a concession to a

borrower experiencing financial difficulties. The increase in our provision was partially offset by: (1) an increase

in cash received by us and estimated amounts due to us for repurchase requests; and (2) accelerated expected

prepayment speeds due to the lower interest rate environment, which reduced the expected lives of loans and

increased the present value of cash flows expected on those loans.

Our provision for credit losses was impacted in 2010 by an agreement with Bank of America, N.A., and its

affiliates, on December 31, 2010, to address outstanding repurchase requests for residential mortgage loans. Bank

of America agreed, among other things, to make a cash payment to us of $1.3 billion, $930 million of which was

recognized as a recovery of charge-offs resulting in a reduction to our provision for loan losses and allowance for

loan losses.

Our provision for credit losses substantially decreased in 2010 compared with 2009 primarily because there was

neither an increase in the number of seriously delinquent loans, nor a sharp decline in home prices in 2010

compared with the significant changes in these factors in 2009; therefore, we did not need to substantially

increase our reserves in 2010 compared with the significant increase in our reserves in 2009. In addition, our

provision for credit losses decreased in 2010 compared with 2009 due to a decline in fair value losses on acquired

- 102 -
credit-impaired loans. Because of our adoption of consolidation accounting guidance in the beginning of 2010,

we no longer record fair value losses upon our acquisition of credit-impaired loans from most of our MBS trusts,

as the substantial majority of these trusts are now consolidated.

Individual Impairment and Troubled Debt Restructurings

Because of the substantial volume of loan modifications we completed and the number of loans that entered a

trial modification period since 2009, approximately two-thirds of our total loss reserves are attributable to

individual impairment rather than the collective reserve for loan losses. Individual impairment for a TDR is

based on the restructured loan’s expected cash flows over the life of the loan, taking into account the effect of

any concessions granted to the borrower, discounted at the loan’s original effective interest rate. The individual

impairment model includes forward-looking assumptions using multiple scenarios of the future economic

environment, including interest rates and home prices. If we expect to recover our recorded investment in an

individually impaired loan through probable foreclosure of the underlying collateral, we measure the impairment

based on the fair value of the collateral, less selling costs. Based on the structure of our modifications, in

particular the size of the concessions granted, and the performance of modified loans combined with the forwardlooking assumptions used in our model, the allowance calculated for an individually impaired loan has generally

been greater than the allowance that would be calculated under the collective reserve.

In April 2011, FASB issued new accounting guidance regarding TDRs effective for the third quarter of 2011 that

applied retrospectively to January 1, 2011. In the third quarter of 2011, we recognized an incremental increase of

$514 million in our provision for credit losses due to loans that were reassessed as TDRs as a result of adopting

the new TDR accounting guidance. For additional information on the new TDR accounting guidance, see

“Note 1, Summary of Significant Accounting Policies.”

Loss Reserves Concentration Analysis

Certain loan categories continued to contribute disproportionately to the increase in our nonperforming loans and

credit losses as displayed in Table 16. These categories include: loans on properties in California, Florida,

Arizona and Nevada and certain Midwest states; loans originated in 2006 and 2007; and loans related to higherrisk product types, such as Alt-A loans. Although we have identified other vintages as unprofitable, the largest

and most disproportionate contributors to credit losses have been the 2006 and 2007 vintages. Accordingly, our

concentration statistics throughout this MD&A focus on only these two vintages. Our combined single-family

loss reserves are also disproportionately higher for these states, Alt-A loans and our 2006 and 2007 vintages.

Table 13 displays our loss reserves concentration analysis.

Table 13: Loss Reserves Concentration Analysis(1)

Combined SingleFamily Loss Reserves

As of December 31,

2011 2010

Midwest states(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16% 14%

California, Florida, Arizona, Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 52

Alt-A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 30

2006 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 67

(1) Loans that meet more than one category are included in each applicable category.

(2) Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD, KS, MO and WI.

Nonperforming Loans

Our balance of nonperforming single-family loans remained high as of December 31, 2011 due to both high

levels of delinquencies and an increase in TDRs. When a TDR occurs, the loan may return to a current status, but

it will continue to be classified as a nonperforming loan as the loan is not performing in accordance with its

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original terms. Table 14 displays the composition of our nonperforming loans, which includes our single-family

and multifamily held-for-investment and held-for-sale mortgage loans. For information on the impact of TDRs

and other individually impaired loans on our allowance for loan losses, see “Note 3, Mortgage Loans.”

Table 14: Nonperforming Single-Family and Multifamily Loans (1)

As of December 31,

2011 2010 2009 2008 2007

(Dollars in millions)

On-balance sheet nonperforming loans including loans in

consolidated Fannie Mae MBS trusts:

Nonaccrual loans .................................... $142,998 $170,788 $ 37,596 $ 15,610 $ 8,397

Troubled debt restructurings on accrual status(2) ............ 108,797 82,702 9,880 5,799 1,809

Total on-balance sheet nonperforming loans(3) ......... 251,795 253,490 47,476 21,409 10,206

Off-balance sheet nonperforming loans in unconsolidated Fannie

Mae MBS trusts(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 89 174,588 98,546 17,048

Total nonperforming loans(3) ............................. 251,949 253,579 222,064 119,955 27,254

Allowance for loan losses and allowance for accrued interest

receivable related to individually impaired on-balance sheet

nonperforming loans ............................... (47,711) (38,827) (5,609) (723) (98)

Total nonperforming loans, net of allowance ................ $204,238 $214,752 $216,455 $119,232 $27,156

Accruing on-balance sheet loans past due 90 days or more(5) . . . . $ 768 $ 896 $ 612 $ 317 $ 204

For the Year Ended December 31,

2011 2010 2009 2008 2007

(Dollars in millions)

Interest related to on-balance sheet nonperforming loans:

Interest income forgone(6) .............................. $8,224 $8,185 $1,341 $401 $215

Interest income recognized for the period(7) ................ 6,598 7,995 1,206 771 328

(1) Certain prior period amounts have been reclassified to conform to the current period presentation.

(2) Includes HomeSaver Advance first-lien loans on accrual status.

(3) In December 2011, we changed our definition of “total on-balance sheet nonperforming loans” and “total nonperforming

loans.” Under our new definitions, we no longer reflect in these amounts (1) our allowance for loan losses or (2) our

allowance for accrued interest receivable related to these individually impaired loans. The amounts we report in Table 14

for prior periods have been revised from amounts we previously disclosed as a result of this change.

(4) Represents loans that would meet our criteria for nonaccrual status if the loans had been on-balance sheet.

(5) Recorded investment in loans that, as of the end of each period, are 90 days or more past due and continuing to accrue

interest. The majority of this amount consists of loans insured or guaranteed by the U.S. government and loans for which

we have recourse against the seller in the event of a default.

(6) Represents the amount of interest income we did not record but would have recorded during the period for on-balance

sheet nonperforming loans as of the end of each period had the loans performed according to their original contractual

terms.

(7) Represents interest income recognized during the period for on-balance sheet loans classified as nonperforming as of the

end of each period. Includes primarily amounts accrued while the loans were performing and cash payments received on

nonaccrual loans.

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Foreclosed Property Expense

Foreclosed property expense, which is displayed in Table 15, decreased in 2011 compared with 2010 due, in part,

to an increase in cash received by us and estimated amounts due to us for repurchase requests. These amounts

were recognized in our provision for credit losses and foreclosed property expense. In addition, we had fewer

REO properties in 2011 compared with 2010, primarily driven by delays in the foreclosure process, which

resulted in lower foreclosed property expense. The decrease in foreclosed property expense was partially offset

by a decrease in the estimated recovery amount from mortgage insurance coverage.

Foreclosed property expense increased during 2010 compared with 2009 primarily due to the substantial increase

in our REO inventory and an increase in valuation adjustments that reduced the value of our REO inventory

during the period. Foreclosed property expense reflected the recognition of cash fees of $796 million in 2010 and

$668 million in 2009 from the cancellation and restructuring of some of our pool mortgage insurance coverage.

There were no such cash fees recognized in 2011. The cancelled and restructured policies covered the unpaid

principal balance of approximately $42 billion in 2010 and approximately $40 billion in 2009. The fees

represented an acceleration of, and discount on, claims expected to be received pursuant to the coverage net of

premiums expected to be paid. These cancellations and restructurings resulted in operational savings from

reduced claims processing and mitigated our counterparty credit risk given the weakened financial condition of

our mortgage insurer counterparties. Further, under our December 31, 2010 agreement with Bank of America,

N.A., and its affiliates, Bank of America agreed, among other things, to a cash payment of $1.3 billion, $266

million of which was recognized as a reduction to foreclosed property expense. In addition, during the second

quarter of 2010, we began recording expenses related to preforeclosure property taxes and insurance to the

provision for loan losses.

Credit Loss Performance Metrics

Our credit-related expenses should be considered in conjunction with our credit loss performance metrics. Our

credit loss performance metrics, however, are not defined terms within GAAP and may not be calculated in the

same manner as similarly titled measures reported by other companies. Because management does not view

changes in the fair value of our mortgage loans as credit losses, we adjust our credit loss performance metrics for

the impact associated with our acquisition of credit-impaired loans from unconsolidated MBS trusts and

HomeSaver Advance loans. We also exclude interest forgone on nonperforming loans in our mortgage portfolio,

other-than-temporary impairment losses resulting from deterioration in the credit quality of our mortgage-related

securities and accretion of interest income on acquired credit-impaired loans from credit losses.

Historically, management viewed our credit loss performance metrics, which include our historical credit losses

and our credit loss ratio, as indicators of the effectiveness of our credit risk management strategies. As our credit

losses are now at such high levels, management has shifted its focus to our loss mitigation strategies and the

reduction of our total credit losses and away from the credit loss ratio to measure performance. However, we

believe that credit loss performance metrics may be useful to investors as the losses are presented as a percentage

of our book of business and have historically been used by analysts, investors and other companies within the

financial services industry. They also provide a consistent treatment of credit losses for on- and off-balance sheet

loans. Moreover, by presenting credit losses with and without the effect of fair value losses associated with the

acquisition of credit-impaired loans and HomeSaver Advance loans, investors are able to evaluate our credit

performance on a more consistent basis among periods. Table 15 displays the components of our credit loss

performance metrics as well as our average single-family and multifamily default rate and initial charge-off

severity rate.

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Table 15: Credit Loss Performance Metrics

For the Year Ended December 31,

2011 2010 2009

Amount Ratio(1) Amount Ratio(1)(2) Amount Ratio(1)

(Dollars in millions)

Charge-offs, net of recoveries(3) ....................... $16,031 52.4 bp $19,999 65.6 bp $ 32,488 106.7 bp

Foreclosed property expense(3) . . . . . . . . . . . . . . . . . . . . . . . . 780 2.6 1,718 5.6 910 3.0

Credit losses including the effect of fair value losses on

acquired credit-impaired loans and HomeSaver Advance

loans .......................................... 16,811 55.0 21,717 71.2 33,398 109.7

Less: Fair value losses resulting from acquired

credit-impaired loans and HomeSaver advanced loans . . . (116) (0.4) (180) (0.6) (20,555) (67.5)

Plus: Impact of acquired credit-impaired loans on

charge-offs and foreclosed property expense .......... 2,042 6.7 2,094 6.8 739 2.4

Credit losses and credit loss ratio ..................... $18,737 61.3 bp $23,631 77.4 bp $ 13,582 44.6 bp

Credit losses attributable to:

Single-family ................................... $18,346 $23,133 $ 13,362

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391 498 220

Total .......................................... $18,737 $23,631 $ 13,582

Single-family default rate ........................... 1.71% 1.99% 1.07%

Single-family initial charge-off severity rate(4) ............ 34.82% 34.07% 37.21%

Average multifamily default rate ...................... 0.53% 0.61% 0.28%

Average multifamily initial charge-off severity rate(4) ...... 37.10% 39.18% 32.46%

(1) Basis points are based on the amount for each line item presented divided by the average guaranty book of business

during the period.

(2) Beginning in the second quarter of 2010, expenses relating to preforeclosure taxes and insurance were recorded as

charge-offs. These expenses were recorded as foreclosed property expense in the first quarter of 2010. The impact of

including these costs in charge-offs was 4.7 basis points for the year ended December 31, 2010.

(3) Includes cash received pursuant to our December 31, 2010 agreement with Bank of America. The impact of this cash

receipt was a reduction in charge-offs, net of recoveries, of $930 million or 3.0 basis points and a reduction in foreclosed

property expense of $266 million or 0.9 basis points for the year ended December 31, 2010.

(4) Single-family and multifamily rates exclude fair value losses on credit-impaired loans acquired from MBS trusts and any

costs, gains or losses associated with REO after initial acquisition through final disposition; single-family rate excludes

charge-offs from short sales.

Credit losses decreased in 2011 compared with 2010 primarily due to delays in the foreclosure process, which

resulted in fewer charge-offs in 2011. In addition, credit losses declined in 2011 due to an increase in cash

received by us and estimated amounts due to us for repurchase requests. The increase in our credit losses in 2010

compared with 2009 was driven by an increase in the number of defaults due to the prolonged decline in the

housing market and home prices.

Table 16 displays an analysis of our credit losses in certain higher-risk loan categories, loan vintages and loans

within certain states that continue to account for a disproportionate share of our credit losses as compared with

our other loans.

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Table 16: Credit Loss Concentration Analysis

Percentage of

Single-Family

Conventional

Guaranty Book of

Business

Outstanding(1)

Percentage of SingleFamily Credit Losses

For the Year Ended

As of December 31, December 31,

2011 2010 2009 2011 2010 2009

Geographical distribution:

Arizona, California, Florida and Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28% 28% 28% 58% 56% 57%

Illinois, Indiana, Michigan and Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 11 11 12 14 15

All other states . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 61 61 30 30 28

Select higher-risk product features(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 22 24 56 61 69

Vintages:

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8 11 28 29 31

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 12 15 30 36 36

All other vintages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 80 74 42 35 33

(1) Calculated based on the unpaid principal balance of loans, where we have detailed loan-level information, for each

category divided by the unpaid principal balance of our single-family conventional guaranty book of business.

(2) Includes Alt-A loans, subprime loans, interest-only loans, loans with original LTV ratios greater than 90% and loans with

FICO credit scores less than 620.

Our 2009, 2010 and 2011 vintages accounted for approximately 2% of our single-family credit losses for 2011.

Credit losses on mortgage loans typically do not peak until the third through sixth years following origination;

however, this range can vary based on many factors, including changes in macroeconomic conditions and

foreclosure timelines. We provide more detailed credit performance information, including serious delinquency

rates by geographic region and foreclosure activity, in “Risk Management—Credit Risk Management—

Mortgage Credit Risk Management.”

Regulatory Hypothetical Stress Test Scenario

Under a September 2005 agreement with FHFA’s predecessor, OFHEO, we are required to disclose on a

quarterly basis the present value of the change in future expected credit losses from our existing single-family

guaranty book of business from an immediate 5% decline in single-family home prices for the entire United

States. Although other provisions of the September 2005 agreement were suspended in March 2009 by FHFA

until further notice, this disclosure requirement was not suspended. For purposes of this calculation, we assume

that, after the initial 5% shock, home price growth rates return to the average of the possible growth rate paths

used in our internal credit pricing models. The sensitivity results represent the difference between future expected

credit losses under our base case scenario, which is derived from our internal home price path forecast, and a

scenario that assumes an instantaneous nationwide 5% decline in home prices.

Table 17 displays a comparison of the credit loss sensitivities for the periods indicated for first-lien single-family

whole loans we own or that back Fannie Mae MBS, before and after consideration of projected credit risk sharing

proceeds, such as private mortgage insurance claims and other credit enhancements.

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Table 17: Single-Family Credit Loss Sensitivity(1)

As of December 31,

2011 2010

(Dollars in millions)

Gross single-family credit loss sensitivity ............................................. $ 21,922 $ 25,937

Less: Projected credit risk sharing proceeds ............................................ (1,690) (2,771)

Net single-family credit loss sensitivity ............................................... $ 20,232 $ 23,166

Outstanding single-family whole loans and loans underlying Fannie Mae MBS ............... $2,769,454 $2,782,512

Single-family net credit loss sensitivity as a percentage of outstanding single-family whole loans

and Fannie Mae MBS ........................................................... 0.73% 0.83%

(1) Represents total economic credit losses, which consist of credit losses and forgone interest. Calculations are based on

97% of our total single-family guaranty book of business as of December 31, 2011 and December 31, 2010, respectively.

The mortgage loans and mortgage-related securities that are included in these estimates consist of: (a) single-family

Fannie Mae MBS (whether held in our mortgage portfolio or held by third parties), excluding certain whole loan REMICs

and private-label wraps; (b) single-family mortgage loans, excluding mortgages secured only by second liens, subprime

mortgages, manufactured housing chattel loans and reverse mortgages; and (c) long-term standby commitments. We

expect the inclusion in our estimates of the excluded products may impact the estimated sensitivities set forth in this table.

Single-family mortgage loans as of December 31, 2010 exclude subprime mortgages.

Because these sensitivities represent hypothetical scenarios, they should be used with caution. Our regulatory

stress test scenario is limited in that it assumes an instantaneous uniform 5% nationwide decline in home prices,

which is not representative of the historical pattern of changes in home prices. Changes in home prices generally

vary on a regional, as well as a local, basis. In addition, these stress test scenarios are calculated independently

without considering changes in other interrelated assumptions, such as unemployment rates or other economic

factors, which are likely to have a significant impact on our future expected credit losses.

Other Non-Interest Expenses

Other non-interest expenses consist of credit enhancement expenses, which reflect the amortization of the credit

enhancement asset we record at the inception of guaranty contracts; costs associated with the purchase of

additional mortgage insurance to protect against credit losses; net gains and losses on the extinguishment of debt;

servicer incentive fees in connection with loans modified under HAMP; and other miscellaneous expenses.

Other non-interest expenses also include losses from partnership investments. We are a limited liability investor

in LIHTC and non-LIHTC investments formed for the purpose of providing equity funding for affordable

multifamily rental properties. Historically, we generally received tax benefits (tax credits and tax deductions for

net operating losses) on our LIHTC investments that we used to reduce our income tax expense. Given our

current tax position, it is unlikely that we will be able to use the tax benefits that we expect to receive this year

and in the future from these LIHTC investments. In 2009, we reduced the carrying value of our LIHTC

investments to zero because we no longer had the intent and ability to sell or otherwise transfer our LIHTC

investments for value. As a result, we no longer recognize net operating losses or other-than-temporary

impairment on our LIHTC investments.

Other non-interest expenses decreased in 2011 compared with 2010 primarily due to a decrease in net losses

recorded on the extinguishment of debt as a result of lower funding needs in 2011 compared with higher call

activity due to low interest rates in 2010. Other non-interest expenses decreased in 2010 compared with 2009 due

primarily to: (1) the recognition of a $5.0 billion loss during the fourth quarter of 2009 to reduce the carrying

value of our LIHTC partnership investments to zero in our consolidated financial statements; (2) a decrease

in master servicing costs related to our master servicing assets and liabilities as a result of derecognizing the

portion of our master servicing asset and liability relating to consolidated trusts upon adoption of the

consolidation accounting guidance; (3) lower expenses for legal claim reserves; and (4) lower interest expense

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associated with unrecognized tax benefits related to certain unresolved tax positions. The decrease in 2010 was

partially offset by an increase in HAMP incentive payments and net losses recorded on the extinguishment of

debt, because our borrowing costs declined and it became advantageous for us to redeem higher cost debt and

replace it with lower cost debt.

Federal Income Taxes

We recorded a tax benefit for federal income taxes of $90 million for 2011 because we effectively settled our

2007 and 2008 tax years with the Internal Revenue Service (“IRS”) in 2011. We recorded a tax benefit for

federal income taxes of $82 million for 2010 primarily due to the reversal of a portion of the valuation allowance

for deferred tax assets resulting from a settlement agreement reached with the IRS for our unrecognized tax

benefits for the tax years 1999 through 2004. We recorded a tax benefit for federal income taxes of $985 million

for 2009, due primarily to the benefit of carrying back a portion of our 2009 loss, net of the reversal of the use of

certain tax credits, to prior years.

We discuss federal income taxes and the factors that led us to record a partial valuation allowance against our net

deferred tax assets in “Note 10, Income Taxes.” The amount of deferred tax assets considered realizable is

subject to adjustment in future periods. We will continue to monitor all available evidence related to our ability

to utilize our remaining deferred tax assets. If we determine that recovery is not likely, we will record an

additional valuation allowance against the deferred tax assets that we estimate may not be recoverable. Our

income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or

increases to our valuation allowance.

Financial Impact of the Making Home Affordable Program on Fannie Mae

Home Affordable Refinance Program

Because we already own or guarantee the original mortgages that we refinance under HARP, our expenses under

that program have consisted mostly of limited administrative costs. See “Business—Making Home Affordable—

Changes to the Home Affordable Refinance Program,” for a discussion on the recent changes to HARP.

Home Affordable Modification Program

Loans in trial modification plans are considered TDRs and are assessed for individual impairment. These TDRs

include loans that entered into a trial modification under the program but that did not receive a permanent

modification under the program. We incurred impairments related to these loans that had entered a trial

modification under HAMP of $5.2 billion during 2011, compared with $14.1 billion during 2010 and $26.4

billion in 2009. During 2009, approximately 40% of the impairments on these loans related to fair value losses on

credit impaired loans acquired from unconsolidated MBS trusts, which represents approximately 84,000 loans.

These impairments increased our provision for loan losses in our consolidated results of operations and

comprehensive loss. The impairments do not reflect the reduction in our collective loss reserves that occurred as

a result of beginning to individually assess the loans for impairment upon entering a trial modification.

We paid or accrued HAMP incentive fees for servicers of $338 million during 2011, compared with $339 million

during 2010 and $17 million during 2009. These fees were related to loans modified under HAMP, which we

recorded as part of “Other expenses.” Borrower incentive payments are included in the calculation of our

allowance for loan losses for individually impaired loans. Additionally, our expenses under HAMP also include

administrative costs.

Overall Impact of the Making Home Affordable Program

Because of the unprecedented nature of the circumstances that led to the Making Home Affordable Program, we

cannot quantify what the impact would have been on Fannie Mae if the Making Home Affordable Program had

not been introduced. We do not know how many loans we would have modified under alternative programs, what

the terms or costs of those modifications would have been, how many foreclosures would have resulted

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nationwide, and at what pace, or the impact on housing prices if the program had not been put in place. As a

result, the amounts we discuss above are not intended to measure how much the program is costing us in

comparison to what it would have cost us if we did not have the program at all. See “Risk Factors” for a

discussion of how efforts we may undertake in support of the housing market may affect us.

BUSINESS SEGMENT RESULTS

We provide a more complete description of our business segments in “Business–Business Segments.” Results of

our three business segments are intended to reflect each segment as if it were a stand-alone business. We are

working on reorganizing our company by function rather than by business in order to improve our operational

efficiencies and effectiveness. In future periods, we may change some of our management reporting and how we

report our business segment results. We describe the management reporting and allocation process used to

generate our segment results in “Note 14, Segment Reporting.” In this section, we discuss changes to our

presentation for reporting results for our three business segments, Single-Family, Multifamily and Capital

Markets, which have been revised due to our prospective adoption of the revised accounting guidance in 2010 on

the consolidation of VIE’s and transfers of financial assets. We then display our segment results for 2011, 2010

and 2009, in the tables below and provide a comparative discussion of these results. This section should be read

together with our comparative discussion of our consolidated results of operations in “Consolidated Results of

Operations.” See “Note 14, Segment Reporting” for a reconciliation of our segment results to our consolidated

results.

Current Segment Reporting Presentation

Our prospective adoption of the consolidation accounting guidance in 2010 had a significant impact on the

presentation and comparability of our consolidated financial statements because we consolidated the substantial

majority of our single-class securitization trusts and eliminated previously recorded deferred revenue from our

guaranty arrangements. We continue to manage Fannie Mae based on the same three business segments;

however, effective in 2010 we changed the presentation of segment financial information that is currently

evaluated by management.

While some line items in our segment results were not impacted by either the change from the consolidation

accounting guidance or changes to our segment presentation, others were impacted materially, which reduces the

comparability of our 2011 and 2010 segment results with 2009. We have not restated results prior to 2010 nor

have we presented 2011 and 2010 results under the old presentation because we determined that it was

impracticable to do so; therefore, our segment results reported in 2011 and 2010 are not comparable with years

prior to 2010. See “Note 1, Summary of Significant Accounting Policies” for additional information regarding

the impact upon adoption.

Under our current segment reporting structure, the sum of the results for our three business segments does not

equal our consolidated results of operations as we separate the activity related to our consolidated trusts from the

results generated by our three segments. In addition, because we apply accounting methods that differ from our

consolidated results for segment reporting purposes, we include an eliminations/adjustments category to

reconcile our business segment results and the activity related to our consolidated trusts to our consolidated

statements of operations and comprehensive loss.

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Summary

Table 18 displays a summary of our segment results under our current segment reporting presentation for 2011

and 2010 and our prior segment presentation for 2009.

Table 18: Business Segment Summary

For the Year Ended December 31,

2011 2010 2009

(Dollars in millions)

Net revenues:(1)

Single-Family ..................................................... $ 5,675 $ 2,126 $ 8,784

Multifamily ....................................................... 1,064 940 582

Capital Markets .................................................... 12,901 13,400 13,128

Consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950 460 —

Eliminations/adjustments ............................................ (146) 567 —

Total .......................................................... $ 20,444 $ 17,493 $ 22,494

Net (loss) income attributable to Fannie Mae:

Single-Family ..................................................... $(23,941) $(26,680) $(63,798)

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583 216 (9,028)

Capital Markets .................................................... 8,999 16,074 857

Consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429 (224) —

Eliminations/adjustments ............................................ (2,925) (3,400) —

Total .......................................................... $(16,855) $(14,014) $(71,969)

As of December 31,

2011 2010 2009

(Dollars in millions)

Total assets:

Single-Family(2) .................................................... $ 11,822 $ 14,843 $ 19,991

Multifamily(2) ...................................................... 5,747 4,881 5,698

Capital Markets .................................................... 836,700 873,052 843,452

Consolidated trusts ................................................. 2,676,952 2,673,937 —

Eliminations/adjustments(2) ........................................... (319,737) (344,741) —

Total .......................................................... $3,211,484 $3,221,972 $869,141

(1) Includes net interest (loss) income, guaranty fee income (expense), and fee and other income (expense).

(2) The allowance for loan losses, allowance for accrued interest receivable and fair value losses previously recognized on

acquired credit impaired loans are not treated as assets for Single-Family and Multifamily segment reporting purposes

because these allowances and losses relate to loan assets that are held by the Capital Markets segment and consolidated

trusts.

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Segment Results

Table 19 displays our segment results under our current segment reporting presentation for 2011.

Table 19: Business Segment Results

For the Year Ended December 31, 2011

Business Segments Other Activity/Reconciling Items

SingleFamily MultifamilyCapital

Markets

Consolidated

Trusts(1)

Eliminations/

Adjustments(2)

Total

Results

(Dollars in millions)

Net interest (loss) income .................... $ (2,411) $ (38) $13,920 $ 5,765 $ 2,045(3) $ 19,281

Provision for loan losses ..................... (25,623) (291) — — — (25,914)

Net interest (loss) income after provision for loan

losses .................................. (28,034) (329) 13,920 5,765 2,045 (6,633)

Guaranty fee income (expense) ............... 7,507 884 (1,497) (4,486)(4) (2,181)(4) 227(4)

Investment (losses) gains, net . . . . . . . . . . . . . . . . . (2) 18 3,711 (315) (2,906)(5) 506

Net other-than-temporary impairments ......... — — (306) (2) — (308)

Fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . (7) — (6,596) (226) 208(6) (6,621)

Debt extinguishment (losses) gains, net ......... — — (254) 22 — (232)

Gains from partnership investments . . . . . . . . . . . . — 81 — — — 81(7)

Fee and other income (expense) . . . . . . . . . . . . . . . 579 218 478 (329) (10) 936

Administrative expenses ..................... (1,638) (264) (468) — — (2,370)

(Provision) benefit for guaranty losses .......... (830) 26 — — — (804)

Foreclosed property expense ................. (765) (15) — — — (780)

Other (expense) income ..................... (857) 25 (34) — (81) (947)

(Loss) income before federal income taxes ...... (24,047) 644 8,954 429 (2,925) (16,945)

Benefit (provision) for federal income taxes . . . . . 106 (61) 45 — — 90

Net (loss) income attributable to Fannie Mae . . $(23,941) $ 583 $ 8,999 $ 429 $(2,925) $(16,855)

(1) Represents activity related to the assets and liabilities of consolidated trusts in our consolidated balance sheets.

(2) Represents the elimination of intercompany transactions occurring between the three business segments and our

consolidated trusts, as well as other adjustments to reconcile to our consolidated results.

(3) Represents the amortization expense of cost basis adjustments on securities that we own in our portfolio that on a GAAP

basis are eliminated.

(4) Represents the guaranty fees paid from consolidated trusts to the Single-Family and Multifamily segments. The

adjustment to guaranty fee income in the Eliminations/Adjustments column represents the elimination of the amortization

of deferred cash fees related to consolidated trusts that were re-established for segment reporting. Total guaranty fee

income is included in fee and other income in our consolidated statements of operations and comprehensive loss.

(5) Primarily represents the removal of realized gains and losses on sales of Fannie Mae MBS classified as available-for-sale

securities that are issued by consolidated trusts and retained in the Capital Markets portfolio. The adjustment also

includes the removal of securitization gains (losses) recognized in the Capital Markets segment relating to portfolio

securitization transactions that do not qualify for sale accounting under GAAP.

(6) Represents the removal of fair value adjustments on consolidated Fannie Mae MBS classified as trading that are retained

in the Capital Markets portfolio.

(7) Gains from partnership investments are included in other expenses in our consolidated statements of operations and

comprehensive loss.

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Single-Family Business Results

Table 20 displays the financial results of our Single-Family business for 2011 and 2010 under the current

segment reporting presentation and for 2009 under the prior segment reporting presentation. The primary source

of revenue for our Single-Family business is guaranty fee income. Expenses primarily include credit-related

expenses, net interest loss and administrative expenses.

Table 20: Single-Family Business Results

For the Year Ended December 31,

2011 2010 2009

(Dollars in millions)

Statement of operations data:

Net interest (loss) income .............................................. $ (2,411) $ (5,386) $ 428

Guaranty fee income(1) ................................................. 7,507 7,206 8,002

Credit-related expenses(2) ............................................... (27,218) (26,420) (71,320)

Other expenses(3) ..................................................... (1,925) (2,149) (2,283)

Loss before federal income taxes ........................................ (24,047) (26,749) (65,173)

Benefit for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 69 1,375

Net loss attributable to Fannie Mae ....................................... $ (23,941) $ (26,680) $ (63,798)

Other key performance data:

Single-family effective guaranty fee rate (in basis points)(4) .................... 26.2 25.1 27.9

Single-family average charged guaranty fee on new acquisitions (in basis

points)(5) .......................................................... 28.8 25.7 23.8

Average single-family guaranty book of business(6) .......................... $2,864,919 $2,873,779 $2,864,759

Single-family Fannie Mae MBS issues(7) ................................... $ 564,606 $ 603,247 $ 791,418

(1) Guaranty fee income is included in fee and other income in our consolidated statements of operations and comprehensive

loss.

(2) Consists of the provision for loan losses, provision for guaranty losses and foreclosed property expense.

(3) Consists of investment gains and losses, fair value losses, fee and other income, administrative expenses and other

expenses.

(4) Calculated based on annualized Single-Family segment guaranty fee income divided by the average single-family

guaranty book of business, expressed in basis points.

(5) Calculated based on the average contractual fee rate for our single-family guaranty arrangements entered into during the

period plus the recognition of any upfront cash payments ratably over an estimated average life, expressed in basis points.

(6) Consists of single-family mortgage loans held in our mortgage portfolio, single-family mortgage loans held by

consolidated trusts, single-family Fannie Mae MBS issued from unconsolidated trusts held by either third parties or

within our retained portfolio, and other credit enhancements that we provide on single-family mortgage assets. Excludes

non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a guaranty.

(7) Reflects unpaid principal balance of Fannie Mae MBS issued and guaranteed by the Single-Family segment during the

period. Includes Housing Finance Agency (HFA) new issue bond program issuances, none of which occurred in 2011 or

2009. There were HFA new issue bond program issuances of $3.1 billion during 2010.

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2011 compared with 2010

Key factors affecting the results of our Single-Family business for 2011 compared with 2010 included the

following:

Net Interest Loss

Net interest loss for the Single-Family business segment primarily consists of: (1) the cost to reimburse the

Capital Markets group for interest income not recognized for loans in our mortgage portfolio on nonaccrual

status; (2) the cost to reimburse MBS trusts for interest income not recognized for loans in consolidated trusts on

nonaccrual status; and (3) income from cash payments received on loans that have been placed on nonaccrual

status.

Net interest loss decreased in 2011 compared with 2010 primarily due to a significant decrease in interest income

not recognized for loans on nonaccrual status because of a decline in the total number of loans on nonaccrual

status driven by loan workouts during 2011.

Guaranty Fee Income

Guaranty fee income increased in 2011 compared with 2010 due to an increase in the amortization of risk-based

fees, reflecting the impact of higher risk based pricing associated with our more recent acquisition vintages.

Our average single-family guaranty book of business was relatively flat period over period despite our continued

high market share because of the decline in U.S. residential mortgage debt outstanding. Our estimated market

share of new single-family mortgage-related securities issuances, which excludes previously securitized

mortgages, remained high at 47.9% for 2011.

Credit-Related Expenses

Credit-related expenses and credit losses in the Single-Family business represent the substantial majority of our

consolidated totals. We provide a discussion of our credit-related expenses and credit losses in “Consolidated

Results of Operations—Credit-Related Expenses.”

2010 compared with 2009

Key factors affecting the results of our Single-Family business for 2010 compared with 2009 included the

following:

Net Interest Income (Expense)

The shift from net interest income in 2009 to net interest expense in 2010 was primarily driven by an increase in

interest not recorded on nonaccrual loans, which increased to $8.4 billion in 2010 from $1.2 billion in 2009. The

number of nonaccrual loans in our consolidated balance sheets increased as a result of our adoption of the

consolidation accounting guidance in 2010.

Guaranty Fee Income

Guaranty fee income decreased in 2010, compared with 2009, primarily because: (1) we now amortize our

single-family deferred cash fees under the static yield method, which resulted in lower amortization income

compared with 2009 when we amortized these fees under the prospective level yield method; (2) guaranty fee

income in 2009 included the amortization of certain non-cash deferred items, the balance of which was

eliminated upon adoption of the consolidation accounting guidance and was not re-established on SingleFamily’s balance sheet at the transition date; and (3) guaranty fee income in 2009 reflected an increase in the fair

value of buy-ups and certain guaranty assets which are no longer adjusted to fair value under the new segment

reporting.

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Our average single-family guaranty book of business was relatively flat period over period despite our continued

high market share because of the decline in U.S. residential mortgage debt outstanding. There were fewer new

mortgage originations due to weakness in the housing market and an increase in liquidations due to the high level

of foreclosures. Our estimated market share of new single-family mortgage-related securities issuances, which

excludes previously securitized mortgages, remained high at 44% for 2010.

The single-family average charged guaranty fee on new acquisitions increased in 2010 compared with 2009

primarily due to an increase in acquisitions of loans with characteristics that receive risk-based pricing

adjustments.

Credit-Related Expenses

Credit-related expenses and credit losses in the Single-Family business represent the substantial majority of our

consolidated totals. We provide additional information on our credit-related expenses in “Consolidated Results of

Operations—Credit-Related Expenses.”

Federal Income Taxes

We recognized an income tax benefit in 2010 due to the reversal of a portion of the valuation allowance for

deferred tax assets primarily due to a settlement agreement reached with the IRS in 2010 for our unrecognized

tax benefits for the tax years 1999 through 2004. The tax benefit recognized for 2009 was primarily due to the

benefit of carrying back to prior years a portion of our 2009 tax loss, net of the reversal of the use of certain tax

credits.

Multifamily Business Results

The Multifamily business results primarily reflect our multifamily guaranty business. Our multifamily business

results also include activity relating to our LIHTC investments, for which we reduced the carrying value to zero

in our consolidated financial statements in 2009, and our equity investments. We are no longer making new

LIHTC or equity investments, although we continue to make contractually required contributions for our legacy

investments. Activity from multifamily products is also reflected in the Capital Markets group results, which

include net interest income related to multifamily loans and securities, gains and losses from the sale of

multifamily MBS and re-securitizations, and other miscellaneous income. Of this activity, a main contributor of

net income from multifamily products in the Capital Markets group results is net interest income. Estimated net

interest income earned on Fannie Mae multifamily mortgage loans and multifamily MBS in the Capital Markets

group results was $873 million for 2011, $865 million for 2010 and $785 million for 2009.

Table 21 displays the financial results of our Multifamily business for 2011 and 2010 under the current segment

reporting presentation and for 2009 under the prior segment reporting presentation. The primary sources of

revenue for our Multifamily business are guaranty fee income and fee and other income. Expenses and other

items that impact income or loss primarily include credit-related expenses, administrative expenses and for 2009

net operating losses from our partnership investments.

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Table 21: Multifamily Business Results

For the Year Ended December 31,

2011 2010 2009

(Dollars in millions)

Statement of operations data:

Guaranty fee income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 884 $ 791 $ 675

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 146 100

Gains (losses) from partnership investments(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 (70) (6,735)

Credit-related expenses(3) ................................................... (280) (194) (2,216)

Other expenses(4) .......................................................... (259) (443) (594)

Income (loss) before federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 644 230 (8,770)

Provision for federal income taxes ............................................ (61) (14) (311)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583 216 (9,081)

Less: Net loss attributable to the noncontrolling interests(2) ........................ . — — 53

Net income (loss) attributable to Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 583 $ 216 $ (9,028)

Other key performance data:

Multifamily effective guaranty fee rate (in basis points)(5) ......................... 46.0 42.3 37.6

Credit loss performance ratio (in basis points)(6) ................................. 20.4 26.6 12.3

Average Multifamily guaranty book of business(7) ............................... $191,984 $186,867 $179,315

Multifamily new business volumes(8) .......................................... $ 24,356 $ 17,919 $ 20,183

Multifamily units financed from new business volumes(9) .......................... 423,000 306,000 372,000

Fannie Mae Multifamily MBS issuances(10) ..................................... $ 34,066 $ 26,499 $ 16,435

Fannie Mae Multifamily structured securities issuances (issued by Capital Markets

group)(11) .............................................................. $ 6,435 $ 4,808 $ 1,648

Additional net interest income earned on Fannie Mae Multifamily mortgage loans and

MBS (included in Capital Markets Group’s results)(12) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 873 $ 865 $ 785

Average Fannie Mae Multifamily mortgage loans and MBS in Capital Markets Group’s

portfolio(13) ............................................................ $110,748 $115,839 $117,417

As of December 31,

2011 2010 2009

(Dollars in millions)

Multifamily serious delinquency rate .......................................... 0.59% 0.71% 0.63%

Percentage of guaranty book of business with credit enhancement . . . . . . . . . . . . . . . . . . . 90% 89% 89%

Fannie Mae percentage of total multifamily mortgage debt outstanding(14) ............. 21.0% 20.6% 19.8%

Fannie Mae Multifamily MBS outstanding(15) ................................... $101,574 $77,251 $59,852

(1) Guaranty fee income is included in fee and other income in our consolidated statements of operations and comprehensive

loss.

(2) Gains (losses) from partnership investments are included in other expenses in our consolidated statements of operations

and comprehensive loss. In 2011 and 2010, gains (losses) from partnership investments are reported using the equity

method of accounting. As a result, net income (loss) attributable to noncontrolling interest from partnership investments

is not included in income (loss) for the Multifamily segment. In 2009, gains (losses) from partnership investments are

reported using either the equity method or consolidation, in accordance with GAAP, with net income (loss) attributable to

noncontrolling interests included in partnership gains (losses).

(3) Consists of the benefit (provision) for loan losses, benefit (provision) for guaranty losses and foreclosed property

expense.

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(4) Consists of net interest income or loss, investment gains, other income or expenses, and administrative expenses.

(5) Calculated based on annualized Multifamily segment guaranty fee income divided by the average multifamily guaranty

book of business, expressed in basis points.

(6) Calculated based on the annualized credit losses divided by the average multifamily guaranty book of business, expressed

in basis points.

(7) Consists of multifamily mortgage loans held in our mortgage portfolio, multifamily mortgage loans held by consolidated

trusts, multifamily Fannie Mae MBS issued from unconsolidated trusts held by either third parties or within our retained

portfolio, and other credit enhancements that we provide on multifamily mortgage assets. Excludes non-Fannie Mae

mortgage-related securities held in our investment portfolio for which we do not provide a guaranty.

(8) Reflects unpaid principal balance of multifamily Fannie Mae MBS issued (excluding portfolio securitizations) and

multifamily loans purchased during the period. Includes HFA new issue bond program issuances, none of which occurred

in 2011. There were HFA new issue bond program issuances of $1.0 billion and $391 million for the years ended

December 31, 2010 and 2009, respectively.

(9) Excludes HFA new issue bond program.

(10) Reflects unpaid principal balance of multifamily Fannie Mae MBS issued during the period. Includes: (a) issuances of

new MBS, (b) $10.0 billion and $8.7 billion of Fannie Mae portfolio securitization transactions for the years ended

December 31, 2011 and 2010, respectively, and (c) $241 million and $389 million of conversions of adjustable-rate loans

to fixed-rate loans and DMBS securities to MBS securities for the years ended December 31, 2011 and 2010,

respectively.

(11) Reflects original unpaid principal balance of out-of-portfolio multifamily structured securities issuances by our Capital

Markets Group.

(12) Net interest income was reduced by guaranty fees allocated to Multifamily from the Capital Markets Group on

multifamily loans in Fannie Mae’s portfolio.

(13) Based on unpaid principal balance.

(14) Includes mortgage loans and Fannie Mae MBS issued and guaranteed by the Multifamily segment. Information as of

December 31, 2011 is through September 30, 2011 and is based on the Federal Reserve’s September 2011 mortgage debt

outstanding release, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for

multifamily residences. Prior period amounts may have been changed to reflect revised historical data from the Federal

Reserve.

(15) Includes $28.3 billion and $19.9 billion of Fannie Mae multifamily MBS held in the mortgage portfolio, the vast majority

of which have been consolidated to loans in our consolidated balance sheets, as of December 31, 2011 and 2010,

respectively; and $1.4 billion of bonds issued by HFAs as of December 31, 2011 and 2010.

2011 compared with 2010

Key factors affecting the results of our Multifamily business for 2011 compared with 2010 included the

following:

Guaranty Fee Income

Multifamily guaranty fee income increased in 2011 compared with 2010 primarily due to higher fees charged on

new acquisitions. New acquisitions with higher guaranty fees have become an increasingly large part of our

multifamily guaranty book of business.

Gains (Losses) from Partnership Investments

We recognized income from partnership investments in 2011 compared with losses in 2010. Overall, stronger

national multifamily market fundamentals resulted in improved property-level operating performance and

increased gains on the sale of investments.

Credit-Related Expenses

Multifamily credit-related expenses increased in 2011 compared with 2010 primarily due to a stable allowance

for loan losses in 2011 compared to a decrease in 2010. Although national multifamily market fundamentals

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continued to improve in 2011, certain local markets and properties continued to underperform compared to the

rest of the nation.

Multifamily credit losses, which consist of net charge-offs and foreclosed property expense, were $391 million

for 2011 compared with $498 million for 2010.

Provision for Federal Income Taxes

In the second quarter of 2011, we reached an effective settlement of issues with the Internal Revenue Service

relating to tax years 2007 and 2008, which reduced our total corporate tax liability. However, the reduction in our

tax liability also reduced the low-income housing tax credits we were able to use in those years, resulting in a

provision for federal income taxes for the Multifamily segment in 2011.

2010 compared with 2009

Key factors affecting the results of our Multifamily business for 2010 compared with 2009 included the

following:

Guaranty Fee Income

Multifamily guaranty fee income increased in 2010 compared with 2009 primarily due to higher fees charged on

new acquisitions. New acquisitions with higher guaranty fees have become an increasingly large part of our book

of business.

Losses from Partnership Investments

In 2009, we reduced the carrying value of our LIHTC investments to zero. As a result, we no longer recognize

net operating losses or other-than-temporary impairment on our LIHTC investments, which resulted in a decrease

in losses from partnership investments in 2010 compared with 2009.

Credit-Related Expenses

Multifamily credit-related expenses decreased in 2010 compared with 2009 primarily due to a modest decrease in

the allowance for loan losses in 2010, as multifamily credit trends stabilized, compared with the increase in the

allowance for 2009. The provision for credit losses for 2010 was $156 million compared with $2.2 billion for

2009.

Although our allowance and provision for multifamily credit losses decreased, our multifamily charge-offs and

foreclosed property expense remained elevated. Our multifamily net charge-offs and foreclosed property expense

increased from $220 million in 2009 to $498 million in 2010. The increase in net charge-offs and foreclosed

property expense was driven by increased volumes of multifamily REO acquisitions in 2010.

Provision for Federal Income Taxes

We recognized a provision for income taxes in 2010 resulting from a settlement agreement reached with the IRS

with respect to our unrecognized tax benefits for tax years 1999 through 2004. The tax provision recognized in

2009 was attributable to the reversal of previously utilized tax credits because of our ability to carry back net

operating losses to recover taxes from prior years.

Capital Markets Group Results

Table 22 displays the financial results of our Capital Markets group for 2011 and 2010 under the current segment

reporting presentation and for 2009 under the prior segment reporting presentation. Following the table we

discuss the Capital Markets group’s financial results and describe the Capital Markets group’s mortgage

portfolio. For a discussion of the debt issued by the Capital Markets group to fund its investment activities, see

“Liquidity and Capital Management.” For a discussion of the derivative instruments that Capital Markets uses to

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manage interest rate risk, see “Consolidated Balance Sheet Analysis—Derivative Instruments,” “Risk

Management—Market Risk Management, Including Interest Rate Risk Management—Derivative Instruments”

and “Note 9, Derivative Instruments and Hedging Activities.” The primary sources of revenue for our Capital

Markets group are net interest income and fee and other income. Expenses and other items that impact income or

loss primarily include fair value gains and losses, investment gains and losses, allocated guaranty fee expense,

other-than-temporary impairment and administrative expenses.

Table 22: Capital Markets Group Results

For the Year Ended December 31,

2011 2010 2009

(Dollars in millions)

Statement of operations data:

Net interest income(1) .................................................. $13,920 $14,321 $14,275

Investment gains, net(2) ................................................. 3,711 4,047 1,460

Net other-than-temporary impairments .................................... (306) (720) (9,861)

Fair value (losses) gains, net(3) ........................................... (6,596) 239 (2,811)

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478 519 319

Other expenses(4) ...................................................... (2,253) (2,359) (2,446)

Income before federal income taxes ...................................... 8,954 16,047 936

Benefit (provision) for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 27 (79)

Net income attributable to Fannie Mae .................................... $ 8,999 $16,074 $ 857

(1) Includes contractual interest income, excluding recoveries, on nonaccrual loans received from the Single-Family segment

of $6.6 billion and $6.3 billion for the years ended December 31, 2011 and 2010, respectively. Nonaccrual loans did not

comprise a significant portion of the Capital Markets group’s portfolio in 2009. In 2011 and 2010, Capital Markets net

interest income is reported based on the mortgage-related assets held in the segment’s portfolio and excludes interest

income on mortgage-related assets held by consolidated MBS trusts that are owned by third parties and the interest

expense on the corresponding debt of such trusts. In 2009, the Capital Markets group’s net interest income included

interest income on mortgage-related assets underlying MBS trusts that we consolidated under the prior consolidation

accounting guidance and the interest expense on the corresponding debt of such trusts.

(2) We include the securities that we own regardless of whether the trust has been consolidated in reporting of gains and

losses on securitizations and sales of available-for-sale securities.

(3) Includes primarily fair value gains or losses on derivatives and trading securities that we own, regardless of whether the

trust has been consolidated.

(4) Includes allocated guaranty fee expense, debt extinguishment gains or losses, net, administrative expenses, and other

income or expenses. Gains or losses related to the extinguishment of debt issued by consolidated trusts are excluded from

the Capital Markets group’s results because purchases of securities are recognized as such.

2011 compared with 2010

Key factors affecting the results of our Capital Markets group for 2011 compared with 2010 included the

following:

Net Interest Income

The Capital Markets group reports interest income and amortization of cost basis adjustments only on securities

and loans that are held in our portfolio. For mortgage loans held in our mortgage portfolio, when interest income

is no longer recognized in accordance with our nonaccrual accounting policy, the Capital Markets group

recognizes interest income reimbursements that the group receives, primarily from Single-Family, for the

contractual interest due. The interest expense recognized on the Capital Markets group’s statement of operations

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is limited to our funding debt, which is reported as “Debt of Fannie Mae” in our consolidated balance sheets. Net

interest expense also includes a cost of capital charge allocated among the three business segments.

The Capital Markets group’s net interest income decreased in 2011 compared with 2010 primarily due to a

decrease in the balance of mortgage-related securities, lower coupon rates on modified loans in our portfolio and

an out-of-period adjustment to reduce interest income on mortgage related securities in 2011. See “Note 5,

Investment in Securities” for additional information on this adjustment. This decrease in interest income on our

interest earning assets was partially offset by a decline in funding costs as we replaced higher cost debt with

lower cost debt. The reimbursements of contractual interest due on nonaccrual loans from the Single-Family

business were a significant portion of the Capital Markets group’s interest income during 2011. However, the

increase in these reimbursements was offset by the decline in interest income on our mortgage-related securities

because our securities portfolio balance has declined.

Our net interest income and net interest yield were higher than they would have otherwise been in 2011, 2010

and 2009 because our debt funding needs were lower than would otherwise have been required as a result of

funds we received from Treasury under the senior preferred stock purchase agreement. Further, dividends paid to

Treasury are not recognized in interest expense.

We supplement our issuance of debt with interest rate-related derivatives to manage the prepayment and duration

risk inherent in our mortgage investments. The effect of these derivatives, in particular the periodic net interest

expense accruals on interest rate swaps, is not reflected in Capital Markets’ net interest income but is included in

our results as a component of “Fair value (losses) gains, net” and is displayed in “Table 10: Fair Value (Losses)

Gains, Net.” If we had included the economic impact of adding the net contractual interest accruals on our

interest rate swaps in our Capital Markets’ interest expense, Capital Markets’ net interest income would have

decreased by $2.2 billion for 2011 compared with a decrease of $2.9 billion for 2010.

Net Other-Than-Temporary Impairments

The net other-than-temporary impairments recognized by the Capital Markets group are consistent with the

amount reported in our consolidated results of operations. See “Note 5, Investments in Securities” for

information on our other-than-temporary impairments by major security type and primary drivers for other-thantemporary impairments recorded in 2011.

Fair Value (Losses) Gains, Net

The fair value losses reported for the Capital Markets group are primarily due to losses on derivatives and are

consistent with the derivative gains and losses reported in our consolidated results of operations. We discuss

details of these components of fair value gains and losses in “Consolidated Results of Operations—Fair Value

(Losses) Gains, Net.”

2010 compared with 2009

Key factors affecting the results of our Capital Markets group for 2010 compared with 2009 included the

following:

Net Interest Income

The Capital Markets group’s net interest income increased in 2010 compared with 2009 primarily due to a

decline in funding costs as we replaced higher cost debt with lower cost debt.

If we had included the economic impact of adding the net contractual interest accruals on our interest rate swaps

in our Capital Markets’ interest expense, Capital Markets’ net interest income would have decreased by $2.9

billion in 2010 compared with a $3.4 billion decrease in 2009.

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Investment Gains (Losses), Net

The increase in investment gains in 2010 compared with 2009 was primarily driven by an increase in gains on

securitizations as well as a significant decline in lower of cost or fair value adjustments on held-for-sale loans.

Net Other-Than-Temporary Impairment

The net other-than-temporary impairment recognized by the Capital Markets group is generally consistent with

the net other-than-temporary impairment reported in our consolidated results of operations. We discuss details on

net other-than-temporary impairment in “Consolidated Results of Operations—Net Other-Than-Temporary

Impairment.”

Fair Value (Losses) Gains, Net

The derivative gains and losses and foreign exchange gains and losses that are reported for the Capital Markets

group are consistent with these same losses reported in our consolidated results of operations. We discuss details

of these components of fair value gains and losses in “Consolidated Results of Operations—Fair Value (Losses)

Gains, Net.”

The gains on our trading securities for the segment during 2010 were driven by a decrease in interest rates and

narrowing of credit spreads on CMBS.

The gains on our trading securities during 2009 were primarily attributable to the narrowing of credit spreads on

CMBS, asset-backed securities, corporate debt securities and agency MBS, partially offset by an increase in

interest rates in 2009.

Federal Income Taxes

We recognized an income tax benefit in 2010 primarily due to the reversal of a portion of the valuation

allowance for deferred tax assets resulting from a settlement agreement reached with the IRS in the first quarter

of 2010 for our unrecognized tax benefits for the tax years 1999 through 2004. We recorded a valuation

allowance for the majority of the tax benefits associated with the pre-tax losses recognized in 2009.

The Capital Markets Group’s Mortgage Portfolio

The Capital Markets group’s mortgage portfolio consists of mortgage loans and mortgage-related securities that

we own. Mortgage-related securities held by Capital Markets include Fannie Mae MBS and non-Fannie Mae

mortgage-related securities. The Fannie Mae MBS that we own are maintained as securities on the Capital

Markets group’s balance sheets. Mortgage-related assets held by consolidated MBS trusts are not included in the

Capital Markets group’s mortgage portfolio.

The amount of mortgage assets that we may own is restricted by our senior preferred stock purchase agreement

with Treasury. By December 31 of each year, we are required to reduce our mortgage assets to 90% of the

maximum allowable amount that we were permitted to own as of December 31 of the immediately preceding

calendar year, until the amount of our mortgage assets reaches $250 billion. The maximum allowable amount of

mortgage assets we may own was reduced to $729 billion as of December 31, 2011 and will be reduced to $656.1

billion as of December 31, 2012. As of December 31, 2011, we owned $708.4 billion in mortgage assets,

compared with $788.8 billion as of December 31, 2010.

Table 23 displays our Capital Markets group’s mortgage portfolio activity for the periods indicated.

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Table 23: Capital Markets Group’s Mortgage Portfolio Activity(1)

For the Year Ended

December 31,

2011 2010

(Dollars in millions)

Mortgage loans:

Beginning balance ............................................................... $ 427,074 $ 281,162

Purchases .................................................................... 153,218 313,075

Securitizations(2) ............................................................... (101,705) (95,783)

Liquidations(3) ................................................................ (80,316) (71,380)

Mortgage loans, ending balance .................................................... 398,271 427,074

Mortgage securities:

Beginning balance ............................................................... $ 361,697 $ 491,566

Purchases(4) ................................................................... 20,760 44,495

Securitizations(2) ............................................................... 101,705 95,783

Sales ....................................................................... (108,430) (179,620)

Liquidations(3) ................................................................ (65,589) (90,527)

Mortgage securities, ending balance ................................................. 310,143 361,697

Total Capital Markets mortgage portfolio .............................................. $ 708,414 $ 788,771

(1) Based on unpaid principal balance.

(2) Includes portfolio securitization transactions that do not qualify for sale treatment under GAAP.

(3) Includes scheduled repayments, prepayments, foreclosures and lender repurchases.

(4) Includes purchases of Fannie Mae MBS issued by consolidated trusts.

Purchases of mortgage loans decreased in 2011 compared with 2010 because we purchased fewer loans that were

four or more months delinquent from MBS trusts in 2011. We significantly increased our purchases of delinquent

loans in 2010 and purchased the substantial majority of our delinquent loan population during the first half of

2010, which included $127 billion of loans that were four or more months delinquent as of December 31, 2009.

We expect to continue to purchase loans from MBS trusts as they become four or more consecutive monthly

payments delinquent subject to market conditions, economic benefit, servicer capacity, and other factors

including the limit on the mortgage assets that we may own pursuant to the senior preferred stock purchase

agreement. We purchased approximately 384,000 delinquent loans with an unpaid principal balance of

approximately $67 billion from our single-family MBS trusts in 2011. As of December 31, 2011, the total unpaid

principal balance of all loans in single-family MBS trusts that were delinquent as to four or more consecutive

monthly payments was $5.8 billion. In January 2012, we purchased approximately 27,000 delinquent loans with

an unpaid principal balance of $4.5 billion from our single-family MBS trusts.

Table 24 displays the composition of the Capital Markets group’s mortgage portfolio as of December 31, 2011

and 2010.

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Table 24: Capital Markets Group’s Mortgage Portfolio Composition(1)

As of December 31,

2011 2010

(Dollars in millions)

Capital Markets group’s mortgage loans:

Single-family loans

Government insured or guaranteed ................................................... $ 41,555 $ 51,783

Conventional:

Long-term, fixed-rate ............................................................ 245,810 237,096

Intermediate-term, fixed-rate ...................................................... 10,289 11,446

Adjustable-rate ................................................................. 23,490 31,526

Total single-family conventional ..................................................... 279,589 280,068

Total single-family loans ............................................................. 321,144 331,851

Multifamily loans

Government insured or guaranteed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362 431

Conventional:

Long-term, fixed-rate ............................................................ 3,629 4,413

Intermediate-term, fixed-rate ...................................................... 58,885 71,010

Adjustable-rate ................................................................. 14,251 19,369

Total multifamily conventional ...................................................... 76,765 94,792

Total multifamily loans .............................................................. 77,127 95,223

Total Capital Markets group’s mortgage loans ............................................ 398,271 427,074

Capital Markets group’s mortgage-related securities:

Fannie Mae ..................................................................... 220,061 260,429

Freddie Mac ..................................................................... 14,509 17,332

Ginnie Mae ..................................................................... 1,043 1,425

Alt-A private-label securities ........................................................ 19,670 22,283

Subprime private-label securities .................................................... 16,538 18,038

CMBS ......................................................................... 23,226 25,052

Mortgage revenue bonds ........................................................... 10,899 12,525

Other mortgage-related securities .................................................... 4,197 4,613

Total Capital Markets group’s mortgage-related securities(2) ................................. 310,143 361,697

Total Capital Markets group’s mortgage portfolio ......................................... $708,414 $788,771

(1) Based on unpaid principal balance.

(2) The fair value of these mortgage-related securities was $316.5 billion and $365.8 billion as of December 31, 2011 and

2010, respectively.

The Capital Markets group’s mortgage portfolio decreased as of December 31, 2011 compared with

December 31, 2010 primarily due to liquidations and sales, partially offset by purchases of delinquent loans from

MBS trusts. The total unpaid principal balance of nonperforming loans in the Capital Markets group’s mortgage

portfolio was $236.2 billion as of December 31, 2011 and $228.0 billion as of December 31, 2010. This

population includes loans that have been modified and have been classified as TDRs, as well as unmodified

delinquent loans that are on nonaccrual status in our consolidated financial statements. We expect our mortgage

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portfolio to continue to decrease due to the restrictions on the amount of mortgage assets we may own under the

terms of our senior preferred stock purchase agreement with Treasury.

CONSOLIDATED BALANCE SHEET ANALYSIS

We seek to structure the composition of our balance sheet and manage its size to comply with our regulatory

requirements, to provide adequate liquidity to meet our needs, and to mitigate our interest rate risk and credit risk

exposure. The major asset components of our consolidated balance sheets include our mortgage investments and

our cash and other investments portfolio. We fund and manage the interest rate risk on these investments through

the issuance of debt securities and the use of derivatives. Our debt securities and derivatives represent the major

liability components of our consolidated balance sheets.

The section below provides a discussion of our consolidated balance sheets as of the dates indicated and should

be read together with our consolidated financial statements, including the accompanying notes.

Table 25 displays our consolidated balance sheets as of December 31, 2011 and 2010.

Table 25: Summary of Consolidated Balance Sheets

As of December 31,

2011 2010 Variance

(Dollars in millions)

Assets

Cash and cash equivalents and federal funds sold and securities purchased under

agreements to resell or similar arrangements ............................... $ 63,539 $ 29,048 $ 34,491

Restricted cash ........................................................ 50,797 63,678 (12,881)

Investments in securities(1) ................................................ 151,780 151,248 532

Mortgage loans:

Of Fannie Mae ...................................................... 380,379 407,482 (27,103)

Of consolidated trusts ................................................. 2,590,398 2,577,794 12,604

Allowance for loan losses ................................................ (72,156) (61,556) (10,600)

Mortgage loans, net of allowance for loan losses ............................ 2,898,621 2,923,720 (25,099)

Other assets(2) .......................................................... 46,747 54,278 (7,531)

Total assets ......................................................... $3,211,484 $3,221,972 $(10,488)

Liabilities and deficit

Debt:

Of Fannie Mae ...................................................... $ 732,444 $ 780,044 $(47,600)

Of consolidated trusts ................................................. 2,457,428 2,416,956 40,472

Other liabilities(3) ....................................................... 26,183 27,489 (1,306)

Total liabilities ...................................................... 3,216,055 3,224,489 (8,434)

Senior preferred stock ................................................... 112,578 88,600 23,978

Other deficit(4) ......................................................... (117,149) (91,117) (26,032)

Total deficit ......................................................... (4,571) (2,517) (2,054)

Total liabilities and deficit .............................................. $3,211,484 $3,221,972 $(10,488)

(1) Includes $49.8 billion as of December 31, 2011 and $32.8 billion as of December 31, 2010 of non-mortgage-related

securities that are included in our other investments portfolio, which we present in “Table 38: Cash and Other

Investments Portfolio.”

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(2) Consists of accrued interest receivable, net; acquired property, net; and other assets.

(3) Consists of accrued interest payable, federal funds purchased and securities sold under agreements to repurchase, and

other liabilities.

(4) Consists of preferred stock, common stock, accumulated deficit, accumulated other comprehensive loss, treasury stock,

and noncontrolling interest.

Cash and Cash Equivalents and Federal Funds Sold and Securities Purchased under Agreements to Resell

or Similar Arrangements

Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar

arrangements are included in our cash and other investments portfolio. See “Liquidity and Capital

Management—Liquidity Management—Cash and Other Investments Portfolio” for additional information on our

cash and other investments portfolio.

Restricted Cash

Restricted cash primarily includes unscheduled borrower payments received by the servicers or consolidated

trusts due to be remitted to the MBS certificateholders in the subsequent month. Our restricted cash decreased as

of December 31, 2011 compared with the balance as of December 31, 2010 primarily due to a decline in

refinance activity, resulting in a decrease in unscheduled payments received.

Investments in Mortgage-Related Securities

Our investments in mortgage-related securities are classified in our consolidated balance sheets as either trading

or available-for-sale and are measured at fair value. Unrealized and realized gains and losses on trading securities

are included as a component of “Fair value losses, net” and unrealized gains and losses on available-for-sale

securities are included in “Other comprehensive income” in our consolidated statements of operations and

comprehensive loss. Realized gains and losses on available-for-sale securities are recognized when securities are

sold in “Investment gains, net” in our consolidated statements of operations and comprehensive loss. See

“Note 5, Investments in Securities” for additional information on our investments in mortgage-related securities,

including the composition of our trading and available-for-sale securities at amortized cost and fair value and the

gross unrealized gains and losses related to our available-for-sale securities as of December 31, 2011.

Table 26 displays the fair value of our investments in mortgage-related securities, including trading and

available-for-sale securities, as of December 31, 2011 and 2010. The decrease is primarily attributable to a

reduction in our agency MBS investments as we continue to manage our portfolio in order to meet portfolio

requirements. The decrease is also attributable to a decline in our Alt-A and subprime private-label securities.

See “Investments in Private-Label Mortgage-Related Securities” for a discussion of factors that contributed to the

decline in the unpaid principal balance and fair value of our Alt-A and subprime private-label securities.

Table 26: Summary of Mortgage-Related Securities at Fair Value

As of December 31,

2011 2010

(Dollars in millions)

Mortgage-related securities:

Fannie Mae ...................................................................... $ 24,274 $ 30,226

Freddie Mac ..................................................................... 15,555 18,322

Ginnie Mae ...................................................................... 1,189 1,629

Alt-A private-label securities ........................................................ 13,032 15,573

Subprime private-label securities ..................................................... 8,866 11,513

CMBS .......................................................................... 24,437 25,608

Mortgage revenue bonds ............................................................ 10,978 11,650

Other mortgage-related securities ..................................................... 3,601 3,974

Total ......................................................................... $101,932 $118,495

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Investments in Private-Label Mortgage-Related Securities

We classify private-label securities as Alt-A, subprime, multifamily or manufactured housing if the securities

were labeled as such when issued. We have also invested in private-label subprime mortgage-related securities

that we have resecuritized to include our guaranty (“wraps”).

The continued negative impact of the current economic environment, including sustained weakness in the

housing market and high unemployment, has adversely affected the performance of our Alt-A and subprime

private-label securities. The unpaid principal balance of our investments in Alt-A and subprime securities was

$36.2 billion as of December 31, 2011, of which $30.2 billion was rated below investment grade. Table 27

displays the unpaid principal balance and the fair value of our investments in Alt-A and subprime private-label

securities along with an analysis of the cumulative losses on these investments as of December 31, 2011. As of

December 31, 2011, we had realized actual cumulative principal shortfalls of approximately 6% compared with

2% as of December 31, 2010, of the total cumulative credit losses reported in this table and reflected in our

consolidated financial statements.

Table 27: Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities

As of December 31, 2011

Unpaid

Principal

Balance

Fair

Value

Total

Cumulative

Losses(1)

Noncredit

Component(2)

Credit

Component(3)

(Dollars in millions)

Trading securities:(4)

Alt-A private-label securities ............... $ 2,710 $ 1,349 $ (1,319) $ (171) $ (1,148)

Subprime private-label securities ........... 2,592 1,280 (1,312) (404) (908)

Total .................................. $ 5,302 $ 2,629 $ (2,631) $ (575) $ (2,056)

Available-for-sale securities:(4)

Alt-A private-label securities ............... $16,960 $11,683 $ (5,744) $(1,631) $ (4,113)

Subprime private-label securities ........... 13,946 7,586 (6,399) (1,970) (4,429)

Total .................................. $30,906 $19,269 $(12,143) $(3,601) $ (8,542)

Grand Total .............................. $36,208 $21,898 $(14,774) $(4,176) $(10,598)

(1) Amounts reflect the difference between the fair value and unpaid principal balance net of unamortized premiums,

discounts and certain other cost basis adjustments.

(2) Represents the estimated portion of the total cumulative losses that is noncredit-related. We have calculated the credit

component based on the difference between the amortized cost basis of the securities and the present value of expected

future cash flows. The remaining difference between the fair value and the present value of expected future cash flows is

classified as noncredit-related.

(3) For securities classified as trading, amounts reflect the estimated portion of the total cumulative losses that is creditrelated. For securities classified as available-for-sale, amounts reflect the estimated portion of total cumulative other-thantemporary credit impairment losses, net of accretion, that are recognized in earnings.

(4) Excludes resecuritizations, or wraps, of private-label securities backed by subprime loans that we have guaranteed and

hold in our mortgage portfolio as Fannie Mae securities.

Table 28 displays the 60 days or more delinquency rates and average loss severities for the loans underlying our

Alt-A and subprime private-label mortgage-related securities for the most recent remittance period of the current

reporting quarter. The delinquency rates and average loss severities are based on available data provided by Intex

Solutions, Inc. (“Intex”) and CoreLogic, LoanPerformance (“CoreLogic”). We also present the average credit

enhancement and monoline financial guaranteed amount for these securities as of December 31, 2011. Based on

the stressed condition of some of our financial guarantors, we believe some of these counterparties will not fully

meet their obligation to us in the future. See “Risk Management—Credit Risk Management—Institutional

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Counterparty Credit Risk Management—Financial Guarantors” for additional information on our financial

guarantor exposure and the counterparty risk associated with our financial guarantors.

Table 28: Credit Statistics of Loans Underlying Alt-A and Subprime Private-Label Mortgage-Related Securities

(Including Wraps)

As of December 31, 2011

Unpaid Principal Balance

≥60 Days

Delinquent(2)(3)

Average

Loss

Severity(3)(4)

Average

Credit

Enhancement(3)(5)

Monoline

Financial

Guaranteed

Amount Trading (6)

AvailableforSale Wraps(1)

(Dollars in millions)

Private-label mortgage-related securities backed by:(7)

Alt-A mortgage loans:

Option ARM Alt-A mortgage loans:

2004 and prior . . . . . . . . . . . . . . $ — $ 479 $ — 31.7% 58.5% 15.5% $ —

2005 ....................... — 1,298 — 43.0 63.5 37.8 251

2006 ....................... — 1,192 — 46.3 68.7 26.9 102

2007 ....................... 1,881 — — 45.5 66.0 55.5 640

Other Alt-A mortgage loans:

2004 and prior .............. — 6,098 — 10.6 50.8 12.4 12

2005 . . . . . . . . . . . . . . . . . . . . . . . 83 4,021 113 23.2 57.2 5.2 —

2006 . . . . . . . . . . . . . . . . . . . . . . . 62 3,755 — 28.2 60.3 0.1 —

2007 . . . . . . . . . . . . . . . . . . . . . . . 684 — 171 41.1 65.9 26.2 274

2008(8) . . . . . . . . . . . . . . . . . . . . . — 117 — — — — —

Total Alt-A mortgage loans: ...... 2,710 16,960 284 1,279

Subprime mortgage loans:

2004 and prior .............. — 1,642 959 24.2 73.8 60.7 626

2005(8) . . . . . . . . . . . . . . . . . . . . . — 170 1,279 41.7 82.0 57.4 224

2006 ....................... — 11,532 — 47.7 79.4 16.9 52

2007 ....................... 2,592 602 5,428 47.6 76.6 21.4 174

Total subprime mortgage loans: . . . 2,592 13,946 7,666 1,076

Total Alt-A and subprime mortgage

loans: ..................... $5,302 $30,906 $7,950 $2,355

(1) Represents our exposure to private-label Alt-A and subprime mortgage-related securities that have been resecuritized (or

wrapped) to include our guarantee.

(2) Delinquency data provided by Intex, where available, for loans backing Alt-A and subprime private-label mortgagerelated securities that we own or guarantee. The reported Intex delinquency data reflect information from December 2011

remittances for November 2011 payments. For consistency purposes, we have adjusted the Intex delinquency data, where

appropriate, to include all bankruptcies, foreclosures and REO in the delinquency rates.

(3) The average delinquency, severity and credit enhancement metrics are calculated for each loan pool associated with

securities where Fannie Mae has exposure and are weighted based on the unpaid principal balance of those securities.

(4) Severity data obtained from CoreLogic, where available, for loans backing Alt-A and subprime private-label mortgagerelated securities that we own or guarantee. The CoreLogic severity data reflect information from December 2011

remittances for November 2011 payments. For consistency purposes, we have adjusted the severity data, where

appropriate.

(5) Average credit enhancement percentage reflects both subordination and financial guarantees. Reflects the ratio of the

current amount of the securities that will incur losses in the securitization structure before any losses are allocated to

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securities that we own or guarantee. Percentage generally calculated based on the quotient of the total unpaid principal

balance of all credit enhancements in the form of subordination or financial guarantee of the security divided by the total

unpaid principal balance of all of the tranches of collateral pools from which credit support is drawn for the security that

we own or guarantee.

(6) Reflects amount of unpaid principal balance supported by financial guarantees from monoline financial guarantors.

(7) Vintages are based on series date and not loan origination date.

(8) The unpaid principal balance includes private-label REMIC securities that have been resecuritized totaling $117 million

for the 2008 vintage of other Alt-A loans and $15 million for the 2005 vintage of subprime loans. These securities are

excluded from the delinquency, severity and credit enhancement statistics reported in this table.

Mortgage Loans

The mortgage loans reported in our consolidated balance sheets include loans owned by Fannie Mae and loans

held in consolidated trusts and are classified as either held for sale or held for investment. The decrease in

mortgage loans, net of the allowance for loan losses, in 2011 was primarily driven by a high volume of

mortgages that refinanced during the year due to low interest rates. For additional information on our mortgage

loans, see “Note 3, Mortgage Loans.” For additional information on the mortgage loan purchase and sale

activities reported by our Capital Markets group, see “Business Segment Results—Capital Markets Group

Results.”

Debt Instruments

Debt of Fannie Mae is the primary means of funding our mortgage investments. Debt of consolidated trusts

represents the amount of Fannie Mae MBS issued from consolidated trusts and held by third-party

certificateholders. We provide a summary of the activity of the debt of Fannie Mae and a comparison of the mix

between our outstanding short-term and long-term debt in “Liquidity and Capital Management—Liquidity

Management—Debt Funding.” Also see “Note 8, Short-Term Borrowings and Long-Term Debt” for additional

information on our outstanding debt.

The increase in debt of consolidated trusts in 2011 was primarily driven by sales of Fannie Mae MBS, which are

accounted for as reissuances of debt of consolidated trusts in our consolidated balance sheets, since the MBS

certificate ownership is transferred from us to a third party.

Derivative Instruments

We supplement our issuance of debt securities with derivative instruments to further reduce duration risk, which

includes prepayment risk, inherent in our mortgage investments. We aggregate, by derivative counterparty, the

net fair value gain or loss, less any cash collateral paid or received, and report these amounts in our consolidated

balance sheets as either assets or liabilities.

Our derivative assets and liabilities consist of these risk management derivatives and our mortgage commitments.

We refer to the difference between the derivative assets and derivative liabilities recorded in our consolidated

balance sheets as our net derivative asset or liability. We present, by derivative instrument type, the estimated fair

value of derivatives recorded in our consolidated balance sheets and the related outstanding notional amounts as

of December 31, 2011 and 2010 in “Note 9, Derivative Instruments.” Table 29 displays an analysis of the factors

driving the change during 2011 in the estimated fair value of our net derivative liability related to our risk

management derivatives recorded in our consolidated balance sheets.

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Table 29: Changes in Risk Management Derivative Assets (Liabilities) at Fair Value, Net

For the Year Ended

December 31,

2011

(Dollars in millions)

Net risk management derivative liability as of December 31, 2010 .............................. $ (789)

Effect of cash payments:

Fair value at inception of contracts entered into during the period, net(1) . . . . . . . . . . . . . . . . . . . . . . . . 44

Fair value at date of termination of contracts settled during the period, net(2) ..................... 1,103

Net collateral posted ................................................................ 3,218

Periodic net cash contractual interest payments(3) .......................................... 2,377

Total cash payments ............................................................... 6,742

Statement of operations impact of recognized amounts:

Net contractual interest expense accruals on interest rate swaps ............................... (2,185)

Net change in fair value during the period ............................................... (3,954)

Risk management derivatives fair value losses, net ...................................... (6,139)

Net risk management derivative liability as of December 31, 2011 .............................. $ (186)

(1) Cash receipts from sale of derivative option contracts increase the derivative liability recorded in our consolidated

balance sheets. Cash payments made to purchase derivative option contracts (purchased option premiums) increase the

derivative asset recorded in our consolidated balance sheets.

(2) Cash payments made to terminate derivative contracts reduce the derivative liability recorded in our consolidated balance

sheets. Primarily represents cash paid (received) upon termination of derivative contracts.

(3) Interest is accrued on interest rate swap contracts based on the contractual terms. Accrued interest income increases our

derivative asset and accrued interest expense increases our derivative liability. The offsetting interest income and expense

are included as components of derivatives fair value losses, net in our consolidated statements of operations and

comprehensive loss. Net periodic interest receipts reduce the derivative asset and net periodic interest payments reduce

the derivative liability. Also includes cash paid (received) on other derivatives contracts.

For additional information on our derivative instruments, see “Consolidated Results of Operations—Fair Value

(Losses) Gains, Net,” “Risk Management—Market Risk Management, Including Interest Rate Risk

Management” and “Note 9, Derivative Instruments.”

Stockholders’ Deficit

Our net deficit increased as of December 31, 2011 compared with December 31, 2010. See Table 30 in

“Supplemental Non-GAAP Information—Fair Value Balance Sheets” for details of the change in our net deficit.

SUPPLEMENTAL NON-GAAP INFORMATION—FAIR VALUE BALANCE SHEETS

As part of our disclosure requirements with FHFA, we disclose on a quarterly basis supplemental non-GAAP

consolidated fair value balance sheets, which reflect our assets and liabilities at estimated fair value.

Table 30 summarizes changes in our stockholders’ deficit reported in our GAAP consolidated balance sheets and

in the fair value of our net assets in our non-GAAP consolidated fair value balance sheets for the year ended

December 31, 2011. The estimated fair value of our net assets is calculated based on the difference between the

fair value of our assets and the fair value of our liabilities, adjusted for noncontrolling interests. We use various

valuation techniques to estimate fair value, some of which incorporate internal assumptions that are subjective

and involve a high degree of management judgment. We describe the specific valuation techniques used to

determine fair value and disclose the carrying value and fair value of our financial assets and liabilities in

“Note 18, Fair Value.”

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Table 30: Comparative Measures—GAAP Change in Stockholders’ Deficit and Non-GAAP Change in Fair Value of

Net Assets (Net of Tax Effect)

For Year Ended

(Dollars in millions)

GAAP consolidated balance sheets:

Fannie Mae stockholders’ deficit as of December 31, 2010(1) ................................... $ (2,599)

Total comprehensive loss ............................................................... (16,408)

Capital transactions:(2)

Funds received from Treasury under the senior preferred stock purchase agreement .............. 23,978

Senior preferred stock dividends ....................................................... (9,613)

Capital transactions, net ................................................................ 14,365

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Fannie Mae stockholders’ deficit as of December 31, 2011(1) ................................... $ (4,624)

Non-GAAP consolidated fair value balance sheets:

Estimated fair value of net assets as of December 31, 2010 .................................... $(120,294)

Capital transactions, net ................................................................ 14,365

Change in estimated fair value of net assets, excluding capital transactions ........................ (21,919)

Decrease in estimated fair value of net assets, net ............................................ (7,554)

Estimated fair value of net assets as of December 31, 2011 .................................... $(127,848)

(1) Our net worth, as defined under the senior preferred stock purchase agreement, is equivalent to the “Total deficit” amount

reported in our consolidated balance sheets. Our net worth, or total deficit, consists of “Total Fannie Mae’s stockholders’

deficit” and “Noncontrolling interests” reported in our consolidated balance sheets.

(2) Represents capital transactions, which are reported in our consolidated financial statements.

During 2011, the fair value of our net assets, excluding capital transactions, decreased by $21.9 billion. The

decrease was attributable to a net decrease in the fair value of credit-related items, primarily due to declining

actual and expected home prices. The continued and extended worsening home price environment contributed to

higher expectations of default and lower recoveries, particularly for underwater and nonperforming loans. The

volatile interest rate environment also contributed to a decline in the fair value of credit-related assets by

affecting the rate used to discount expected losses to present value. These credit-related effects were partially

offset by an increase in the fair value of the net portfolio attributable to the positive impact of the spread between

mortgage assets and associated debt and derivatives.

Cautionary Language Relating to Supplemental Non-GAAP Financial Measures

In reviewing our non-GAAP consolidated fair value balance sheets, there are a number of important factors and

limitations to consider. The estimated fair value of our net assets is calculated as of a particular point in time

based on our existing assets and liabilities. It does not incorporate other factors that may have a significant

impact on our long-term fair value, including revenues generated from future business activities in which we

expect to engage, the value from our foreclosure and loss mitigation efforts or the impact that legislation or

potential regulatory actions may have on us. As a result, the estimated fair value of our net assets presented in our

non-GAAP consolidated fair value balance sheets does not represent an estimate of our net realizable value,

liquidation value or our market value as a whole. Amounts we ultimately realize from the disposition of assets or

settlement of liabilities may vary materially from the estimated fair values presented in our non-GAAP

consolidated fair value balance sheets.

In addition, the fair value of our net assets attributable to common stockholders presented in our fair value

balance sheet does not represent an estimate of the value we expect to realize from operating the company or

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what we expect to draw from Treasury under the terms of our senior preferred stock purchase agreement,

primarily because:

• The estimated fair value of our credit exposures significantly exceeds our projected credit losses as fair

value takes into account certain assumptions about liquidity and required rates of return that a market

participant may demand in assuming a credit obligation. Because we do not generally intend to have other

parties assume the credit risk inherent in our book of business, and therefore would not be obligated to pay a

market premium for its assumption, we do not expect the current market premium portion of our current

estimate of fair value to impact future Treasury draws;

• The fair value balance sheet does not reflect amounts we expect to draw in the future to pay dividends on

the senior preferred stock; and

• The fair value of our net assets reflects a point in time estimate of the fair value of our existing assets and

liabilities, and does not incorporate the value associated with new business that may be added in the future.

The fair value of our net assets is not a measure defined within GAAP and may not be comparable to similarly

titled measures reported by other companies.

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Supplemental Non-GAAP Consolidated Fair Value Balance Sheets

We display our non-GAAP fair value balance sheets in Table 31 below.

Table 31: Supplemental Non-GAAP Consolidated Fair Value Balance Sheets

As of December 31, 2011 As of December 31, 2010

GAAP

Carrying

Value

Fair Value

Adjustment(1)

Estimated

Fair Value

GAAP

Carrying

Value

Fair Value

Adjustment(1)

Estimated

Fair Value

(Dollars in millions)

Assets:

Cash and cash equivalents ................... $ 68,336 $ — $ 68,336 $ 80,975 $ — $ 80,975

Federal funds sold and securities purchased under

agreements to resell or similar arrangements . . . 46,000 — 46,000 11,751 — 11,751

Trading securities .......................... 74,198 — 74,198 56,856 — 56,856

Available-for-sale securities .................. 77,582 — 77,582 94,392 — 94,392

Mortgage loans:

Mortgage loans held for sale . . . . . . . . . . . . . . . 311 14 325 915 — 915

Mortgage loans held for investment, net of

allowance for loan losses:

Of Fannie Mae ...................... 322,825 (27,829) 294,996 358,698 (39,331) 319,367

Of consolidated trusts ................. 2,575,485 76,540(2) 2,652,025(3) 2,564,107 46,038(2) 2,610,145(3)

Total mortgage loans ..................... 2,898,621 48,725 2,947,346(4) 2,923,720 6,707 2,930,427(4)

Advances to lenders ........................ 5,538 (118) 5,420(5)(6) 7,215 (225) 6,990(5)(6)

Derivative assets at fair value . . . . . . . . . . . . . . . . . 561 — 561(5)(6) 1,137 — 1,137(5)(6)

Guaranty assets and buy-ups, net . . . . . . . . . . . . . . 503 398 901(5)(6) 458 356 814(5)(6)

Total financial assets ..................... 3,171,339 49,005 3,220,344(7) 3,176,504 6,838 3,183,342(7)

Credit enhancements . . . . . . . . . . . . . . . . . . . . . . . 455 2,550 3,005(5)(6) 479 3,286 3,765(5)(6)

Other assets ............................... 39,690 (258) 39,432(5)(6) 44,989 (261) 44,728(5)(6)

Total assets ............................. $3,211,484 $ 51,297 $3,262,781 $3,221,972 $ 9,863 $3,231,835

Liabilities:

Federal funds purchased and securities sold under

agreements to repurchase . . . . . . . . . . . . . . . . . . $ — $ — $ — $ 52 $ (1) $ 51

Short-term debt:

Of Fannie Mae ........................ 146,752 30 146,782 151,884 90 151,974

Of consolidated trusts ................... 4,973 — 4,973 5,359 — 5,359

Long-term debt:

Of Fannie Mae ........................ 585,692(8) 28,291 613,983 628,160(8) 21,524 649,684

Of consolidated trusts ................... 2,452,455(8) 144,202(2) 2,596,657 2,411,597(8) 103,332(2) 2,514,929

Derivative liabilities at fair value . . . . . . . . . . . . . . 916 — 916(9)(10) 1,715 — 1,715(9)(10)

Guaranty obligations . . . . . . . . . . . . . . . . . . . . . . . 811 3,133 3,944(9)(10) 769 3,085 3,854(9)(10)

Total financial liabilities ................... 3,191,599 175,656 3,367,255(7) 3,199,536 128,030 3,327,566(7)

Other liabilities ............................ 24,456 (1,135) 23,321(9)(10) 24,953 (472) 24,481(9)(10)

Total liabilities .......................... 3,216,055 174,521 3,390,576 3,224,489 127,558 3,352,047

Equity (deficit):

Fannie Mae stockholders’ equity (deficit):

Senior preferred(11) .......................... 112,578 — 112,578 88,600 — 88,600

Preferred ................................. 19,130 (18,163) 967 20,204 (19,829) 375

Common ................................. (136,332) (105,061) (241,393) (111,403) (97,866) (209,269)

Total Fannie Mae stockholders’ deficit/nonGAAP fair value of net assets ........... $ (4,624) $(123,224) $ (127,848) $ (2,599) $(117,695) $ (120,294)

Noncontrolling interests . . . . . . . . . . . . . . . . . . . 53 — 53 82 — 82

Total deficit ............................ (4,571) (123,224) (127,795) (2,517) (117,695) (120,212)

Total liabilities and equity (deficit) .......... $3,211,484 $ 51,297 $3,262,781 $3,221,972 $ 9,863 $3,231,835

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Explanation and Reconciliation of Non-GAAP Measures to GAAP Measures

(1) Each of the amounts listed as a “fair value adjustment” represents the difference between the carrying value included in our

GAAP consolidated balance sheets and our best judgment of the estimated fair value of the listed item.

(2) Fair value of consolidated loans is impacted by credit risk, which has no corresponding impact on the consolidated debt.

(3) Includes certain mortgage loans that we elected to report at fair value in our GAAP consolidated balance sheets of $3.6

billion and $3.0 billion as of December 31, 2011 and 2010, respectively.

(4) Performing loans had a fair value of $2.8 trillion and an unpaid principal balance of $2.7 trillion as of December 31, 2011

and 2010. Nonperforming loans, which for the purposes of our non-GAAP fair value balance sheets consists of loans that are

delinquent by one or more payments, had a fair value of $128.9 billion and an unpaid principal balance of $226.5 billion as

of December 31, 2011 compared with a fair value of $168.5 billion and an unpaid principal balance of $287.4 billion as

of December 31, 2010. See “Note 18, Fair Value” for additional information on valuation techniques for performing and

nonperforming loans.

(5) The following line items: (a) Advances to lenders; (b) Derivative assets at fair value; (c) Guaranty assets and buy-ups, net;

(d) Credit enhancements; and (e) Other assets, together consist of the following assets presented in our GAAP consolidated

balance sheets: (a) Accrued interest receivable, net; (b) Acquired property, net; and (c) Other assets.

(6) “Other assets” include the following GAAP consolidated balance sheets line items: (a) Accrued interest receivable, net and

(b) Acquired property, net. The carrying value of these items in our GAAP consolidated balance sheets totaled $21.4 billion

and $27.5 billion as of December 31, 2011 and 2010, respectively. “Other assets” in our GAAP consolidated balance sheets

include the following: (a) Advances to lenders; (b) Derivative assets at fair value; (c) Guaranty assets and buy-ups, net; and

(d) Credit enhancements. The carrying value of these items totaled $7.1 billion and $9.3 billion as of December 31, 2011 and

2010, respectively.

(7) We estimated the fair value of these financial instruments in accordance with the fair value accounting guidance as described

in “Note 18, Fair Value.”

(8) Includes certain long-term debt instruments that we elected to report at fair value in our GAAP consolidated balance sheets

of $4.8 billion and $3.2 billion as of December 31, 2011 and 2010, respectively.

(9) The following line items: (a) Derivative liabilities at fair value; (b) Guaranty obligations; and (c) Other liabilities, consist of

the following liabilities presented in our GAAP consolidated balance sheets: (a) Accrued interest payable and (b) Other

liabilities.

(10) “Other liabilities” include Accrued interest payable in our GAAP consolidated balance sheets. The carrying value of this

item in our GAAP consolidated balance sheets totaled $12.6 billion and $13.8 billion as of December 31, 2011 and 2010,

respectively. We assume that certain other liabilities, such as deferred revenues, have no fair value. Although we report the

“Reserve for guaranty losses” as part of “Other liabilities” in our GAAP consolidated balance sheets, it is incorporated into

and reported as part of the fair value of our guaranty obligations in our non-GAAP supplemental consolidated fair value

balance sheets. “Other liabilities” in our GAAP consolidated balance sheets include the following: (a) Derivative liabilities at

fair value and (b) Guaranty obligations. The carrying value of these items totaled $1.7 billion and $2.5 billion as of

December 31, 2011 and 2010, respectively.

(11) The amount included in “estimated fair value” of the senior preferred stock is the liquidation preference, which is the same

as the GAAP carrying value, and does not reflect fair value.

LIQUIDITY AND CAPITAL MANAGEMENT

Liquidity Management

Our business activities require that we maintain adequate liquidity to fund our operations. Our liquidity risk

management policy is designed to address our liquidity risk. Liquidity risk is the risk that we will not be able to

meet our funding obligations in a timely manner. Liquidity risk management involves forecasting funding

requirements, maintaining sufficient capacity to meet our needs based on our ongoing assessment of financial

market liquidity and adhering to our regulatory requirements.

Our treasury function resides within the Capital Markets group and is responsible for implementing our liquidity

and contingency planning strategies. See “Liquidity Risk Management Practices and Contingency Planning” for a

discussion of our liquidity contingency plans. Also see “Risk Factors” in this report for a description of the risks

associated with our liquidity risk and liquidity contingency planning.

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Primary Sources and Uses of Funds

Our primary source of funds is proceeds from the issuance of short-term and long-term debt securities.

Accordingly, our liquidity depends largely on our ability to issue unsecured debt in the capital markets. Our

status as a GSE and federal government support of our business continue to be essential to maintaining our

access to the unsecured debt markets.

In addition to funding we obtain from the issuance of debt securities, our other sources of cash include:

• principal and interest payments received on mortgage loans, mortgage-related securities and non-mortgage

investments we own;

• proceeds from the sale of mortgage-related securities, mortgage loans and non-mortgage assets, including

proceeds from the sales of foreclosed real estate assets;

• funds from Treasury pursuant to the senior preferred stock purchase agreement;

• borrowings under secured and unsecured intraday funding lines of credit we have established with several

large financial institutions;

• guaranty fees received on Fannie Mae MBS;

• borrowings against mortgage-related securities and other investment securities we hold pursuant to

repurchase agreements and loan agreements;

• payments received from mortgage insurance counterparties; and

• net receipts on derivative instruments.

Our primary funding needs include:

• the repayment of matured, redeemed and repurchased debt;

• the purchase of mortgage loans (including delinquent loans from MBS trusts), mortgage-related securities

and other investments;

• interest payments on outstanding debt;

• dividend payments made to Treasury pursuant to the senior preferred stock purchase agreement;

• net payments on derivative instruments;

• the pledging of collateral under derivative instruments;

• administrative expenses; and

• losses incurred in connection with our Fannie Mae MBS guaranty obligations.

Liquidity Risk Management Practices and Contingency Planning

Our liquidity position could be adversely affected by many factors, both internal and external to our business,

including: actions taken by our conservator, the Federal Reserve, U.S. Treasury or other government agencies;

legislation relating to us or our business; a U.S. government payment default on its debt obligations; a downgrade

in the credit ratings of our senior unsecured debt or the U.S government’s debt from the major ratings

organizations; a systemic event leading to the withdrawal of liquidity from the market; an extreme market-wide

widening of credit spreads; public statements by key policy makers; a significant further decline in our net worth;

loss of demand for our debt, or certain types of our debt, from a major group of investors; a significant credit

event involving one of our major institutional counterparties; a sudden catastrophic operational failure in the

financial sector; or elimination of our GSE status. See “Risk Factors” for a description of factors that could

adversely affect our liquidity.

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We conduct liquidity contingency planning to prepare for an event in which our access to the unsecured debt

markets becomes limited. We plan for alternative sources of liquidity that are designed to allow us to meet our

cash obligations without relying upon the issuance of unsecured debt.

As directed by FHFA, our liquidity management policies and practices require that we:

• maintain a portfolio of highly liquid securities to cover a minimum of 30 calendar days of net cash needs,

assuming no access to the short- and long-term unsecured debt markets and other assumptions required by

FHFA;

• maintain within our cash and other investments portfolio a daily balance of U.S. Treasury securities and/or

cash with the Federal Reserve Bank of New York that has a redemption amount of at least 50% of the

average of the previous three month-end balances of our cash and other investments portfolio (as adjusted in

agreement with FHFA); and

• maintain a liquidity profile that meets or exceeds our projected 365-day net cash needs by supplementing

liquidity holdings with unencumbered agency mortgage securities.

As of December 31, 2011, we were in compliance with each of the liquidity risk management policies and

practices set forth above.

In addition to these FHFA requirements, we run routine operational testing of our ability to rely upon mortgage

collateral to obtain financing. We enter into relatively small repurchase agreements in order to confirm that we

have the operational and systems capability to do so. In addition, we have provided collateral in advance to a

number of clearing banks in the event we seek to enter into repurchase agreements in the future. We do not,

however, have committed repurchase agreements with specific counterparties, as historically we have not relied

on this form of funding. As a result, our use of such facilities and our ability to enter into them in significant

dollar amounts may be challenging in a stressed market environment. See “Risk Factors” for the risks associated

with our ability to fund operations.

See “Cash and Other Investments Portfolio” and “Unencumbered Mortgage Portfolio” for further discussions of

our alternative sources of liquidity if our access to the debt markets were to become limited.

Debt Funding

We separately present the debt from consolidations (“debt of consolidated trusts”) and the debt issued by us

(“debt of Fannie Mae”) in our consolidated balance sheets and in the debt tables below. Our discussion regarding

debt funding in this section focuses on the debt of Fannie Mae. We fund our business primarily through the

issuance of short-term and long-term debt securities in the domestic and international capital markets. Because

debt issuance is our primary funding source, we are subject to “roll-over,” or refinancing, risk on our outstanding

debt.

We have a diversified funding base of domestic and international investors. Purchasers of our debt securities are

geographically diversified and include fund managers, commercial banks, pension funds, insurance companies,

foreign central banks, corporations, state and local governments, and other municipal authorities.

Although our funding needs may vary from quarter to quarter depending on market conditions, we currently

expect our debt funding needs will decline in future periods as we reduce the size of our mortgage portfolio in

compliance with the requirement of the senior preferred stock purchase agreement that we reduce our mortgage

portfolio 10% per year until it reaches $250 billion.

Fannie Mae Debt Funding Activity

Table 32 displays the activity in the debt of Fannie Mae for the periods indicated. This activity includes federal

funds purchased and securities sold under agreements to repurchase but excludes the debt of consolidated trusts

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as well as intraday loans. The reported amounts of debt issued and paid off during the period represent the face

amount of the debt at issuance and redemption, respectively. Activity for short-term debt of Fannie Mae relates

to borrowings with an original contractual maturity of one year or less while activity for long-term debt of Fannie

Mae relates to borrowings with an original contractual maturity of greater than one year.

Table 32: Activity in Debt of Fannie Mae

For the Year Ended December 31,

2011 2010 2009

(Dollars in millions)

Issued during the period:

Short-term:(1)

Amount ............................................... $424,503 $451,289 $1,381,640

Weighted-average interest rate ............................. 0.12% 0.25% 0.18%

Long-term:

Amount ............................................... $256,670 $463,157 $ 295,147

Weighted-average interest rate ............................. 1.72% 1.88% 2.52%

Total issued:

Amount ............................................... $681,173 $914,446 $1,676,787

Weighted-average interest rate ............................. 0.72% 1.08% 0.59%

Paid off during the period:(2)

Short-term:(1)

Amount ............................................... $429,711 $499,828 $1,513,683

Weighted-average interest rate ............................. 0.19% 0.23% 0.51%

Long-term:

Amount ............................................... $302,473 $406,267 $ 260,578

Weighted-average interest rate ............................. 2.52% 3.16% 4.09%

Total paid off:

Amount ............................................... $732,184 $906,095 $1,774,261

Weighted-average interest rate ............................. 1.15% 1.54% 1.04%

(1) The amount of short-term debt issued and paid off for the year ended 2009 included $766.8 billion of debt

issued and repaid to Fannie Mae MBS trusts.

(2) Consists of all payments on debt, including regularly scheduled principal payments, payments at maturity,

payments resulting from calls and payments for any other repurchases. Calls and repurchases of zero-coupon

debt are reported at original face value, which does not equal the amount of actual cash payment.

Due to the adoption of the consolidation accounting guidance in 2010, we no longer include debt issued and

repaid to Fannie Mae MBS trusts in our short-term debt activity, as the substantial majority of our MBS trusts

were consolidated and the underlying assets and debt of these trusts were recognized in our consolidated balance

sheets. In 2009, short-term debt activity of Fannie Mae, excluding debt issued and repaid to Fannie Mae MBS

trusts, consisted of issuances of $614.6 billion with a weighted-average interest rate of 0.27% and repayments of

$746.6 billion with a weighted-average interest rate of 0.93%.

Debt funding activity in 2011 decreased compared with 2010 primarily due to lower funding needs as a result of

(1) a reduction in the size of our mortgage portfolio pursuant to the requirements of the senior preferred stock

purchase agreement, (2) a decrease in our redemption of debt with higher interest rates, which we replaced with

issuances of debt with lower interest rates, and (3) a decrease in our purchases of delinquent loans from MBS

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trusts. Additionally, our debt funding needs were lower than would otherwise have been required as a result of

funds we received from Treasury under the senior preferred stock purchase agreement.

Our ability to issue long-term debt has been strong primarily due to actions taken by the federal government to

support us and the financial markets. We believe that continued federal government support of our business and

the financial markets, as well as our status as a GSE, are essential to maintaining our access to debt funding.

Changes or perceived changes in the government’s support could materially adversely affect our ability to

refinance our debt as it becomes due, which could have a material adverse impact on our liquidity, financial

condition and results of operations. In February 2011, Treasury and HUD released a report to Congress on

reforming America’s housing finance market. The report provides that the Administration will work with

FHFA to determine the best way to responsibly wind down both Fannie Mae and Freddie Mac. The report

emphasizes the importance of proceeding with a careful transition plan and providing the necessary financial

support to Fannie Mae and Freddie Mac during the transition period. For more information on GSE reform, see

“Legislative and Regulatory Developments—GSE Reform.”

In addition, due to our reliance on the U.S. government’s support, our access to debt funding or the cost of our

debt funding could be materially adversely affected by a change or perceived change in the creditworthiness of

the U.S. government. A downgrade in our credit ratings could reduce demand for our debt securities and increase

our borrowing costs. S&P’s downgrade of our credit rating on August 8, 2011, which was a result of a similar

action on the U.S. government’s sovereign credit rating, has not adversely affected our access to debt funding or

the cost of our debt funding. See our discussion of credit ratings in “Risk Factors” for information about factors

that may lead to the U.S. government’s long-term debt rating being lowered, and “Credit Ratings” for further

discussion of our dependence on our credit ratings.

Future changes or disruptions in the financial markets could significantly change the amount, mix and cost of

funds we obtain, which also could increase our liquidity and roll-over risk and have a material adverse impact on

our liquidity, financial condition and results of operations. See “Risk Factors” for a discussion of the risks we

face relating to (1) the uncertain future of our company; (2) our reliance on the issuance of debt securities to

obtain funds for our operations and the relative cost to obtain these funds; and (3) our liquidity contingency

plans.

Outstanding Debt

Total outstanding debt of Fannie Mae includes federal funds purchased and securities sold under agreements to

repurchase and short-term and long-term debt, excluding debt of consolidated trusts.

As of December 31, 2011, our outstanding short-term debt, based on its original contractual maturity, as a

percentage of our total outstanding debt increased to 20% from 19% as of December 31, 2010. For information

on our outstanding debt maturing within one year, including the current portion of our long-term debt, as a

percentage of our total debt, see “Maturity Profile of Outstanding Debt of Fannie Mae.” In addition, the

weighted-average interest rate on our long-term debt, based on its original contractual maturity, decreased to

2.42% as of December 31, 2011 from 2.77% as of December 31, 2010.

Pursuant to the terms of the senior preferred stock purchase agreement, we are prohibited from issuing debt

without the prior consent of Treasury if it would result in our aggregate indebtedness exceeding our outstanding

debt limit, which is 120% of the amount of mortgage assets we were allowed to own on December 31 of the

immediately preceding calendar year. Our debt limit under the senior preferred stock purchase agreement was

reduced to $972 billion in 2011. As of December 31, 2011, our aggregate indebtedness totaled $742.3 billion,

which was $229.7 billion below our debt limit. The calculation of our indebtedness for purposes of complying

with our debt limit reflects the unpaid principal balance and excludes debt basis adjustments and debt of

consolidated trusts. Because of our debt limit, we may be restricted in the amount of debt we issue to fund our

operations.

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Table 33 displays information as of December 31, 2011 and 2010 on our outstanding short-term and long-term

debt based on its original contractual terms.

Table 33: Outstanding Short-Term Borrowings and Long-Term Debt(1)

As of December 31,

2011 2010

Maturities Outstanding

WeightedAverage

Interest

Rate Maturities Outstanding

WeightedAverage

Interest

Rate

(Dollars in millions)

Federal funds purchased and securities sold

under agreements to repurchase . . . . . . . . — $ — —% — $ 52 2.20%

Short-term debt:

Fixed-rate:

Discount notes ................... — $ 146,301 0.13% — $ 151,500 0.32%

Foreign exchange discount notes . . . . . — 371 1.88 — 384 2.43

Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . — 80 0.04 — — —

Total short-term debt of Fannie Mae(3) ..... 146,752 0.13 151,884 0.32

Debt of consolidated trusts ............ — 4,973 0.09 — 5,359 0.23

Total short-term debt .................. $ 151,725 0.13% $ 157,243 0.32%

Long-term debt:

Senior fixed:

Benchmark notes and bonds ......... 2012 - 2030 $ 277,146 2.81% 2011 - 2030 $ 300,344 3.20%

Medium-term notes(4) .............. 2012 -2021 176,886 1.61 2011 -2020 199,266 2.13

Foreign exchange notes and bonds . . . 2021 -2028 662 5.44 2017 -2028 1,177 6.21

Other(5)(6) ........................ 2012 -2040 50,912 5.29 2011 -2040 44,893 5.64

Total senior fixed ............... 505,606 2.64 545,680 3.02

Senior floating:

Medium-term notes(4) .............. 2012 - 2016 71,855 0.32 2011 -2015 72,039 0.31

Other(5)(6) ........................ 2020 -2037 420 8.01 2020 -2037 386 4.92

Total senior floating ............. 72,275 0.35 72,425 0.34

Subordinated fixed-rate:

Qualifying subordinated(7) ........... 2012 -2014 4,894 5.08 2011 -2014 7,392 5.47

Subordinated debentures ........... 2019 2,917 9.91 2019 2,663 9.91

Total subordinated fixed-rate ...... 7,811 6.88 10,055 6.65

Total long-term debt of Fannie Mae(8) ..... 585,692 2.42 628,160 2.77

Debt of consolidated trusts(6) ........... 2012 -2051 2,452,455 4.18 2011 - 2051 2,411,597 4.59

Total long-term debt ................... $3,038,147 3.84% $3,039,757 4.22%

Outstanding callable debt of Fannie

Mae(9) ............................. $ 187,937 2.17% $ 219,804 2.53%

(1) Outstanding debt amounts and weighted-average interest rates reported in this table include the effect of unamortized

discounts, premiums and other cost basis adjustments. Reported amounts include fair value gains and losses associated

with debt that we elected to carry at fair value. The unpaid principal balance of outstanding debt of Fannie Mae, which

- 138 -
excludes unamortized discounts, premiums and other cost basis adjustments and debt of consolidated trusts, totaled

$741.6 billion and $792.6 billion as of December 31, 2011 and 2010, respectively.

(2) Includes foreign exchange discount notes denominated in U.S. dollars.

(3) Short-term debt of Fannie Mae consists of borrowings with an original contractual maturity of one year or less and,

therefore, does not include the current portion of long-term debt. Reported amounts include a net discount and other cost

basis adjustments of $53 million and $128 million as of December 31, 2011 and 2010, respectively.

(4) Includes long-term debt with an original contractual maturity of greater than 1 year and up to 10 years, excluding zerocoupon debt.

(5) Includes long-term debt that is not included in other debt categories.

(6) Includes a portion of structured debt instruments that is reported at fair value.

(7) Consists of subordinated debt with an interest deferral feature.

(8) Long-term debt of Fannie Mae consists of borrowings with an original contractual maturity of greater than one year.

Reported amounts include the current portion of long-term debt that is due within one year, which totaled $134.3 billion

and $95.4 billion as of December 31, 2011 and 2010, respectively. Reported amounts also include unamortized discounts,

premiums and other cost basis adjustments of $9.2 billion and $12.4 billion as of December 31, 2011 and 2010,

respectively. The unpaid principal balance of long-term debt of Fannie Mae, which excludes unamortized discounts,

premiums, fair value adjustments and other cost basis adjustments and amounts related to debt of consolidated trusts,

totaled $594.8 billion and $640.5 billion as of December 31, 2011 and 2010, respectively.

(9) Consists of long-term callable debt of Fannie Mae that can be paid off in whole or in part at our option or the option of

the investor at any time on or after a specified date. Includes the unpaid principal balance, and excludes unamortized

discounts, premiums and other cost basis adjustments.

Table 34 below displays additional information for each category of our short-term borrowings.

Table 34: Outstanding Short-Term Borrowings(1)

2011

As of December 31 Average During the Year

Outstanding

Weighted

Average

Interest

Rate Outstanding(2)

Weighted

Average

Interest

Rate

Maximum

Outstanding(3)

(Dollars in millions)

Federal funds purchased and securities sold under

agreements to repurchase . . . . . . . . . . . . . . . . . . . . . $ — —% $ 10 0.11% $ 829

Fixed-rate short-term debt:

Discount notes .............................. $146,301 0.13% $160,358 0.18% $198,382

Foreign exchange discount notes . . . . . . . . . . . . . . . 371 1.88 327 2.25 401

Other(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 0.04 9 0.06 80

Total short-term debt ......................... $146,752 0.13%

2010

As of December 31 Average During the Year

Outstanding

Weighted

Average

Interest

Rate Outstanding(2)

Weighted

Average

Interest

Rate

Maximum

Outstanding(3)

(Dollars in millions)

Federal funds purchased and securities sold under

agreements to repurchase . . . . . . . . . . . . . . . . . . . . . $ 52 2.20% $ 72 0.16% $ 200

Fixed-rate short-term debt:

Discount notes .............................. $151,500 0.32% $210,986 0.29% $260,377

Foreign exchange discount notes . . . . . . . . . . . . . . . 384 2.43 299 1.86 384

Other(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 15 0.53 100

Floating-rate short-term debt .................... — — 8 0.02 50

Total short-term debt ......................... $151,884 0.32%

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2009

As of December 31 Average During the Year

Outstanding

Weighted

Average

Interest

Rate Outstanding(2)

Weighted

Average

Interest

Rate

Maximum

Outstanding(3)

(Dollars in millions)

Federal funds purchased and securities sold under

agreements to repurchase . . . . . . . . . . . . . . . . . . . . . $ — —% $ 42 1.55% $ 189

Fixed-rate short-term debt:

Discount notes .............................. $199,987 0.27% $253,884 0.92% $325,239

Foreign exchange discount notes . . . . . . . . . . . . . . . 300 1.50 222 1.41 300

Other(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 0.53 199 1.30 334

Floating-rate short-term debt . . . . . . . . . . . . . . . . . . . . 50 0.02 2,744 1.20 3,136

Total short-term debt ......................... $200,437 0.27%

(1) Includes unamortized discounts, premiums and other cost basis adjustments.

(2) For 2011, average amount outstanding has been calculated using daily balances. For 2010 and 2009, average amount

outstanding has been calculated using month-end balances.

(3) For 2011, maximum outstanding represents the highest daily outstanding balance during the year. For 2010 and 2009,

maximum outstanding represents the highest month-end outstanding balance during the year.

(4) Includes foreign exchange discount notes denominated in U.S. dollars.

Subordinated Debt

We had $4.9 billion in outstanding qualifying subordinated debt as of December 31, 2011. Of this amount,

$2.4 billion will mature during 2012. The terms of these securities state that, if our core capital is below 125% of

our critical capital requirement (which it was as of December 31, 2011), we will defer interest payments on these

securities. FHFA has directed us, however, to continue paying principal and interest on our outstanding

qualifying subordinated debt during the conservatorship and thereafter until directed otherwise, regardless of our

existing capital levels.

Under the senior preferred stock purchase agreement, we are prohibited from issuing additional subordinated

debt without the written consent of Treasury. We did not issue any subordinated debt in 2011.

Maturity Profile of Outstanding Debt of Fannie Mae

Table 35 displays the maturity profile, as of December 31, 2011, of our outstanding debt maturing within one

year, by month, including amounts we have announced for early redemption. Our outstanding debt maturing

within one year, including the current portion of our long-term debt, increased as a percentage of our total

outstanding debt, excluding debt of consolidated trusts and federal funds purchased and securities sold under

agreements to repurchase, to 38% as of December 31, 2011, compared with 32% as of December 31, 2010. The

weighted-average maturity of our outstanding debt that is maturing within one year was 158 days as of

December 31, 2011, compared with 116 days as of December 31, 2010.

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Table 35: Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year(1)

Long-Term

Short-Term

(Dollars in billions)

$12.0

$3.3 $6.1

$8.1 $6.1

$5.3 $10.0

$16.4 $18.2 $12.6

$13.2

$23.0

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12

$29.8 $27.4 $23.6 $15.7 $20.3 $10.0 $6.2 $4.0 $2.2 $4.8 $1.9 $0.9

(1) Includes unamortized discounts, premiums and other cost basis adjustments of $110 million as of December 31, 2011.

Excludes debt of consolidated trusts maturing within one year of $7.8 billion as of December 31, 2011.

Table 36 displays the maturity profile, as of December 31, 2011, of the portion of our long-term debt that

matures in more than one year, on a quarterly basis for one year and on an annual basis thereafter, excluding

amounts we have announced for early redemption within one year. The weighted-average maturity of our

outstanding debt maturing in more than one year was approximately 59 months as of December 31, 2011

compared with approximately 58 months as of December 31, 2010.

Table 36: Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year(1) (Dollars in billions)

$0

$50

$100

$150

Q1 2013 Q2 2013 Q3 2013 Q4 2013 2014 2015 2016 2017 &

thereafter

$25.0

$17.8

$42.3 $43.6

$117.9

$43.7

$70.7

$90.4

(1) Includes unamortized discounts, premiums and other cost basis adjustments of $9.1 billion as of December 31, 2011.

Excludes debt of consolidated trusts of $2.4 trillion as of December 31, 2011.

We intend to repay our short-term and long-term debt obligations as they become due primarily through proceeds

from the issuance of additional debt securities. We also intend to use funds we receive from Treasury under the

senior preferred stock purchase agreement to pay our debt obligations and to pay dividends on the senior

preferred stock.

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Contractual Obligations

Table 37 displays, by remaining maturity, our future cash obligations related to our long-term debt, announced

calls, operating leases, purchase obligations and other material noncancelable contractual obligations as of

December 31, 2011.

Table 37: Contractual Obligations

Payment Due by Period as of December 31, 2011

Total

Less than

1 Year

1 to < 3

Years

3 to 5

Years

More than

5 Years

(Dollars in millions)

Long-term debt obligations(1) ............................ $585,692 $134,277 $246,612 $114,425 $ 90,378

Contractual interest on long-term debt obligations(2) .......... 80,596 11,996 18,386 12,322 37,892

Operating lease obligations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 36 43 26 15

Purchase obligations:

Mortgage commitments(4) ............................. 45,530 45,517 13 — —

Other purchase obligations(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 158 72 4 —

Other long-term liabilities reflected in the consolidated

balance sheet(6) ................................... 1,053 882 70 32 69

Total contractual obligations ............................ $713,225 $192,866 $265,196 $126,809 $128,354

(1) Represents the carrying amount of our long-term debt assuming payments are made in full at maturity. Amounts exclude

$2.5 trillion in long-term debt from consolidations. Amounts include unamortized net discount and other cost basis

adjustments of $9.2 billion.

(2) Excludes contractual interest on long-term debt from consolidations.

(3) Includes certain premises and equipment leases.

(4) Includes on- and off-balance sheet commitments to purchase mortgage loans and mortgage-related securities.

(5) Includes only unconditional purchase obligations that are subject to a cancellation penalty for certain telecom services,

software and computer services, and other agreements. Excludes arrangements that may be cancelled without penalty.

Amounts also include off-balance sheet commitments for the unutilized portion of lending agreements entered into with

multifamily borrowers.

(6) Excludes risk management derivative transactions that may require cash settlement in future periods and our obligations

to stand ready to perform under our guarantees relating to Fannie Mae MBS and other financial guarantees, because the

amount and timing of payments under these arrangements are generally contingent upon the occurrence of future events.

For a description of the amount of our on- and off-balance sheet Fannie Mae MBS and other financial guarantees as of

December 31, 2011, see “Off-Balance Sheet Arrangements.” Includes future cash payments due under our contractual

obligations to fund LIHTC and other partnerships that are unconditional and legally binding and cash received as

collateral from derivative counterparties, which are included in our consolidated balance sheets under “Other liabilities.”

Equity Funding

As a result of the covenants under the senior preferred stock purchase agreement and Treasury’s ownership of the

warrant to purchase up to 79.9% of the total shares of our common stock outstanding, we no longer have access

to equity funding except through draws under the senior preferred stock purchase agreement. For a description of

the covenants under the senior preferred stock purchase agreement, see “Business—Conservatorship and

Treasury Agreements—Treasury Agreements—Covenants Under Treasury Agreements.” We discuss our

funding under the senior preferred stock purchase agreement in “Capital Management—Capital Activity—Senior

Preferred Stock Purchase Agreement.”

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Cash and Other Investments Portfolio

Table 38 displays information on the composition of our cash and other investments portfolio for the periods

indicated.

Table 38: Cash and Other Investments Portfolio

As of December 31,

2011 2010 2009(1)

(Dollars in millions)

Cash and cash equivalents .................................................... $ 17,539 $17,297 $ 6,812

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

arrangements ............................................................ 46,000 11,751 53,684

Non-mortgage-related securities:

U.S. Treasury securities(2) .................................................. 47,737 27,432 —

Asset-backed securities(3) ................................................... 2,111 5,321 8,515

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 367

Total non-mortgage-related securities ....................................... 49,848 32,753 8,882

Total cash and other investments .............................................. $113,387 $61,801 $69,378

(1) Prior period amounts have been reclassified to conform to current year presentation. Other non-mortgage-related

securities includes corporate debt securities.

(2) Excludes $600 million and $4.0 billion of U.S. Treasury securities which are a component of cash equivalents as of

December 31, 2011 and 2010, respectively, as these securities had a maturity at the date of acquisition of three months or

less.

(3) Includes securities primarily backed by credit cards loans, student loans and automobile loans.

Our cash and other investments portfolio increased in 2011 compared with 2010. We have increased the amount

of cash and highly liquid non-mortgage securities held in our portfolio to bolster our liquidity position. See “Risk

Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Issuers of

Investments Held in our Cash and Other Investments Portfolio” for additional information on the risks associated

with the assets in our cash and other investments portfolio.

Unencumbered Mortgage Portfolio

Another potential source of liquidity in the event our access to the unsecured debt market becomes impaired is

the unencumbered mortgage assets in our mortgage portfolio, which could be sold or used as collateral for

secured borrowing. We believe that the amount of mortgage-related assets that we could successfully sell or

borrow against in the event of a liquidity crisis or significant market disruption is substantially lower than the

amount of mortgage-related assets we hold. Our ability to sell whole loans from our mortgage portfolio is limited

due to the credit-related issues of these loans, as well as operational constraints.

While our liquidity contingency planning attempts to address stressed market conditions and our status under

conservatorship and Treasury arrangements, we believe that our liquidity contingency plans may be difficult or

impossible to execute for a company of our size in our circumstances. See “Risk Factors” for a description of the

risks associated with our liquidity contingency planning.

Credit Ratings

Our credit ratings from the major credit ratings organizations, as well as the credit ratings of the U.S.

government, are primary factors that could affect our ability to access the capital markets and our cost of funds.

In addition, our credit ratings are important when we seek to engage in certain long-term transactions, such as

derivative transactions. S&P, Moody’s and Fitch have all indicated that, if they were to lower the sovereign

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credit ratings on the U.S, they would likely lower their ratings on the debt of Fannie Mae and certain other

government-related entities.

On November 28, 2011, Fitch affirmed the U.S. Issuer Default Rating (“IDR”) as “AAA” and revised the rating

outlook to negative. Following this action, and due to our direct reliance on the U.S. government for capital

support, Fitch affirmed our long-term IDR as “AAA” and revised our rating outlook from stable to negative.

On August 5, 2011, S&P lowered the long-term sovereign credit rating on the U.S. to “AA+.” As a result of this

action, and due to our direct reliance on the U.S. government for capital support, on August 8, 2011, S&P

lowered our long-term senior debt rating to “AA+” with a negative outlook. Previously, our long-term senior debt

had been rated by S&P as “AAA” and had been on CreditWatch Negative. S&P affirmed our short-term senior

debt rating of “A-1+” and removed it from CreditWatch Negative.

On August 2, 2011, Moody’s confirmed the U.S. government’s rating and our long-term debt ratings. Moody’s

also removed the designation that these ratings were under review for possible downgrade and revised the rating

outlook for both the U.S. government’s rating and our long-term debt ratings to negative.

We cannot predict whether one or more of these ratings agencies will lower our debt ratings in the future. See

“Risk Factors” for a discussion of the possibility of further downgrades and the risks to our business relating to a

decrease in our credit ratings, which could include an increase in our borrowing costs, limits on our ability to

issue debt, and additional collateral requirements under our derivatives contracts and other borrowing

arrangements.

Table 39 displays the credit ratings issued by the three major credit rating agencies as of February 23, 2012.

Table 39: Fannie Mae Credit Ratings

As of February 23, 2012

S&P Moody’s Fitch

Long-term senior debt . . . . . . . . . AA+ Aaa AAA

Short-term senior debt ......... A-1+ P-1 F1+

Qualifying subordinated debt . . . A Aa2 AAPreferred stock . . . . . . . . . . . . . . . C Ca C/RR6

Bank financial strength rating . . . — E+ —

Outlook .................... Negative Negative Negative

(for Long Term Senior

Debt and Qualifying

Subordinated Debt)

(for Long Term Senior

Debt and Qualifying

Subordinated Debt)

(for AAA rated Long Term

Issuer Default Rating)

We have no covenants in our existing debt agreements that would be violated by a downgrade in our credit

ratings. However, in connection with certain derivatives counterparties, we could be required to provide

additional collateral to or terminate transactions with certain counterparties in the event that our senior unsecured

debt ratings are downgraded. The amount of additional collateral required depends on the contract and is usually

a fixed incremental amount, the market value of the exposure, or both. See “Note 9, Derivative Instruments” for

additional information on collateral we are required to provide to our derivatives counterparties in the event of

downgrades in our credit ratings.

Cash Flows

Year Ended December 31, 2011. Cash and cash equivalents increased from December 31, 2010 by $242 million to

$17.5 billion as of December 31, 2011. Net cash generated from investing activities totaled $464.4 billion, resulting

primarily from proceeds received from repayments of loans held for investment. These net cash inflows were offset

by net cash used in operating activities of $15.2 billion and net cash used in financing activities of $448.9 billion

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primarily attributable to a significant amount of debt redemptions in excess of proceeds received from the issuances

of debt as well as proceeds received from Treasury under the senior preferred stock purchase agreement.

Year Ended December 31, 2010. Cash and cash equivalents increased from December 31, 2009 by $10.5 billion

to $17.3 billion as of December 31, 2010. Net cash generated from investing activities totaled $540.2 billion,

resulting primarily from proceeds received from repayments of loans held for investment. These net cash inflows

were partially offset by net cash used in operating activities of $27.4 billion resulting primarily from purchases of

trading securities. The net cash used in financing activities of $502.3 billion was primarily attributable to a

significant amount of debt redemptions in excess of proceeds received from the issuances of debt as well as

proceeds received from Treasury under the senior preferred stock purchase agreement.

Capital Management

Regulatory Capital

FHFA has announced that, during the conservatorship, our existing statutory and FHFA-directed regulatory

capital requirements will not be binding and FHFA will not issue quarterly capital classifications. We submit

capital reports to FHFA during the conservatorship and FHFA monitors our capital levels. We report our

minimum capital requirement, core capital and GAAP net worth in our periodic reports on Form 10-Q and

Form 10-K, and FHFA also reports them on its website. FHFA is not reporting on our critical capital, risk-based

capital or subordinated debt levels during the conservatorship. For information on our minimum capital

requirements see “Note 16, Regulatory Capital Requirements.”

Capital Activity

Following our entry into conservatorship, FHFA advised us to manage to a positive net worth, which is

represented as the “total deficit” line item in our consolidated balance sheets. Our ability to manage our net worth

continues to be very limited. We are effectively unable to raise equity capital from private sources at this time

and, therefore, are reliant on the senior preferred stock purchase agreement to address any net worth deficit.

Senior Preferred Stock Purchase Agreement

Under the senior preferred stock purchase agreement, Treasury made a commitment to provide funding, under

certain conditions, to eliminate deficits in our net worth. We have received a total of $111.6 billion from

Treasury pursuant to the senior preferred stock purchase agreement as of December 31, 2011. The Acting

Director of FHFA will submit a request for $4.6 billion from Treasury under the senior preferred stock purchase

agreement to eliminate our net worth deficit as of December 31, 2011 and request the receipt of those funds on or

prior to March 31, 2012. Upon receipt of the requested funds, the aggregate liquidation preference of the senior

preferred stock, including the initial aggregate liquidation preference of $1.0 billion, will equal $117.1 billion.

We expect to have a net worth deficit in future periods and therefore will be required to obtain additional funding

from Treasury pursuant to the senior preferred stock purchase agreement.

The senior preferred stock purchase agreement provides that the $200 billion maximum amount of the commitment

from Treasury will increase as necessary to accommodate any net worth deficiencies attributable to periods during

2010, 2011 and 2012. If we do not have a positive net worth as of December 31, 2012, then the amount of funding

available under the senior preferred stock purchase agreement after 2012 will be $124.8 billion ($200 billion less

$75.2 billion in cumulative draws for net worth deficiencies through December 31, 2009).

In the event we have a positive net worth as of December 31, 2012, then the amount of funding available after 2012

under the senior preferred stock purchase agreement will depend on the size of that positive net worth relative to the

cumulative draws for net worth deficiencies attributable to periods during 2010, 2011 and 2012, as follows:

• If our positive net worth as of December 31, 2012 is less than the cumulative draws for net worth

deficiencies attributable to periods during 2010, 2011 and 2012, then the amount of available funding will

be $124.8 billion less our positive net worth as of December 31, 2012.

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• If our positive net worth as of December 31, 2012 is greater than the cumulative draws for net worth

deficiencies attributable to periods during 2010, 2011 and 2012, then the amount of available funding will

be $124.8 billion less the cumulative draws attributable to periods during 2010, 2011 and 2012.

As of February 29, 2012, the amount of the quarterly commitment fee payable by us to Treasury under the senior

preferred stock purchase agreement had not been established; however, Treasury has waived the quarterly

commitment fee under the senior preferred stock purchase agreement for each quarter of 2011 and the first

quarter of 2012 due to the continued fragility of the U.S. mortgage market and Treasury’s belief that imposing

the commitment fee would not generate increased compensation for taxpayers. Treasury stated that it will

reevaluate the situation during the next calendar quarter to determine whether to set the quarterly commitment

fee for the remaining quarters of 2012.

Dividends

The conservator announced in September 2008 that we would not pay any dividends on the common stock or on

any series of outstanding preferred stock. In addition, the senior preferred stock purchase agreement prohibits us

from declaring or paying any dividends on Fannie Mae equity securities (other than the senior preferred stock)

without the prior written consent of Treasury. Dividends on our outstanding preferred stock (other than the senior

preferred stock) are non-cumulative; therefore, holders of this preferred stock are not entitled to receive any

forgone dividends in the future.

Holders of the senior preferred stock are entitled to receive, when, as and if declared by our Board of Directors,

cumulative quarterly cash dividends at the annual rate of 10% per year on the then-current liquidation preference of

the senior preferred stock. Treasury is the current holder of our senior preferred stock. As conservator and under our

charter, FHFA has authority to declare and approve dividends on the senior preferred stock. If at any time we do not

pay cash dividends on the senior preferred stock when they are due, then immediately following the period we did

not pay dividends and for all dividend periods thereafter until the dividend period following the date on which we

have paid in cash full cumulative dividends (including any unpaid dividends added to the liquidation preference),

the dividend rate will be 12% per year. Dividends on the senior preferred stock that are not paid in cash for any

dividend period will accrue and be added to the liquidation preference of the senior preferred stock.

Our fourth quarter dividend of $2.6 billion was declared by the conservator and paid by us on December 31,

2011. Upon receipt of the additional funds from Treasury in March 2012 that FHFA will request on our behalf,

the annualized dividend on the senior preferred stock will be $11.7 billion based on the 10% dividend rate. The

level of dividends on the senior preferred stock will increase in future periods if, as we expect, the conservator

requests additional funds on our behalf from Treasury under the senior preferred stock purchase agreement.

OFF-BALANCE SHEET ARRANGEMENTS

We enter into certain business arrangements to facilitate our statutory purpose of providing liquidity to the

secondary mortgage market and to reduce our exposure to interest rate fluctuations. Some of these arrangements are

not recorded in our consolidated balance sheets or may be recorded in amounts different from the full contract or

notional amount of the transaction, depending on the nature or structure of, and accounting required to be applied to,

the arrangement. These arrangements are commonly referred to as “off-balance sheet arrangements” and expose us

to potential losses in excess of the amounts recorded in our consolidated balance sheets.

Our off-balance sheet arrangements result primarily from the following:

• our guaranty of mortgage loan securitization and resecuritization transactions over which we do not have

control;

• other guaranty transactions;

• liquidity support transactions; and

• partnership interests.

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Our maximum potential exposure to credit losses relating to our outstanding and unconsolidated Fannie Mae

MBS and other financial guarantees is primarily represented by the unpaid principal balance of the mortgage

loans underlying outstanding and unconsolidated Fannie Mae MBS and other financial guarantees of $62.0

billion as of December 31, 2011 and $56.9 billion as of December 31, 2010.

For information on the mortgage loans underlying both our on- and off-balance sheet Fannie Mae MBS, as well

as whole mortgage loans that we own, see “Risk Management—Credit Risk Management.”

Partnership Investment Interests

For partnership investments where we have determined that we are the primary beneficiary, we have

consolidated these investments and recorded all of the partnership assets and liabilities in our consolidated

balance sheets. The carrying value of our partnership investments, which primarily include investments in

affordable rental and for-sale housing partnerships, totaled $1.4 billion as of December 31, 2011, compared with

$1.8 billion as of December 31, 2010.

LIHTC Partnership Interests

In most instances, we are not the primary beneficiary of our LIHTC partnership investments, and therefore our

consolidated balance sheets reflect only our investment in the LIHTC partnership, rather than the full amount of

the LIHTC partnership’s assets and liabilities. FHFA informed us that, after consultation with Treasury,

generally we are not authorized to sell or transfer our LIHTC partnership interests. Some exceptions to this rule

exist in very limited circumstances and, in most cases, only with FHFA consent.

In the fourth quarter of 2009, we reduced the carrying value of our LIHTC partnership investments to zero, as we

no longer had both the intent and ability to sell or otherwise transfer our LIHTC investments for value. However,

we still have an obligation to fund our LIHTC partnership investments and have recorded such obligation as a

liability in our financial statements. Our obligation to fund consolidated LIHTC partnerships was $53 million as

of December 31, 2011 and $139 million as of December 31, 2010. Our obligation to fund unconsolidated LIHTC

partnerships was $140 million as of December 31, 2011 and $141 million as of December 31, 2010. Our

contributions to consolidated LIHTC partnerships were $34 million for the year ended December 31, 2011 and

$114 million for the year ended December 31, 2010. Our contribution to unconsolidated LIHTC partnerships was

$42 million for the year ended December 31, 2011 and $158 million for the year ended December 31, 2010. As a

result of our current tax position, we currently are not making any new LIHTC investments, other than pursuant

to commitments existing prior to 2008, and are not recognizing any tax benefits in our consolidated statements of

operations associated with the tax credits and net operating losses. For additional information regarding our

holdings in off-balance sheet limited partnerships and other off-balance sheet transactions, refer to “Note 2,

Consolidations and Transfers of Financial Assets” and “Note 17, Concentrations of Credit Risk.”

Treasury Housing Finance Agency Initiative

During the fourth quarter of 2009, we entered into a memorandum of understanding with Treasury, FHFA and

Freddie Mac pursuant to which we agreed to provide assistance to state and local housing finance agencies

(“HFAs”) through two primary programs, which together comprise what we refer to as the HFA initiative.

In November 2011, we entered into an Omnibus Consent to HFA Initiative Program Modifications with

Treasury, Freddie Mac and FHFA pursuant to which the parties agreed to specified modifications to the HFA

initiative programs, including a three-year extension of the expiration date for the temporary credit and liquidity

facilities (“TCLFs”) from December 2012 to December 2015, and a one-year extension of the expiration date for

release of escrowed funds for the new issue bond (“NIB”) program from December 31, 2011 to December 31,

2012. See “Certain Relationships and Related Transactions, and Director Independence—Transactions with

Related Persons—Transactions with Treasury—Treasury Housing Finance Agency Initiative” for a discussion of

the HFA initiative.

Pursuant to the TCLF program that we describe in “Related Parties” in “Note 1, Summary of Significant

Accounting Policies,” Treasury has purchased participation interests in TCLFs provided by us and Freddie Mac

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to the HFAs. These facilities create a credit and liquidity backstop for the HFAs. Our outstanding commitments

under the TCLF program totaled $3.0 billion as of December 31, 2011 and $3.7 billion as of December 31, 2010.

Our total outstanding liquidity commitments to advance funds for securities backed by multifamily housing

revenue bonds totaled $16.8 billion as of December 31, 2011 and $17.8 billion as of December 31, 2010. These

commitments require us to advance funds to third parties that enable them to repurchase tendered bonds or

securities that are unable to be remarketed. Any repurchased securities are pledged to us to secure funding until

the securities are remarketed. We hold cash and cash equivalents in our cash and other investments portfolio in

excess of these commitments to advance funds (exclusive of our outstanding commitments under the HFA

TCLFs program, for which we are not required to hold excess cash).

As of December 31, 2011 and 2010, there were no liquidity guarantee advances outstanding.

RISK MANAGEMENT

Our business activities expose us to the following three major categories of financial risk: credit risk, market risk

(including interest rate and liquidity risk) and operational risk. We seek to actively monitor and manage these

risks by using an established risk management framework. Our risk management framework is intended to

provide the basis for the principles that govern our risk management activities.

• Credit Risk. Credit risk is the potential for financial loss resulting from the failure of a borrower or

institutional counterparty to honor its financial or contractual obligations, resulting in a potential loss of

earnings or cash flows. In regards to financial securities or instruments, credit risk is the risk of not

receiving principal, interest or any other financial obligation on a timely basis, for any reason. Credit risk

exists primarily in our mortgage credit book of business and derivatives portfolio.

• Market Risk. Market risk is the exposure generated by adverse changes in the value of financial

instruments caused by a change in market prices or interest rates. Two significant market risks we face and

actively manage are interest rate risk and liquidity risk. Interest rate risk is the risk of changes in our longterm earnings or in the value of our assets due to fluctuations in interest rates. Liquidity risk is our potential

inability to meet our funding obligations in a timely manner.

• Operational Risk. Operational risk is the loss resulting from inadequate or failed internal processes,

people, systems, or from external events.

We are also subject to a number of other risks that could adversely impact our business, financial condition,

earnings and cash flow, including human capital, legal, regulatory and compliance, reputational, strategic and

execution risks that may arise due to a failure to comply with laws, regulations or ethical standards and codes of

conduct applicable to our business activities and functions. These risks are typically brought to the attention of

our Management Committee, our Board of Directors or one or more of the Board’s committees and, in some

cases, FHFA for discussion.

Another risk that can impact our financial condition, earnings and cash flow is model risk, which is defined as

the potential for model errors to adversely affect the company. This occurs because of our use of modeled

estimations of future economic environments, borrower behavior or valuation methodologies. See “Risk Factors”

for a discussion of the risks associated with our reliance on models.

Our risk management framework and governance structure are intended to provide comprehensive controls and

ongoing management of the major risks inherent in our business activities. Our ability to identify, assess,

mitigate and control, and report and monitor risk is crucial to our safety and soundness.

• Risk Identification. Risk identification is the process of finding, recognizing and describing risk. The

identification of risk facilitates effective risk management by achieving awareness of the sources, impact

and magnitude of risk.

• Risk Assessment. We assess risk using a variety of methodologies, such as calculation of potential losses

from loans and stress tests relating to interest rate sensitivity. When we assess risk, we look at metrics such

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as frequency, severity, concentration, correlation, volatility and loss. Information obtained from these

assessments is reviewed on a regular basis to ensure that our risk assumptions are reasonable and reflect our

current positions.

• Risk Mitigation & Control. We proactively develop appropriate mitigation strategies to prevent excessive

risk exposure, address risks that exceed established tolerances, and address risks that create unanticipated

business impact. Mitigation strategies and controls can be in the form of reduction, transference, acceptance

or avoidance of the identified risk. We also manage risk through four control elements that are designed to

work in conjunction with each other: (1) risk policies, (2) risk limits, (3) delegations of authority, and

(4) risk committees.

• Risk Reporting & Monitoring. Our business units actively monitor emerging and identified risks that are

taken when executing our strategies. Risks and concerns are reported to the appropriate level of

management to ensure that the necessary action is taken to mitigate the risk.

Enterprise Risk Governance

Our enterprise risk management structure was reorganized in 2011, and we continue to work with FHFA to

implement its final form. We intend the final structure to be designed to balance a strong corporate risk

management philosophy, appetite and culture with a well-defined, independent risk management function. Our

objective is to ensure that people and processes are organized in a way to promote a cross-functional approach to

risk management and that controls are in place to better manage our risks and comply with legal and regulatory

requirements.

Our enterprise risk governance structure consists of the Board of Directors, executive leadership, including the

Chief Risk Officer, the Enterprise Risk Management division, designated officers responsible for managing our

financial risks, business unit chief risk officers, and risk management committees. This structure is designed to

encourage a culture of accountability within the divisions and promote effective risk management throughout the

company.

Our organizational structure and risk management framework work in conjunction with each other to identify

risk-related trends with respect to customers, products or portfolios and external events to develop appropriate

strategies to mitigate emerging and identified risks.

Board of Directors

The Board’s Risk Policy & Capital Committee provides oversight of enterprise risk management activities and

pursuant to its charter, assists the Board in providing oversight of our risk management, including overseeing the

management of credit, market and operational risk policies and limits. In addition, the Audit Committee reviews

the system of internal controls that we rely upon to provide reasonable assurance of compliance with our

enterprise risk management processes.

Enterprise Risk Management Division

Our Enterprise Risk Management division reports directly to the Chief Risk Officer who reports directly to the

Chief Executive Officer. The Chief Risk Officer also reports independently to the Board’s Risk Policy & Capital

Committee. Enterprise Risk Management is responsible for the identification of emerging risks, the monitoring

and reporting of risk within the existing policies and limits and independent oversight of risk management across

the company.

We manage risk by using a “three line of defense” structure. The first line of defense is the active management of

risk by the business unit. Each business unit is charged with conforming to the risk guidelines, risk appetite, risk

policies and limits approved by the Board’s Risk Policy & Capital Committee and the Management Committee,

with additional oversight provided by FHFA. The second line of defense is Enterprise Risk Management, which

is responsible for ensuring compliance with the risk framework and independently reporting on risk management

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issues and performance. The third line of defense is Internal Audit, which is responsible for ensuring all parties

are performing the actions for which they are accountable and for identifying any omissions or potential process

improvements. Enterprise Risk Management reports independently to the Board’s Risk Policy & Capital

Committee and Internal Audit reports independently to the Board’s Audit Committee.

Risk Committees

We use our risk committees as a forum for discussing emerging risks, risk mitigation strategies, and

communication across business lines. Risk committees enhance the risk management framework by reinforcing

our risk management culture and providing accountability for the resolution of key risk issues and decisions.

Each business risk committee is chaired by the head of the business unit. In addition, the business unit chief risk

officer can be designated as the committee co-chair or as a member of the committee who is responsible for the

oversight of the risks discussed. Committees are also populated with key business and risk leaders from the

respective business units.

Our current committee structure includes four Enterprise Risk Committees (Credit Risk, Operational Risk, Model

Oversight and Capital Markets Risk) and four Business Risk Committees (Underwriting & Pricing, Asset and

Liability, Credit Portfolio Management Risk and Multifamily Risk Management).

Internal Audit

Our Internal Audit group, under the direction of the Chief Audit Executive, provides an objective assessment of

the design and execution of our internal control system, including our management systems, risk governance, and

policies and procedures. The Chief Audit Executive reports directly and independently to the Audit Committee of

the Board of Directors, and audit personnel are compensated based on objectives set for the group by the Audit

Committee rather than corporate financial results or goals. The Chief Audit Executive reports administratively to

the Chief Executive Officer and may be removed only upon approval by the Board’s Audit Committee. Internal

audit activities are designed to provide reasonable assurance that resources are safeguarded; that significant

financial, managerial and operating information is complete, accurate and reliable; and that employee actions

comply with our policies and applicable laws and regulations.

Compliance and Ethics

The Compliance and Ethics division, under the direction of the Chief Compliance Officer, is dedicated to

developing policies and procedures to help ensure that Fannie Mae and its employees comply with the law, our

Code of Conduct, and all regulatory obligations. The Chief Compliance Officer reports directly to our Chief

Executive Officer and independently to the Audit Committee of the Board of Directors, and Compliance and

Ethics personnel are compensated on objectives set for the group by the Audit Committee of the Board of

Directors rather than corporate financial results or goals. The Chief Compliance Officer may be removed only

upon Board approval. The Chief Compliance Officer is responsible for overseeing our compliance activities;

developing and promoting a code of ethical conduct; evaluating and investigating any allegations of misconduct;

and overseeing and coordinating regulatory reporting and examinations.

Credit Risk Management

We are generally subject to two types of credit risk: mortgage credit risk and institutional counterparty credit

risk. Continuing adverse market conditions have resulted in significant exposure to mortgage and institutional

counterparty credit risk. The metrics used to measure credit risk are generated using internal models. Our internal

models require numerous assumptions and there are inherent limitations in any methodology used to estimate

macroeconomic factors such as home prices, unemployment and interest rates and their impact on borrower

behavior. When market conditions change rapidly and dramatically, the assumptions of our models may no

longer accurately capture or reflect the changing conditions. On a continuous basis, management makes

judgments about the appropriateness of the risk assessments indicated by the models. See “Risk Factors” for a

discussion of the risks associated with our use of models.

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Mortgage Credit Risk Management

Mortgage credit risk is the risk that a borrower will fail to make required mortgage payments. We are exposed to

credit risk on our mortgage credit book of business because we either hold mortgage assets, have issued a

guaranty in connection with the creation of Fannie Mae MBS backed by mortgage assets or provided other credit

enhancements on mortgage assets. While our mortgage credit book of business includes all of our mortgagerelated assets, both on- and off-balance sheet, our guaranty book of business excludes non-Fannie Mae mortgagerelated securities held in our portfolio for which we do not provide a guaranty.

Mortgage Credit Book of Business

Table 40 displays the composition of our entire mortgage credit book of business as of the dates indicated. Our

total single-family mortgage credit book of business accounted for 93% of our total mortgage credit book of

business as of December 31, 2011 and 2010.

Table 40: Composition of Mortgage Credit Book of Business(1)

As of December 31, 2011 As of December 31, 2010

Single-Family Multifamily Total Single-Family Multifamily Total

(Dollars in millions)

Mortgage loans and Fannie Mae

MBS(2) ......................... $2,798,633 $176,898 $2,975,531 $2,826,994 $170,552 $2,997,546

Unconsolidated Fannie Mae MBS, held

by third parties(3) ................. 17,910 1,702 19,612 19,468 1,855 21,323

Other credit guarantees(4) ............. 25,824 16,582 42,406 18,625 16,994 35,619

Guaranty book of business ......... $2,842,367 $195,182 $3,037,549 $2,865,087 $189,401 $3,054,488

Agency mortgage-related securities(5) . . . 15,522 33 15,555 18,797 24 18,821

Other mortgage-related securities ...... 43,019 31,511 74,530 48,678 34,205 82,883

Mortgage credit book of business .... $2,900,908 $226,726 $3,127,634 $2,932,562 $223,630 $3,156,192

Guaranty Book of Business Detail:

Conventional Guaranty Book of

Business(6) .................... $2,769,919 $192,797 $2,962,716 $2,790,590 $186,712 $2,977,302

Government Guaranty Book of

Business(7) .................... $ 72,448 $ 2,385 $ 74,833 $ 74,497 $ 2,689 $ 77,186

(1) Based on unpaid principal balance. Prior period amounts have been reclassified to conform to the current period

presentation.

(2) Consists of mortgage loans and Fannie Mae MBS recognized in our consolidated balance sheets. The principal balance of

resecuritized Fannie Mae MBS is included only once in the reported amount.

(3) Reflects unpaid principal balance of unconsolidated Fannie Mae MBS, held by third-party investors. The principal

balance of resecuritized Fannie Mae MBS is included only once in the reported amount.

(4) Includes single-family and multifamily credit enhancements that we have provided and that are not otherwise reflected in

the table.

(5) Consists of mortgage-related securities issued by Freddie Mac and Ginnie Mae.

(6) Refers to mortgage loans and mortgage-related securities that are not guaranteed or insured, in whole or in part, by the

U.S. government or one of its agencies.

(7) Refers to mortgage loans and mortgage-related securities guaranteed or insured, in whole or in part, by the U.S.

government or one of its agencies.

In the following sections, we discuss the mortgage credit risk of the single-family and multifamily loans in our

guaranty book of business. The credit statistics reported below, unless otherwise noted, pertain generally to the

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portion of our guaranty book of business for which we have access to detailed loan-level information, which

constituted approximately 99% of each of our single-family conventional guaranty book of business and our

multifamily guaranty book of business, excluding defeased loans, as of December 31, 2011 and 2010. We

typically obtain this data from the sellers or servicers of the mortgage loans in our guaranty book of business and

receive representations and warranties from them as to the accuracy of the information. While we perform

various quality assurance checks by sampling loans to assess compliance with our underwriting and eligibility

criteria, we do not independently verify all reported information and we rely on lender representations regarding

the accuracy of the characteristics of loans in our guaranty book of business. See “Risk Factors” for a discussion

of the risk that we could experience mortgage fraud as a result of this reliance on lender representations.

Single-Family Mortgage Credit Risk Management

Our strategy in managing single-family mortgage credit risk consists of four primary components: (1) our

acquisition and servicing policies and underwriting and servicing standards, including the use of credit

enhancements; (2) portfolio diversification and monitoring; (3) management of problem loans; and (4) REO

management. These strategies, which we discuss below, may increase our expenses and may not be effective in

reducing our credit-related expenses or credit losses. We provide information on our credit-related expenses and

credit losses in “Consolidated Results of Operations—Credit-Related Expenses.”

In evaluating our single-family mortgage credit risk, we closely monitor changes in housing and economic

conditions and the impact of those changes on the credit risk profile of our single-family mortgage credit book of

business. We regularly review and provide updates to our underwriting standards and eligibility guidelines that

take into consideration changing market conditions. The credit risk profile of our single-family mortgage credit

book of business is influenced by, among other things, the credit profile of the borrower, features of the loan,

loan product type, the type of property securing the loan and the housing market and general economy. We focus

more on loans that we believe pose a higher risk of default, which typically have been loans associated with

higher mark-to-market LTV ratios, loans to borrowers with lower FICO credit scores and certain higher risk loan

product categories, such as Alt-A loans. These and other factors affect both the amount of expected credit loss on

a given loan and the sensitivity of that loss to changes in the economic environment.

Because we believe we have limited credit exposure on our government loans, the single-family credit statistics

we focus on and report in the sections below generally relate to our single-family conventional guaranty book of

business, which represents the substantial majority of our total single-family guaranty book of business.

We provide information on the performance of non-Fannie Mae mortgage-related securities held in our portfolio,

including the impairment that we have recognized on these securities, in “Consolidated Balance Sheet

Analysis—Investments in Mortgage-Related Securities—Investments in Private-Label Mortgage-Related

Securities.”

Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards

Our Single-Family business, with the oversight of our Enterprise Risk Management division, is responsible for

pricing and managing credit risk relating to the portion of our single-family mortgage credit book of business

consisting of single-family mortgage loans and Fannie Mae MBS backed by single-family mortgage loans

(whether held in our portfolio or held by third parties). Desktop UnderwriterTM, our proprietary automated

underwriting system which measures default risk by assessing the primary risk factors of a mortgage, is used to

evaluate the majority of the loans we purchase or securitize. As part of our regular evaluation of Desktop

Underwriter, we conduct periodic examinations of the underlying risk assessment models and recalibrate the

models based on actual loan performance and market assumptions to improve Desktop Underwriter’s ability to

effectively analyze risk. Subject to our prior approval, we also may purchase and securitize mortgage loans that

have been underwritten using other automated underwriting systems, as well as manually underwritten mortgage

loans that meet our stated underwriting requirement or meet agreed-upon standards that differ from our standard

underwriting and eligibility criteria. Additionally, as the number of our delinquent and defaulted loans has

increased, so has the corresponding number of these loans reviewed for compliance with our requirements. We

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use the information obtained from these loan quality reviews to provide more timely feedback to lenders on

possible areas for correction in their origination practices. We initiated underwriting and eligibility changes that

became effective in 2009 that focused on strengthening the underwriting and eligibility standards to promote

sustainable homeownership. The result of many of these changes is reflected in the substantially improved risk

profile of the single-family acquisitions since 2009.

As discussed in “Our Charter and Regulation of Our Activities—Charter Act,” our charter generally requires

credit enhancement on any single-family conventional mortgage loan that we purchase or securitize if it has an

LTV ratio over 80% at the time of purchase. However, under our Refi Plus initiative, which offers expanded

refinance opportunities for eligible Fannie Mae borrowers and includes but is not limited to HARP, we allow our

borrowers who have mortgage loans with current LTV ratios above 80% to refinance their mortgages without

obtaining new mortgage insurance in excess of what was already in place. HARP offers additional refinancing

flexibility to eligible borrowers with loans that have LTVs greater than 80% who are current on their loans and

whose loans are owned or guaranteed by us or Freddie Mac and meet certain additional criteria. Changes to

HARP that were announced in October 2011 are intended to remove certain obstacles preventing borrowers from

refinancing their mortgage loans. HARP originally authorized us to acquire loans only if their current LTVs did

not exceed 125% for fixed-rate loans and did not exceed 105% for adjustable-rate mortgages. The October 2011

changes to HARP permit eligible borrowers to refinance into a new loan without regard to the loan’s LTV, so

long as the new loan is fixed-rate and has a term of no greater than 30 years. The changes also extended HARP

through December 2013. Our acquisitions under HARP are limited to refinancings where (1) we acquired the

loan being refinanced on or before May 31, 2009, (2) the refinancing provides a benefit to the borrower by

lowering the borrower’s monthly payment, reducing the interest rate, or resulting in a more stable loan product

(for example, by moving from an adjustable-rate loan to a fixed-rate loan), and (3) the loan is secured by an

owner-occupied property.

Borrower-paid primary mortgage insurance is the most common type of credit enhancement in our single-family

mortgage credit book of business. Primary mortgage insurance transfers varying portions of the credit risk

associated with a mortgage loan to a third-party insurer. In order for us to receive a payment in settlement of a

claim under a primary mortgage insurance policy, the insured loan must be in default and the borrower’s interest

in the property that secured the loan must have been extinguished, generally in a foreclosure action. The claims

process for primary mortgage insurance typically takes three to six months after title to the property has been

transferred.

Mortgage insurers may also provide pool mortgage insurance, which is insurance that applies to a defined group

of loans. Pool mortgage insurance benefits typically are based on actual loss incurred and are subject to an

aggregate loss limit. Under some of our pool mortgage insurance policies, we are required to meet specified loss

deductibles before we can recover under the policy. We typically collect claims under pool mortgage insurance

three to six months after disposition of the property that secured the loan. For a discussion of our aggregate

mortgage insurance coverage as of December 31, 2011 and 2010, see “Risk Management—Credit Risk

Management—Institutional Counterparty Credit Risk Management—Mortgage Insurers.”

Our mortgage servicers are the primary points of contact for borrowers and perform a vital role in our efforts to

reduce defaults and pursue foreclosure alternatives. We discuss the actions we have taken to improve the

servicing of our delinquent loans below in “Problem Loan Management.”

Single-Family Portfolio Diversification and Monitoring

Diversification within our single-family mortgage credit book of business by product type, loan characteristics

and geography is an important factor that influences credit quality and performance and may reduce our credit

risk. We monitor various loan attributes, in conjunction with housing market and economic conditions, to

determine if our pricing and our eligibility and underwriting criteria accurately reflect the risk associated with

loans we acquire or guarantee. In some cases, we may decide to significantly reduce our participation in riskier

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loan product categories. We also review the payment performance of loans in order to help identify potential

problem loans early in the delinquency cycle and to guide the development of our loss mitigation strategies.

The profile of our guaranty book of business is comprised of the following key loan attributes:

— LTV ratio. LTV ratio is a strong predictor of credit performance. The likelihood of default and the gross

severity of a loss in the event of default are typically lower as the LTV ratio decreases. This also applies to

the estimated mark-to-market LTV ratios, particularly those over 100%, as this indicates that the

borrower’s mortgage balance exceeds the property value.

— Product type. Certain loan product types have features that may result in increased risk. Generally,

intermediate-term, fixed-rate mortgages exhibit the lowest default rates, followed by long-term, fixed-rate

mortgages. Historically, adjustable-rate mortgages (“ARMs”), including negative-amortizing and interestonly loans, and balloon/reset mortgages have exhibited higher default rates than fixed-rate mortgages,

partly because the borrower’s payments rose, within limits, as interest rates changed.

— Number of units. Mortgages on one-unit properties tend to have lower credit risk than mortgages on two-,

three- or four-unit properties.

— Property type. Certain property types have a higher risk of default. For example, condominiums

generally are considered to have higher credit risk than single-family detached properties.

— Occupancy type. Mortgages on properties occupied by the borrower as a primary or secondary residence

tend to have lower credit risk than mortgages on investment properties.

— Credit score. Credit score is a measure often used by the financial services industry, including our

company, to assess borrower credit quality and the likelihood that a borrower will repay future obligations

as expected. A higher credit score typically indicates lower credit risk.

— Loan purpose. Loan purpose indicates how the borrower intends to use the funds from a mortgage loan.

Cash-out refinancings have a higher risk of default than either mortgage loans used for the purchase of a

property or other refinancings that restrict the amount of cash returned to the borrower.

— Geographic concentration. Local economic conditions affect borrowers’ ability to repay loans and the

value of collateral underlying loans. Geographic diversification reduces mortgage credit risk.

— Loan age. We monitor year of origination and loan age, which is defined as the number of years since

origination. Credit losses on mortgage loans typically do not peak until the third through six years

following origination; however, this range can vary based on many factors, including changes in

macroeconomic conditions and foreclosure timelines.

Table 41 displays our single-family conventional business volumes and our single-family conventional guaranty

book of business for the periods indicated, based on certain key risk characteristics that we use to evaluate the

risk profile and credit quality of our single-family loans.

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Table 41: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1)

Percent of Single-Family

Conventional Business Volume(2)

For the Year Ended December 31,

Percent of Single-Family

Conventional Guaranty

Book of Business (3)(4)

As of December 31,

2011 2010 2009 2011 2010 2009

Original LTV ratio:(5)

<= 60% . . . . . . . . . . . . . . . . . . . . . . . . . 29% 30% 33% 24% 24% 24%

60.01% to 70% . . . . . . . . . . . . . . . . . . . 16 16 17 16 16 16

70.01% to 80% . . . . . . . . . . . . . . . . . . . 37 38 40 40 41 42

80.01% to 90%(6) ................. . 9 9 7 10 9 9

90.01% to 100%(6) ................ .753999

Greater than 100%(6) ............... 2 2 * 1 1 *

Total ......................... 100% 100% 100% 100% 100% 100%

Weighted average . . . . . . . . . . . . . . . 69% 68% 67% 71% 71% 71%

Average loan amount ................ $209,847 $219,431 $219,118 $156,194 $155,531 $153,302

Estimated mark-to-market LTV ratio:(7)

<= 60% . . . . . . . . . . . . . . . . . . . . . . . . . 26% 28% 31%

60.01% to 70% . . . . . . . . . . . . . . . . . . . 12 13 13

70.01% to 80% . . . . . . . . . . . . . . . . . . . 18 19 19

80.01% to 90% . . . . . . . . . . . . . . . . . . . 16 15 14

90.01% to 100% . . . . . . . . . . . . . . . . . . 10 9 9

Greater than 100% . . . . . . . . . . . . . . . . 18 16 14

Total ......................... 100% 100% 100%

Weighted average . . . . . . . . . . . . . . . 79% 77% 75%

Product type:

Fixed-rate:(8)

Long-term . . . . . . . . . . . . . . . . . . . . . 67% 72% 82% 73% 74% 75%

Intermediate-term . . . . . . . . . . . . . . . 26 22 15 15 14 13

Interest-only .................. .***123

Total fixed-rate . . . . . . . . . . . . . . . 93 94 97 89 90 91

Adjustable-rate:

Interest-only .................. .111344

Negative-amortizing ............. — — * — * 1

Other ARMs .................. .652864

Total adjustable-rate .......... . 7 6 3 11 10 9

Total ....................... 100% 100% 100% 100% 100% 100%

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Percent of Single-Family

Conventional Business Volume(2)

For the Year Ended December 31,

Percent of Single-Family

Conventional Guaranty Book of

Business(3)(4)

As of December 31,

2011 2010 2009 2011 2010 2009

Number of property units:

1 unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97% 98% 98% 97% 97% 96%

2-4 units ............................ 3 2 2 3 3 4

Total ........................... 100% 100% 100% 100% 100% 100%

Property type:

Single-family homes . . . . . . . . . . . . . . . . . . . 91% 91% 92% 91% 91% 91%

Condo/Co-op ......................... 9 9 8 9 9 9

Total ........................... 100% 100% 100% 100% 100% 100%

Occupancy type:

Primary residence . . . . . . . . . . . . . . . . . . . . . 89% 91% 93% 89% 90% 90%

Second/vacation home ................. 5 4 5 5 4 4

Investor ............................. 6 5 2 6 6 6

Total ............................. 100% 100% 100% 100% 100% 100%

FICO credit score at origination:

< 620 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *% *% *% 3% 4% 4%

620 to < 660 . . . . . . . . . . . . . . . . . . . . . . . . . 2 2 2 7 7 8

660 to < 700 . . . . . . . . . . . . . . . . . . . . . . . . . 7 7 7 13 15 16

700 to < 740 . . . . . . . . . . . . . . . . . . . . . . . . . 16 16 17 20 21 22

>= 740 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 75 74 57 53 50

Total ............................. 100% 100% 100% 100% 100% 100%

Weighted average . . . . . . . . . . . . . . . . . . . 762 762 761 738 735 730

Loan purpose:

Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24% 22% 20% 31% 33% 36%

Cash-out refinance . . . . . . . . . . . . . . . . . . . . 17 20 27 27 29 31

Other refinance . . . . . . . . . . . . . . . . . . . . . . . 59 58 53 42 38 33

Total ............................. 100% 100% 100% 100% 100% 100%

Geographic concentration:(9)

Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15% 16% 16% 15% 15% 16%

Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 20 19 19 19 19

Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 18 20 24 24 24

Southwest . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 15 15 15 15 15

West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 31 30 27 27 26

Total ............................. 100% 100% 100% 100% 100% 100%

Origination year:

<=2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2% 2% 3%

2002 ............................... 2 3 4

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 11 14

2004 ............................... 5 7 7

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9 10

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8 11

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 12 15

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9 13

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 21 23

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 18 —

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 — —

Total ............................. 100% 100% 100%

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* Represents less than 0.5% of single-family conventional business volume or book of business.

(1) We reflect second lien mortgage loans in the original LTV ratio calculation only when we own both the first and second

lien mortgage loans or we own only the second lien mortgage loan. Second lien mortgage loans represented less than

0.6% of our single-family conventional guaranty book of business as of December 31, 2011, 2010 and 2009. Second lien

mortgage loans held by third parties are not reflected in the original LTV or mark-to-market LTV ratios in this table.

(2) Calculated based on unpaid principal balance of single-family loans for each category at time of acquisition. SingleFamily business volume refers to both single-family mortgage loans we purchase for our mortgage portfolio and singlefamily mortgage loans we guarantee.

(3) Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the

aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business as of the end of

each period.

(4) Our single-family conventional guaranty book of business includes jumbo-conforming and high-balance loans that

represented approximately 4.8% of our single-family conventional guaranty book of business as of December 31, 2011

and 3.9% as of December 31, 2010. See “Business–Our Charter and Regulation of Our Activities—Charter Act—Loan

Standards” and “Risk Management—Credit Risk Management—Single Family Mortgage Credit Risk Management–

Credit Profile Summary” for additional information on loan limits.

(5) The original LTV ratio generally is based on the original unpaid principal balance of the loan divided by the appraised

property value reported to us at the time of acquisition of the loan. Excludes loans for which this information is not

readily available.

(6) We purchase loans with original LTV ratios above 80% to fulfill our mission to serve the primary mortgage market and

provide liquidity to the housing system. Except as permitted under Refi Plus, our charter generally requires primary

mortgage insurance or other credit enhancement for loans that we acquire that have an LTV ratio over 80%.

(7) The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of

each reported period divided by the estimated current value of the property, which we calculate using an internal

valuation model that estimates periodic changes in home value. Excludes loans for which this information is not readily

available.

(8) Long-term fixed-rate consists of mortgage loans with maturities greater than 15 years, while intermediate-term fixed-rate

has maturities equal to or less than 15 years. Loans with interest-only terms are included in the interest-only category

regardless of their maturities.

(9) Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD and WI. Northeast includes CT, DE, ME, MA, NH, NJ, NY,

PA, PR, RI, VT and VI. Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA and WV. Southwest

consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX and UT. West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA

and WY.

Credit Profile Summary

We continue to see the positive effects of actions we took beginning in 2008 to significantly strengthen our

underwriting and eligibility standards and change our pricing to promote sustainable homeownership and

stability in the housing market. The single-family loans we purchased or guaranteed in 2011 have a strong credit

profile with a weighted average original LTV ratio of 69%, a weighted average FICO credit score of 762, and a

product mix with a significant percentage of fully amortizing fixed-rate mortgage loans. Due to lower acquisition

volume and the relatively high volume of Refi Plus loans (including HARP loans), the LTV ratios at origination

for our 2011 acquisitions are higher than for our 2009 and 2010 acquisitions. In addition, we had a slight increase

in the acquisition of home purchase mortgages with LTV ratios greater than 80% in 2011 compared with 2010

because: (1) most mortgage insurance companies lowered their premiums in 2011 for loans with higher credit

scores; and (2) in April 2011, FHA implemented a price increase in their annual mortgage insurance

premium. Both price changes improved the economics of obtaining private mortgage insurance as compared to

purchasing FHA insurance and drove an increase in our market share for these loans. Approximately 18% of our

total single-family conventional business volume for 2011 consisted of loans with LTV ratios higher than 80% at

the time of purchase compared with 16% for 2010.

The credit profile of our acquisitions has been influenced by historically low mortgage rates in recent periods,

which has resulted in an increase in the percentage of acquisitions that are refinanced loans. Refinanced loans,

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which include Refi Plus loans, comprised 76% of our single-family acquisitions in 2011. Refinanced loans

generally have a strong credit profile because refinancing indicates borrowers’ ability to make their mortgage

payment and desire to maintain homeownership, but Refi Plus loans, which may have lower FICO credit scores

and higher LTV ratios than we generally require, in some cases may not ultimately perform as well as traditional

refinanced loans. It is too early to determine whether the performance of loans with higher risk characteristics

refinanced under the Refi Plus program will perform differently from other refinanced loans; however, we do

expect Refi Plus loans will perform better than the loans they replace because Refi Plus loans should reduce the

borrowers’ monthly payments or otherwise provide more sustainability than the borrowers’ old loans (for

example, by having a fixed rate instead of an adjustable rate). Loans we acquired under Refi Plus in 2011

constituted approximately 24% of our total single-family acquisitions for the period, compared with

approximately 23% of total single-family acquisitions in all of 2010.

In addition, the recent decline in mortgage interest rates has led to a higher percentage of acquisitions of

intermediate-term fixed-rate mortgages because the lower mortgage rates have made these products more

affordable to many borrowers. Effective January 1, 2012, certain loan level pricing adjustments on HARP loans

will be waived on fixed-rate mortgages with terms of 20 years or less, which may have an impact on the amount

of intermediate-term loans we acquire in the future.

The prolonged and severe decline in home prices has resulted in the overall estimated weighted average

mark-to-market LTV ratio of our single-family conventional guaranty book of business to remain high at 79% as

of December 31, 2011, and 77% as of December 31, 2010. The portion of our single-family conventional

guaranty book of business with an estimated mark-to-market LTV ratio greater than 100% was 18% as of

December 31, 2011, and 16% as of December 31, 2010. If home prices decline further, more loans may have

mark-to-market LTV ratios greater than 100%, which increases the risk of delinquency and default.

Whether our acquisitions in 2012 will exhibit the same credit profile as our recent acquisitions depends on many

factors, including our future pricing and eligibility standards, our future objectives, mortgage insurers’ eligibility

standards, our future volume of Refi Plus acquisitions, which typically include higher LTV ratios and

lower FICO credit scores, and future market conditions. We expect the ultimate performance of all our loans will

be affected by macroeconomic trends, including unemployment, the economy, and home prices.

We expect our guaranty fees to increase over the next few years, which may impact the volume of loans we

acquire in the future. See “Business—Legislative and Regulatory Developments—Changes to Our Single-Family

Guaranty Fee Pricing and Revenue” for information on potential changes to our guaranty fees.

Alt-A and Subprime Loans

Our exposure to Alt-A and subprime loans included in our single-family conventional guaranty book of business,

as defined in this section, does not include (1) our investments in private-label mortgage-related securities backed

by Alt-A and subprime loans or (2) resecuritizations, or wraps, of private-label mortgage-related securities

backed by Alt-A mortgage loans that we have guaranteed. See “Consolidated Balance Sheet Analysis—

Investments in Mortgage-Related Securities—Investments in Private-Label Mortgage-Related Securities” for a

discussion of our exposure to private-label mortgage-related securities backed by Alt-A and subprime loans. As a

result of our decision to discontinue the purchase of newly originated Alt-A loans, except for those that represent

the refinancing of an existing Fannie Mae loan, we expect our acquisitions of Alt-A mortgage loans to continue

to be minimal in future periods and the percentage of the book of business attributable to Alt-A will continue to

decrease over time. We are also not currently acquiring newly originated subprime loans.

We have classified a mortgage loan as Alt-A if the lender that delivered the loan to us classified the loan as Alt-A

based on documentation or other features. We have classified a mortgage loan as subprime if the loan was

originated by a lender specializing in subprime business or by a subprime division of a large lender. We exclude

from the subprime classification loans originated by these lenders if we acquired the loans in accordance with our

standard underwriting criteria, which typically require compliance by the seller with our Selling Guide (including

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standard representations and warranties) and/or evaluation of the loans through our Desktop Underwriter system.

We apply our classification criteria in order to determine our Alt-A and subprime loan exposures; however, we

have other loans with some features that are similar to Alt-A and subprime loans that we have not classified as

Alt-A or subprime because they do not meet our classification criteria. The unpaid principal balance of Alt-A

loans included in our single-family conventional guaranty book of business of $182.2 billion as of December 31,

2011, represented approximately 6.6% of our single-family conventional guaranty book of business. The unpaid

principal balance of subprime loans included in our single-family conventional guaranty book of business of $5.8

billion as of December 31, 2011, represented approximately 0.2% of our single-family conventional guaranty

book of business.

Jumbo-Conforming and High-Balance Loans

The outstanding unpaid principal balance of our jumbo-conforming and high-balance loans was $133.0 billion, or

4.8% of our single-family conventional guaranty book of business, as of December 31, 2011 and $109.7 billion,

or 3.9% of our single-family conventional guaranty book of business, as of December 31, 2010. The standard

conforming loan limit for a one-unit property was $417,000 in 2011 and 2010. Our loan limits were higher in

specified high-cost areas, reaching as high as $729,750 for one-unit properties; however, our loan limits for loans

originated after September 30, 2011 decreased in specified high-cost areas to an amount not to exceed $625,500

for one-unit properties. Unlike FHA, which is not subject to current loan limits for refinancing its existing loans

above current limits, our current loan limits apply to all new acquisitions. Therefore, we expect refinances of our

existing loans above current limits to be significantly reduced. See “Business—Our Charter and Regulation of

Our Activities—Charter Act—Loan Standards” for additional information on our loan limits.

Reverse Mortgages

The outstanding unpaid principal balance of reverse mortgage whole loans and Fannie Mae MBS backed by

reverse mortgage loans in our guaranty book of business was $50.9 billion as of December 31, 2011 and $50.8

billion as of December 31, 2010. The balance of our reverse mortgage loans could increase over time, as each

month the scheduled and unscheduled payments, interest, mortgage insurance premium, servicing fee, and

default-related costs accrue to increase the unpaid principal balance. The majority of these loans are home equity

conversion mortgages insured by the federal government through FHA. Because home equity conversion

mortgages are insured by the federal government, we believe that we have limited exposure to losses on these

loans. In 2010, we communicated to our lenders that we are exiting the reverse mortgage business and will no

longer acquire newly originated home equity conversion mortgages.

Adjustable-rate Mortgages and Fixed-rate Interest-only Mortgages

ARMs are mortgage loans with an interest rate that adjusts periodically over the life of the mortgage based on

changes in a specified index. Interest-only loans allow the borrower to pay only the monthly interest due, and

none of the principal, for a fixed term. The majority of our interest-only loans are ARMs. Our negativeamortizing loans are ARMs that allow the borrower to make monthly payments that are less than the interest

actually accrued for the period. The unpaid interest is added to the principal balance of the loan, which increases

the outstanding loan balance. ARMs represented 10.7% of our single-family conventional guaranty book of

business as of December 31, 2011.

Table 42 displays information for ARMs and fixed-rate interest-only loans in our single-family guaranty book of

business, aggregated by product type and categorized by the year of their next scheduled contractual reset date.

The contractual reset is either an adjustment to the loan’s interest rate or a scheduled change to the loan’s

monthly payment to begin to reflect the payment of principal. The timing of the actual reset dates may differ

from those presented due to a number of factors, including refinancing or exercising of other provisions within

the terms of the mortgage.

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Table 42: Single-Family Adjustable-Rate Mortgage Resets by Year(1)

Reset Year

2012 2013 2014 2015 2016 Thereafter Total

(Dollars in millions)

ARMs—Amortizing ..................... $49,027 $ 4,442 $14,960 $70,706 $35,168 $20,977 $195,280

ARMs—Interest Only ................... 40,268 7,788 7,254 19,109 7,737 7,349 89,505

ARMs—Negative Amortizing ............. 6,699 121 419 962 560 180 8,941

Total ................................. $95,994 $12,351 $22,633 $90,777 $43,465 $28,506 $293,726

Fixed-Rate Interest Only . . . . . . . . . . . . . . . . . $ 309 $ 106 $ 175 $ 1,571 $ 9,873 $25,403 $ 37,437

(1) Does not include loans we have modified, some of which are subject to higher interest rates and increased monthly

payments in the future.

We have not observed a materially different performance trend for interest-only loans or negative-amortizing

loans that have recently reset as compared to those that are still in the initial period. We believe the current

performance trend is the result of the current low interest rate environment and we do not expect this trend to

continue if interest rates rise significantly.

Problem Loan Management

Our problem loan management strategies are primarily focused on reducing defaults to avoid losses that would

otherwise occur and pursuing foreclosure alternatives to attempt to minimize the severity of the losses we incur.

If a borrower does not make required payments, or is in jeopardy of not making payments, we work with the

servicers of our loans to offer workout solutions to minimize the likelihood of foreclosure as well as the severity

of loss. Our loan workouts reflect our various types of home retention strategies, including loan modifications,

repayment plans and forbearances, and foreclosure alternatives, including short sales and deeds-in-lieu of

foreclosure. When appropriate, we seek to move to foreclosure expeditiously. For additional discussion on our

efforts to reduce defaults and credit losses, see “Executive Summary—Reducing Credit Losses on Our Legacy

Book of Business.”

Our home retention solutions are intended to help borrowers stay in their homes and include loan modifications,

repayment plans and forbearances. Because we believe that reducing delays and implementing solutions that can

be executed in a timely manner and early in the delinquency increases the likelihood that our problem loan

management strategies will be successful in avoiding a default or minimizing severity, it is important for our

servicers to work with borrowers to complete these solutions as early in their delinquency as feasible. If the

servicer cannot provide a viable home retention solution for a problem loan, the servicer will seek to offer

foreclosure alternatives, primarily short sales and deeds-in-lieu of foreclosure. These alternatives reduce the

severity of our loss resulting from a borrower’s default while permitting the borrower to avoid going through a

foreclosure. The existence of a second lien may limit our ability to provide borrowers with loan workout options,

particularly those that are part of our foreclosure prevention efforts; however, we are not required to contact a

second lien holder to obtain their approval prior to providing a borrower with a loan modification. We

occasionally execute third-party sales, where we sell the property to a third party immediately prior to entering

the foreclosure process. When appropriate, we seek to move to foreclosure expeditiously.

We seek to improve the servicing of our delinquent loans through a variety of means, including improving our

communications with and training of our servicers, increasing the number of our personnel who manage our

servicers, directing servicers to contact borrowers at an earlier stage of delinquency and improve their telephone

communications with borrowers, and holding our servicers accountable for following our requirements. In the

second quarter of 2011, we issued new standards for mortgage servicers regarding the management of delinquent

loans, default prevention and foreclosure time frames under FHFA’s directive to align GSE policies for servicing

delinquent mortgages. The new standards, reinforced by new incentives and compensatory fees, require servicers

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to take a more consistent approach for homeowner communications, loan modifications and other workouts, and,

when necessary, foreclosures. The new standards are designed to: (1) achieve effective contact with the

borrower, including creating a uniform standard for communicating with the homeowner, determining reasons

for delinquency and assessing their ability to pay, and educating homeowners on the availability of foreclosure

prevention options; (2) set clear timelines and establish clear and consistent policies in the foreclosure process;

and (3) provide incentives to servicers to complete loan workouts earlier in the homeowner’s delinquency and

charge servicers compensatory fees when they fail to have the proper contact with the borrower. We believe

these standards, which became effective October 1, 2011, will bring greater consistency, clarity, fairness and

efficiency to the process, help improve servicer performance, and hold servicers accountable for their

effectiveness in assisting homeowners.

In addition to these new standards, we have taken other steps to improve the servicing of our delinquent loans

including: (1) updating our Servicing Guide, which should improve our servicers’ ability to understand and

comply with our requirements and allow them to complete workouts earlier in the delinquency process, thereby

avoiding foreclosure; (2) implementing our STAR program, a servicer performance management system

designed to encourage improvements in customer service and foreclosure prevention outcomes for homeowners

by rating servicers on their performance in these areas; and (3) transferring servicing on loan populations that

include loans with higher-risk characteristics to special servicers with which we have worked to develop hightouch protocols for servicing these loans. For example, in the third quarter of 2011, we agreed to purchase from

Bank of America, N.A. the mortgage servicing rights associated with up to $74 billion in unpaid principal

balance of mortgage loans in our single-family guaranty book of business, which represented approximately 11%

of our servicing portfolio with Bank of America as of September 30, 2011. We believe retaining special servicers

to service these loans using high-touch protocols will reduce our future credit losses on the transferred loan

portfolio, while enabling Bank of America to better focus on our remaining portfolio with them. We continue to

work with some of our servicers to test and implement high-touch servicing protocols designed for managing

higher-risk loans, which include lower ratios of loans per servicer employee, beginning borrower outreach

strategies earlier in the delinquency cycle and establishing a single point of resolution for distressed borrowers.

The efforts of our mortgage servicers are critical in keeping people in their homes and preventing foreclosures. We

continue to work with our servicers to implement our foreclosure prevention initiatives effectively and to find ways

to enhance our workout protocols and their workflow processes. As of December 31, 2011, we had established 12

Mortgage Help Centers across the nation to accelerate the response time for struggling borrowers with loans owned

by us. During 2011, these centers helped borrowers obtain nearly 6,100 home retention plans. We have also

established partnerships with 17 local non-profit organizations in 16 cities, collectively known as our Mortgage

Help Network. The Mortgage Help Network represents a contractual relationship with select not-for-profit

counseling agencies located in our top delinquent mortgage markets to provide borrowers foreclosure prevention

counseling, documentation and assistance with pending loan workout solutions. We also use direct mail and phone

calls to encourage homeowners to pursue home retention solutions and foreclosure alternatives, and have

established partnerships with counseling agencies in ten states across the country to provide similar services.

Further, in cooperation with several Multiple Listing Services across the nation, we developed the Short Sale

Assistance Desk to assist real estate professionals in handling post-offer short sale issues that may relate to servicer

responsiveness, the existence of a second lien, or issues involving mortgage insurance.

In the following section, we present statistics on our problem loans, describe specific efforts undertaken to

manage these loans and prevent foreclosures and provide metrics regarding the performance of our loan workout

activities. We generally define single-family problem loans as loans that have been identified as being at

imminent risk of payment default; early stage delinquent loans that are either 30 days or 60 days past due; and

seriously delinquent loans, which are loans that are three or more monthly payments past due or in the

foreclosure process. Unless otherwise noted, single-family delinquency data is calculated based on number of

loans. We include single-family conventional loans that we own and that back Fannie Mae MBS in the

calculation of the single-family delinquency rate. Percentage of book outstanding calculations are based on the

unpaid principal balance of loans for each category divided by the unpaid principal balance of our total singlefamily guaranty book of business for which we have detailed loan-level information.

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Problem Loan Statistics

The following table displays the delinquency status of loans in our single-family conventional guaranty book of

business (based on number of loans) as of the dates indicated.

Table 43: Delinquency Status of Single-Family Conventional Loans

As of December 31,

2011 2010 2009

Delinquency status:

30 to 59 days delinquent ............................................................ 2.17% 2.32% 2.46%

60 to 89 days delinquent ............................................................ 0.74 0.87 1.07

Seriously delinquent ............................................................... 3.91 4.48 5.38

Percentage of seriously delinquent loans that have been delinquent for more than 180 days . . . . . 70% 67% 57%

Our serious delinquency rate decreased in 2011 compared with 2010 and 2009, driven by our home retention

solutions, as well as foreclosure alternatives and completed foreclosures. The decrease is also attributable to our

acquisition of loans with stronger credit profiles since the beginning of 2009, as these loans have become an

increasingly larger portion of our single-family guaranty book of business, resulting in a smaller percentage of

our loans becoming seriously delinquent.

Although our single-family serious delinquency rate has decreased every quarter since the first quarter of 2010,

our serious delinquency rate and the period of time that loans remain seriously delinquent have been negatively

affected in recent periods by the increase in the average number of days it is taking to complete a foreclosure.

Continuing issues in the servicer foreclosure process and new legislative, regulatory and judicial requirements

have lengthened the time it takes to foreclose on a mortgage loan in many states. In addition, servicers and states

are dealing with the backlog of foreclosures resulting from these delays and from the elevated level of

foreclosures resulting from the housing market downturn. Longer foreclosure timelines result in these loans

remaining in our book of business for a longer time, which has caused our serious delinquency rate to decrease

more slowly in the last year than it would have if the pace of foreclosures had been faster. We believe the

changes in the foreclosure environment will continue to negatively affect our single-family serious delinquency

rates, foreclosure timelines and credit-related expenses. For more information on the delays in the foreclosure

process, see “Executive Summary—Reducing Credit Losses on Our Legacy Book of Business.” We expect

serious delinquency rates will continue to be affected in the future by home price changes, changes in other

macroeconomic conditions, the length of the foreclosure process, the volume of loan modifications and the extent

to which borrowers with modified loans continue to make timely payments.

Table 44 displays a comparison, by geographic region and by loans with and without credit enhancement, of the

serious delinquency rates as of the dates indicated for single-family conventional loans in our single-family

guaranty book of business.

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Table 44: Single-Family Serious Delinquency Rates

As of December 31,

2011 2010 2009

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Single-family conventional

delinquency rates by geographic

region:(1)

Midwest . . . . . . . . . . . . . . . . . . . 15% 3.73% 15% 4.16% 16% 4.97%

Northeast . . . . . . . . . . . . . . . . . . 19 4.43 19 4.38 19 4.53

Southeast . . . . . . . . . . . . . . . . . . 24 5.68 24 6.15 24 7.06

Southwest . . . . . . . . . . . . . . . . . 15 2.30 15 3.05 15 4.19

West . . . . . . . . . . . . . . . . . . . . . . 27 2.87 27 4.06 26 5.45

Total single-family

conventional loans ....... 100% 3.91% 100% 4.48% 100% 5.38%

Single-family conventional loans:

Credit enhanced . . . . . . . . . . . . . 14% 9.10% 15% 10.60% 18% 13.51%

Non-credit enhanced . . . . . . . . . 86 3.07 85 3.40 82 3.67

Total single-family

conventional loans ....... 100% 3.91% 100% 4.48% 100% 5.38%

(1) See footnote 9 to “Table 41: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of

Business” for states included in each geographic region.

While loans across our single-family guaranty book of business have been affected by the weak market

conditions, loans in certain states, certain higher-risk loan categories, such as Alt-A loans and loans with higher

mark-to-market LTVs, and our 2006 and 2007 loan vintages continue to exhibit higher than average delinquency

rates and/or account for a disproportionate share of our credit losses. California, Florida, Arizona and Nevada and

some states in the Midwest have experienced more significant declines in home prices coupled with

unemployment rates that remain high.

Table 45 displays the serious delinquency rates and other financial information for our single-family

conventional loans with some of these higher-risk characteristics as of the periods indicated. The reported

categories are not mutually exclusive.

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Table 45: Single-Family Conventional Serious Delinquency Rate Concentration Analysis

As of December 31,

2011 2010 2009

Unpaid

Principal

Balance

Percentage of

Book

Outstanding

Serious

Delinquency Rate

Esti

mated

Markto- Market

LTV

Ratio(1)

Unpaid

Principal

Balance

Percentage of

Book

Outstanding

Serious

Delinquency Rate

Estimated

Markto- Market

LTV

Ratio(1)

Unpaid

Principal

Balance

Percentage of

Book

Outstanding

Serious

Delinquency Rate

Estimated

Markto- Market

LTV

Ratio(1)

(Dollars in millions)

States:

Arizona ............................$ 66,875 2% 3.65% 109% $ 71,052 2% 6.23% 105%$ 76,073 3% 8.80% 100%

California ........................... 516,608 19 2.46 81 507,598 18 3.89 76 484,923 17 5.73 77

Florida ............................ 175,344 6 11.80 108 184,101 7 12.31 107 195,309 7 12.82 100

Nevada ............................ 28,766 1 7.42 138 31,661 1 10.66 128 34,657 1 13.00 123

Select Midwest states(2) ................ 284,060 10 4.39 84 292,734 11 4.80 80 304,147 11 5.62 77

All other states ...................... 1,689,846 62 3.18 73 1,695,615 61 3.46 71 1,701,379 61 4.11 69

Product type:

Alt-A(3) ............................. 182,236 7 12.43 101 211,770 8 13.87 96 248,311 9 15.63 92

Subprime ........................... 5,791 * 23.18 111 6,499 * 28.20 103 7,364 * 30.68 97

Vintages:

2006 .............................. 186,835 7 11.81 111 232,009 8 12.19 104 292,184 11 12.87 97

2007 .............................. 269,012 10 12.62 112 334,110 12 13.24 104 422,956 15 14.06 96

All other

vintages .......................... 2,305,652 83 2.39 73 2,216,642 80 2.62 70 2,081,348 74 3.08 67

Estimated mark-to-market LTV ratio:

Greater than 100%(1) .................. 493,762 18 13.76 131 435,991 16 17.70 130 403,443 14 22.09 128

Select combined risk characteristics:

Original LTV ratio > 90% and FICO score

< 620 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,992 1 18.67 115 21,205 1 21.41 109 23,966 1 27.96 104

* Percentage is less than 0.5%.

(1) Second lien mortgage loans held by third parties are not included in the calculation of the estimated mark-to-market LTV ratios.

(2) Consists of Illinois, Indiana, Michigan and Ohio.

(3) For 2009, data for Alt-A loans does not reflect loans we acquired in 2009 upon the refinance of existing Alt-A loans.

Loan Workout Metrics

We continue to work with our servicers to implement our home retention and foreclosure prevention initiatives. Loan

modifications involve changes to the original mortgage terms such as product type, interest rate, amortization term,

maturity date and/or unpaid principal balance. Modifications include TDRs, which is the only form of modification in

which we do not expect to collect the full original contractual principal and interest due under the loan. Other resolutions

and modifications may result in our receiving the full amount due, or certain installments due, under the loan over a

period of time that is longer than the period of time originally provided for under the terms of the loan. Additionally, we

currently offer up to twelve months of forbearance for those homeowners who are unemployed as an additional tool to

help homeowners avoid foreclosure.

In March 2009, we implemented HAMP, a modification initiative under the Making Home Affordable Program.

Intended to be uniform across servicers, HAMP is aimed at helping borrowers whose loan is either currently delinquent

or is at imminent risk of default. HAMP modifications can include reduced interest rates, term extensions, and/or

principal forbearance to bring the monthly payment down to 31% of the borrower’s gross (pre-tax) income. We require

that servicers first evaluate borrowers for eligibility under HAMP before considering other workout options or

foreclosure. By design, not all borrowers facing foreclosure will be eligible for a HAMP modification. As a result, we

are working with servicers to ensure that borrowers who do not qualify for HAMP or who fail to successfully complete

the HAMP required trial period are provided with alternative home retention options or a foreclosure avoidance

alternative.

In addition, we continue to focus on alternatives to foreclosure for borrowers who are unable to retain their homes.

Foreclosure alternatives may be more appropriate if the borrower has experienced a significant adverse change in

financial condition due to events such as unemployment or reduced income, divorce, or unexpected issues like medical

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bills and is therefore no longer able to make the required mortgage payments. Since the cost of foreclosure can be

significant to both the borrower and Fannie Mae, to avoid foreclosure and satisfy the first-lien mortgage

obligation, our servicers work with a borrower to sell their home prior to foreclosure in a short sale or accept a

deed-in-lieu of foreclosure whereby the borrower voluntarily signs over the title to their property to the servicer.

These alternatives are designed to reduce our credit losses while helping borrowers avoid having to go through a

foreclosure.

Table 46 displays statistics on our single-family loan workouts that were completed, by type, for the periods

indicated. These statistics include loan modifications but do not include trial modifications or repayment and

forbearance plans that have been initiated but not completed.

Table 46: Statistics on Single-Family Loan Workouts

For the Year Ended December 31,

2011 2010 2009

Unpaid

Principal

Balance

Number

of Loans

Unpaid

Principal

Balance

Number

of Loans

Unpaid

Principal

Balance

Number

of Loans

(Dollars in millions)

Home retention strategies:

Modifications .................................. $42,793 213,340 $ 82,826 403,506 $18,702 98,575

Repayment plans and forbearances completed(1) ....... 5,042 35,318 4,385 31,579 2,930 22,948

HomeSaver Advance first-lien loans . . . . . . . . . . . . . . . . — — 688 5,191 6,057 39,199

47,835 248,658 87,899 440,276 27,689 160,722

Foreclosure alternatives:

Short sales .................................... 15,412 70,275 15,899 69,634 8,457 36,968

Deeds-in-lieu of foreclosure ....................... 1,679 9,558 1,053 5,757 491 2,649

17,091 79,833 16,952 75,391 8,948 39,617

Total loan workouts ............................... $64,926 328,491 $104,851 515,667 $36,637 200,339

Loan workouts as a percentage of single-family guaranty

book of business(2) ............................... 2.29% 1.85% 3.66% 2.87% 1.26% 1.10%

(1) Repayment plans reflect only those plans associated with loans that were 60 days or more delinquent.

(2) Calculated based on loan workouts during the period as a percentage of our single-family guaranty book of business as of

the end of the period.

HAMP guidance directs servicers to cancel or convert trial modifications after three or four monthly payments,

depending on the borrower’s circumstances. As of December 31, 2011, 52% of our HAMP trial modifications

had been converted to permanent HAMP modifications since the inception of the program. The conversion rate

for HAMP modifications since June 1, 2010, when servicers were required to perform a full verification of a

borrower’s eligibility prior to offering a HAMP trial modification, was 83% as of December 31, 2011. The

average length of a trial period for HAMP modifications initiated after June 1, 2010 was four months.

The volume of workouts completed in 2011 decreased compared with 2010, primarily driven by a decline in the

number of seriously delinquent loans in 2011, compared with 2010. In addition, we began to require that all nonHAMP modifications also must go through a trial period, which initially lowers the number of modifications that

can become permanent in any particular period. The volume of workouts increased in 2010 compared with 2009

due to an increase in loan modification volume because the number of borrowers who were experiencing

financial difficulty increased and a significant number of HAMP trial modifications were completed and became

permanent HAMP modifications. HomeSaver Advance first-lien loans were workouts focused on borrowers

facing short-term hardships, and this workout option was retired in 2010.

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During 2011, we initiated approximately 211,000 trial modifications, including HAMP and non-HAMP,

compared with approximately 166,000 trial modifications during 2010. We also initiated other types of workouts,

such as repayment plans and forbearances. It is difficult to predict how many of these trial modifications and

initiated plans will be completed.

The number of foreclosure alternatives we agreed to during 2011 remained high as these are favorable solutions

for a large number of borrowers. We expect the volume of our workouts and foreclosure alternatives to remain

high throughout 2012.

Table 47 displays the profile of loan modifications (HAMP and non-HAMP) provided to borrowers during the

years indicated.

Table 47: Single-Family Loan Modification Profile

2011 2010 2009

Term extension, interest rate reduction, or combination of both(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99% 93% 93%

Initial reduction in monthly payment(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 91 87

Estimated mark-to-market LTV ratio > 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 53 47

Troubled debt restructurings(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 94 92

(1) Reported statistics for term extension, interest rate reduction or the combination include subprime adjustable-rate

mortgage loans that have been modified to a fixed-rate loan.

(2) These modification statistics do not include subprime adjustable-rate mortgage loans that were modified to a fixed-rate

loan and were current at the time of the modification.

(3) Percentage for the year ended December 31, 2011 reflects the impact of the new TDR accounting guidance which was

retrospectively adopted beginning January 1, 2011. Prior periods have not been revised.

Our approach to workouts continues to focus on the large number of borrowers facing financial hardships.

Accordingly, the vast majority of loan modifications we have completed since 2009 have been concentrated on

deferring or lowering the borrowers’ monthly mortgage payments to allow borrowers to work through their

hardships.

An increasing percentage of our modifications have been made to loans with a mark-to-market LTV ratio greater

than 100%. These borrowers are typically unable to refinance their mortgages or sell their homes for a price that

allows them to pay off their mortgage obligation as their mortgages are greater than the value of their homes.

Additionally, the serious delinquency rate for these loans tends to be significantly higher than the overall average

serious delinquency rate. As of December 31, 2011, the serious delinquency rate for loans with a mark-to-market

LTV ratio greater than 100% was 14%, compared with our overall average single-family serious delinquency rate

of 3.91%.

Table 48 displays the percentage of our loan modifications completed during 2010 and the second half of 2009

that were current and performing one year after modification, as well as the percentage of our loan modifications

completed during the second half of 2009 that were current and performing two years after modification. We

implemented HAMP in early 2009, and thus did not complete a significant number of modifications under this

program until the third quarter of 2009.

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Table 48: Percentage of Loan Modifications That Were Current and Performing at One and Two Years PostModification(1)(2)

2010 2009

Q4 Q3 Q2 Q1 Q4 Q3

One Year Post-Modification

HAMP Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74% 74% 74% 76% 73% 71%

Other Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67% 67% 65% 55% 50% 39%

Two Years Post-Modification

HAMP Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67% 64%

Other Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48% 37%

(1) Excludes loans that were classified as subprime ARMs that were modified into fixed rate mortgages and were current at

the time of modification. Modifications included permanent modifications, but do not reflect loans currently in trial

modifications.

(2) Includes loans that are paid off.

We began changing the structure of our non-HAMP modifications in 2010 to lower borrowers’ monthly

mortgage payments to a greater extent, which improved the performance of our non-HAMP modifications

overall. In addition, because post-modification performance was greater for our HAMP modifications than for

our non-HAMP modifications, we began in September 2010 to include trial periods for our non-HAMP

modifications.

There is significant uncertainty regarding the ultimate long term success of our current modification efforts. We

believe the performance of our workouts will be highly dependent on economic factors, such as unemployment

rates, household wealth and income, and home prices. Modifications, even those with reduced monthly

payments, may also not be sufficient to help borrowers with second liens and other significant non-mortgage debt

obligations. FHFA, other agencies of the U.S. government or Congress may ask us to undertake new initiatives to

support the housing and mortgage markets should our current modification efforts ultimately not perform in a

manner that results in the stabilization of these markets. See “Risk Factors” for a discussion of efforts we may be

required or asked to undertake and their potential affect on us.

REO Management

Foreclosure and REO activity affect the amount of credit losses realized in a given period. Table 49 displays our

foreclosure activity, by region, for the periods indicated. Regional REO acquisition and charge-off trends

generally follow a pattern that is similar to, but lags, that of regional delinquency trends.

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Table 49: Single-Family Foreclosed Properties

For the Year Ended December 31,

2011 2010 2009

Single-family foreclosed properties (number of properties):

Beginning of period inventory of single-family foreclosed properties (REO)(1) ..... 162,489 86,155 63,538

Acquisitions by geographic area:(2)

Midwest ........................................................ 45,167 57,761 36,072

Northeast ....................................................... 9,858 14,049 7,934

Southeast ....................................................... 51,153 79,453 39,302

Southwest ....................................................... 44,675 55,276 31,197

West ........................................................... 48,843 55,539 31,112

Total properties acquired through foreclosure(1) ............................ 199,696 262,078 145,617

Dispositions of REO ................................................. (243,657) (185,744) (123,000)

End of period inventory of single-family foreclosed properties (REO)(1) .......... 118,528 162,489 86,155

Carrying value of single-family foreclosed properties (dollars in millions)(3) ....... $ 9,692 $ 14,955 $ 8,466

Single-family foreclosure rate(4) .......................................... 1.13% 1.46% 0.80%

(1) Includes acquisitions through deeds-in-lieu of foreclosure.

(2) See footnote 9 to “Table 41: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of

Business” for states included in each geographic region.

(3) Excludes foreclosed property claims receivables, which are reported in our consolidated balance sheets as a component of

“Acquired property, net.”

(4) Estimated based on the total number of properties acquired through foreclosure or deeds-in-lieu of foreclosure as a

percentage of the total number of loans in our single-family guaranty book of business as of the end of each respective

period.

The ongoing weak economy, as well as high unemployment rates, continues to result in a high level of mortgage

loans that transition from delinquent to REO status, either through foreclosure or deed-in-lieu of foreclosure. Our

foreclosure rates remain high; however, foreclosure levels were lower than they would have been during 2011

due to delays in the processing of foreclosures caused by continuing foreclosure process issues encountered by

our servicers and new legislative, regulatory and judicial requirements. Additionally, foreclosure levels were

affected by our directive to servicers to delay foreclosure sales until the loan servicer verifies that the borrower is

ineligible for a HAMP modification and that all other home retention and foreclosure prevention alternatives

have been exhausted. The delay in potential foreclosures, as well as an increase in the number of dispositions of

REO properties, has resulted in a decrease in the inventory of foreclosed properties since December 31, 2010.

The percentage of our single-family foreclosed properties that we determined we were unable to market for sale

was 47% as of December 31, 2011 compared with 41% as of December 31, 2010. The two largest concentrations

of our unable-to-market-for-sale inventory are: (1) properties that are still occupied by the person or personal

property, and for which the eviction process is not yet complete (“occupied status”); and (2) properties that are

within the period during which state law allows the former mortgagor and second lien holders to redeem the

property (“redemption status”). Being in occupied status lengthens the time a property remains in our REO

inventory by an average of one to three months; occupied status properties represented approximately 31% of our

unable to market for sale inventory as of December 31, 2011 compared with approximately 40% as of

December 31, 2010. Being in redemption status lengthens the time a property remains in our REO inventory by

an average of two to six months; redemption status properties represented approximately 26% of our unable to

market for sale inventory as of December 31, 2011 compared with approximately 27% as of December 31, 2010.

As we are unable to market a higher portion of our inventory, it slows the pace at which we can dispose of our

properties and increases our foreclosed property expense related to costs associated with ensuring that the

property is vacant and maintaining the property.

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In February 2012, FHFA announced that it was beginning the pilot phase of an REO initiative that will allow

qualified investors to purchase pools of foreclosed properties from us with the requirement to rent the purchased

properties for a specified number of years. During the pilot phase, we will offer for sale pools of various types of

assets including rental properties, vacant properties and nonperforming loans with a focus on the hardest-hit

areas. We do not yet know whether this initiative will have a material impact on our future REO sales and REO

inventory levels.

As shown in Table 50, we have experienced a disproportionate share of foreclosures in certain states as compared

with their share of our guaranty book of business. This is primarily because these states have had significant

home price depreciation or weak economies and, in the case of California and Florida specifically, a significant

number of Alt-A loans.

Table 50: Single-Family Acquired Property Concentration Analysis

As of For the Year Ended As of For the Year Ended As of For the Year Ended

December 31, 2011 December 31, 2010 December 31, 2009

Percentage of

Book

Outstanding(1)

Percentage of

Properties

Acquired

by Foreclosure(2)

Percentage of

Book

Outstanding(1)

Percentage of

Properties

Acquired

by Foreclosure(2)

Percentage of

Book

Outstanding(1)

Percentage of

Properties

Acquired

by Foreclosure(2)

States:

Arizona, California, Florida, and

Nevada . . . . . . . . . . . . . . . . . . . . . . . . 28% 33% 28% 36% 28% 36%

Illinois, Indiana, Michigan, and Ohio . . 10 17 11 17 11 20

(1) Calculated based on the unpaid principal balance of loans, where we have detailed loan-level information, for each

category divided by the unpaid principal balance of our single-family conventional guaranty book of business.

(2) Calculated based on the number of properties acquired through foreclosure during the period divided by the total number

of properties acquired through foreclosure.

Multifamily Mortgage Credit Risk Management

The credit risk profile of our multifamily mortgage credit book of business is influenced by the structure of the

financing, the type and location of the property, the condition and value of the property, the financial strength of

the borrower and lender, market and sub-market trends and growth, and the current and anticipated cash flows

from the property. These and other factors affect both the amount of expected credit loss on a given loan and the

sensitivity of that loss to changes in the economic environment. We provide information on our credit-related

expenses and credit losses in “Business Segment Results—Multifamily Business Results.”

While our multifamily mortgage credit book of business includes all of our multifamily mortgage-related assets,

both on- and off-balance sheet, our guaranty book of business excludes non-Fannie Mae multifamily mortgagerelated securities held in our portfolio for which we do not provide a guaranty. Our multifamily guaranty book of

business consists of: multifamily mortgage loans held in our mortgage portfolio; Fannie Mae MBS held in our

portfolio or by third parties; and other credit enhancements that we provide on mortgage assets.

Multifamily Acquisition Policy and Underwriting Standards

Our Multifamily business, with the oversight of our Enterprise Risk Management division, is responsible for

pricing and managing the credit risk on multifamily mortgage loans we purchase and on Fannie Mae MBS

backed by multifamily loans (whether held in our portfolio or held by third parties). Our primary multifamily

delivery channel is the DUS program, which is comprised of multiple lenders that span the spectrum from large

financial institutions to smaller independent multifamily lenders. Multifamily loans that we purchase or that back

Fannie Mae MBS are either underwritten by a Fannie Mae-approved lender or subject to our underwriting review

prior to closing, depending on the product type and/or loan size. Loans delivered to us by DUS lenders and their

affiliates represented 86% of our multifamily guaranty book of business as of December 31, 2011, compared

with 84% as of December 31, 2010 and 81% as of December 31, 2009.

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We use various types of credit enhancement arrangements for our multifamily loans, including lender risksharing, lender repurchase agreements, pool insurance, subordinated participations in mortgage loans or

structured pools, cash and letter of credit collateral agreements, and cross-collateralization/cross-default

provisions. The most prevalent form of credit enhancement on multifamily loans is lender risk-sharing. Lenders

in the DUS program typically share in loan-level credit losses in one of two ways: (1) they bear losses up to the

first 5% of unpaid principal balance of the loan and share in remaining losses up to a prescribed limit; or (2) they

share up to one-third of the credit losses on an equal basis with us. Non-DUS lenders typically share or absorb

credit losses based on a negotiated percentage of the loan or the pool balance.

Table 51 displays the percentage of the unpaid principal balance of loans in our multifamily guaranty book of

business with lender risk-sharing and with no recourse to the lender as of the dates indicated:

Table 51: Multifamily Lender Risk-Sharing

As of December 31,

2011 2010

Lender risk-sharing

DUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68% 65%

Non-DUS negotiated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 13

No recourse to the lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 22

At the time of our purchase or guarantee of multifamily mortgage loans, we and our lenders rely significantly on

sound underwriting standards, which often include third party appraisals and cash flow analysis. Our standards

for multifamily loans specify maximum original LTV ratios and minimum original debt service coverage ratios

(“DSCR”) that vary based on the loan characteristics. Original LTV reflects the borrower equity in the

transaction. Similarly, original DSCR reflects the anticipated cash flow on the transaction at underwriting, with

additional measures taken to address higher risk loans. Our experience has been that original LTV and DSCR

values have been reliable indicators of future credit performance. The weighted average original LTV ratio for

our multifamily guaranty book of business was 66% as of December 31, 2011 and 67% as of December 31, 2010

and 2009. The percentage of our multifamily guaranty book of business with an original LTV ratio greater than

80% was 5% as of December 31, 2011, 2010, and 2009. We present the current risk profile of our multifamily

guaranty book of business in “Note 6, Financial Guarantees.”

Multifamily Portfolio Diversification and Monitoring

Diversification within our multifamily mortgage credit book of business by geographic concentration,

term-to-maturity, interest rate structure, borrower concentration and credit enhancement arrangement is an

important factor that influences credit quality and performance and helps reduce our credit risk.

We and our lenders monitor the performance and risk concentrations of our multifamily loans and the underlying

properties on an ongoing basis throughout the life of the loan; at the loan, property and portfolio level. We track

credit risk characteristics to determine the loan credit quality indicator, which are the internal risk categories and

are further discussed in “Note 3, Mortgage Loans.” The credit risk characteristics we use to help determine the

internal risk categories include the physical condition of the property, delinquency status, the relevant local

market and economic conditions that may signal changing risk or return profiles, and other risk factors. For

example, we closely monitor the rental payment trends and vacancy levels in local markets to identify loans that

merit closer attention or loss mitigation actions, in addition to capitalization rates. We are managing our exposure

to refinancing risk for multifamily loans maturing in the next several years. We have a team that proactively

manages upcoming loan maturities to minimize losses on maturing loans. This team assists lenders and

borrowers with timely and appropriate refinancing of maturing loans with the goal of reducing defaults and

foreclosures related to loans maturing in the near term. For our investments in multifamily loans, the primary

asset management responsibilities are performed by our DUS and other multifamily lenders. We periodically

evaluate these lenders’ and our other third party service providers’ performance for compliance with our asset

management criteria.

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As part of our ongoing credit risk management process, we have worked with our lenders over the last two years

to collect limited sets of quarterly property operating measures from borrowers, in addition to more complete

annual financial updates, for those loans where we are entitled contractually to receive such information. We

focus on loans with an estimated current DSCR below 1.0, as that is one key indicator of a loan with a welldefined weakness that may jeopardize the timely full repayment, as well as a key input into the overall risk

assessment process. The percentage of loans in our multifamily guaranty book of business with a current DSCR

less than 1.0 was approximately 7% as of December 31, 2011 and approximately 10% as of December 31, 2010.

Our estimates of current DSCRs are based on the latest available income information for these properties and our

assessments of market conditions. Although we use the most recently available results from our multifamily

borrowers, there is a lag in reporting, which typically can range from 6 to 18 months, as they prepare their results

in the normal course of business.

Problem Loan Management and Foreclosure Prevention

The number of multifamily loans at risk of becoming seriously delinquent has decreased in 2011, as early-stage

delinquencies have decreased. Since delinquency rates are a lagging indicator, we expect to continue to incur

additional credit losses. We periodically refine our underwriting standards in response to market conditions and

enact proactive portfolio management and monitoring which are each designed to keep credit losses to a low

level relative to our multifamily guaranty book of business.

Problem Loan Statistics

Table 52 displays a comparison of our multifamily serious delinquency rates for loans with and without credit

enhancement in our multifamily guaranty book of business. We classify multifamily loans as seriously

delinquent when payment is 60 days or more past due. We include the unpaid principal balance of multifamily

loans that we own or that back Fannie Mae MBS and any housing bonds for which we provide credit

enhancement in the calculation of the multifamily serious delinquency rate.

Table 52: Multifamily Serious Delinquency Rates

As of December 31,

2011 2010 2009

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Multifamily loans:

Credit enhanced . . . . . . . . . . . . . 90% 0.55% 89% 0.67% 89% 0.54%

Non-credit enhanced . . . . . . . . . 10 0.88 11 1.01 11 1.33

Total multifamily loans ..... 100% 0.59% 100% 0.71% 100% 0.63%

The multifamily serious delinquency rate decreased as of December 31, 2011 compared with December 31, 2010

as national multifamily market fundamentals continued to improve. Table 53 displays a comparison of our

multifamily serious delinquency rates for loans acquired through DUS lenders versus loans acquired through

non-DUS lenders and their percentage of total multifamily credit losses.

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Table 53: Multifamily Concentration Analysis

As of December 31, Percentage of

Multifamily Credit Losses

For the Years Ended

December 31,

2011 2010 2009

Percentage

of Book

Outstanding

Serious

Delinquency

Rate

Percentage

of Book

Outstanding

Serious

Delinquency

Rate

Percentage

of Book

Outstanding

Serious

Delinquency

Rate 2011 2010 2009

DUS small balance

loans(1) . . . . . . . . . 8% 0.45% 8% 0.55% 7% 0.47% 9% 7% 9%

DUS non small

balance loans(2) . . 72 0.51 70 0.56 69 0.38 72 61 77

Non-DUS small

balance loans(1) . . 9 1.38 10 1.47 11 1.16 12 10 11

Non-DUS non small

balance loans(2) . . 11 0.57 12 0.97 13 1.54 7 22 3

(1) Loans with original unpaid principal balances up to $3 million as well as loans in high cost markets with original unpaid

principal balances up to $5 million.

(2) Loans with original unpaid principal balances greater than $3 million as well as loans in high cost markets with original

unpaid principal balances greater than $5 million.

The DUS loans in our guaranty book of business have lower delinquency rates when compared with the

non-DUS loans in our guaranty book primarily due to the DUS model, which has several features that align our

interests with those of the lenders. Small balance non-DUS loans continue to represent a disproportionately large

share of delinquencies, but they are generally covered by loss sharing arrangements that limit the credit losses we

incur.

Multifamily loans with an original balance of up to $3 million nationwide or $5 million in high cost markets,

which we refer to as small balance loans, acquired through non-DUS lenders continue to exhibit higher

delinquencies than small balance loans acquired through DUS lenders. These small balance non-DUS loans

account for 20% of our multifamily serious delinquency rate and 9% of our multifamily guaranty book of

business as of December 31, 2011 compared with 21% of our multifamily serious delinquency rate and

approximately 10% of our multifamily guaranty book of business as of December 31, 2010. These small balance

non-DUS loan acquisitions were most common in 2007 and 2008 and have not been a significant portion of our

total multifamily acquisitions since 2008. Although our 2007 and early 2008 acquisitions were underwritten to

our then-current credit standards and required borrower cash equity, they were acquired near the peak of

multifamily housing values. During the second half of 2008, our underwriting standards were adjusted to reflect

the evolving market trends at that time.

In addition, Florida, Nevada and Ohio have a disproportionately high share of seriously delinquent loans

compared with their share of the multifamily guaranty book of business as a result of slow economic recovery in

certain areas of these states. These states accounted for 39% of multifamily serious delinquencies but only 8% of

the multifamily guaranty book of business as of December 31, 2011.

REO Management

Foreclosure and REO activity affect the level of credit losses. Table 54 displays our held for sale multifamily

REO balances for the periods indicated.

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Table 54: Multifamily Foreclosed Properties

For the Year Ended December 31,

2011 2010 2009

Multifamily foreclosed properties (number of properties):

Beginning of period inventory of multifamily foreclosed properties (REO) . . . . . . . . . . . 222 73 29

Total properties acquired through foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 232 105

Disposition of REO ..................................................... (219) (83) (61)

End of period inventory of multifamily foreclosed properties (REO) . . . . . . . . . . . . . . . . . 260 222 73

Carrying value of multifamily foreclosed properties (dollars in millions) . . . . . . . . . . . . . $ 577 $596 $265

The increase in our multifamily foreclosed property inventory reflects the continuing stress on our multifamily

guaranty book of business as certain local markets and properties continue to exhibit weak fundamentals, though

national multifamily market fundamentals continued to improve in 2011.

Institutional Counterparty Credit Risk Management

We rely on our institutional counterparties to provide services and credit enhancements, including primary and

pool mortgage insurance coverage, risk sharing agreements with lenders and financial guaranty contracts that are

critical to our business. Institutional counterparty credit risk is the risk that these institutional counterparties may

fail to fulfill their contractual obligations to us, including seller/servicers who are obligated to repurchase loans

from us or reimburse us for losses in certain circumstances. Defaults by a counterparty with significant

obligations to us could result in significant financial losses to us.

Several of our institutional counterparties may now be subject to provisions of the Dodd-Frank Act. However, we

cannot predict its potential impact on our company or our industry at this time. For additional discussion on key

provisions and additional information about this legislation please see “Legislative and Regulatory

Developments—Financial Regulatory Reform Legislation” and “Risk Factors.”

We have exposure primarily to the following types of institutional counterparties:

• mortgage seller/servicers that service the loans we hold in our investment portfolio or that back our Fannie

Mae MBS;

• third-party providers of credit enhancement on the mortgage assets that we hold in our investment portfolio

or that back our Fannie Mae MBS, including mortgage insurers, financial guarantors and lenders with risk

sharing arrangements;

• custodial depository institutions that hold principal and interest payments for Fannie Mae portfolio loans

and MBS certificateholders, as well as collateral posted by derivatives counterparties, repurchase transaction

counterparties and mortgage originators or servicers;

• issuers of securities held in our cash and other investments portfolio;

• derivatives counterparties;

• mortgage originators and investors;

• debt security and mortgage dealers; and

• document custodians.

We routinely enter into a high volume of transactions with counterparties in the financial services industry,

including brokers and dealers, mortgage lenders and commercial banks, and mortgage insurers, resulting in a

significant credit concentration with respect to this industry. We also have significant concentrations of credit

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risk with particular counterparties. Many of our institutional counterparties provide several types of services for

us. For example, many of our lender customers or their affiliates act as mortgage seller/servicers, derivatives

counterparties, custodial depository institutions and document custodians on our behalf.

Unfavorable market conditions have adversely affected, and continue to adversely affect, the liquidity and

financial condition of many of our institutional counterparties, which has significantly increased the risk to our

business of defaults by these counterparties due to bankruptcy or receivership, lack of liquidity, insufficient

capital, operational failure or other reasons. As described in “Risk Factors,” the financial difficulties that our

institutional counterparties are experiencing may negatively affect their ability to meet their obligations to us and

the amount or quality of the products or services they provide to us.

In the event of a bankruptcy or receivership of one of our counterparties, we may be required to establish our

ownership rights to the assets these counterparties hold on our behalf to the satisfaction of the bankruptcy court

or receiver, which could result in a delay in accessing these assets causing a decline in their value. In addition, if

we are unable to replace a defaulting counterparty that performs services that are critical to our business with

another counterparty, it could materially adversely affect our ability to conduct our operations.

On September 22, 2009, we filed a proof of claim as a creditor in the bankruptcy case of Lehman Brothers

Holdings, Inc., which filed for bankruptcy in September 2008. The claim of $8.9 billion included losses we

incurred in connection with the termination of our outstanding derivatives contracts with a subsidiary of Lehman

Brothers, federal securities law claims related to Lehman Brothers private-label securities and notes held in our

cash and other investments portfolio, losses arising under certain REMIC and grantor trust transactions, and

mortgage loan repurchase obligations. A contingent claim of $6.9 billion was also included, primarily relating to

a large multifamily transaction. However, we believe we will receive only a portion of our total claims based on

Lehman Brothers’ financial condition.

Mortgage Seller/Servicers

Our primary exposures to institutional counterparty risk are with mortgage seller/servicers that service the loans

we hold in our mortgage portfolio or that back our Fannie Mae MBS, as well as seller/servicers that are obligated

to repurchase loans from us or reimburse us for losses in certain circumstances. We rely on mortgage seller/

servicers to meet our servicing standards and fulfill their servicing obligations. As the volume of repurchase

requests increases, the risk increases that affected seller/servicers will not be willing or able to meet the terms of

their repurchase obligations and we may be unable to recover on all outstanding loan repurchase obligations

resulting from seller/servicers’ breaches of contractual obligations.

Mortgage seller/servicers collect mortgage and escrow payments from borrowers, pay taxes and insurance costs

from escrow accounts, monitor and report delinquencies, and perform other required activities on our behalf. We

have minimum standards and financial requirements for mortgage seller/servicers. For example, we require

servicers to collect and retain a sufficient level of servicing fees to reasonably compensate a replacement servicer

in the event of a servicing contract breach. In addition, we perform periodic on-site and financial reviews of our

servicers and monitor their financial and portfolio performance as compared to peers and internal benchmarks.

We work with our largest servicers to establish performance goals and monitor performance against the goals,

and our servicing consultants work with servicers to improve servicing results and compliance with our servicing

guide.

We likely would incur costs and potential increases in servicing fees and could also face operational risks if we

decide to replace a mortgage seller/servicer. If a significant mortgage servicer counterparty fails, and its

mortgage servicing obligations are not transferred to a company with the ability and intent to fulfill all of these

obligations, we could incur penalties for late payment of taxes and insurance on the properties that secure the

mortgage loans serviced by that mortgage seller/servicer. We could also be required to absorb losses on defaulted

loans that a failed servicer is obligated to repurchase from us if we determine there was an underwriting or

eligibility breach.

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Risk management steps we have taken or may take to mitigate our risk to sellers and servicers with whom we

have material counterparty exposure include guaranty of obligations by higher-rated entities, reduction or

elimination of exposures, reduction or elimination of certain business activities, transfer of exposures to third

parties, receipt of collateral and suspension or termination of the selling and servicing relationship.

We are exposed to the risk that a mortgage seller/servicer or another party involved in a mortgage loan

transaction will engage in mortgage fraud by misrepresenting the facts about the loan. We have experienced

financial losses in the past and may experience significant financial losses and reputational damage in the future

as a result of mortgage fraud. See “Risk Factors” for additional discussion on risks of mortgage fraud to which

we are exposed.

Our business with our mortgage seller/servicers is concentrated. Our ten largest single-family mortgage servicers,

including their affiliates, serviced 75% of our single-family guaranty book of business as of December 31, 2011,

compared to 77% as of December 31, 2010. Our largest mortgage servicer is Bank of America, N.A. which,

together with its affiliates, serviced approximately 21% of our single-family guaranty book of business as of

December 31, 2011, compared with 26% as of December 31, 2010. In addition, we had two other mortgage

servicers, JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A., that, with their affiliates, each serviced over

10% of our single-family guaranty book of business as of December 31, 2011. In addition, Wells Fargo Bank

serviced over 10% of our multifamily guaranty book of business as of December 31, 2011 and 2010. Because we

delegate the servicing of our mortgage loans to mortgage servicers and do not have our own servicing function,

servicers’ lack of appropriate process controls or the loss of business from a significant mortgage servicer

counterparty could pose significant risks to our ability to conduct our business effectively. Many of our largest

servicer counterparties continue to reevaluate the effectiveness of their process controls. Many servicers are also

subject to consent orders by their regulators that require the servicers to correct foreclosure process deficiencies

and improve their servicing and foreclosure practices. This has resulted in extended foreclosure timelines and,

therefore, additional holding costs for us, such as property taxes and insurance, repairs and maintenance, and

valuation adjustments due to home price changes. See “Executive Summary” for a discussion of managing

foreclosure timelines.

Unfavorable market conditions have adversely affected, and continue to adversely affect, the liquidity and

financial condition and performance of many of our mortgage seller/servicers. Several mortgage seller/servicers

have experienced ratings downgrades and liquidity constraints. However, our primary mortgage servicer

counterparties have generally continued to meet their obligations to us during 2011.

Our mortgage seller/servicers are obligated to repurchase loans or foreclosed properties, or reimburse us for

losses if the foreclosed property has been sold, under certain circumstances, such as if it is determined that the

mortgage loan did not meet our underwriting or eligibility requirements, if loan representations and warranties

are violated or if mortgage insurers rescind coverage. We refer to our demands that seller/servicers meet these

obligations collectively as “repurchase requests.” The number of our repurchase requests remained high during

2011, and we expect that the amount of our outstanding repurchase requests will remain high.

During 2011, Fannie Mae issued repurchase requests to seller/servicers for breaches of contractual obligations on

$23.8 billion in loans, measured by unpaid principal balance. As of December 31, 2011, $13.5 billion, or 57%, of

these requests were resolved in our favor and $9.6 billion, or 40%, remained outstanding. Repurchase requests

were concluded in our favor through the repurchase collection, reimbursement of losses, or other remedies such

as, but not limited to, loan pricing adjustments, indemnification or forward repurchase agreements, lender

corrective action, or negotiated settlements. Similarly, during 2010, Fannie Mae issued repurchase requests to

seller/servicers on $13.1 billion in loans, measured by unpaid principal balance. As of December 31, 2011, $11.8

billion, or 90%, of these requests were resolved in our favor and $658 million, or 5%, remained outstanding.

During 2011, the aggregate unpaid principal balance of loans repurchased by our seller/servicers pursuant to their

contractual obligations was $11.5 billion, compared with $8.8 billion in 2010.

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Table 55 displays our top five mortgage seller/servicers by outstanding repurchase requests based on the unpaid

principal balance of the loans underlying repurchase requests issued as of December 31, 2011 as well as the

seller/servicers’ percentage of our repurchase requests that are over 120 days outstanding.

Table 55: Outstanding Repurchase Requests

As of December 31, 2011

Outstanding

Repurchase

Requests(1)

Percentage of

Outstanding

Repurchase

Requests

Over 120 Days(2)

(Dollars in millions)

Mortgage Seller/Servicer Counterparty:

Bank of America, N.A. ..................................................... $ 5,449 18%

JPMorgan Chase Bank, N.A. ................................................. 1,136 2

Citimortgage(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 917 2

Wells Fargo Bank, N.A.(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 830 2

SunTrust Bank, Inc.(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430 *

Other(4) .................................................................. 1,638 6

Total .................................................................... $10,400

Outstanding repurchase requests over 120 days ................................... $ 3,139

* Less than 0.5%.

(1) Includes repurchase requests resulting from the rescission of mortgage insurance coverage.

(2) Represents the percentage of our total outstanding repurchase requests that have been outstanding for more than 120 days

from either the original repurchase date or, for lenders remitting after the property is disposed, the date of our final loss

determination.

(3) Seller/servicer has entered into a plan with us to resolve outstanding repurchase requests and/or has posted collateral to

us.

(4) Includes some seller/servicers that have entered into a plan with us to resolve outstanding repurchase requests and/or have

posted collateral to us.

The dollar amounts of our outstanding repurchase requests provided above are based on the unpaid principal

balance of the loans underlying the repurchase request issued, not the actual amount we have requested from the

lenders. In some cases, we allow lenders to remit payment equal to our loss, including imputed interest, on the

loan after we have disposed of the REO, which is less than the unpaid principal balance of the loan. As a result,

we expect our actual cash receipts relating to these outstanding repurchase requests to be significantly lower than

the unpaid principal balance of the loan. Amounts relating to repurchase requests originating from missing

documentation or loan files are excluded from the total requests outstanding until the completion of a full

underwriting review, once the documents and loan files are received.

In the fourth quarter of 2011, Bank of America, the seller/servicer with which we have the most repurchase

requests outstanding, slowed the pace of its repurchases. As a result of Bank of America’s failure to honor its

contractual obligations in a timely manner, the already high volume of our outstanding repurchase requests with

Bank of America increased substantially. Measured by unpaid principal balance, Bank of America accounted for

approximately 52% of our total outstanding repurchase requests as of December 31, 2011, compared with 45% as

of September 30, 2011 and 41% as of December 31, 2010, shortly after entering into an agreement with us to

address its then-outstanding repurchase requests. Similarly, Bank of America accounted for 59% of our

repurchase requests that had been outstanding for more than 120 days as of December 31, 2011, compared with

48% as of September 30, 2011 and 37% as of December 31, 2010. We are taking steps to address Bank of

America’s delays in honoring our repurchase requests. For example, we did not renew our existing loan delivery

contract with Bank of America at the end of January, which significantly restricted the types of loans it can

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deliver to us. Bank of America can continue delivering loans to us under our Refi Plus initiative, including

HARP loans. Bank of America’s failure to honor repurchase obligations in a timely manner has not caused us to

change our estimate of the amounts we expect to collect from them ultimately, and we continue to work with

Bank of America to resolve these issues. If we collect less than the amount we expect from Bank of America, we

may be required to seek additional funds from Treasury under our senior preferred stock purchase agreement.

Table 55 displays our top five mortgage seller/servicers by outstanding repurchase requests based on the unpaid

principal balance of the loans underlying repurchase requests issued as of December 31, 2011. We do not expect

the change in our agreement with Bank of America to be material to our business or results of operations as Bank

of America represented less than 5% of our loan delivery volume in the quarter ended December 31, 2011.

In June 2011, we issued an announcement that (1) reminded lenders of their existing obligations with respect to

mortgage insurance; (2) required lenders to report to us mortgage insurance rescissions, mortgage insurerinitiated cancellations, and claim denials; (3) confirmed our repurchase policies with respect to these actions;

(4) temporarily extended from 30 to 90 days our timeframe within which lenders must repurchase loans and

provided an appeal process; (5) required that all outstanding mortgage insurance-related repurchase demands as

of April 30, 2011 be satisfactorily resolved by September 30, 2011; (6) reiterated our process for the redelivery

of certain repurchased loans; and (7) reiterated our remedies if a lender fails to meet our repurchase requirements.

Not all outstanding mortgage insurance related repurchase demands as of April 30, 2011 were resolved by

September 30, 2011. We entered into “tolling agreements” with several of our major lenders that required these

lenders to post collateral based on their maximum exposure in exchange for an extension until June 2012 to

resolve their outstanding mortgage insurance related repurchase demands. Bank of America has disputed many of

these demands and accounts for nearly half of these unresolved mortgage insurance related requests.

We continue to aggressively pursue our contractual rights associated with these repurchase requests, including

the repurchase requests we have made to Bank of America. Failure by a seller/servicer to repurchase a loan or to

otherwise make us whole for our losses, may result in the imposition of certain sanctions including, but not

limited to:

• requiring the posting of collateral,

• denying transfer of servicing requests or denying pledged servicing requests,

• modifying or suspending any contract or agreement with a lender, or

• suspending or terminating a lender or imposing some other formal sanction on a lender.

If we are unable to resolve these matters to our satisfaction, we may seek additional remedies. If we are unable to

resolve our repurchase requests, either through collection or additional remedies, we will not recover the losses

we have recognized from the associated loans.

We continue to work with our mortgage seller/servicers to fulfill outstanding repurchase requests. Failure by a

significant seller/servicer counterparty, or a number of seller/servicers, to fulfill repurchase obligations to us

could result in a significant increase in our credit losses and have a material adverse effect on our results of

operations and financial condition. In addition, actions we take to pursue our contractual remedies could increase

our costs, reduce our revenues, or otherwise have a material, adverse effect on our results of operations or

financial condition. We estimate our allowance for loan losses assuming the benefit of repurchase demands only

from those counterparties we determine have the financial capacity to fulfill this obligation. Accordingly, as of

December 31, 2011, in estimating our allowance for loan loss we assumed no benefit from repurchase demands

due to us from seller/servicers that lacked the financial capacity to honor their contractual obligations.

Mortgage Insurers

We use several types of credit enhancement to manage our single-family mortgage credit risk, including primary

and pool mortgage insurance coverage. Table 56 displays our maximum potential loss recovery for the primary and

pool mortgage insurance coverage on single-family loans in our guaranty book of business and our unpaid principal

balance covered by insurance for our mortgage insurer counterparties as of December 31, 2011 and 2010. The table

includes our top nine mortgage insurer counterparties, which provided over 99% of our total mortgage insurance

coverage on single-family loans in our guaranty book of business as of December 31, 2011 and 2010.

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Table 56: Mortgage Insurance Coverage

Maximum Coverage(1)

Unpaid Principal Balance

Covered By Insurance(2)

As of December 31, 2011 As of

December 31,

2010

As of

December 31,

2011

As of

December 31,

Counterparty:(3) Primary Pool Total 2010

(Dollars in millions)

Mortgage Guaranty Insurance Corporation . . . $20,000 $1,479 $21,479 $23,277 $ 89,872 $101,823

Radian Guaranty, Inc. .................... 15,072 433 15,505 15,370 63,534 64,042

United Guaranty Residential Insurance

Company ............................ 14,439 140 14,579 14,044 59,233 58,416

Genworth Mortgage Insurance Corporation . . . 13,566 62 13,628 14,331 54,893 57,845

PMI Mortgage Insurance Co. .............. 10,873 255 11,128 12,359 47,734 53,768

Republic Mortgage Insurance Company ..... 8,322 897 9,219 10,566 39,130 46,660

Triad Guaranty Insurance Corporation ....... 2,492 658 3,150 3,809 12,400 16,974

CMG Mortgage Insurance Company(4) ....... 1,951 — 1,951 1,938 8,241 8,174

Essent Guaranty, Inc. . . . . . . . . . . . . . . . . . . . . 395 — 395 — 1,685 —

Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 — 217 209 1,214 1,140

Total ................................. $87,327 $3,924 $91,251 $95,903 $377,936 $408,842

Total as a percentage of single-family guaranty

book of business . . . . . . . . . . . . . . . . . . . . . . 3% 3% 13% 14%

(1) Maximum coverage refers to the aggregate dollar amount of insurance coverage (that is, “risk in force”) on single-family

loans in our guaranty book of business and represents our maximum potential loss recovery under the applicable

mortgage insurance policies.

(2) Represents the unpaid principal balance of single-family loans in our guaranty book of business covered under the

applicable mortgage insurance policies (that is, “insurance in force”).

(3) Insurance coverage amounts provided for each counterparty may include coverage provided by consolidated affiliates and

subsidiaries of the counterparty.

(4) CMG Mortgage Insurance Company is a joint venture owned by PMI Mortgage Insurance Co. and CUNA Mutual

Insurance Society.

Increases in mortgage insurance claims due to higher defaults and credit losses in recent periods have adversely

affected the financial results and condition of mortgage insurers. Each of our top seven mortgage insurer

counterparties that continue to be rated by S&P, Fitch and Moody’s have a current insurer financial strength

rating below the “AA-” level that we require under our qualified mortgage insurer approval requirements to be

considered qualified as a “Type 1” mortgage insurer. Due to these low credit ratings, we primarily rely on our

internal credit ratings when assessing our exposure to a counterparty.

Our rating structure is based on a scale of 1 to 20. A rating of 1 represents a counterparty that we view as having

excellent credit quality and a rating of 20 represents a counterparty with poor credit quality. These internal

ratings, which reflect our views of a mortgage insurer’s claims paying ability, are based primarily on an

assessment of the mortgage insurer’s capital adequacy and liquidity. These assessments involve in-depth credit

reviews of each mortgage insurer, a comprehensive analysis of the mortgage insurance sector, stress analyses of

the insurer’s portfolio, discussions with the insurer’s management, the insurer’s plans to maintain capital within

the insuring entity and our views on macroeconomic variables which impact a mortgage insurer’s estimated

future paid losses, such as changes in home prices and changes in interest rates. From time to time, we may also

discuss a counterparty’s situation with the rating agencies.

As of February 29, 2012, three of our mortgage insurers (Triad, RMIC and PMI) have publicly disclosed that

they are in run-off. One mortgage insurer, Genworth Mortgage Insurance Corporation, has publicly disclosed that

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absent a waiver it estimates that it would not meet state regulatory capital requirements for its main insurance

writing entity as of December 31, 2011. An additional two of our mortgage insurers (Mortgage Guaranty

Insurance Corporation and Radian Guaranty, Inc.) have disclosed that, in the absence of additional capital

contributions to their insurance writing entity, their capital might fall below state regulatory capital requirements

in the future. These six mortgage insurers provided a combined $74.1 billion, or 81%, of our risk in force

mortgage insurance coverage of our single-family guaranty book of business as of December 31, 2011. We are

unable to determine how long certain of our mortgage insurer counterparties will remain below their stateimposed risk-to-capital limits. If mortgage insurers are not able to raise capital and they exceed their

risk-to-capital limits, they will likely be forced into run-off or receivership unless they can secure and maintain a

waiver from their state regulator. A mortgage insurer that is in run-off continues to collect premiums and pay

claims on its existing insurance business, but no longer writes new insurance. This would increase the risk that

the mortgage insurer will fail to pay our claims under insurance policies, and could also cause the quality and

speed of its claims processing to deteriorate.

The already weak financial condition of many of our mortgage insurer counterparties deteriorated at an

accelerated pace during the second half of 2011, which increased the significant risk that these counterparties

will fail to fulfill their obligations to pay our claims under insurance policies. We evaluate each of our mortgage

insurer counterparties individually to determine whether or under what conditions it will remain eligible to insure

new mortgages sold to us. However, based on our evaluation, we may impose additional terms and conditions of

approval on some of our mortgage insurers, including: limiting the volume and types of loans they may insure for

us; requiring them to obtain our consent prior to providing risk sharing arrangements with mortgage lenders;

requiring them to meet certain financial conditions, such as maintaining a minimum level of policyholders’

surplus, a maximum risk-to-capital ratio, a maximum combined ratio, or a minimum amount of acceptable liquid

assets; or requiring that they secure parental or other capital support agreements.

On July 29, 2011, we notified RMIC that, effective immediately, both RMIC and its affiliate, Republic Mortgage

Insurance Company of North Carolina (“RMIC-NC”), were suspended nationwide as approved mortgage

insurers. We also notified our mortgage sellers and servicers that we would not accept any mortgage loan insured

by RMIC or RMIC-NC that is delivered after November 30, 2011, except for refinanced Fannie Mae loans where

continuation of the coverage is effected through modification of an existing mortgage insurance certificate. On

October 12, 2011, RMIC and RMIC-NC each voluntarily entered into an agreement with their regulator to

discontinue writing or assuming any new mortgage guaranty insurance business in all states. RMIC’s parent

company has indicated that it is more likely than not that the capital contributed to RMIC by its parent

company will “continue on a path toward full depletion in relatively short order.” In January 2012, RMIC’s

parent company announced that RMIC has been ordered into supervision by its regulator. Pursuant to the order,

effective January 20, 2012, RMIC is paying 50% of all valid claims for an initial period not to exceed one year,

with the remaining 50% deferred. It is uncertain when, and if, RMIC’s regulator will allow RMIC to begin

paying its deferred claims and/or increase the amount of cash RMIC pays on claims.

Following issuance by the Arizona Department of Insurance of a supervisory order directing PMI and its

subsidiary PMI Insurance Co. (“PIC”) to cease offering new commitments for insurance after August 19, 2011

and to cease issuing certificates after September 16, 2011, we notified PMI on August 22, 2011 that, effective

immediately, PMI and its subsidiaries, PIC and PMI Mortgage Assurance Co. (“PMAC”), were suspended

nationwide as approved mortgage insurers. We simultaneously notified our mortgage sellers and servicers that

we would not accept any mortgage loan insured by PMI, PIC or PMAC that is delivered after December 30,

2011, except for refinanced Fannie Mae loans where continuation of the coverage is effected through

modification of an existing mortgage insurance certificate.

As reported by PMI, on October 20, 2011, PMI received from its regulator an order under which the regulator

now has full possession, management and control of PMI. The regulator is also seeking to place PMI into

receivership; PMI’s holding company has consented. As a result, we expect PMI to soon be placed in

receivership. Pursuant to the order, effective October 24, 2011, the regulator instituted a partial claim payment

plan whereby PMI pays 50% on all valid claims under PMI mortgage guaranty insurance policies and 50% is

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deferred as a policyholder claim. It is uncertain when, and if, PMI’s regulator will allow PMI to begin paying its

deferred policyholder claims and/or increase the amount of cash PMI pays on claims.

Triad ceased issuing commitments for new mortgage insurance and began to run-off its existing business in July

2008. In April 2009, Triad received an order from its regulator that changes the way it will pay all policyholder

claims. Under the order, Triad will pay 60% of all valid claims under Triad’s mortgage guaranty insurance

policies and defer the remaining 40% by the creation of a deferred payment obligation. Triad began paying

claims through this combination of cash and deferred payment obligations in June 2009. When, and if, Triad’s

financial position permits, Triad’s regulator will allow Triad to begin paying its deferred payment obligations

and/or increase the amount of cash Triad pays on claims.

The claims obligations of RMIC, PMI and Triad have been partially deferred pursuant to orders from their state

regulators. State regulators could take additional corrective actions against these companies, including placing

them into receivership. While our remaining mortgage insurers have continued to pay claims owed to us in full,

there can be no assurance that they will continue do so given their current financial condition. If we determine

that it is probable that we will not collect all of our claims from one or more of these mortgage insurer

counterparties, it could result in an increase in our loss reserves, which could adversely affect our earnings,

liquidity, financial condition and net worth.

Some mortgage insurers have explored corporate restructurings designed to provide relief from risk-to-capital

limits in certain states. We have approved several restructurings so that certain of our mortgage insurer

counterparties could continue to write new business in all fifty states. Additionally, mortgage insurers continue to

approach us with various proposed corporate restructurings that would require our approval of affiliated

mortgage insurance writing entities.

The number of mortgage loans for which our mortgage insurer counterparties have rescinded coverage continues

to remain high. In those cases where the mortgage insurer has rescinded coverage, we generally require the

seller/servicer to repurchase the loan or indemnify us against loss. The table below displays cumulative rescission

rates as of December 31, 2011, by the period in which the claim was filed. We do not present information for

claims filed in the most recent two quarters to allow sufficient time for a substantial percentage of the claims

filed to reach reasonable resolution.

Table 57: Rescission Rates of Mortgage Insurance Claims

As of December 31, 2011

Cumulative Rescission

Rate(1)

Cumulative Claims

Resolution Percentage(2)

Primary mortgage insurance claims filed in:

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11% 88%

First half of 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 46

Pool mortgage insurance claim filed in:

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 99

First half of 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 92

(1) Represents claims filed during the period that have been rescinded as of December 31, 2011, divided by total claims filed

during the same period.

(2) Represents claims filed during the period that have been resolved as of December 31, 2011, divided by the total claims

filed during the same period. Claims resolved mainly consist of claims for which we have settled and claims for which

coverage has been rescinded by the mortgage insurer.

In 2010, some mortgage insurers disclosed that they entered into agreements with lenders whereby they agreed to

waive certain rights to investigate claims for some of the lenders’ insured loans in return for some compensation

against loss. These agreements are likely to result in fewer mortgage insurance rescissions for certain groups of

loans, but they do not affect our rights to demand repurchase in the event of violations of lender representations

and warranties.

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As a result, in April 2011, we issued an announcement which prohibited servicers from entering into any

agreement that modifies the terms of an approved mortgage insurance master policy on loans delivered to us. We

also required servicers to disclose any such agreements with mortgage insurers to us. With respect to our

mortgage insurance counterparties, changes to the substance of their master policies have required our prior

approval since 2005. In October 2010, we required our top mortgage insurers to notify us promptly of any

agreement that affects their investigative or rescission rights. In April 2011, we further clarified and amended our

mortgage insurer requirements to prohibit any agreement that has the effect of modifying a master policy,

including any investigative or rescission rights, absent our approval. By taking these steps, we expect to mitigate

the risk of loss for loans that would have resulted in mortgage insurance rescission, and—as a result—a lender

repurchase, for loan defects that we may not have otherwise uncovered in our independent review process.

When we estimate the credit losses that are inherent in our mortgage loan portfolio and under the terms of our

guaranty obligations we also consider the recoveries that we will receive on primary mortgage insurance, as

mortgage insurance recoveries would reduce the severity of the loss associated with defaulted loans. We evaluate

the financial condition of our mortgage insurer counterparties and adjust the contractually due recovery amounts

to ensure that only probable losses as of the balance sheet date are included in our loss reserve estimate. As a

result, if our assessment of one or more of our mortgage insurer counterparty’s ability to fulfill their respective

obligations to us worsens, it could result in an increase in our loss reserves.

The following table displays our estimated benefit from mortgage insurer recoveries. Our valuation allowance for

mortgage insurer receivables increased significantly from December 31, 2010 to December 31, 2011 as a result

of our determination that our mortgage insurer counterparties’ financial condition has deteriorated.

Table 58: Estimated Mortgage Insurance Benefit

As of December 31,

2011 2010

(Dollars in millions)

Contractual mortgage insurance benefit(1) ....................................... $15,099 $17,507

Less: Collectability adjustment(2) .............................................. 2,867 1,150

Estimated benefit included in total loss reserves .................................. $12,232 $16,357

(1) Relates to loans that are individually measured for impairment and those that are collectively reserved.

(2) Represents an adjustment that reduces the contractual benefit for our assessment of our mortgage insurer counterparties’

inability to fully pay the contractual mortgage insurance claims.

For loans that are collectively evaluated for impairment, we estimate the portion of our incurred loss that we

expect to recover from each of our mortgage insurance counterparties based on the losses that have been

incurred, the contractual mortgage insurance coverage, and an estimate of each counterparty’s resources

available to pay claims to us. An analysis by our Counterparty Risk division determines whether, based on all the

information available to us, any counterparty is considered probable to fail to meet their obligations in the next

30 months. This period is consistent with the amount of time over which claims related to losses incurred today

are expected to be paid. If that separate analysis finds a counterparty is probable to fail, we then reserve for the

shortfall between incurred claims and estimated resources available to pay claims to us.

For loans that have been determined to be individually impaired, we calculate a net present value of the expected

cash flows for each loan to determine the level of impairment, which is included in our allowance for loan losses

or reserve for guaranty losses. These expected cash flow projections include proceeds from mortgage insurance,

that are based, in part, on the internal credit ratings for each of our mortgage insurance counterparties.

Specifically, for loans insured by a mortgage insurer with a poorer credit rating, our cash flow projections

include fewer proceeds from the insurer. Also, as our internal credit ratings of our mortgage insurer

counterparties decrease, we reduce the amount of benefits we expect to receive from the insurance they provide,

which in turn increases the fair value of our guaranty obligation.

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As described above, our methodologies for individually and collectively impaired loans differ as required by

GAAP, but both consider the ability of our counterparties to pay their obligations in a manner that is consistent

with each methodology. As the loans individually assessed for impairment consider the life of the loan, we use

the noted risk ratings to adjust the loss severity in our best estimates of future cash flows. As the loans

collectively assessed for impairment only look to the probable payments we would receive associated with our

loss emergence period, we use the noted shortfall to adjust the loss severity.

When an insured loan held in our mortgage portfolio subsequently goes into foreclosure, we charge off the loan,

eliminating any previously-recorded loss reserves, and record REO and a mortgage insurance receivable for the

claim proceeds deemed probable of recovery, as appropriate. However, if a mortgage insurer rescinds insurance

coverage, the initial receivable becomes due from the mortgage seller/servicer. We had outstanding receivables

of $3.6 billion as of December 31, 2011 and $4.4 billion as of December 31, 2010 related to amounts claimed on

insured, defaulted loans that we have not yet received, of which $639 million as of December 31, 2011 and $648

million as of December 31, 2010 was due from our mortgage seller/servicers. We assessed the total outstanding

receivables for collectibility, and they were recorded net of a valuation allowance of $570 million as of

December 31, 2011 and $317 million as of December 31, 2010 in “Other assets.” These mortgage insurance

receivables are short-term in nature, having an average duration of approximately six months, and the valuation

allowance reduces our claim receivable to the amount that we consider probable of collection. We received

proceeds under our primary and pool mortgage insurance policies for single-family loans of $5.8 billion during

2011 and $6.4 billion during 2010.

From time to time, we may enter into negotiated transactions with mortgage insurer counterparties pursuant to

which we agree to cancel or restructure insurance coverage, in excess of charter requirements, in exchange for a

fee. These insurance cancellations and restructurings may provide our counterparties with capital relief and

provide us with cash in lieu of future claims that the counterparty may not be able to pay, thereby reducing our

future counterparty credit exposure. The cash fees received of $796 million during 2010 are included in our total

proceeds amount. Although we did not cancel or restructure any coverage during 2011, we may negotiate

additional insurance coverage cancellations or restructurings in 2012.

We generally are required, pursuant to our charter, to obtain credit enhancement on single-family conventional

mortgage loans that we purchase or securitize with LTV ratios over 80% at the time of purchase. In connection

with Refi Plus, we are generally able to purchase an eligible loan if the loan has mortgage insurance in an amount

at least equal to the amount of mortgage insurance that existed on the loan that was refinanced. As a result, these

refinanced loans with updated LTV ratios above 80% may have no mortgage insurance or less insurance than we

would otherwise require for a loan not originated under this program. In 2011, most mortgage insurance

companies lowered their premiums for loans with high credit scores, and FHA implemented a price increase in

their annual mortgage insurance premium. Both price changes improved the economics of purchasing private

mortgage insurance as compared to purchasing FHA insurance and drove an increase in our acquisition of

mortgage loans with LTV ratios over 80%.

Financial Guarantors

We are the beneficiary of financial guarantees on non-agency securities held in our investment portfolio and on

non-agency securities that have been resecuritized to include a Fannie Mae guaranty and sold to third parties.

Table 59 displays the total unpaid principal balance of guaranteed non-agency securities in our portfolio as of

December 31, 2011, and 2010.

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Table 59: Unpaid Principal Balance of Financial Guarantees

As of December 31,

2011 2010

(Dollars in millions)

Alt-A private-label securities .......................................................... $1,279 $1,544

Subprime private-label securities ....................................................... 1,398 1,487

Mortgage revenue bonds ............................................................. 4,931 5,264

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317 347

Non mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 172

Total ............................................................................. $7,971 $8,814

The already weak financial condition of most of the non-governmental financial guarantors that provided bond

insurance coverage to us continued to deteriorate during 2011, which increased the significant risk that these

counterparties will fail to fulfill their obligations to reimburse us for claims under our financial guarantees. From

time to time, we may enter into negotiated transactions with financial guarantor counterparties pursuant to which

we agree to cancellation of their guaranty in exchange for a cancellation fee. We did not enter into any of these

transactions in 2011 or 2010.

With the exception of Ambac Assurance Corporation (“Ambac”), as described below, none of our

non-governmental financial guarantor counterparties has failed to repay us for claims under guaranty contracts.

Ambac provided coverage on $3.3 billion, or 41%, of our total non-governmental guarantees, as of December 31,

2011. Based on the stressed financial condition of our non-governmental financial guarantor counterparties, we

believe that all but one of these counterparties may not be able to fully meet their obligations to us in the future.

We model our securities without assuming the benefit of non-governmental financial guarantees. We then adjust

results for those external financial guarantees from guarantors that we determine are creditworthy, although we

continue to seek collection of any amounts due to us from all counterparties. As of December 31, 2011, when

modeling our securities for impairments we did not assume the benefit of external financial guarantees from

non-governmental counterparties. See “Note 5, Investments in Securities” for a further discussion of our model

methodology and key inputs used to determine other-than-temporary-impairment.

In March 2010, Ambac and its insurance regulator, the Wisconsin Office of the Commissioner of Insurance,

imposed a court-ordered moratorium on certain claim payments under Ambac’s bond insurance coverage,

including claims arising under coverage on $1.2 billion of our private-label securities insured by Ambac as of

December 31, 2010. Prior to March 2010, we received payments from Ambac for our claims on Ambac insured

private-label securities. As a result of the moratorium, we have not received payments for the additional claims

filed with Ambac in 2010. On January 24, 2011, the Wisconsin Circuit Court of Dane County confirmed

Ambac’s rehabilitation plan; however, the plan is subject to stay and appeal. The outcome of legal proceedings

regarding the moratorium and the proposed company rehabilitation each remain uncertain at this time. We

assumed no benefit for Ambac’s financial guaranty when estimating other-than-temporary impairment. See

“Consolidated Balance Sheet Analysis—Investments in Mortgage-Related Securities” for more information on

our investments in private-label mortgage-related securities.

We are also the beneficiary of financial guarantees included in securities issued by Freddie Mac, the federal

government and its agencies that totaled $31.4 billion as of December 31, 2011 and $25.7 billion as of

December 31, 2010.

Lenders with Risk Sharing

We enter into risk sharing agreements with lenders pursuant to which the lenders agree to bear all or some

portion of the credit losses on the covered loans. Our maximum potential loss recovery from lenders under these

risk sharing agreements on single-family loans was $12.8 billion as of December 31, 2011 and $15.6 billion as of

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December 31, 2010. As of December 31, 2011, 58% of our maximum potential loss recovery on single-family

loans was from three lenders and as of December 31, 2010, 56% of our maximum potential loss recovery on

single-family loans was from the same three lenders. Our maximum potential loss recovery from lenders under

these risk sharing agreements on DUS and non-DUS multifamily loans was $32.1 billion as of December 31,

2011 and $30.3 billion as of December 31, 2010. As of December 31, 2011, 40% of our maximum potential loss

recovery on multifamily loans was from three DUS lenders. As of December 31, 2010, 41% of our maximum

potential loss recovery on multifamily loans was from the same three DUS lenders.

Unfavorable market conditions have adversely affected, and continue to adversely affect, the liquidity and

financial condition of our lender counterparties. The percentage of single-family recourse obligations to lenders

with investment grade credit ratings (based on the lower of S&P, Moody’s and Fitch ratings) was 46% as of

December 31, 2011 and 2010. The percentage of these recourse obligations to lender counterparties rated below

investment grade was 26% as of December 31, 2011 and 23% as of December 31, 2010. The remaining

percentage of these recourse obligations were to lender counterparties that were not rated by rating agencies,

which was 28% as of December 31, 2011 and 31% as of December 31, 2010. Given the stressed financial

condition of some of our lenders, we expect in some cases we will recover less, perhaps significantly less, than

the amount the lender is obligated to provide us under our risk sharing arrangement with them. Depending on the

financial strength of the counterparty, we may require a lender to pledge collateral to secure its recourse

obligations.

As noted above in “Multifamily Credit Risk Management,” our primary multifamily delivery channel is our DUS

program, which is comprised of lenders that span the spectrum from large depositories to independent non-bank

financial institutions. As of December 31, 2011, approximately 51% of the unpaid principal balance of loans in

our multifamily guaranty book of business serviced by our DUS lenders was from institutions with an external

investment grade credit rating or a guarantee from an affiliate with an external investment grade credit rating.

Given the recourse nature of the DUS program, the lenders are bound by eligibility standards that dictate, among

other items, minimum capital and liquidity levels, and the posting of collateral at a highly rated custodian to

secure a portion of the lenders’ future obligations. We actively monitor the financial condition of these lenders to

help ensure the level of risk remains within our standards. Effective January 2011, we increased the capital

requirements for DUS lenders to better align with more recent actual and modeled loss projections. Lenders

delivering loans through the DUS program are now required to maintain higher levels of capital.

Custodial Depository Institutions

A total of $66.4 billion in deposits for single-family payments were received and held by 284 institutions in the

month of December 2011 and a total of $75.4 billion in deposits for single-family payments were received and

held by 289 institutions in the month of December 2010. Of these total deposits, 92% as of December 31, 2011

and 2010 were held by institutions rated as investment grade by S&P, Moody’s and Fitch. Our ten largest

custodial depository institutions held 92% of these deposits as of December 31, 2011 and 93% of these deposits

as of December 31, 2010.

If a custodial depository institution were to fail while holding remittances of borrower payments of principal and

interest due to us in our custodial account, we would be an unsecured creditor of the depository for balances in

excess of the deposit insurance protection and might not be able to recover all of the principal and interest

payments being held by the depository on our behalf, or there might be a substantial delay in receiving these

amounts. If this were to occur, we would be required to replace these amounts with our own funds to make

payments that are due to Fannie Mae MBS certificateholders. Accordingly, the insolvency of one of our principal

custodial depository counterparties could result in significant financial losses to us. In the month of December

2011, approximately $6.1 billion or 9% of our total deposits for single-family payments received and held by

these institutions was in excess of the deposit insurance protection limit compared with approximately $6.2

billion or 8% in the month of December 2010. These amounts can vary as they are calculated based on individual

payments of mortgage borrowers and we must estimate which borrowers are paying their regular principal and

interest payments and other types of payments, such as prepayments from refinancing or sales.

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Due to the challenging market conditions, several of our custodial depository counterparties experienced ratings

downgrades and liquidity constraints. In response, we reduced the aggregate amount of our funds permitted to be

held with these counterparties and required more frequent remittances of funds.

Our counterparty exposure relating to principal and interest payments held on our behalf decreased significantly

in recent years as a result of (1) the September 2009 adoption of a rule amending the deposit insurance

regulations on mortgage servicer accounts to extend coverage on these accounts on a “per borrower” basis; and

(2) the Dodd-Frank Act, which permanently increased the amount of federal deposit insurance available to

$250,000 per depositor. The Dodd-Frank Act also provides temporary unlimited coverage through December 31,

2012 for noninterest-bearing transaction accounts. We generally use noninterest-bearing transaction accounts for

otherwise ineligible custodial depository institutions.

Issuers of Investments Held in our Cash and Other Investments Portfolio

Our cash and other investments portfolio primarily consists of cash and cash equivalents, federal funds sold and

securities purchased under agreements to resell or similar arrangements, U.S. Treasury securities and assetbacked securities. Our cash and other investment counterparties are primarily financial institutions and the

Federal Reserve Bank. See “Liquidity and Capital Management—Liquidity Management—Cash and Other

Investments Portfolio” for more detailed information on our cash and other investments portfolio.

Our cash and other investments portfolio, which totaled $113.4 billion as of December 31, 2011, included $48.3

billion of U.S. Treasury securities. We held no unsecured positions as of December 31, 2011. As of

December 31, 2010, our cash and other investments portfolio totaled $61.8 billion and included $31.5 billion of

U.S. Treasury securities and $10.3 billion of unsecured positions, all of which were short-term deposits with

financial institutions that had short-term credit ratings of A-1, P-1, F1 (or equivalent) or higher from S&P’s,

Moody’s and Fitch ratings as of December 31, 2010.

We monitor the credit risk position of our cash and other investments portfolio by duration and rating level. In

addition, we monitor the financial position and any downgrades of these counterparties. The outcome of our

monitoring could result in a range of events, including selling some of these investments. If one of our primary

cash and other investments portfolio counterparties fails to meet its obligations to us under the terms of the

investments, it could result in financial losses to us and have a material adverse effect on our earnings, liquidity,

financial condition and net worth. During 2011, we continued to evaluate the growing uncertainty of the stability

of various European economies and financial institutions and as a result of this evaluation, reduced the number of

counterparties in our cash and other investments portfolio in those markets and began to lend to remaining

counterparties on a secured basis.

Derivative Counterparty Credit Exposure

Our derivative counterparty credit exposure relates principally to interest rate and foreign currency derivatives

contracts. We estimate our exposure to credit loss on derivative instruments by calculating the replacement cost,

on a present value basis, to settle at current market prices all outstanding derivative contracts in a net gain

position at the counterparty level where the right of legal offset exists. For derivative instruments where the right

of legal offset does not exist, we calculate the replacement cost of the outstanding derivative contracts in a gain

position at the transaction level. The fair value of derivatives in a gain position is included in our consolidated

balance sheets in “Other assets.”

We manage our credit exposure by requiring counterparties to post collateral, which includes cash, U.S. Treasury

securities, agency debt and agency mortgage-related securities. We have a collateral management policy with

provisions for requiring collateral on interest rate and foreign currency derivative contracts in net gain positions

based upon the counterparty’s credit rating by requiring counterparties to post collateral. We analyze

counterparty credit exposure on our derivative instruments daily and make collateral calls as appropriate based

on the results of internal pricing models and dealer quotes. In the case of a bankruptcy filing by an interest rate or

foreign currency derivative counterparty or other default by the counterparty under the derivative contract, we

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would have the right to terminate all outstanding derivative contracts with that counterparty and may retain

collateral previously posted by that counterparty to the extent that we are in a net gain position on the termination

date.

Our net counterparty credit exposure on derivatives contracts decreased to $96 million as of December 31, 2011,

from $152 million as of December 31, 2010. We had outstanding interest rate and foreign currency derivative

transactions with 16 counterparties as of December 31, 2011 and 15 counterparties as of December 31, 2010.

Derivatives transactions with 9 of our counterparties accounted for approximately 91% of our total outstanding

notional amount as of December 31, 2011, with each of these counterparties accounting for between

approximately 7% and 15% of the total outstanding notional amount. As of December 31, 2011, we had

outstanding notional amounts and master netting agreements with 16 counterparties.

We expect that, under the Dodd-Frank Act, we will be required in the future to submit certain interest rate swaps

for clearing to a derivatives clearing organization. In anticipation of those requirements, we have cleared a small

number of new interest rate swap transactions with the Chicago Mercantile Exchange, Inc. (“CME”), a

derivatives clearing organization. As a result, we are exposed to the institutional credit risk of CME and its

members that execute and submit our transactions for clearing. Our institutional credit risk exposure to the CME

or other comparable exchanges or trading facilities, as well as their members, will increase in the future.

See “Note 9, Derivative Instruments” for information on the outstanding notional amount and additional

information on our risk management derivative contracts as of December 31, 2011 and 2010, as well as a

discussion of our collateral requirements under our derivatives contracts. See “Risk Factors” for a discussion of

the impact of decreases in our credit ratings on our collateral obligations under our derivatives contracts.

Mortgage Originators, Investors, and Dealers

We are routinely exposed to pre-settlement risk through the purchase or sale of closed mortgage loans and

mortgage-related securities with mortgage originators, mortgage investors, and mortgage dealers. The risk is the

possibility that the counterparty will be unable or unwilling to either deliver mortgage assets or compensate us

for the cost to cancel or replace the transaction. We manage this risk by determining position limits with these

counterparties, based upon our assessment of their creditworthiness, and monitoring and managing these

exposures.

Debt Security Dealers

The credit risk associated with dealers that commit to place our debt securities is that they will fail to honor their

contracts to take delivery of the debt, which could result in delayed issuance of the debt through another dealer.

We manage these risks by establishing approval standards and limits on exposure and monitoring both our

exposure positions and changes in the credit quality of dealers.

Document Custodians

We use third-party document custodians to provide loan document certification and custody services for some of

the loans that we purchase and securitize. In many cases, our lender customers or their affiliates also serve as

document custodians for us. Our ownership rights to the mortgage loans that we own or that back our Fannie

Mae MBS could be challenged if a lender intentionally or negligently pledges or sells the loans that we

purchased or fails to obtain a release of prior liens on the loans that we purchased, which could result in financial

losses to us. When a lender or one of its affiliates acts as a document custodian for us, the risk that our ownership

interest in the loans may be adversely affected is increased, particularly in the event the lender were to become

insolvent. We mitigate these risks through legal and contractual arrangements with these custodians that identify

our ownership interest, as well as by establishing qualifying standards for document custodians and requiring

removal of the documents to our possession or to an independent third-party document custodian if we have

concerns about the solvency or competency of the document custodian.

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Market Risk Management, Including Interest Rate Risk Management

We are subject to market risk, which includes interest rate risk, spread risk and liquidity risk. These risks arise

from our mortgage asset investments. Interest rate risk is the risk of loss in value or expected future earnings that

may result from changes to interest rates. Spread risk is the resulting impact of changes in the spread between our

mortgage assets and our debt and derivatives we use to hedge our position. Liquidity risk is the risk that we will

not be able to meet our funding obligations in a timely manner.

Interest Rate Risk Management

Our goal is to manage market risk to be neutral to movements in interest rates and volatility, subject to model

constraints and prevailing market conditions. We employ an integrated interest rate risk management strategy

that allows for informed risk taking within pre-defined corporate risk limits. Decisions regarding our strategy in

managing interest rate risk are based upon our corporate market risk policy and limits that are established by our

Chief Market Risk Officer and our Chief Risk Officer and are subject to review and approval by our Board of

Directors. Our Capital Markets Group has primary responsibility for executing our interest rate risk management

strategy.

We have actively managed the interest rate risk of our “net portfolio,” which is defined below, through the

following techniques: (1) asset selection and structuring (that is, by identifying or structuring mortgage assets

with attractive prepayment and other risk characteristics); (2) issuing a broad range of both callable and

non-callable debt instruments; and (3) using interest-rate derivatives. We have not actively managed or hedged

our spread risk, or the impact of changes in the spread between our mortgage assets and debt (referred to as

mortgage-to-debt spreads) after we purchase mortgage assets, other than through asset monitoring and

disposition. For mortgage assets in our portfolio that we intend to hold to maturity to realize the contractual cash

flows, we accept period-to-period volatility in our financial performance attributable to changes in

mortgage-to-debt spreads that occur after our purchase of mortgage assets. For more information on the impact

that changes in spreads have on the value of the fair value of our net assets, see “Supplemental Non-GAAP

Information—Fair Value Balance Sheets.”

We monitor current market conditions, including the interest rate environment, to assess the impact of these

conditions on individual positions and our overall interest rate risk profile. In addition to qualitative factors, we

use various quantitative risk metrics in determining the appropriate composition of our consolidated balance

sheet and relative mix of debt and derivatives positions in order to remain within pre-defined risk tolerance levels

that we consider acceptable. We regularly disclose two interest rate risk metrics that estimate our overall interest

rate exposure: (1) fair value sensitivity to changes in interest rate levels and the slope of the yield curve and

(2) duration gap.

The metrics used to measure our interest rate exposure are generated using internal models. Our internal models,

consistent with standard practice for models used in our industry, require numerous assumptions. There are

inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. The

reliability of our prepayment estimates and interest rate risk metrics depends on the availability and quality of

historical data for each of the types of securities in our net portfolio. When market conditions change rapidly and

dramatically, as they did during the financial market crisis of late 2008, the assumptions of our models may no

longer accurately capture or reflect the changing conditions. On a continuous basis, management makes

judgments about the appropriateness of the risk assessments indicated by the models.

Sources of Interest Rate Risk Exposure

The primary source of our interest rate risk is the composition of our net portfolio. Our net portfolio consists of

our existing investments in mortgage assets, investments in non-mortgage securities, our outstanding debt used to

fund those assets and the derivatives used to supplement our debt instruments and manage interest rate risk, and

any fixed-price asset, liability or derivative commitments.

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Our performing mortgage assets consist mainly of single-family and multifamily mortgage loans. For singlefamily loans, borrowers have the option to prepay at any time before the scheduled maturity date or continue

paying until the stated maturity. Given this prepayment option held by the borrower, we are exposed to

uncertainty as to when or at what rate prepayments will occur, which affects the length of time our mortgage

assets will remain outstanding and the timing of the cash flows related to these assets. This prepayment

uncertainty results in a potential mismatch between the timing of receipt of cash flows related to our assets and

the timing of payment of cash flows related to our liabilities.

Changes in interest rates, as well as other factors, influence mortgage prepayment rates and duration and also

affect the value of our mortgage assets. When interest rates decrease, prepayment rates on fixed-rate mortgages

generally accelerate because borrowers usually can pay off their existing mortgages and refinance at lower rates.

Accelerated prepayment rates have the effect of shortening the duration and average life of the fixed-rate

mortgage assets we hold in our portfolio. In a declining interest rate environment, existing mortgage assets held

in our portfolio tend to increase in value or price because these mortgages are likely to have higher interest rates

than new mortgages, which are being originated at the then-current lower interest rates. Conversely, when

interest rates increase, prepayment rates generally slow, which extends the duration and average life of our

mortgage assets and results in a decrease in value.

Although the fair value of our guaranty assets and our guaranty obligations is highly sensitive to changes in

interest rates and the market’s perception of future credit performance, we do not actively manage the change in

the fair value of our guaranty business that is attributable to changes in interest rates. We do not believe that

periodic changes in fair value due to movements in interest rates are the best indication of the long-term value of

our guaranty business because these changes do not take into account future guaranty business activity.

Interest Rate Risk Management Strategy

Our strategy for managing the interest rate risk of our net portfolio involves asset selection and structuring of our

liabilities to match and offset the interest rate characteristics of our balance sheet. Our strategy consists of the

following principal elements:

• Debt Instruments. We issue a broad range of both callable and non-callable debt instruments to manage

the duration and prepayment risk of expected cash flows of the mortgage assets we own.

• Derivative Instruments. We supplement our issuance of debt with derivative instruments to further reduce

duration and prepayment risks.

• Monitoring and Active Portfolio Rebalancing. We continually monitor our risk positions and actively

rebalance our portfolio of interest rate-sensitive financial instruments to maintain a close match between the

duration of our assets and liabilities.

Debt Instruments

Historically, the primary tool we have used to fund the purchase of mortgage assets and manage the interest rate

risk implicit in our mortgage assets is the variety of debt instruments we issue. The debt we issue is a mix that

typically consists of short- and long-term, non-callable and callable debt. The varied maturities and flexibility of

these debt combinations help us in reducing the mismatch of cash flows between assets and liabilities in order to

manage the duration risk associated with an investment in long-term fixed-rate assets. Callable debt helps us

manage the prepayment risk associated with fixed-rate mortgage assets because the duration of callable debt

changes when interest rates change in a manner similar to changes in the duration of mortgage assets. See

“Liquidity and Capital Management—Liquidity Management—Debt Funding” for additional information on our

debt activity.

Derivative Instruments

Derivative instruments also are an integral part of our strategy in managing interest rate risk. Derivative

instruments may be privately negotiated contracts, which are often referred to as over-the-counter derivatives, or

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they may be listed and traded on an exchange. When deciding whether to use derivatives, we consider a number

of factors, such as cost, efficiency, the effect on our liquidity, results of operations, and our overall interest rate

risk management strategy.

The derivatives we use for interest rate risk management purposes fall into four broad categories:

• Interest rate swap contracts. An interest rate swap is a transaction between two parties in which each

agrees to exchange, or swap, interest payments. The interest payment amounts are tied to different interest

rates or indices for a specified period of time and are generally based on a notional amount of principal. The

types of interest rate swaps we use include pay-fixed swaps, receive-fixed swaps and basis swaps.

• Interest rate option contracts. These contracts primarily include pay-fixed swaptions, receive-fixed

swaptions, cancelable swaps and interest rate caps. A swaption is an option contract that allows us or a

counterparty to enter into a pay-fixed or receive-fixed swap at some point in the future.

• Foreign currency swaps. These swaps convert debt that we issue in foreign-denominated currencies into

U.S. dollars. We enter into foreign currency swaps only to the extent that we issue foreign currency debt.

• Futures. These are standardized exchange-traded contracts that either obligate a buyer to buy an asset at a

predetermined date and price or a seller to sell an asset at a predetermined date and price. The types of

futures contracts we enter into include Eurodollar, U.S. Treasury and swaps.

We use interest rate swaps, interest rate options and futures, in combination with our issuance of debt securities,

to better match the duration of our assets with the duration of our liabilities. We are generally an end user of

derivatives; our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within

prescribed risk parameters. We generally only use derivatives that are relatively liquid and straightforward to

value. We use derivatives for four primary purposes:

(1) As a substitute for notes and bonds that we issue in the debt markets;

(2) To achieve risk management objectives not obtainable with debt market securities;

(3) To quickly and efficiently rebalance our portfolio and

(4) To hedge foreign currency exposure.

Decisions regarding the repositioning of our derivatives portfolio are based upon current assessments of our

interest rate risk profile and economic conditions, including the composition of our consolidated balance sheets

and relative mix of our debt and derivative positions, the interest rate environment and expected trends.

Measurement of Interest Rate Risk

Below we present two quantitative metrics that provide estimates of our interest rate exposure: (1) fair value

sensitivity of net portfolio to changes in interest rate levels and slope of yield curve; and (2) duration gap. The

metrics presented are calculated using internal models that require standard assumptions regarding interest rates and

future prepayments of principal over the remaining life of our securities. These assumptions are derived based on

the characteristics of the underlying structure of the securities and historical prepayment rates experienced at

specified interest rate levels, taking into account current market conditions, the current mortgage rates of our

existing outstanding loans, loan age and other factors. On a continuous basis, management makes judgments about

the appropriateness of the risk assessments and will make adjustments as necessary to properly assess our interest

rate exposure and manage our interest rate risk. The methodologies used to calculate risk estimates are periodically

changed on a prospective basis to reflect improvements in the underlying estimation process.

Interest Rate Sensitivity to Changes in Interest Rate Level and Slope of Yield Curve

As part of our disclosure commitments with FHFA, we disclose on a monthly basis the estimated adverse impact

on the fair value of our net portfolio that would result from the following hypothetical situations:

• A 50 basis point shift in interest rates.

• A 25 basis point change in the slope of the yield curve.

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In measuring the estimated impact of changes in the level of interest rates, we assume a parallel shift in all

maturities of the U.S. LIBOR interest rate swap curve.

In measuring the estimated impact of changes in the slope of the yield curve, we assume a constant 7-year rate

and a shift of 16.7 basis points for the 1-year rate and 8.3 basis points for the 30-year rate. We believe the

aforementioned interest rate shocks for our monthly disclosures represent moderate movements in interest rates

over a one-month period.

Duration Gap

Duration gap measures the price sensitivity of our assets and liabilities to changes in interest rates by quantifying

the difference between the estimated durations of our assets and liabilities. Our duration gap analysis reflects the

extent to which the estimated maturity and repricing cash flows for our assets are matched, on average, over time

and across interest rate scenarios to the estimated cash flows of our liabilities. A positive duration gap indicates

that the duration of our assets exceeds the duration of our liabilities. We disclose duration gap on a monthly basis

under the caption “Interest Rate Risk Disclosures” in our Monthly Summary, which is available on our website

and announced in a press release.

The sensitivity measures presented in Table 60, which we disclose on a quarterly basis as part of our disclosure

commitments with FHFA, are an extension of our monthly sensitivity measures. There are three primary

differences between our monthly sensitivity disclosure and the quarterly sensitivity disclosure presented below:

(1) the quarterly disclosure is expanded to include the sensitivity results for larger rate level shocks of plus or

minus 100 basis points; (2) the monthly disclosure reflects the estimated pre-tax impact on the market value of

our net portfolio calculated based on a daily average, while the quarterly disclosure reflects the estimated pre-tax

impact calculated based on the estimated financial position of our net portfolio and the market environment as of

the last business day of the quarter; and (3) the monthly disclosure shows the most adverse pre-tax impact on the

market value of our net portfolio from the hypothetical interest rate shocks, while the quarterly disclosure

includes the estimated pre-tax impact of both up and down interest rate shocks.

Our net portfolio market value sensitivity was lower as of December 31, 2011 compared with December 31, 2010

due to a number of factors, including a lower mortgage portfolio balance and the composition of our outstanding

debt. During 2011, our total mortgage portfolio balance decreased from $788.8 billion to $708.4 billion as of

December 31, 2011. In addition, we issued $256.7 billion in long-term debt during 2011, primarily consisting of

callable debt instruments, which hedge both the duration and the prepayment risks of our mortgage assets. See

“Liquidity and Capital Management—Liquidity Management—Debt Funding” for additional information on our

debt activity. Interest rates also decreased significantly during 2011, which reduced the price sensitivity of

our mortgage assets, resulting in a lower market value sensitivity.

In addition, Table 60 also provides the average, minimum, maximum and standard deviation for duration gap and

for the most adverse market value impact on the net portfolio for non-parallel and parallel interest rate shocks for

the three months ended December 31, 2011 and 2010.

Table 60: Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve(1)

As of December 31,

2011 2010

(Dollars in billions)

Rate level shock:

-100 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.3 $(0.8)

-50 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 (0.2)

+50 basis points ......................................................... (0.1) (0.2)

+100 basis points ........................................................ (0.4) (0.5)

Rate slope shock:

-25 basis points (flattening) ................................................ — (0.1)

+25 basis points (steepening) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 0.1

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The duration gap for the three months ended December 31, 2011 averaged zero months and the maximum and

minimum gap did not exceed plus or minus one month, which is similar to the results for the three months ended

December 31, 2010.

For the Three Months Ended December 31, 2011

Duration

Gap

Rate Slope Shock

25 Bps

Rate Level Shock

50 Bps

(In months) Exposure

(Dollars in billions)

Average ........................................ (0.1) $— $(0.1)

Minimum ....................................... (0.7) — (0.2)

Maximum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 — —

Standard deviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 — 0.1

For the Three Months Ended December 31, 2010

Duration

Gap

Rate Slope Shock

25 Bps

Rate Level Shock

50 Bps

(In months) Exposure

(Dollars in billions)

Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 $0.1 $0.3

Minimum ....................................... (0.7) — —

Maximum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9 0.1 0.4

Standard deviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 — 0.1

(1) Computed based on changes in LIBOR swap rates.

A majority of the interest rate risk associated with our mortgage-related securities and loans is hedged with our

debt issuance, which includes callable debt. We use derivatives to help manage the residual interest rate risk

exposure between our assets and liabilities. Derivatives have enabled us to keep our interest rate risk exposure at

consistently low levels in a wide range of interest-rate environments. Table 61 displays an example of how

derivatives impacted the net market value exposure for a 50 basis point parallel interest rate shock.

From December 31, 2010 to December 31, 2011, as displayed below in Table 61, debt issuance hedged a

majority of the interest rate risk associated with our mortgage-related securities and loans. As displayed in

Table 60, derivatives were also used to maintain a low interest rate risk exposure as the average duration gap was

zero.

Table 61: Derivative Impact on Interest Rate Risk (50 Basis Points)

Before

Derivatives

After

Derivatives

Effect of

Derivatives

(Dollars in billions)

As of December 31, 2011 .................................... $(1.3) $(0.1) $1.2

As of December 31, 2010 .................................... $(0.9) $(0.2) $0.7

Other Interest Rate Risk Information

The interest rate risk measures discussed above exclude the impact of changes in the fair value of our net

guaranty assets resulting from changes in interest rates. We exclude our guaranty business from these sensitivity

measures based on our current assumption that the guaranty fee income generated from future business activity

will largely replace guaranty fee income lost due to mortgage prepayments.

We provide additional interest rate sensitivities below in Table 62, including separate disclosure of the potential

impact on the fair value of our trading assets and our other financial instruments for the periods indicated, from

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the same hypothetical changes in the level of interest rates as displayed above in Table 60. We also assume a

parallel shift in all maturities along the interest rate swap curve in calculating these sensitivities. We believe

these interest rate changes represent reasonably possible near-term changes in interest rates over the next twelve

months.

Table 62: Interest Rate Sensitivity of Financial Instruments

As of December 31, 2011

Pre-tax Effect on Estimated Fair Value

Change in Interest Rates

(in basis points)

Estimated

Fair Value -100 -50 +50 +100

(Dollars in billions)

Trading financial instruments ............................... $ 74.2 $ 0.9 $0.4 $(0.4) $ (0.9)

Other financial instruments, net(1)(2) ........................... (221.1) 17.1 8.4 (6.6) (12.1)

As of December 31, 2010

Pre-tax Effect on Estimated Fair Value

Change in Interest Rates

(in basis points)

Estimated

Fair Value -100 -50 +50 +100

(Dollars in billions)

Trading financial instruments ............................... $ 56.9 $ 0.9 $0.4 $(0.4) $(0.8)

Other financial instruments, net(1)(2) ........................... (201.1) 10.9 4.1 (3.9) (6.1)

(1) Consists of the net of “Guaranty assets” and “Guaranty obligations” reported in our consolidated balance sheets.

(2) Also consists of the net of all other financial instruments reported in “Note 18, Fair Value.”

Liquidity Risk Management

See “Liquidity and Capital Management—Liquidity Management” for a discussion on how we manage liquidity

risk.

Operational Risk Management

Our corporate operational risk framework is based on the OFHEO/FHFA Enterprise Guidance on Operational

Risk Management, published September 23, 2008. Our framework is intended to provide a methodology to

identify, assess, mitigate, control and monitor operational risks across the company. Included in this framework

is a requirement for a system to track and report operational risk incidents. The framework also includes a

methodology for business owners to conduct risk and control self assessments to self identify potential

operational risks and points of execution failure, the effectiveness of associated controls, and document

corrective action plans to close identified deficiencies. The success of our operational risk effort will depend on

the consistent execution of the operational risk programs and the timely remediation of high operational risk

issues.

We have made a number of enhancements to our operational risk management efforts including our business

process focus, policies and framework. To quantify our operational risk exposure, we rely on the Basel

Standardized approach, which is based on a percentage of gross income.

See “Risk Factors” for more information regarding our operational risk.

Management of Business Resiliency

Our business resiliency program is designed to provide reasonable assurance for continuity of critical business

operations in the event of disruptions caused by the loss of facilities, technology or personnel. Despite the

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planning, testing and continuous preparation of back up venues that we engage in, a catastrophic event may still

result in a significant business disruption.

Non-Mortgage Related Fraud Risk

Our anti-fraud program provides a framework for managing non-mortgage related fraud risk. The program is

designed to provide reasonable assurance for the prevention and detection of non-mortgage related fraudulent

activity. However, because fraudulent activity requires the intentional circumvention of the internal control

structure, the efforts of the program may not always prevent, or immediately detect, instances of such activity.

See “Risk Factors” for a discussion on our operational risk.

IMPACT OF FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

We identify and discuss the expected impact on our consolidated financial statements of recently issued

accounting pronouncements in “Note 1, Summary of Significant Accounting Policies.”

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GLOSSARY OF TERMS USED IN THIS REPORT

Terms used in this report have the following meanings, unless the context indicates otherwise.

An “Acquired credit-impaired loan” refers to a loan we have acquired for which there is evidence of credit

deterioration since origination and for which it is probable we will not be able to collect all of the contractually

due cash flows. We record our net investment in such loans at the lower of the acquisition cost of the loan or the

estimated fair value of the loan at the date of acquisition. Typically, loans we acquire from our unconsolidated

MBS trusts pursuant to our option to purchase upon default meet these criteria. Because we acquire these loans

from our MBS trusts at par value plus accrued interest, to the extent the par value of a loan exceeds the estimated

fair value at the time we acquire the loan, we record the related fair value loss as a charge against the “Reserve

for guaranty losses.”

“Alt-A mortgage loan” or “Alt-A loan” generally refers to a mortgage loan originated under a lender’s program

offering reduced or alternative documentation than that required for a full documentation mortgage loan but may

also include other alternative product features. As a result, Alt-A mortgage loans have a higher risk of default

than non-Alt-A mortgage loans. In reporting our Alt-A exposure, we have classified mortgage loans as Alt-A if

the lenders that delivered the mortgage loans to us classified the loans as Alt-A based on documentation or other

product features. We have loans with some features that are similar to Alt-A mortgage loans that we have not

classified as Alt-A because they do not meet our classification criteria. We have classified private-label

mortgage-related securities held in our investment portfolio as Alt-A if the securities were labeled as such when

issued.

“Business volume” or “new business acquisitions” refers to the sum in any given period of the unpaid principal

balance of: (1) the mortgage loans and mortgage-related securities we purchase for our investment portfolio;

(2) the mortgage loans we securitize into Fannie Mae MBS that are acquired by third parties; and (3) credit

enhancements that we provide on our mortgage assets. It excludes mortgage loans we securitize from our

portfolio and the purchase of Fannie Mae MBS for our investment portfolio.

“Buy-ups” refer to upfront payments we make to lenders to adjust the monthly contractual guaranty fee rate on a

Fannie Mae MBS so that the pass-through coupon rate on the MBS is in a more easily tradable increment of a

whole or half percent.

“Buy-downs” refer to upfront payments we receive from lenders to adjust the monthly contractual guaranty fee

rate on a Fannie Mae MBS so that the pass-through coupon rate on the MBS is in a more easily tradable

increment of a whole or half percent.

“Charge-off” refers to loan amounts written off as uncollectible bad debts. These loan amounts are removed

from our consolidated balance sheet and charged against our loss reserves when the balance is deemed

uncollectible, which is generally at foreclosure.

“Conventional mortgage” refers to a mortgage loan that is not guaranteed or insured by the U.S. government or

its agencies, such as the VA, the FHA or the Rural Development Housing and Community Facilities Program of

the Department of Agriculture.

“Credit enhancement” refers to an agreement used to reduce credit risk by requiring collateral, letters of credit,

mortgage insurance, corporate guarantees, or other agreements to provide an entity with some assurance that it

will be compensated to some degree in the event of a financial loss.

“Duration” refers to the sensitivity of the value of a security to changes in interest rates. The duration of a

financial instrument is the expected percentage change in its value in the event of a change in interest rates of

100 basis points.

“Guaranty book of business” refers to the sum of the unpaid principal balance of: (1) mortgage loans held in our

mortgage portfolio; (2) Fannie Mae MBS held in our mortgage portfolio; (3) Fannie Mae MBS held by third

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parties; and (4) other credit enhancements that we provide on mortgage assets. It excludes non-Fannie Mae

mortgage-related securities held in our investment portfolio for which we do not provide a guaranty.

“HomeSaver Advance loan” refers to a 15-year unsecured personal loan in an amount equal to all past due

payments relating to a borrower’s first-lien mortgage loan, generally up to the lesser of $15,000 or 15% of the

unpaid principal balance of the delinquent first-lien loan. The advance is used to bring the first-lien mortgage

loan current. This workout option was retired in 2010.

“Implied volatility” refers to the market’s expectation of the magnitude of future changes in interest rates.

“Interest rate swap” refers to a transaction between two parties in which each agrees to exchange payments tied

to different interest rates or indices for a specified period of time, generally based on a notional principal amount.

An interest rate swap is a type of derivative.

“LIHTC partnerships” refer to low-income housing tax credit limited partnerships or limited liability companies.

“Loans,” “mortgage loans” and “mortgages” refer to both whole loans and loan participations, secured by

residential real estate, cooperative shares or by manufactured housing units.

“Mortgage assets,” when referring to our assets, refers to both mortgage loans and mortgage-related securities

we hold in our investment portfolio.

“Mortgage credit book of business” refers to the sum of the unpaid principal balance of: (1) mortgage loans held

in our mortgage portfolio; (2) Fannie Mae MBS held in our mortgage portfolio; (3) non-Fannie Mae mortgagerelated securities held in our investment portfolio; (4) Fannie Mae MBS held by third parties; and (5) other credit

enhancements that we provide on mortgage assets.

“Multifamily mortgage loan” refers to a mortgage loan secured by a property containing five or more residential

dwelling units.

“Notional amount” refers to the hypothetical dollar amount in an interest rate swap transaction on which

exchanged payments are based. The notional amount in an interest rate swap transaction generally is not paid or

received by either party to the transaction and is typically significantly greater than the potential market or credit

loss that could result from such transaction.

“Option-adjusted spread” or “OAS” refers to the incremental expected return between a security, loan or

derivative contract and a benchmark yield curve (typically, U.S. Treasury securities, LIBOR and swaps, or

agency debt securities). The OAS provides explicit consideration of the variability in the security’s cash flows

across multiple interest rate scenarios resulting from any options embedded in the security, such as prepayment

options. For example, the OAS of a mortgage that can be prepaid by the homeowner without penalty is typically

lower than a nominal yield spread to the same benchmark because the OAS reflects the exercise of the

prepayment option by the homeowner, which lowers the expected return of the mortgage investor. In other

words, OAS for mortgage loans is a risk-adjusted spread after consideration of the prepayment risk in mortgage

loans. The market convention for mortgages is typically to quote their OAS to swaps. The OAS of our debt and

derivative instruments are also frequently quoted to swaps. The OAS of our net mortgage assets is therefore the

combination of these two spreads to swaps and is the option-adjusted spread between our assets and our funding

and hedging instruments.

“Outstanding Fannie Mae MBS” refers to the total unpaid principal balance of Fannie Mae MBS that is held by

third-party investors and held in our mortgage portfolio.

“Pay-fixed swap” refers to an agreement under which we pay a predetermined fixed rate of interest based upon a

set notional principal amount and receive a variable interest payment based upon a stated index, with the index

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resetting at regular intervals over a specified period of time. These contracts generally increase in value as

interest rates rise and decrease in value as interest rates fall.

“Private-label securities” refers to mortgage-related securities issued by entities other than agency issuers

Fannie Mae, Freddie Mac or Ginnie Mae.

“Receive-fixed swap” refers to an agreement under which we make a variable interest payment based upon a

stated index, with the index resetting at regular intervals, and receive a predetermined fixed rate of interest based

upon a set notional amount and over a specified period of time. These contracts generally increase in value as

interest rates fall and decrease in value as interest rates rise.

“REMIC” or “Real Estate Mortgage Investment Conduit” refers to a type of mortgage-related security in which

interest and principal payments from mortgages or mortgage-related securities are structured into separately

traded securities.

“REO” refers to real-estate owned by Fannie Mae because we have foreclosed on the property or obtained the

property through a deed-in-lieu of foreclosure.

“Severity rate” or “loss severity rate” refers to a measure of the amounts that will not be recovered in the event

a loan defaults. Severity rates generally reflect charge-offs as a percentage of unpaid principal balance.

Additional items may be taken into account in calculating severity rates. For example, the numerator may reflect

items such as foreclosed property expenses, taxes and insurance, and expected recoveries from pool insurance,

while the denominator may reflect items such as purchased interest, basis, and selling costs.

“Single-class Fannie Mae MBS” refers to Fannie Mae MBS where the investors receive principal and interest

payments in proportion to their percentage ownership of the MBS issue.

“Single-family mortgage loan” refers to a mortgage loan secured by a property containing four or fewer

residential dwelling units.

“Small balance loans” refers to multifamily loans with an original unpaid balance of up to $3 million nationwide

or up to $5 million in high cost markets.

“Subprime mortgage loan” generally refers to a mortgage loan made to a borrower with a weaker credit profile

than that of a prime borrower. As a result of the weaker credit profile, subprime borrowers have a higher

likelihood of default than prime borrowers. Subprime mortgage loans were typically originated by lenders

specializing in this type of business or by subprime divisions of large lenders, using processes unique to

subprime loans. In reporting our subprime exposure, we have classified mortgage loans as subprime if the

mortgage loans were originated by one of these specialty lenders or a subprime division of a large lender. We

exclude loans originated by these lenders if we acquired the loans in accordance with our standard underwriting

criteria, which typically require compliance by the seller with our Selling Guide (including standard

representations and warranties) and/or evaluation of the loans through our Desktop Underwriter system. We have

loans with some features that are similar to subprime mortgage loans that we have not classified as subprime

because they do not meet our classification criteria. We have classified private-label mortgage-related securities

held in our investment portfolio as subprime if the securities were labeled as such when issued.

“Structured Fannie Mae MBS” refers to Fannie Mae MBS that are resecuritizations of other Fannie Mae MBS.

“Swaptions” refers to options on interest rate swaps in the form of contracts granting an option to one party and

creating a corresponding commitment from the counterparty to enter into specified interest rate swaps in the

future. Swaptions are traded in the over-the-counter market and not through an exchange.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosure about market risk is set forth in “MD&A—Risk Management—Market

Risk Management, including Interest Rate Risk Management.”

Item 8. Financial Statements and Supplementary Data

Our consolidated financial statements and notes thereto are included elsewhere in this annual report on

Form 10-K as described below in “Exhibits and Financial Statement Schedules.”

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

OVERVIEW

We are required under applicable laws and regulations to maintain controls and procedures, which include

disclosure controls and procedures as well as internal control over financial reporting, as further described below.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures refer to controls and other procedures designed to provide reasonable

assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is

recorded, processed, summarized and reported within the time periods specified in the rules and forms of the

SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide

reasonable assurance that information required to be disclosed by us in the reports that we file or submit under

the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and

Chief Financial Officer, as appropriate, to allow timely decisions regarding our required disclosure. In designing

and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures,

no matter how well designed and operated, can provide only reasonable assurance of achieving the desired

control objectives, and management was required to apply its judgment in evaluating and implementing possible

controls and procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our

Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures

as in effect as of December 31, 2011, the end of the period covered by this report. As a result of management’s

evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and

procedures were not effective at a reasonable assurance level as of December 31, 2011 or as of the date of filing

this report.

Our disclosure controls and procedures were not effective as of December 31, 2011 or as of the date of filing this

report because they did not adequately ensure the accumulation and communication to management of

information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws.

As a result, we were not able to rely upon the disclosure controls and procedures that were in place as of

December 31, 2011 or as of the date of this filing, and we continue to have a material weakness in our internal

control over financial reporting. This material weakness is described in more detail below under “Description of

Material Weakness.” Based on discussions with FHFA and the structural nature of the weakness in our disclosure

controls and procedures, it is likely that we will not remediate the weakness in our disclosure controls and

procedures relating to information known to FHFA while we are under conservatorship.

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Overview

Our management is responsible for establishing and maintaining adequate internal control over financial

reporting. Internal control over financial reporting, as defined in rules promulgated under the Exchange Act, is a

process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and

effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding

the reliability of financial reporting and the preparation of financial statements for external purposes in

accordance with GAAP. Internal control over financial reporting includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions

and dispositions of our assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial

statements in accordance with GAAP, and that our receipts and expenditures are being made only in

accordance with authorizations of our management and our Board of Directors; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or

disposition of our assets that could have a material effect on our financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting

objectives because of its inherent limitations. Internal control over financial reporting is a process that involves

human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human

failures. Internal control over financial reporting also can be circumvented by collusion or improper override.

Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a

timely basis by internal control over financial reporting. However, these inherent limitations are known features

of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not

eliminate, this risk.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31,

2011. In making its assessment, management used the criteria established in Internal Control—Integrated

Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Management’s assessment of our internal control over financial reporting as of December 31, 2011 identified a

material weakness, which is described below. Because of this material weakness, management has concluded that

our internal control over financial reporting was not effective as of December 31, 2011 or as of the date of filing

this report.

Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on our

internal control over financial reporting, expressing an adverse opinion on the effectiveness of our internal

control over financial reporting as of December 31, 2011. This report is included below.

Description of Material Weakness

The Public Company Accounting Oversight Board’s Auditing Standard No. 5 defines a material weakness as a

deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a

reasonable possibility that a material misstatement of the company’s annual or interim financial statements will

not be prevented or detected on a timely basis.

Management has determined that we had the following material weakness as of December 31, 2011:

• Disclosure Controls and Procedures. We have been under the conservatorship of FHFA since

September 6, 2008. Under the Regulatory Reform Act, FHFA is an independent agency that currently

functions as both our conservator and our regulator with respect to our safety, soundness and mission.

Because of the nature of the conservatorship under the Regulatory Reform Act, which places us under the

“control” of FHFA (as that term is defined by securities laws), some of the information that we may need to

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meet our disclosure obligations may be solely within the knowledge of FHFA. As our conservator, FHFA

has the power to take actions without our knowledge that could be material to our shareholders and other

stakeholders, and could significantly affect our financial performance or our continued existence as an

ongoing business. Although we and FHFA attempted to design and implement disclosure policies and

procedures that would account for the conservatorship and accomplish the same objectives as a disclosure

controls and procedures policy of a typical reporting company, there are inherent structural limitations on

our ability to design, implement, test or operate effective disclosure controls and procedures. As both our

regulator and our conservator under the Regulatory Reform Act, FHFA is limited in its ability to design and

implement a complete set of disclosure controls and procedures relating to Fannie Mae, particularly with

respect to current reporting pursuant to Form 8-K. Similarly, as a regulated entity, we are limited in our

ability to design, implement, operate and test the controls and procedures for which FHFA is responsible.

Due to these circumstances, we have not been able to update our disclosure controls and procedures in a

manner that adequately ensures the accumulation and communication to management of information known

to FHFA that is needed to meet our disclosure obligations under the federal securities laws, including

disclosures affecting our consolidated financial statements. As a result, we did not maintain effective

controls and procedures designed to ensure complete and accurate disclosure as required by GAAP as of

December 31, 2011 or as of the date of filing this report. Based on discussions with FHFA and the structural

nature of this weakness, it is likely that we will not remediate this material weakness while we are under

conservatorship.

MITIGATING ACTIONS RELATING TO MATERIAL WEAKNESS

Disclosure Controls and Procedures

As described above under “Description of Material Weakness,” we continue to have a material weakness in our

internal control over financial reporting relating to our disclosure controls and procedures. However, we and

FHFA have engaged in the following practices intended to permit accumulation and communication to

management of information needed to meet our disclosure obligations under the federal securities laws:

• FHFA has established the Office of Conservatorship Operations, which is intended to facilitate operation of

the company with the oversight of the conservator.

• We have provided drafts of our SEC filings to FHFA personnel for their review and comment prior to filing.

We also have provided drafts of external press releases, statements and speeches to FHFA personnel for

their review and comment prior to release.

• FHFA personnel, including senior officials, have reviewed our SEC filings prior to filing, including this

annual report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”), and engaged in

discussions regarding issues associated with the information contained in those filings. Prior to filing our

2011 Form 10-K, FHFA provided Fannie Mae management with a written acknowledgement that it had

reviewed the 2011 Form 10-K, and it was not aware of any material misstatements or omissions in the 2011

Form 10-K and had no objection to our filing the Form 10-K.

• The Director of FHFA or, after August 2009, the Acting Director of FHFA, and our Chief Executive Officer

have been in frequent communication, typically meeting on at least a bi-weekly basis.

• FHFA representatives attend meetings frequently with various groups within the company to enhance the

flow of information and to provide oversight on a variety of matters, including accounting, credit and

market risk management, liquidity, external communications and legal matters.

• Senior officials within FHFA’s Office of the Chief Accountant have met frequently with our senior finance

executives regarding our accounting policies, practices and procedures.

In view of these activities, we believe that our consolidated financial statements for the year ended December 31,

2011 have been prepared in conformity with GAAP.

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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Overview

Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer,

whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter

have materially affected, or are reasonably likely to materially affect, our internal control over financial

reporting. Below we describe changes in our internal control over financial reporting since September 30, 2011

that management believes have materially affected, or are reasonably likely to materially affect, our internal

control over financial reporting.

Changes in Management

• In the first quarter of 2012, Michael J. Williams, our President and Chief Executive Officer, announced that

he will step down from his position when our Board of Directors names a successor.

• During the fourth quarter of 2011, Gregory A. Fink, Senior Vice President and Controller, was appointed as

our principal accounting officer, succeeding David C. Hisey, who stepped down as our Executive Vice

President and Deputy Chief Financial Officer in February 2012.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Fannie Mae:

We have audited the internal control over financial reporting of Fannie Mae and consolidated entities (in

conservatorship) (the “Company”) as of December 31, 2011, based on criteria established in Internal Control—

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The

Company’s management is responsible for maintaining effective internal control over financial reporting and for

its assessment of the effectiveness of internal control over financial reporting, included in the accompanying

Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion

on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board

(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about

whether effective internal control over financial reporting was maintained in all material respects. Our audit

included obtaining an understanding of internal control over financial reporting, assessing the risk that a material

weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that

risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our

audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the

company’s principal executive and principal financial officers, or persons performing similar functions, and

effected by the company’s board of directors, management, and other personnel to provide reasonable assurance

regarding the reliability of financial reporting and the preparation of financial statements for external purposes in

accordance with generally accepted accounting principles. A company’s internal control over financial reporting

includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,

accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance

with generally accepted accounting principles, and that receipts and expenditures of the company are being made

only in accordance with authorizations of management and directors of the company; and (3) provide reasonable

assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the

company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of

collusion or improper management override of controls, material misstatements due to error or fraud may not be

prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal

control over financial reporting to future periods are subject to the risk that the controls may become inadequate

because of changes in conditions, or that the degree of compliance with the policies or procedures may

deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,

such that there is a reasonable possibility that a material misstatement of the company’s annual or interim

financial statements will not be prevented or detected on a timely basis. The following material weakness has

been identified and included in management’s assessment:

• Disclosure Controls and Procedures—The Company’s disclosure controls and procedures did not adequately

ensure the accumulation and communication to management of information known to the Federal Housing

Finance Agency that is needed to meet its disclosure obligations under the federal securities laws as they

relate to financial reporting.

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This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our

audit of the consolidated financial statements as of and for the year ended December 31, 2011, of the Company

and this report does not affect our report on such financial statements.

In our opinion, because of the effect of the material weakness identified above on the achievement of the

objectives of the control criteria, the Company has not maintained effective internal control over financial

reporting as of December 31, 2011, based on the criteria established in Internal Control—Integrated Framework

issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the consolidated financial statements as of and for the year ended December 31, 2011, of the

Company and our report dated February 29, 2012, expressed an unqualified opinion on those financial statements

and included explanatory paragraphs regarding the Company’s adoption of new accounting standards and the

Company’s dependence upon the continued support from various agencies of the United States Government,

including the United States Department of Treasury and the Company’s conservator and regulator, the Federal

Housing Finance Agency.

/s/ Deloitte & Touche LLP

Washington, DC

February 29, 2012

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Item 9B. Other Information

Termination Agreement with Former Deputy Chief Financial Officer

David C. Hisey, our former Executive Vice President and Deputy Chief Financial Officer, left the company on

February 24, 2012. We entered into a termination agreement with Mr. Hisey on February 28, 2012, the terms of

which were approved by FHFA. The agreement provides that Mr. Hisey will receive $966,625, representing all

of his corporate performance-adjusted 2011 deferred pay, in four installments on the same payment dates as other

deferred pay recipients. The agreement also provides that Mr. Hisey may elect to receive outplacement services

and a subsidy for up to 18 months of medical and dental premiums if he elects COBRA continuation coverage.

The termination agreement provides that Mr. Hisey may not solicit or accept employment with or act in any way,

directly or indirectly, to solicit or obtain employment or work for Freddie Mac for a period of 12 months

following termination. Under the termination agreement, Mr. Hisey agreed to a general release of the company

from all claims relating to his employment with or termination from the company.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

DIRECTORS

Our current directors are listed below. They have provided the following information about their principal

occupation, business experience and other matters. Upon FHFA’s appointment as our conservator on

September 6, 2008, FHFA succeeded to all rights, titles, powers and privileges of any director of Fannie Mae

with respect to Fannie Mae and its assets. More information about FHFA’s September 6, 2008 appointment as

our conservator and its subsequent reconstitution of our Board and direction regarding the Board’s function and

authorities can be found below in “Corporate Governance—Conservatorship and Delegation of Authority to

Board of Directors.”

As discussed in more detail below under “Corporate Governance—Composition of Board of Directors,” FHFA,

as conservator, appointed an initial group of directors to our Board following our entry into conservatorship,

delegated to the Board the authority to appoint directors to subsequent vacancies subject to conservator review,

and defined the term of service of directors during conservatorship. The Nominating and Corporate Governance

Committee evaluates the qualifications of individual directors on an annual basis. In its assessment of current

directors and evaluation of potential candidates for director, the Nominating and Corporate Governance

Committee considers, among other things, whether the Board as a whole possesses meaningful experience,

qualifications and skills in the following subject areas: business; finance; capital markets; accounting; risk

management; public policy; mortgage lending, real estate, low-income housing and/or homebuilding; and the

regulation of financial institutions. See “Corporate Governance—Composition of Board of Directors” below for

further information on the factors the Nominating and Corporate Governance Committee considers in evaluating

and selecting board members.

Dennis R. Beresford, 73, has served as Ernst & Young Executive Professor of Accounting at the J.M. Tull School

of Accounting, Terry College of Business, University of Georgia since 1997. From 1987 to 1997, Mr. Beresford

served as Chairman of the Financial Accounting Standards Board, or FASB, the designated organization in the

private sector for establishing standards of financial accounting and reporting in the U.S. From 1961 to 1986,

Mr. Beresford was with Ernst & Young LLP, including ten years as a Senior Partner and National Director of

Accounting. In addition, Mr. Beresford served on the SEC Advisory Committee on Improvements to Financial

Reporting. Mr. Beresford is currently a member of the Board of Directors of Legg Mason, Inc., where he serves

as Chairman of the Audit Committee and as a member of the Finance and Risk Committees. He also serves as a

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member of the Standing Advisory Group of the Public Company Accounting Oversight Board. He previously

was a member of the Board of Directors of Kimberly-Clark Corporation from November 2002 to April 2011,

where he served as Chairman of the Audit Committee. He also previously was a member of the Board of

Directors of MCI, Inc. from July 2002 to January 2006, where he served as Chairman of the Audit Committee.

Mr. Beresford is a certified public accountant. Mr. Beresford initially became a Fannie Mae director in May

2006, before we were put into conservatorship, and FHFA appointed Mr. Beresford to Fannie Mae’s Board in

December 2008. Mr. Beresford serves as Chair of the Audit Committee and is also a member of the

Compensation Committee and the Executive Committee.

The Nominating and Corporate Governance Committee concluded that Mr. Beresford should serve as a director

due to his extensive experience in accounting, finance, business and risk management, which he gained in the

positions described above. Mr. Beresford has reached the mandatory retirement age for members of the Board of

Directors and, accordingly, his last day as a member of the Board is February 29, 2012.

William Thomas Forrester, 63, served as Chief Financial Officer of The Progressive Corporation from 1999 until

his retirement in March 2007, and served in a variety of senior financial and operating positions with Progressive

prior to that time. Prior to joining The Progressive Corporation in 1984, Mr. Forrester was with Price Waterhouse

LLP, a major public accounting firm, from 1976 to 1984. Mr. Forrester is currently a member of the Board of

Directors and Chairman of the Audit Committee of The Navigators Group, Inc. He also serves on the Finance

Committee and Compensation Committee of The Navigators Group, Inc. Mr. Forrester is also currently a

member of the Board of Directors of Alterra Capital Holdings Limited, where he serves on the Audit and Risk

Management Committee and the Underwriting Committee. He previously was a member of the Board of

Directors of Axis Capital Holdings Limited from December 2003 to May 2006, where he served as Chairman of

the Audit Committee. Mr. Forrester has been a Fannie Mae director since December 2008. Mr. Forrester serves

as a member of both the Audit Committee and the Nominating and Corporate Governance Committee.

Mr. Forrester will serve as Chair of the Audit Committee following Mr. Beresford’s retirement on February 29,

2012.

The Nominating and Corporate Governance Committee concluded that Mr. Forrester should continue to serve as

a director due to his extensive experience in business, finance, accounting and risk management, which he gained

in the positions described above.

Brenda J. Gaines, 62, served as President and Chief Executive Officer of Diners Club North America, a

subsidiary of Citigroup, from October 2002 until her retirement in April 2004. She served as President, Diners

Club North America, from February 1999 to September 2002. From 1988 until her appointment as President, she

held various positions within Diners Club North America, Citigroup and Citigroup’s predecessor corporations.

She also served as Deputy Chief of Staff for the Mayor of the City of Chicago from 1985 to 1987 and as Chicago

Commissioner of Housing from 1983 to 1985. Ms. Gaines also has over 12 years of experience with the

Department of Housing and Urban Development, including serving as Deputy Regional Administrator from 1980

to 1981. Ms. Gaines is currently a member of the Board of Directors of Office Depot, Inc., where she serves as a

member of both the Audit Committee and the Corporate Governance and Nominating Committee. Ms. Gaines is

also a member of the Board of Directors of AGL Resources Inc., where she serves as a member of both the Audit

Committee and the Nominating, Governance and Corporate Responsibility Committee, and Tenet Healthcare

Corporation, where she serves as a member of both the Compensation Committee and the Quality, Compliance &

Ethics Committee. She previously was a member of the Board of Directors of NICOR, Inc. from April 2006 to

December 2011, where she served on the Corporate Governance Committee. She also previously was a member

of the Board of Directors of CNA Financial Corporation from October 2004 to May 2007, where she served as a

member and Chair of the Audit Committee. Ms. Gaines initially became a Fannie Mae director in September

2006, before we were put into conservatorship, and FHFA appointed Ms. Gaines to Fannie Mae’s Board in

December 2008. Ms. Gaines serves as Chair of the Compensation Committee and is also a member of the Audit

Committee and the Executive Committee.

The Nominating and Corporate Governance Committee concluded that Ms. Gaines should continue to serve as a

director due to her extensive experience in business, finance, accounting, risk management, public policy

matters, mortgage lending, low-income housing, and the regulation of financial institutions, which she gained in

the positions described above.

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Charlynn Goins, 69, served as Chairperson of the Board of Directors of New York City Health and Hospitals

Corporation from June 2004 to October 2008. She also served on the Board of Trustees of The Mainstay Funds,

New York Life Insurance Company’s retail family of funds, from June 2001 through July 2006 and on the Board

of Directors of The Community’s Bank from February 2001 through June 2004. Ms. Goins also was a Senior

Vice President of Prudential Financial, Inc. (formerly, Prudential Securities, Inc.) from 1990 to 1997. Ms. Goins

serves as the Chairperson of the New York Community Trust. She also serves as a director and a member of the

Organization and Compensation Committee of AXA Financial Inc. She is also a director of AXA Equitable,

MONY Life and MONY Life of America, which are subsidiaries of AXA Financial Inc. Ms. Goins is an

attorney. Ms. Goins has been a Fannie Mae director since December 2008. Ms. Goins serves as Chair of the

Nominating and Corporate Governance Committee and is also a member of the Executive Committee.

The Nominating and Corporate Governance Committee concluded that Ms. Goins should continue to serve as a

director due to her extensive experience in business, finance, public policy matters, and the regulation of

financial institutions, which she gained in the positions described above.

Frederick B. “Bart” Harvey III, 62, retired in March 2008 from his role as chairman of the Board of Trustees of

Enterprise Community Partners and Enterprise Community Investment, providers of development capital and

technical expertise to create affordable housing and rebuild communities. Enterprise is a national non-profit that

raises funds from the private sector to finance homes primarily for low and very low income people. Enterprise

has also pioneered “green” affordable housing with its EnterpriseGreen Communities initiative. Mr. Harvey was

Enterprise’s chief executive officer from 1993 to 2007. He joined Enterprise in 1984, and a year later became

vice chairman. Before joining Enterprise, Mr. Harvey served for 10 years in various domestic and international

positions with Dean Witter Reynolds (now Morgan Stanley), leaving as Managing Director of Corporate

Finance. Mr. Harvey was a member of the Board of Directors of the Federal Home Loan Bank of Atlanta from

1996 to 1999, a director of the National Housing Trust from 1990 to 2008, and also served as an executive

committee member of the National Housing Conference from 1999 to 2008. Mr. Harvey initially became a

Fannie Mae director in August 2008, before we were put into conservatorship, and FHFA appointed Mr. Harvey

to Fannie Mae’s Board in December 2008. Mr. Harvey serves as a member of the Nominating and Corporate

Governance Committee and the Risk Policy and Capital Committee.

The Nominating and Corporate Governance Committee concluded that Mr. Harvey should continue to serve as a

director due to his extensive experience in business, finance, capital markets, risk management, public policy

matters, mortgage lending, low-income housing and homebuilding, which he gained in the positions described

above.

Robert H. Herz, 58, serves as President of Robert H. Herz LLC, providing consulting services on financial

reporting and other matters. He also serves as a senior advisor to and as a member of the Advisory Board of

WebFilings LLC, a provider of financial reporting software. From July 2002 to September 2010, Mr. Herz was

Chairman of the Financial Accounting Standards Board, or FASB. He was also a part-time member of the

International Accounting Standards Board, or IASB, from January 2001 to June 2002. He was a partner in

PricewaterhouseCoopers LLP from 1985 until his retirement in 2002. He serves on the Accounting Standards

Oversight Council of Canada, as a member of the Standing Advisory Group of the Public Company Accounting

Oversight Board, on the Leadership Board of the Manchester Business School in England, on the Advisory

Council of AccountAbility.org, as Trustee of the Kessler Foundation, and as an executive in residence at the

Columbia Business School. Mr. Herz has been a Fannie Mae director since June 2011. Mr. Herz is a member of

both the Audit Committee and the Nominating and Corporate Governance Committee.

The Nominating and Corporate Governance Committee concluded that Mr. Herz should continue to serve as a

director due to his extensive experience in accounting, business, finance, capital markets and risk management,

which he gained in the positions described above.

Philip A. Laskawy, 70, retired from Ernst & Young in September 2001, after having held several positions during

his employment there from 1961 to 2001, including serving as Chairman and Chief Executive Officer from 1994

until his retirement in September 2001. Mr. Laskawy currently serves on the Boards of Directors of General

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Motors Corporation, Henry Schein, Inc., Lazard Ltd. and Loews Corporation. He is a member of the Audit

Committee of each of these companies, including Chairman of the Audit Committee of both General Motors

Corporation and Lazard Ltd. He is also Chair of the Nominating and Governance Committee and a member of

the Strategic Advisory Committee at Henry Schein, Inc. and a member of the Finance & Risk Committee at

General Motors Corporation. Mr. Laskawy previously was a member of the Board of Directors of The

Progressive Corporation (from 2001 through December 2007) and Discover Financial Services (from June 2007

through September 2008). He served as Chairman of the Audit Committee at each of these companies.

Mr. Laskawy initially became a director and Chairman of Fannie Mae’s Board in September 2008. Mr. Laskawy

is Chair of the Executive Committee.

The Nominating and Corporate Governance Committee concluded that Mr. Laskawy should continue to serve as

a director due to his extensive experience in business, finance, accounting and risk management, which he gained

in the positions described above.

Egbert L. J. Perry, 56, is the Chairman and Chief Executive Officer of The Integral Group LLC. Founded in

1993 by Mr. Perry, Integral is a real estate advisory, investment management and development company based in

Atlanta. Mr. Perry has over 29 years experience as a real estate professional, including work in urban

development, developing and investing in mixed-income, mixed-use communities, affordable/work force

housing and commercial real estate projects in markets across the country. Mr. Perry currently serves as Chair of

the Board of Directors of Atlanta Life Financial Group, where he serves as a member of the Audit Committee, as

Chair of the Advisory Board of the Penn Institute for Urban Research and as a trustee of the University of

Pennsylvania and Children’s Healthcare of Atlanta. Mr. Perry served from 2002 through 2008 as a director of the

Federal Reserve Bank of Atlanta. Mr. Perry has been a Fannie Mae director since December 2008. Mr. Perry is a

member of both the Compensation Committee and the Risk Policy and Capital Committee.

The Nominating and Corporate Governance Committee concluded that Mr. Perry should continue to serve as a

director due to his extensive experience in business, finance, accounting, mortgage lending, real estate,

low-income housing and homebuilding, which he gained in the positions described above.

Jonathan Plutzik, 57, has served as Chairman of Betsy Ross Investors, LLC since August 2005. He also has

served as President of the Jonathan Plutzik and Lesley Goldwasser Family Foundation Inc. and as Chairman of

the Coro New York Leadership Center since January 2003. Mr. Plutzik served as Non-Executive Chairman of the

Board of Directors at Firaxis Games from June 2002 to December 2005. Before that, he served from 1978 to June

2002 in various positions with Credit Suisse First Boston, retiring in June 2002 from his role as Vice Chairman.

Mr. Plutzik has been a Fannie Mae director since November 2009. Mr. Plutzik is a member of both the

Compensation Committee and the Risk Policy and Capital Committee.

The Nominating and Corporate Governance Committee concluded that Mr. Plutzik should continue to serve as a

director due to his extensive experience in business, finance, capital markets, risk management and the regulation

of financial institutions, which he gained in the positions described above.

David H. Sidwell, 58, served as Executive Vice President and Chief Financial Officer of Morgan Stanley from

March 2004 to October 2007, when he retired. From 1984 to March 2004, Mr. Sidwell worked for JPMorgan

Chase & Co. in a variety of financial and operating positions, most recently as Chief Financial Officer of

JPMorgan Chase’s investment bank from January 2000 to March 2004. Prior to joining JP Morgan in 1984,

Mr. Sidwell was with Price Waterhouse LLP, a major public accounting firm, from 1975 to 1984. Mr. Sidwell

serves as a Trustee of the International Accounting Standards Committee Foundation. Mr. Sidwell is currently a

member of the Board of Directors and Senior Independent Director of UBS AG, where he serves as Chair of the

Risk Committee and a member of the Governance & Nominating Committee. He previously was a member of

the Board of Directors of MSCI Inc. from November 2007 through September 2008, where he served as Chair of

the Audit Committee and a member of the Nominating and Corporate Governance Committee. Mr. Sidwell has

been a Fannie Mae director since December 2008. Mr. Sidwell is Chair of the Risk Policy and Capital Committee

and a member of the Compensation Committee and the Executive Committee.

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The Nominating and Corporate Governance Committee concluded that Mr. Sidwell should continue to serve as a

director due to his extensive experience in business, finance, capital markets, accounting, risk management and

the regulation of financial institutions, which he gained in the positions described above.

Michael J. Williams, 54, has been President and Chief Executive Officer of Fannie Mae since April 2009. He

previously served as Fannie Mae’s Executive Vice President and Chief Operating Officer from November 2005

to April 2009. Mr. Williams also served as Fannie Mae’s Executive Vice President for Regulatory Agreements

and Restatement from February 2005 to November 2005, as President—Fannie Mae eBusiness from July 2000 to

February 2005 and as Senior Vice President—e-commerce from July 1999 to July 2000. Prior to this,

Mr. Williams served in various roles in the Single-Family and Corporate Information Systems divisions of

Fannie Mae. Mr. Williams joined Fannie Mae in 1991. Mr. Williams has been a Fannie Mae director since April

2009. He is a member of the Executive Committee. In January 2012, Mr. Williams notified the company that he

will step down from his position as President and Chief Executive Officer and as a member of the Board of

Directors when a new President and Chief Executive Officer is appointed.

Mr. Williams serves as a member of our Board of Directors pursuant to a FHFA order that specifies that our

Chief Executive Officer will serve as a member of the Board. In addition, the Nominating and Corporate

Governance Committee concluded that Mr. Williams should continue to serve as a director due to his extensive

experience in business, finance, accounting, mortgage lending, real estate, low-income housing and the

regulation of financial institutions, which he gained in the positions described above.

CORPORATE GOVERNANCE

Conservatorship and Delegation of Authority to Board of Directors

On September 6, 2008, the Director of FHFA appointed FHFA as our conservator in accordance with the GSE

Act. Upon its appointment, the conservator immediately succeeded to 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 succeeded to the title to the books, records and assets of any other legal custodian of Fannie Mae. As a result,

our Board of Directors no longer had the power or duty to manage, direct or oversee our business and affairs.

On November 24, 2008, FHFA, as conservator, reconstituted our Board of Directors and directed us regarding

the function and authorities of the Board of Directors. FHFA has delegated to our Board of Directors and

management the authority to conduct our day-to-day operations, subject to the direction of the conservator.

FHFA’s delegation of authority to the Board became effective on December 19, 2008 when FHFA appointed

nine Board members to serve in addition to the Board Chairman, who was appointed by FHFA on September 16,

2008. Pursuant to FHFA’s delegation of authority to the Board, the Board is responsible for carrying out normal

Board functions, but is required to obtain the review and approval of FHFA as conservator before taking action in

the specified areas described below. The delegation of authority will remain in effect until modified or rescinded

by the conservator. The conservatorship has no specified termination date. The 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 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.

The conservator instructed that in taking actions the Board should ensure that appropriate regulatory approvals

have been received. In addition, the conservator directed the Board to consult with and obtain the approval of the

conservator before taking action in the following areas:

(1) actions involving capital stock, dividends, the senior preferred stock purchase agreement, increases in risk

limits, material changes in accounting policy and reasonably foreseeable material increases in operational

risk;

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(2) the creation of any subsidiary or affiliate or any substantial non-ordinary course transactions with any

subsidiary or affiliate;

(3) matters that relate to conservatorship;

(4) actions involving hiring, compensation and termination benefits of directors and officers at the executive vice

president level and above and other specified executives;

(5) actions involving retention and termination of external auditors and law firms serving as consultants to the

Board;

(6) settlements of litigation, claims, regulatory proceedings or tax-related matters in excess of a specified

threshold;

(7) any merger with or acquisition of a business for consideration in excess of $50 million; and

(8) any action that in the reasonable business judgment of the Board at the time that the action is taken is likely

to cause significant reputational risk.

For more information on the conservatorship, refer to “Business—Conservatorship and Treasury Agreements—

Conservatorship.”

Composition of Board of Directors

In November 2008, FHFA directed that our Board will have a minimum of nine and not more than thirteen

directors. There will be a non-executive Chairman of the Board, and our Chief Executive Officer will be the only

corporate officer serving as a director. Our initial directors were appointed by the conservator and subsequent

vacancies have been and may continue to be filled by the Board, subject to review by the conservator. Each

director will serve on the Board until the earlier of (1) resignation or removal by the conservator or (2) the

election of a successor director at an annual meeting of shareholders.

Fannie Mae’s bylaws provide that each director holds office for the term for which he or she was elected or

appointed and until his or her successor is chosen and qualified or until he or she dies, resigns, retires or is

removed from office in accordance with applicable law or regulation, whichever occurs first. Under the Charter

Act, each director is elected or appointed for a term ending on the date of our next annual shareholders’ meeting.

As noted above, however, the conservator appointed the initial directors to our Board, delegated to the Board the

authority to appoint directors to subsequent vacancies subject to conservator review, and defined the term of

service of directors during conservatorship.

FHFA’s examination guidance for corporate governance and our Corporate Governance guidelines include a

term limit for board members, which provides that a board member may not serve on the Board for more than 10

years or past the age of 72, whichever comes first. The Director of FHFA may waive the term limit for good

cause, and has waived the term limit for Mr. Beresford through the date of Fannie Mae’s filing of its Form 10-K

for the year ended December 31, 2011. Accordingly, in accordance with the term limit requirement, Mr.

Beresford’s last day as a member of the Board is February 29, 2012.

Under the Charter Act, our Board shall at all times have as members at least one person from each of the

homebuilding, mortgage lending and real estate industries, and at least one person from an organization that has

represented consumer or community interests for not less than two years or one person who has demonstrated a

career commitment to the provision of housing for low-income households. It is the policy of the Board that a

substantial majority of Fannie Mae’s directors will be independent, in accordance with the standards adopted by

the Board. In addition, our Corporate Governance guidelines provide that the Board, as a group, must be

knowledgeable in business, finance, capital markets, accounting, risk management, public policy, mortgage

lending, real estate, low-income housing, homebuilding, regulation of financial institutions, and any other areas

that may be relevant to the safe and sound operation of Fannie Mae. In addition to expertise in the areas noted

above, our Corporate Governance Guidelines specify that the Nominating and Corporate Governance Committee

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will seek out Board members who possess the highest personal values, judgment, and integrity, and who have an

understanding of the regulatory and policy environment in which Fannie Mae does business. The Committee also

considers whether a prospective candidate for the Board has the ability to attend meetings and fully participate in

the activities of the Board.

The Nominating and Corporate Governance Committee also considers diversity when evaluating the composition

of the Board. Our Corporate Governance Guidelines specify that the Nominating and Corporate Governance

Committee is committed to considering minorities, women and individuals with disabilities in the identification

and evaluation process of prospective candidates. The Guidelines also specify that the Committee will seek out

Board members who represent diversity in ideas, perspectives, gender, race, and disability. These provisions of

our Corporate Governance Guidelines implement FHFA regulations that require the company to implement and

maintain policies and procedures that, among other things, encourage the consideration of diversity in

nominating or soliciting nominees for positions on our Board.

The Nominating and Corporate Governance Committee evaluates the qualifications and performance of current

directors on an annual basis. Factors taken into consideration by the Committee in making this evaluation

include:

• a director’s contribution to the effective functioning of the corporation;

• any change in the director’s principal area of responsibility with his or her company or his or her retirement

from the company;

• whether the director continues to bring relevant experience to the Board;

• whether the director has the ability to attend meetings and fully participate in the activities of the Board;

• whether the director has developed any relationships with Fannie Mae or another organization, or other

circumstances have arisen, that might make it inappropriate for the director to continue serving on the

Board;

• the director’s age and length of service on the Board; and

• the director’s particular experience, qualifications, attributes and skills.

Information regarding the particular experience, qualifications, attributes and skills of each of our current

directors is provided above under “Directors.”

Board Leadership Structure

We have had a non-executive Chairman of the Board since 2004. FHFA examination guidance and our Corporate

Governance Guidelines require separate Chairman of the Board and Chief Executive Officer positions and

require that the Chairman of the Board be an independent director. Our Board is also structured so that all but one

of our directors, our Chief Executive Officer, are independent. A non-executive Chairman structure enables

non-management directors to raise issues and concerns for Board consideration without immediately involving

management and is consistent with the Board’s emphasis on independent oversight, as well as our conservator’s

directives.

Our Board has five standing committees: the Audit Committee, the Compensation Committee, the Executive

Committee, the Nominating and Corporate Governance Committee, and the Risk Policy and Capital Committee.

The Board and the standing Board committees function in accordance with their designated duties and with the

authorities as set forth in federal statutes, regulations and FHFA examination and policy guidance, Delaware law

(for corporate governance purposes) and in Fannie Mae’s bylaws and applicable charters of Fannie Mae’s Board

committees. Such duties or authorities may be modified by the conservator at any time. In January 2011, the

Board dissolved the Strategic Planning Committee and determined that its strategic planning oversight roles and

responsibilities would be discharged by the full Board of Directors.

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The Board oversees risk management primarily through the Risk Policy and Capital Committee. This Committee

oversees management’s risk-related policies, including receiving, reviewing and discussing with management

presentations and analyses on corporate level risk policies and limits, performance against these policies and

limits, and the sufficiency of risk management capabilities. For more information on the Board’s role in risk

oversight, see “MD&A—Risk Management—Enterprise Risk Governance—Board of Directors.”

Corporate Governance Information, Committee Charters and Codes of Conduct

Our Corporate Governance Guidelines, as well as the charters for our Board’s Audit Committee, Compensation

Committee, Nominating and Corporate Governance Committee, and Risk Policy and Capital Committee, are

posted on our Web site, www.fanniemae.com, under “Governance” in the “About Us” section of our Web site.

Our Executive Committee does not have a written charter. The responsibilities, duties and authorities of the

Executive Committee are set forth in our bylaws, which are also posted on our Web site, www.fanniemae.com,

under “Governance” in the “About Us” section of our Web site.

We have a Code of Conduct that is applicable to all officers and employees and a Code of Conduct and Conflicts

of Interest Policy for Members of the Board of Directors. Our Code of Conduct also serves as the code of ethics

for our Chief Executive Officer and senior financial officers required by the Sarbanes-Oxley Act of 2002 and

implementing regulations of the SEC. We have posted these codes on our Web site, www.fanniemae.com, under

“Governance” in the “About Us” section of our Web site. We intend to disclose any changes to or waivers from

these codes that apply to any of our executive officers or directors by posting this information on our Web site.

Although our equity securities are no longer listed on the New York Stock Exchange (“NYSE”), we are required

by FHFA’s corporate governance regulations and examination guidance for corporate governance, compensation

practices and accounting practices to follow specified NYSE corporate governance requirements relating to,

among other things, the independence of our Board members and the charters, independence, composition,

expertise, duties and other requirements of our Board Committees.

Audit Committee Membership

Our Board has a standing Audit Committee consisting of Mr. Beresford, who is the Chair, Mr. Forrester,

Ms. Gaines and Mr. Herz, all of whom are independent under the requirements of independence set forth in

FHFA’s corporate governance regulations (which requires the standard of independence adopted by the NYSE),

Fannie Mae’s Corporate Governance Guidelines and other SEC rules and regulations applicable to audit

committees. The Board has determined that Mr. Beresford, Mr. Forrester, Ms. Gaines and Mr. Herz each have

the requisite experience to qualify as an “audit committee financial expert” under the rules and regulations of the

SEC and has designated each of them as such. Mr. Beresford’s last day as a member of the Board is February 29,

2012. Following Mr. Beresford’s retirement, Mr. Forrester will serve as Chair of the Audit Committee.

Executive Sessions

Our non-management directors meet regularly in executive sessions without management present. Our Board of

Directors reserves time for executive sessions at every regularly scheduled Board meeting. The non-executive

Chairman of the Board, Mr. Laskawy, presides over these sessions.

Communications with Directors or the Audit Committee

Interested parties wishing to communicate any concerns or questions about Fannie Mae to the non-executive

Chairman of the Board or to our non-management directors individually or as a group may do so by electronic

mail addressed to “board@fanniemae.com,” or by U.S. mail addressed to Board of Directors, c/o Office of the

Corporate Secretary, Fannie Mae, Mail Stop 1H-2S/05, 3900 Wisconsin Avenue NW, Washington, DC 20016-

2892. Communications may be addressed to a specific director or directors, including Mr. Laskawy, the

Chairman of the Board, or to groups of directors, such as the independent or non-management directors.

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Interested parties wishing to communicate with the Audit Committee regarding accounting, internal accounting

controls or auditing matters may do so by electronic mail addressed to “auditcommittee@fanniemae.com,” or by

U.S. mail addressed to Audit Committee, c/o Office of the Corporate Secretary, Fannie Mae, Mail Stop 1H-2S/05,

3900 Wisconsin Avenue NW, Washington, DC 20016-2892.

The Office of the Corporate Secretary is responsible for processing all communications to a director or directors.

Communications that are deemed by the Office of the Corporate Secretary to be commercial solicitations,

ordinary course customer inquiries or complaints, incoherent or obscene are not forwarded to directors.

Director Nominations; Shareholder Proposals

During the conservatorship, FHFA, as conservator, has all powers of the shareholders and Board of Directors of

Fannie Mae. As a result, under the GSE Act, Fannie Mae’s common shareholders no longer have the ability to

recommend director nominees or elect the directors of Fannie Mae or bring business before any meeting of

shareholders pursuant to the procedures in our bylaws. We currently do not plan to hold an annual meeting of

shareholders in 2012. For more information on the conservatorship, refer to “Business—Conservatorship and

Treasury Agreements—Conservatorship.”

EXECUTIVE OFFICERS

Our current executive officers who are not also members of the Board of Directors are listed below. They have

provided the following information about their principal occupation, business experience and other matters.

Kenneth J. Bacon, 57, has been Executive Vice President—Multifamily (formerly, Housing and Community

Development) since July 2005 and was interim head of Housing and Community Development from January

2005 to July 2005. He was Senior Vice President—Multifamily Lending and Investment from May 2000 to

January 2005, and Senior Vice President—American Communities Fund from October 1999 to May 2000. From

August 1998 to October 1999 he was Senior Vice President of the Community Development Capital

Corporation. He was Senior Vice President of Fannie Mae’s Northeastern Regional Office in Philadelphia from

May 1993 to August 1998. Mr. Bacon was a director of the Fannie Mae Foundation from January 1995 until it

was dissolved in June 2009. He was Vice Chairman of the Fannie Mae Foundation from January 2005 to

September 2008 and was Chairman from September 2008 to June 2009. Mr. Bacon is a director of Comcast

Corporation and the Corporation for Supportive Housing. He is a member of the Executive Leadership Council.

Mr. Bacon plans to leave the company in March 2012.

David C. Benson, 52, has been Executive Vice President—Capital Markets since April 2009. He also served as

Treasurer from June 2010 to January 2012. Mr. Benson previously served as Fannie Mae’s Executive Vice

President—Capital Markets and Treasury from August 2008 to April 2009, as Fannie Mae’s Senior Vice

President and Treasurer from March 2006 to August 2008, and as Fannie Mae’s Vice President and Assistant

Treasurer from June 2002 to February 2006. Prior to joining Fannie Mae in 2002, Mr. Benson was Managing

Director in the fixed income division of Merrill Lynch & Co. From 1988 through 2002, he served in several

capacities at Merrill Lynch in the areas of risk management, trading, debt syndication and e-commerce based in

New York and London.

Andrew J. Bon Salle, 46, has been Senior Vice President and Head of Underwriting and Pricing since May 2011.

Mr. Bon Salle previously served as Fannie Mae’s Senior Vice President—Capital Markets from March 2006 to

May 2011, and as Fannie Mae’s Vice President—Portfolio Management from November 2000 to February 2006.

Mr. Bon Salle held the positions of Director, Finance from December 1996 to November 2000 and of Manager,

Early Funding Programs from March 1994 to December 1996. Mr. Bon Salle joined Fannie Mae in September

1992 as a senior capital markets analyst.

Terence W. Edwards, 56, has been Executive Vice President—Credit Portfolio Management since September

2009, when he joined Fannie Mae. Prior to joining Fannie Mae, Mr. Edwards served as the President and Chief

Executive Officer of PHH Corporation, a leading outsource provider of mortgage and fleet management services,

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from January 2005 to June 2009. Mr. Edwards was also a member of the Board of Directors of PHH Corporation

from January 2005 through June 2009. Prior to PHH Corporation’s spin-off from Cendant Corporation (now

known as Avis Budget Group, Inc.) in January 2005, Mr. Edwards served as President and Chief Executive

Officer of Cendant Mortgage Corporation (now known as PHH Mortgage Corporation), a subsidiary of Cendant

Corporation, beginning in February 1996. Mr. Edwards had previously served in other executive roles at PHH

Corporation, which he joined in 1980.

Jeffery R. Hayward, 56, has been Senior Vice President and Head of Multifamily since January 2012.

Mr. Hayward has served in various roles at Fannie Mae for nearly 25 years. He previously served as Fannie

Mae’s Senior Vice President—National Servicing Organization from April 2010 to January 2012. He also served

as Senior Vice President of Community Lending in Fannie Mae’s Multifamily division from May 2004 to April

2010. Prior to that time, Mr. Hayward served as both a Senior Vice President and a Vice President in Fannie

Mae’s Single-Family division, including as Senior Vice President in the National Business Center from

November 2001 to May 2004, as Vice President for Single-Family Business Strategy from November 1999 to

November 2001, as Vice President for Asset Management Services from August 1998 to November 1999 and as

Vice President for Quality Control and Operations from January 1996 to August 1998. Mr. Hayward also served

as Vice President for Risk Management from June 1993 to January 1996. Before that, he served as Director,

Loan Acquisition from October 1992 to June 1993, as Director, Marketing from December 1989 to September

1992, and as Senior Negotiator from July 1988 to December 1989. Mr. Hayward joined the company in April

1987 as a senior MBS representative.

Linda K. Knight, 62, has served as the Executive Vice President leading Fannie Mae’s operating plan since

September 2010. Since January 2011, Ms. Knight has also led the Strategy, Execution & Transformation

business unit. Ms. Knight also led the Financial Planning & Analysis business unit from January 2011 to July

2011. Ms. Knight served as Executive Vice President—Mortgage-Backed Securities and Pricing from June 2010

to September 2010, and she served as Executive Vice President and Treasurer from April 2009 to June 2010.

Ms. Knight previously served as Executive Vice President—Enterprise Operations & Securities from November

2008 to April 2009. Ms. Knight was responsible for securities operations from August 2008 to September 2010.

She was responsible for enterprise operations from April 2007 to April 2009, except for a period from August

2008 to September 2008. Ms. Knight served under the title Executive Vice President—Securities from August to

November 2008 and as Executive Vice President—Enterprise Operations from April 2007 until August 2008.

Previously, Ms. Knight served as Executive Vice President—Capital Markets from March 2006 to April 2007.

Before that, she served as Senior Vice President and Treasurer from February 1993 to March 2006, and Vice

President and Assistant Treasurer from November 1986 to February 1993. Ms. Knight held the position of

Director, Treasurer’s Office from November 1984 to November 1986. Ms. Knight joined Fannie Mae in August

1982 as a senior market analyst. Ms. Knight plans to leave the company in March 2012.

Timothy J. Mayopoulos, 52, has been Executive Vice President, Chief Administrative Officer, General Counsel

and Corporate Secretary since September 2010. Mr. Mayopoulos was Executive Vice President, General Counsel

and Corporate Secretary from April 2009 to September 2010. Before joining Fannie Mae, Mr. Mayopoulos was

Executive Vice President and General Counsel of Bank of America Corporation from January 2004 to December

2008. He was Managing Director and General Counsel, Americas of Deutsche Bank AG’s Corporate and

Investment Bank from January 2002 to January 2004. He was Managing Director and Senior Deputy General

Counsel, Americas of Credit Suisse First Boston from November 2000 to May 2001, and Managing Director and

Associate General Counsel of Donaldson, Lufkin & Jenrette, Inc. from May 1996 to November 2000.

Mr. Mayopoulos was previously in private law practice at Davis Polk & Wardwell and served in the Office of the

Independent Counsel during the Whitewater investigation.

Susan R. McFarland, 51, has served as Executive Vice President and Chief Financial Officer since July 2011.

Prior to joining Fannie Mae, she served as Executive Vice President, Finance and Principal Accounting Officer

of Capital One Financial Corporation from March 2011 to July 2011. She served as Capital One’s Executive

Vice President and Controller from March 2004 to March 2011, and as Chief Financial Officer of various lines of

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business at Capital One prior to that time. Prior to joining Capital One, she was with Bank One and its

predecessor bank from 1986 to 2002, most recently as the Chief Financial Officer of the Retail Bank. She started

her career with Deloitte & Touche.

John R. Nichols, 49, has been Executive Vice President and Chief Risk Officer since August 2011. Mr. Nichols

previously served as Senior Vice President and Interim Chief Risk Officer from March 2011 to August 2011. He also

served as Senior Vice President and Capital Markets Chief Risk Officer from November 2010 to June 2011. Prior to

joining Fannie Mae, Mr. Nichols was Managing Director for BlackRock from February 2005 to October 2010.

Zachary Oppenheimer, 52, has been Senior Vice President and Head of Customer Engagement since May 2011.

Mr. Oppenheimer previously served as Fannie Mae’s Senior Vice President and Chief Acquisition Officer from

August 2009 to May 2011, and as Senior Vice President, Single-Family Mortgage Business from November

1998 through August 2009. Mr. Oppenheimer was Vice President of Marketing from April 1991 through

November 1998. He held the positions of Director, Sales and Marketing from June 1988 to April 1991, of

Director, MBS from May 1987 to June 1988, of MBS Manager from August 1985 to May 1987, and of Senior

Sales Representative from October 1984 to August 1985. Mr. Oppenheimer joined Fannie Mae in August 1983

as an associate quality control representative.

Michael A. Shaw, 64, has been Executive Vice President and Chief Credit Officer since April 2009. Mr. Shaw

previously served as Executive Vice President and Enterprise Risk Officer from November 2008 to April 2009,

and as Executive Vice President and Chief Risk Officer from August 2008 to November 2008. Prior to that time,

Mr. Shaw served as Senior Vice President—Credit Risk Oversight beginning in April 2006, when he joined

Fannie Mae. Prior to that time, Mr. Shaw was employed at JPMorgan Chase & Co., where he served as Senior

Credit Executive from 2004 to 2006, as Senior Risk Executive, Policy, Reporting, Analytics and Finance during

2004 and as Senior Credit Executive—Consumer, Chase Financial Services from 2003 to 2004. Prior to joining

JP Morgan, Mr. Shaw held senior risk positions at GE Capital and a subsidiary from 1997 to 2003. Mr. Shaw

previously served in several senior risk positions at Citigroup Inc., which he joined in 1972.

Edward G. Watson, 50, has been Executive Vice President—Operations and Technology, since April 2009, when

he joined Fannie Mae. Mr. Watson has more than 25 years of experience in the financial services industry. Prior

to joining Fannie Mae, Mr. Watson held a variety of positions with Citigroup Inc., a global diversified financial

services holding company. From April 2004 to April 2008, he was Global Head, Capital Markets Operations and

Institutional Clients Group Business Services. Before that, he served in a series of senior finance positions,

including as Chief Financial Officer of Citigroup International, the European Investment Bank, and of Global

Investment Management. Upon joining Citigroup in 1994, Mr. Watson led the effort to build the infrastructure

for a start-up interest rate and equity over-the-counter derivatives business, which he ran until 1998.

Under our bylaws, each executive officer holds office until his or her successor is chosen and qualified or until he

or she dies, resigns, retires or is removed from office, whichever occurs first.

Section 16(a) Beneficial Ownership Reporting Compliance

Our directors and officers file with the SEC reports on their ownership of our stock and on changes in their stock

ownership. Based on a review of forms filed during 2011 or with respect to 2011 and on written representations

from our directors and officers, we believe that all of our directors and officers timely filed all required reports

and reported all transactions reportable during 2011.

Item 11. Executive Compensation

The information required by this item will be included in an amendment to this annual report on Form 10-K filed

on or before April 30, 2012.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

The following table provides information as of December 31, 2011 with respect to shares of common stock that

may be issued under our existing equity compensation plans. At this time, we are prohibited from issuing new

stock without the prior written consent of Treasury under the terms of the senior preferred stock purchase

agreement, other than as required by the terms of any binding agreement in effect on the date of the senior

preferred stock purchase agreement, including as required by the terms of outstanding stock options and

restricted stock units.

Equity Compensation Plan Information

As of December 31, 2011

Plan Category

Number of

Securities to be

Issued upon

Exercise of

Outstanding

Options,

Warrants

and Rights (#)

Weighted-Average

Exercise Price of

Outstanding

Options, Warrants

and Rights

Number of

Securities

Remaining Available

for Future Issuance

under Equity

Compensation Plans

(Excluding

Securities

Reflected in First

Column) (#)

Equity compensation plans approved by stockholders ............. 3,143,029(1) $72.34(2) 41,110,196(3)

Equity compensation plans not approved by stockholders . . . . . . . . . . N/A N/A N/A

Total ................................................ 3,143,029 $72.34 41,110,196

(1) This amount includes outstanding stock options; restricted stock units; deferred stock units; and shares issuable upon the

payout of deferred stock balances. Outstanding awards, options and rights include grants under the Fannie Mae Stock

Compensation Plan of 1993, the Stock Compensation Plan of 2003 and the payout of shares deferred upon the settlement

of awards made under the 1993 plan and a prior plan.

(2) The weighted average exercise price is calculated for the outstanding options and does not take into account restricted

stock units or deferred shares.

(3) This number of shares consists of 11,960,258 shares available under the 1985 Employee Stock Purchase Plan and

29,149,938 shares available under the Stock Compensation Plan of 2003 that may be issued as restricted stock, stock

bonuses, stock options or in settlement of restricted stock units, performance share program awards, stock appreciation

rights or other stock-based awards. No more than 1,433,784 of the shares issuable under the Stock Compensation Plan of

2003 may be issued as restricted stock or restricted stock units vesting in full in fewer than three years, performance

shares with a performance period of less than one year or bonus shares subject to similar vesting provisions or

performance periods.

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Beneficial Ownership

The following table shows the beneficial ownership of our common stock by each of our current directors and the

named executives, and all current directors and executive officers as a group, as of February 15, 2012, unless

otherwise indicated. As of that date, no director or named executive, nor all directors and current executive

officers as a group, owned as much as 1% of our outstanding common stock.

Amount and Nature of Beneficial Ownership(1)

Name and Position

Common Stock

Beneficially

Owned Excluding

Stock Options

Stock Options

Exercisable or

Other Shares

Obtainable

Within 60 Days of

February 15,

2012(2)

Total

Common Stock

Beneficially

Owned

David C. Benson ............................................ 14,966 53,927 68,893

Executive Vice President—Capital Markets

Dennis R. Beresford .......................................... 4,719 0 4,719

Director

Terence W. Edwards ......................................... 0 0 0

Executive Vice President—Credit Portfolio Management

W. Thomas Forrester ......................................... 0 0 0

Director

Brenda J. Gaines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487 0 487

Director

Charlynn Goins ............................................. 0 0 0

Director

Frederick Barton Harvey, III ................................... 0 0 0

Director

Robert H. Herz .............................................. 0 0 0

Director

David C. Hisey .............................................. 4,649 10,000 14,649

Executive Vice President and Deputy Chief Financial Officer

Philip A. Laskawy ........................................... 0 0 0

Chairman of the Board

Timothy J. Mayopoulos ....................................... 0 0 0

Executive Vice President, Chief Administrative Officer, General

Counsel and Corporate Secretary

Susan R. McFarland .......................................... 0 0 0

Executive Vice President and Chief Financial Officer

Egbert L. J. Perry ............................................ 0 0 0

Director

Jonathan Plutzik ............................................. 0 0 0

Director

David H. Sidwell ............................................ 0 0 0

Director

Michael J. Williams(3) ........................................ 239,744 139,089 378,833

President and Chief Executive Officer

All directors and current executive officers as a group (24 persons)(4) . . . 478,235 373,848 852,083

(1) Beneficial ownership is determined in accordance with the rules of the SEC for computing the number of shares of

common stock beneficially owned by each person and the percentage owned. Holders of stock options have no

investment or voting power over the shares issuable upon the exercise of the options until the options are exercised.

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(2) These shares are issuable upon the exercise of outstanding stock options, except for 1,373 shares of deferred stock held

by Mr. Williams, which he could obtain within 60 days in certain circumstances.

(3) Mr. Williams’ shares include 81,541 shares held jointly with his spouse and 700 shares held by his daughter.

(4) The amount of shares held by all directors and current executive officers as a group includes 748 shares of stock held by

their family members. The beneficially owned total includes 1,373 shares of deferred stock.

The following table shows the beneficial ownership of our common stock by each holder of more than 5% of our

common stock as of February 15, 2012.

5% Holders

Common Stock

Beneficially Owned Percent of Class

Department of the Treasury ............................................... Variable(1) 79.9%

1500 Pennsylvania Avenue, NW., Room 3000 Washington, DC 20220

(1) In September 2008, we issued to Treasury a warrant to purchase, for one one-thousandth of a cent ($0.00001) per share,

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 at the time the warrant is exercised. The warrant may be exercised in whole or in part at any time until

September 7, 2028. As of February 29, 2012, Treasury has not exercised the warrant. The information above assumes

Treasury beneficially owns no other shares of our common stock.

Item 13. Certain Relationships and Related Transactions, and Director Independence

POLICIES AND PROCEDURES RELATING TO TRANSACTIONS WITH RELATED PERSONS

We review transactions in which Fannie Mae is a participant and in which any of our directors or executive

officers or their immediate family members has an interest to determine whether any of those persons has a

material interest in the transaction. Our current written policies and procedures for the review, approval or

ratification of transactions with related persons that are required to be reported under Item 404(a) of

Regulation S-K are set forth in our:

• Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors;

• Nominating and Corporate Governance Committee Charter;

• Board of Directors’ delegation of authorities and reservation of powers;

• Code of Conduct for employees; and

• Conflict of Interest Policy and Conflict of Interest Procedure for employees.

In addition, depending on the circumstances, relationships and transactions with related persons may require

approval of the conservator pursuant to the delegation of authority issued to the Board of Directors by the

conservator on November 24, 2008 or may require the approval of Treasury pursuant to the senior preferred

stock purchase agreement.

Our Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors prohibits our

directors from engaging in any conduct or activity that is inconsistent with our best interests, as defined by the

conservator’s express directions, its policies and applicable federal law. The Code of Conduct and Conflicts of

Interest Policy for Members of the Board of Directors requires each of our directors to excuse himself or herself

from voting on any issue before the Board that could result in a conflict, self-dealing or other circumstance where

the director’s position as a director would be detrimental to us or result in a noncompetitive, favored or unfair

advantage to either the director or the director’s associates. In addition, our directors must disclose to the Chair of

the Nominating and Corporate Governance Committee, or another member of the committee, any situation that

involves or appears to involve a conflict of interest. This includes, for example, any financial interest of a

director, an immediate family member of a director or a business associate of a director in any transaction being

considered by the Board, as well as any financial interest a director may have in an organization doing business

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with us. Each of our directors also must annually certify compliance with the Code of Conduct and Conflicts of

Interest Policy for Members of the Board of Directors.

The Nominating and Corporate Governance Committee Charter and our Board’s delegation of authorities and

reservation of powers require the Nominating and Corporate Governance Committee to approve any transaction

that Fannie Mae engages in with any director, nominee for director or executive officer, or any immediate family

member of a director, nominee for director or executive officer, that is required to be disclosed pursuant to

Item 404 of Regulation S-K. In addition, the Board’s delegation of authorities and reservation of powers requires

the Board and the conservator to approve any action that in the reasonable business judgment of the Board at the

time the action is taken is likely to cause significant reputational risk. Depending on the Board’s business

judgment, this requirement might include a related party transaction.

Our Code of Conduct for employees requires that we and our employees seek to avoid any actual or apparent

conflict between our business interests and the personal interests of our employees or their family members. An

employee who knows or suspects a violation of our Code of Conduct must raise the issue with the employee’s

manager, another appropriate member of management, a member of our Human Resources division or our

Compliance and Ethics division.

Our Conflict of Interest Policy and Conflict of Interest Procedure for employees requires that our executive

officers report to the Compliance & Ethics Division any existing or currently proposed transaction with us,

whether or not in the ordinary course of business, in which the executive officer or any immediate family

member of the executive officer has a direct or indirect interest. Our Conflict of Interest Procedure for employees

provides that the Compliance & Ethics Division will refer any such report to the Office of the Corporate

Secretary for review to determine whether the Nominating and Corporate Governance Committee or FHFA is

required to review and approve the transaction pursuant to the Nominating and Corporate Governance

Committee Charter and/or the Board’s delegation of authorities and reservation of powers.

We are required by the conservator to obtain its approval for various matters, some of which may involve

relationships or transactions with related persons. These matters include actions involving the senior preferred

stock purchase agreement, the creation of any subsidiary or affiliate or any substantial non-ordinary course

transactions with any subsidiary or affiliate, actions involving hiring, compensation and termination benefits of

directors and officers at the executive vice president level and above and other specified executives, and any

action that in the reasonable business judgment of the Board at the time that the action is taken is likely to cause

significant reputational risk. The senior preferred stock purchase agreement requires us to obtain written

Treasury approval of transactions with affiliates unless, among other things, the transaction is upon terms no less

favorable to us than would be obtained in a comparable arm’s-length transaction with a non-affiliate or the

transaction is undertaken in the ordinary course or pursuant to a contractual obligation or customary employment

arrangement in existence at the time the senior preferred stock purchase agreement was entered into.

We also require our directors and executive officers, not less than annually, to describe to us any situation

involving a transaction with us in which a director or executive officer could potentially have a personal interest

that would require disclosure under Item 404 of Regulation S-K.

TRANSACTIONS WITH RELATED PERSONS

Transactions with Treasury

Treasury beneficially owns more than 5% of the outstanding shares of our common stock by virtue of the warrant

we issued to Treasury on September 7, 2008. The warrant entitles Treasury to purchase shares of our common

stock equal to 79.9% of our outstanding common stock on a fully diluted basis on the date of exercise, for an

exercise price of $0.00001 per share, and is exercisable in whole or in part at any time on or before September 7,

2028. We describe below our current agreements with Treasury, as well as payments we will be making to

Treasury in the future pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011.

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FHFA, as conservator, approved the senior preferred stock purchase agreement and the amendments to the

agreement, our role as program administrator for the Home Affordable Modification Program and other

initiatives under the Making Home Affordable Program, and the housing finance agency transactions described

below.

Treasury Senior Preferred Stock Purchase Agreement

We issued the warrant to Treasury pursuant to the terms of the senior preferred stock purchase agreement we

entered into with Treasury on September 7, 2008. Under the senior preferred stock purchase agreement, we also

issued to Treasury one million shares of senior preferred stock. We issued the warrant and the senior preferred

stock as an initial commitment fee in consideration of Treasury’s commitment to provide up to $100 billion in

funds to us under the terms and conditions set forth in the senior preferred stock purchase agreement. On May 6,

2009, Treasury amended the senior preferred stock purchase agreement to increase its funding commitment to

$200 billion and to revise some of the covenants in the agreement. Treasury further amended the senior preferred

stock purchase agreement on December 24, 2009 in order to further increase its funding commitment as

necessary to accommodate any net worth deficiencies attributable to periods during 2010, 2011 and 2012. If we

do not have a positive net worth as of December 31, 2012, then the amount of funding available under the senior

preferred stock purchase agreement after 2012 will be $124.8 billion ($200 billion less $75.2 billion in

cumulative draws for net worth deficiencies through December 31, 2009). In the event we have a positive net

worth as of December 31, 2012, then the amount of funding available after 2012 under the senior preferred stock

purchase agreement will depend on the size of that positive net worth relative to the cumulative draws for net

worth deficiencies attributable to periods during 2010, 2011 and 2012, as follows: (a) if our positive net worth as

of December 31, 2012 is less than the cumulative draws for net worth deficiencies attributable to periods during

2010, 2011 and 2012, then the amount of available funding will be $124.8 billion less our positive net worth as of

December 31, 2012; or (b) if our positive net worth as of December 31, 2012 is greater than the cumulative

draws for net worth deficiencies attributable to periods during 2010, 2011 and 2012, then the amount of available

funding will be $124.8 billion less the cumulative draws attributable to periods during 2010, 2011 and 2012. The

amendment also made some other revisions to the agreement.

The senior preferred stock purchase agreement also requires that we pay a quarterly commitment fee, beginning

on March 31, 2011, in an amount to be determined by Treasury no later than December 31, 2010. As of

February 29, 2012, the amount of the quarterly commitment fee payable by us to Treasury under the senior

preferred stock purchase agreement had not been established; however, Treasury has waived the quarterly

commitment fee for each quarter of 2011 and the first quarter of 2012 due to the continued fragility of the

mortgage market and Treasury’s belief that the imposition of the quarterly commitment fee would not generate

increased compensation for taxpayers. In its notification to FHFA that it had waived the quarterly commitment

fee for the first quarter of 2012, Treasury indicated that it will reevaluate the situation during the next calendar

quarter to determine whether the quarterly commitment fee should then be set.

We have received an aggregate of $111.6 billion from Treasury under the senior preferred stock purchase

agreement, and the Acting Director of FHFA will submit a request to Treasury on our behalf for an additional

$4.6 billion from Treasury under the senior preferred purchase stock agreement. Through December 31, 2011, we

have paid an aggregate of $19.8 billion to Treasury in dividends on the senior preferred stock. See “Business—

Conservatorship and Treasury Agreements—Treasury Agreements” for more information about the senior

preferred stock purchase agreement.

Treasury Making Home Affordable Program

On February 18, 2009, the Obama Administration announced its Homeowner Affordability and Stability Plan, a

plan to provide stability and affordability to the U.S. housing market. Pursuant to this plan, in March 2009, the

Administration announced the details of its Making Home Affordable Program, a program intended to provide

assistance to homeowners and prevent foreclosures. One of the primary initiatives under the Making Home

Affordable Program is the Home Affordable Modification Program, or HAMP, which is aimed at helping

borrowers whose loan is either currently delinquent or at imminent risk of default by modifying their mortgage

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loan to make their monthly payments more affordable. In addition to our participation in the Administration’s

initiatives under the Making Home Affordable Program, Treasury engaged us to serve as program administrator

for loans modified under HAMP pursuant to the financial agency agreement between Treasury and us, dated

February 18, 2009. See “Business—Making Home Affordable Program—Our Role as Program Administrator”

for a description of our principal activities as program administrator for HAMP and other initiatives under the

Making Home Affordable Program.

Under our arrangement with Treasury, Treasury has agreed to compensate us for a significant portion of the work

we have performed in our role as program administrator for HAMP and other initiatives under the Making Home

Affordable Program. Pursuant to the current budget established by Treasury, we expect to receive an aggregate of

approximately $252 million from Treasury for our work as program administrator for U.S. government fiscal

years 2009 through 2012, as well as receive from Treasury an additional amount of approximately $56 million to

be passed through to third-party vendors engaged by us for HAMP and other initiatives under the Making Home

Affordable Program. These amounts are based on current workload estimates and program scope, and will be

updated to reflect any changes in policy, workload and program scope.

Treasury Housing Finance Agency Initiative

On October 19, 2009, we entered into a memorandum of understanding with Treasury, FHFA and Freddie Mac

that established terms under which we, Freddie Mac and Treasury would provide assistance to state and local

housing finance agencies (“HFAs”) so that the HFAs could continue to meet their mission of providing

affordable financing for both single-family and multifamily housing. Pursuant to this HFA initiative, we, Freddie

Mac and Treasury are providing assistance to the HFAs through two primary programs: a temporary credit and

liquidity facilities (“TCLF”) program, which is intended to improve the HFAs’ access to liquidity for outstanding

HFA bonds, and a new issue bond (“NIB”) program, which is intended to support new lending by the HFAs. We

entered into various agreements in November and December 2009 to implement these HFA assistance programs,

including several to which Treasury is a party. Pursuant to the TCLF program, Treasury has purchased

participation interests in temporary credit and liquidity facilities provided by us and Freddie Mac to the HFAs,

which facilities create a credit and liquidity backstop for the HFAs. Pursuant to the NIB program, Treasury has

purchased new securities issued and guaranteed by us and Freddie Mac, which are backed by new housing bonds

issued by the HFAs.

In November 2011, we entered into an Omnibus Consent to HFA Initiative Program Modifications with

Treasury, Freddie Mac and FHFA pursuant to which the parties agreed to specified modifications to the HFA

initiative programs, including a three-year extension of the expiration date for the TCLFs from December 2012

to December 2015, and a one-year extension of the expiration date for release of escrowed funds for the NIB

program from December 31, 2011 to December 31, 2012. HFAs that participate in the extension of the TCLF

program will be required to develop and submit a plan to Treasury, Fannie Mae and Freddie Mac that includes a

summary of the methods the HFAs will use to reduce TCLF exposure in the future. An HFA’s plan must be

acceptable to Treasury, Fannie Mae and Freddie Mac in order for that HFA’s TLCFs to be extended.

The total amount originally established by Treasury for the TCLF program and the NIB program was

$23.4 billion: an aggregate of $8.2 billion for the TCLF program (of which $7.7 billion consisted of principal and

approximately $500 million consisted of accrued interest) and an aggregate of $15.2 billion for the NIB program

(of which $12.4 billion related to single-family bonds and $2.8 billion related to multifamily bonds). The

amounts outstanding under these programs have been reduced since the programs were established and will

continue to be reduced over time as principal payments are received on the mortgage loans financed by the NIB

program and as liquidity facilities under the TCLF program are replaced by the HFAs. As of December 31, 2011,

the total outstanding amount under the TCLF program was $5.9 billion (of which $5.6 billion consisted of

principal and approximately $347 million consisted of accrued interest) and the total unpaid principal amount

outstanding under the NIB program was $15.0 billion.

We and Freddie Mac administer these programs on a coordinated basis. We issued temporary credit and liquidity

facilities and securities backed by HFA bonds on a 50-50 pro rata basis with Freddie Mac under these programs.

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Treasury will bear the initial losses of principal under the TCLF program and the NIB program up to 35% of total

original principal on a combined program-wide basis, and thereafter we and Freddie Mac each will bear the

losses of principal that are attributable to our own portion of the temporary credit and liquidity facilities and the

securities that we have issued. Treasury will bear all losses of unpaid interest under the two programs.

Accordingly, as of December 31, 2011, Fannie Mae’s maximum potential risk of loss under these programs,

assuming a 100% loss of principal, was approximately $6.3 billion. As of December 31, 2011, there had been no

losses of principal or interest under the TCLF program or the NIB program.

Temporary Payroll Tax Cut Continuation Act of 2011

In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 which, among

other provisions, requires that we increase our single-family guaranty fees by at least 10 basis points and remit

this increase to Treasury, rather than retaining the incremental revenue. FHFA has announced that, effective

April 1, 2012, the guaranty fee on all single-family residential mortgages delivered to Fannie Mae and Freddie

Mac on or after that date for securitization will increase by 10 basis points. FHFA is analyzing whether

additional guaranty fee increases may be necessary to comply with the law.

Transactions with PHH Corporation

Terence W. Edwards has been Executive Vice President—Credit Portfolio Management of Fannie Mae since

September 14, 2009, when he joined Fannie Mae. Prior to joining Fannie Mae, Mr. Edwards served as the

President and Chief Executive Officer, as well as a member of the Board of Directors, of PHH Corporation, until

June 17, 2009. Mr. Edwards continued to be employed by PHH Corporation until September 11, 2009.

PHH Mortgage Corporation (“PHH”), a subsidiary of PHH Corporation, is a single-family seller-servicer

customer of Fannie Mae. We regularly enter into transactions with PHH in the ordinary course of this business

relationship. In 2011, PHH delivered approximately $23 billion in mortgage loans to us, which included the

delivery of loans for direct payment and the delivery of pools of mortgage loans in exchange for Fannie Mae

MBS. We acquired most of these mortgage loans pursuant to our early funding programs. This represented

approximately 4.1% of our single-family business volume in 2011 and made PHH our sixth-largest single-family

customer. In addition, as of December 31, 2011, PHH serviced approximately $76 billion of single-family

mortgage loans either owned directly by Fannie Mae or backing Fannie Mae MBS, which represented

approximately 2.7% of our single-family servicing book, making PHH our seventh-largest servicer. PHH also

entered into transactions with us to purchase or sell approximately $15 billion in agency mortgage-related

securities in 2011. As a single-family seller-servicer customer, PHH also pays us fees for its use of certain Fannie

Mae technology, enters into risk-sharing arrangements with us, and provides us with collateral to secure some of

its obligations. PHH renewed its delivery commitment to us in November 2010 for a 17-month term.

In December 2011, we renewed our committed purchase facility with PHH, pursuant to which PHH may have, at

any given time during the term of the facility, up to $1.0 billion in outstanding early funding transactions with us.

This agreement is in addition to our existing uncommitted transaction limits with PHH under our early funding

programs. We have also provided PHH with an early reimbursement facility to fund certain of PHH’s servicing

advances. The maximum amount outstanding under this early reimbursement facility during 2011 was

approximately $78 million. PHH is also a participating lender in our HomePath® Mortgage financing initiative

relating to our REO properties.

We believe that Fannie Mae is one of PHH’s largest business partners and that transactions with Fannie Mae are

material to PHH’s business. According to PHH Corporation’s annual report on Form 10-K for the year ended

December 31, 2010, 95% of its mortgage loan sales during 2010 were sold to, or were sold pursuant to programs

sponsored by, Fannie Mae, Freddie Mac or Ginnie Mae, and it is highly dependent on programs administered by

Fannie Mae, Freddie Mac and Ginnie Mae.

Pursuant to a separation agreement with PHH Corporation, Mr. Edwards is entitled to receive additional

compensation from PHH Corporation for his prior services to the company. Some of this additional

compensation is dependent on the performance of PHH Corporation. According to Forms 8-K filed by PHH

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Corporation on August 5, 2009 and September 16, 2009, Mr. Edwards’ separation agreement with PHH

Corporation provided that he would receive the following additional compensation from PHH Corporation: (a) an

amount equal to his base salary for a 24-month period beginning on PHH Corporation’s first regular pay date

after March 11, 2010; (b) annual cash bonuses for calendar years 2009, 2010 and 2011 in an amount equal to the

bonus he would have received based on actual performance of the company (except that the 2011 bonus will be

prorated to reflect the actual number of months covered by the severance period in 2011), which bonuses will be

paid to Mr. Edwards at the same time bonuses are payable to corporate employees, but no later than March 15

after the end of the applicable performance year; and (c) a cash transition payment of $50,000 on PHH

Corporation’s first regular pay date after March 11, 2010. In addition, the outstanding options and restricted

stock units that have been previously awarded to him will continue to vest and, on the last day of the severance

period, all remaining unvested options and restricted stock units will become fully vested, except for the 2009

performance-based restricted stock units which will become vested only to the extent that performance goals

have been satisfied.

Our policies and procedures for the review and approval of related party transactions described above under

“Policies and Procedures Relating to Transactions with Related Persons” did not require the review, approval or

ratification of the above-described transactions with PHH. Our Nominating and Corporate Governance

Committee Charter and our Board’s delegation of authorities did not require the Nominating and Corporate

Governance Committee to review and approve these transactions because Fannie Mae did not engage in any such

transactions directly with Mr. Edwards; however, the Nominating and Corporate Governance Committee has

reviewed this relationship. As required under our Conflict of Interest Policy and Conflict of Interest Procedure

for employees in effect at the time Mr. Edwards commenced his employment with us, Mr. Edwards reported his

ongoing financial interest in PHH Corporation at the time of his employment and requested review and approval

of the conflict. Our Chief Executive Officer reviewed and approved of the conflict, and to address the conflict

has required that Mr. Edwards be recused from all matters relating to PHH.

Transactions with Phelan Firms

Kenneth J. Phelan was Executive Vice President—Chief Risk Officer from April 2009 through February 2011,

when he left the company. Mr. Phelan’s brother, Lawrence T. Phelan, is an equity partner with ownership

interests in two law firms that perform services for Fannie Mae, as well as a minority owner in a company that

performs services for these law firms on Fannie Mae matters. The services performed by these firms for Fannie

Mae include loss mitigation, foreclosures, bankruptcies, REO matters, evictions and related services.

Phelan Hallinan and Schmieg. Lawrence Phelan has an approximately 49% ownership interest in Phelan

Hallinan and Schmieg, LLP (“PHS”), a law firm representing lenders and servicers in Pennsylvania. PHS or its

predecessor (Federman and Phelan) has provided legal services to Fannie Mae for over 26 years, and is currently

part of Fannie Mae’s retained attorney network. In January and February 2011, PHS invoiced approximately $1.1

million in legal fees relating to work performed for Fannie Mae, which represented a significant portion of PHS’s

overall legal fees invoiced for those months. PHS also invoiced approximately $1.9 million in third-party costs

relating to Fannie Mae matters in January and February 2011.

Phelan Hallinan Schmieg and Diamond. Lawrence Phelan also has an approximately 41% ownership interest in

Phelan Hallinan Schmieg and Diamond, PC (“PHSD”), a law firm representing lenders and servicers in New

Jersey. PHSD has provided legal services to Fannie Mae for over 11 years, and is currently part of Fannie Mae’s

retained attorney network. PHSD invoiced approximately $0.8 million in legal fees in January and February 2011

relating to work performed for Fannie Mae, which represented a significant portion of PHSD’s overall legal fees

invoiced for those months. PHSD also invoiced approximately $1.5 million in third-party costs relating to Fannie

Mae matters in January and February 2011.

Full Spectrum Holdings. Lawrence Phelan also has an approximately 31% interest in Full Spectrum Holdings

LLC, a company that provides support services for PHS, PHSD and other firms. Full Spectrum Holdings

performs services such as title searches, investigations and service of process for PHSD and PHS on Fannie

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Mae-related matters. Full Spectrum Holdings billed PHS and PHSD approximately $2.0 million for work

performed on Fannie Mae matters in January and February 2011, which represented a significant portion of their

revenues for those months. This amount represents approximately 59% of the third-party costs invoiced by PHS

and PHSD in January and February 2011 described above.

Kenneth Phelan has no affiliation with PHS, PHSD or Full Spectrum Holdings and receives no compensation or

other financial benefits from these firms. In accordance with the requirements of our Nominating and Corporate

Governance Committee Charter and our Board’s delegation of authorities, the Nominating and Corporate

Governance Committee approved Fannie Mae’s transactions with these firms.

Transactions involving The Integral Group LLC

Egbert L.J. Perry, who joined our Board in December 2008, is the Chairman, Chief Executive Officer and

controlling shareholder of The Integral Group LLC, referred to as Integral. Over the past ten years, our

Multifamily (formerly, Housing and Community Development) business has invested indirectly in certain limited

partnerships or limited liability companies that are controlled and managed by entities affiliated with Integral, in

the capacity of general partner or managing member, as the case may be. These limited partnerships or limited

liability companies are referred to as the Integral Property Partnerships. The Integral Property Partnerships own

and manage LIHTC properties. We also hold multifamily mortgage loans made to borrowing entities sponsored

by Integral. We believe that Mr. Perry has no material direct or indirect interest in these transactions, and

therefore disclosure of these transactions in this report is not required pursuant to Item 404 of Regulation S-K. In

addition, as described in “Director Independence—Our Board of Directors” below, the Board of Directors has

concluded that these business relationships are not material to Mr. Perry’s independence.

Mr. Perry has informed us that Integral accepted no further equity investments from us relating to Integral

Property Partnerships beginning in December 2008, when he joined our Board. Mr. Perry has also informed us

that Integral does not intend to seek debt financing intended specifically to be purchased by us, although, as a

secondary market participant, in the ordinary course of our business we may purchase multifamily mortgage

loans made to borrowing entities sponsored by Integral.

DIRECTOR INDEPENDENCE

Our Board of Directors, with the assistance of the Nominating and Corporate Governance Committee, has

reviewed the independence of all current Board members under the requirements set forth in FHFA’s corporate

governance regulations (which requires the standard of independence adopted by the NYSE) and under the

standards of independence adopted by the Board, as set forth in our Corporate Governance Guidelines and

outlined below. It is the policy of our Board of Directors that a substantial majority of our seated directors will be

independent in accordance with these standards. Our Board is currently structured so that all but one of our

directors, our Chief Executive Officer, is independent. Based on its review, the Board has determined that all of

our non-employee directors meet the director independence requirements set forth in FHFA’s corporate

governance regulations and in our Corporate Governance Guidelines.

Independence Standards

Under the standards of independence adopted by our Board, which meet and in some respects exceed the

independence requirements set forth in FHFA’s corporate governance regulations (which requires the standard of

independence adopted by the NYSE), an “independent director” must be determined to have no material

relationship with us, either directly or through an organization that has a material relationship with us. A

relationship is “material” if, in the judgment of the Board, it would interfere with the director’s independent

judgment. The Board did not consider the Board’s duties to the conservator, together with the federal

government’s controlling beneficial ownership of Fannie Mae, in determining independence of the Board

members.

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In addition, under FHFA’s corporate governance regulations, our Audit Committee is required to be in

compliance with the NYSE’s listing requirements for audit committees, under which members of a company’s

audit committee must meet additional, heightened independence criteria. Our own independence standards

require all independent directors to meet these criteria.

To assist it in determining whether a director is independent, our Board has adopted the standards set forth

below, which are posted on our Web site, www.fanniemae.com, under “Governance” in the “About Us” section

of our Web site:

• A director will not be considered independent if, within the preceding five years:

• the director was our employee; or

• an immediate family member of the director was employed by us as an executive officer.

• A director will not be considered independent if:

• the director is a current partner or employee of our external auditor, or within the preceding five years,

was (but is no longer) a partner or employee of our external auditor and personally worked on our audit

within that time; or

• an immediate family member of the director is a current partner of our external auditor, or is a current

employee of our external auditor and personally works on Fannie Mae’s audit, or, within the preceding

five years, was (but is no longer) a partner or employee of our external auditor and personally worked on

our audit within that time.

• A director will not be considered independent if, within the preceding five years:

• the director was employed by a company at a time when one of our current executive officers sat on that

company’s compensation committee; or

• an immediate family member of the director was employed as an officer by a company at a time when

one of our current executive officers sat on that company’s compensation committee.

• A director will not be considered independent if, within the preceding five years:

• the director received any compensation from us, directly or indirectly, other than fees for service as a

director; or

• an immediate family member of the director received any compensation from us, directly or indirectly,

other than compensation received for service as our employee (other than an executive officer).

• A director will not be considered independent if:

• the director is a current executive officer, employee, controlling stockholder or partner of a company or

other entity that does or did business with us and to which we made, or from which we received,

payments within the preceding five years that, in any single fiscal year, were in excess of $1 million or

2% of the entity’s consolidated gross annual revenues, whichever is greater; or

• an immediate family member of the director is a current executive officer of a company or other entity

that does or did business with us and to which we made, or from which we received, payments within the

preceding five years that, in any single fiscal year, were in excess of $1 million or 2% of the entity’s

consolidated gross annual revenues, whichever is greater.

• A director will not be considered independent if the director or the director’s spouse is an executive officer,

employee, director or trustee of a nonprofit organization to which we make or have made contributions

within the preceding three years (including contributions made by the Fannie Mae Foundation prior to

December 31, 2008) that, in a single year, were in excess of 5% of the organization’s consolidated gross

annual revenues, or $120,000, whichever is less (amounts contributed under our Matching Gifts Program are

not included in the contributions calculated for purposes of this standard). The Nominating and Corporate

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Governance Committee also will receive periodic reports regarding charitable contributions to organizations

otherwise associated with a director or any spouse of a director.

After considering all the facts and circumstances, our Board may determine in its judgment that a director is

independent (in other words, the director has no relationship with us that would interfere with the director’s

independent judgment), even though the director does not meet the standards listed above, so long as the

determination of independence is consistent with the NYSE definition of “independence.” Where the standards

above do not address a particular relationship, the determination of whether the relationship is material, and

whether a director is independent, will be made by our Board, based upon the recommendation of the

Nominating and Corporate Governance Committee.

Our Board of Directors

Our Board of Directors, with the assistance of the Nominating and Corporate Governance Committee, has

reviewed the independence of all current Board members under the requirements set forth in FHFA’s corporate

governance regulations (which requires the standard of independence adopted by the NYSE) and under the

standards of independence adopted by the Board contained in our Corporate Governance Guidelines, as outlined

above. Based on its review, the Board has affirmatively determined that all of our non-employee directors meet

the director independence standards of our Guidelines and the NYSE, and that each of the following ten directors

is independent: Philip A. Laskawy, Dennis R. Beresford, William Thomas Forrester, Brenda J. Gaines, Charlynn

Goins, Frederick B. Harvey III, Robert H. Herz, Egbert L. J. Perry, Jonathan Plutzik and David H. Sidwell.

In determining the independence of each of these Board members, the Board of Directors considered the

following relationships in addition to those addressed by the standards contained in our Guidelines as set forth

above:

• Certain of these Board members also serve as directors or advisory Board members of other companies that

engage in business with Fannie Mae. In each of these cases, the Board members are only directors or

advisory Board members of these other companies. In addition, in most instances, the payments made by or

to Fannie Mae pursuant to these relationships during the past five years fell below our Guidelines’

thresholds of materiality for a Board member that is a current executive officer, employee, controlling

shareholder or partner of a company engaged in business with Fannie Mae. In light of these facts, the Board

of Directors has concluded that these business relationships are not material to the independence of these

Board members.

• Certain of these Board members also serve as trustees or board members for charitable organizations that

have received donations and/or fees from Fannie Mae. In each case, the amounts of these charitable

donations and/or fees fell substantially below our Guidelines’ thresholds of materiality for a Board member

who is a current trustee or board member of a charitable organization that receives donations from Fannie

Mae. In light of this fact, the Board of Directors has concluded that these relationships with charitable

organizations are not material to the independence of these Board members.

• Certain of these Board members serve as directors of other companies that hold Fannie Mae fixed income

securities or control entities that direct investments in such securities. It is not possible for Fannie Mae to

determine the extent of the holdings of these companies in Fannie Mae fixed income securities as all

payments to holders are made through the Federal Reserve, and most of these securities are held in turn by

financial intermediaries. Each director has confirmed that the transactions by these other companies in

Fannie Mae fixed income securities are entered into in the ordinary course of business of these companies

and are not entered into at the direction of, or upon approval by, him or her in his or her capacity as a

director of these companies. In light of these facts, the Board of Directors has concluded that these business

relationships are not material to the independence of these Board members.

• One of these Board members and an immediate family member of another Board member serve as a director

and employee, respectively, of companies that have been sued by FHFA, as conservator to Fannie Mae and

Freddie Mac, for violations of laws in the sale of residential private-label mortgage-backed securities to

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Fannie Mae and Freddie Mac. The Board of Directors has concluded that these relationships were not

material to the independence of these Board members.

• Mr. Perry is an executive officer and majority shareholder of The Integral Group LLC, which has had

multiple indirect business relationships with Fannie Mae during the past five years. These business

relationships include the following:

• Since January 1, 2007, Fannie Mae has held six multifamily mortgage loans made to six borrowing

entities sponsored by Integral. In each case, Integral participates in the borrowing entity as a general

partner of the limited partnership, or as a managing member of the limited liability company, as the case

may be, and holds a 0.01% economic interest in such entity. The aggregate unpaid principal balance of

these loans as of December 31, 2011 constituted approximately 5% of Integral’s total debt outstanding.

The borrowing entities have made interest payments on these loans. The total amount of these interest

payments did not exceed $1 million in any of the last five years.

• Fannie Mae has invested as a limited partner or member in certain LIHTC funds that in turn have invested

indirectly as a limited partner or member in various Integral Property Partnerships, which are lower-tier

project partnerships or limited liability companies that own LIHTC properties. Integral participates

indirectly as a member or the general partner of the Integral Property Partnerships (each a “Project

General Partner”). The Integral Property Partnerships construct, develop and manage housing projects, a

portion of which includes affordable housing units. Each Project General Partner and its affiliates earn

certain fees each year in connection with those project activities, and such fees are paid from income

generated by the project (other than certain developer fees paid from development sources). Fannie Mae’s

indirect investments in the Integral Property Partnerships, through the LIHTC funds, have not resulted in

any direct payments by Fannie Mae to any Project General Partner or its affiliates, including Integral.

Fannie Mae’s indirect equity investment in the Integral Property Partnerships as of December 31, 2011

constituted less than 4% of the total capitalization and approximately 10% of the total equity in all of the

Integral Property Partnerships.

The aggregate debt service and other required payments made, directly and indirectly, to or on behalf of

Fannie Mae pursuant to these relationships with Integral for each of the past five years fall below our

Guidelines’ thresholds of materiality for a Board member who is a current executive officer, employee,

controlling shareholder or partner of a company that engages in business with Fannie Mae. In addition, as a

limited partner or member in the LIHTC funds, which in turn are limited partners in the Integral Property

Partnerships, Fannie Mae has no direct dealings with Integral or Mr. Perry and has not been involved in the

management of the Integral Property Partnerships. Mr. Perry also was not generally aware of the identity of

the limited partners or members of the LIHTC funds, as Integral sells the partnership or LLC interests to

syndicators who, in turn, syndicate these interests to limited partners or members of their choosing. Further,

Integral has not accepted additional equity investments from Fannie Mae since Mr. Perry joined the Board.

Fannie Mae is not currently seeking to make additional equity investments in the LIHTC market and

Mr. Perry has informed Fannie Mae that Integral does not intend to seek debt financing specifically to be

purchased by Fannie Mae. Based on the foregoing, the Board of Directors has concluded that these business

relationships are not material to Mr. Perry’s independence.

• Mr. Plutzik’s wife, Leslie Goldwasser, is a Managing Director with Credit Suisse. She is not an executive

officer of Credit Suisse. Fannie Mae has multiple business relationships with Credit Suisse in the ordinary

course of its business. We believe that payments made by or to Fannie Mae pursuant to its relationships with

Credit Suisse during the past five years likely fell below our Guidelines’ thresholds of materiality for when

an immediate family member of a director is a current executive officer, employee, controlling shareholder

or partner of a company engaged in business with Fannie Mae. Ms. Goldwasser has confirmed that she has

no direct or indirect interest or involvement in any transactions between Fannie Mae and Credit Suisse and

that her compensation is not affected directly or indirectly by any such transactions. In light of these facts,

the Board of Directors has concluded that these business relationships are not material to Mr. Plutzik’s

independence.

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The Board determined that none of these relationships would interfere with the director’s independent judgment.

Mr. Williams is not considered an independent director under the Guidelines because of his position as Chief

Executive Officer.

Item 14. Principal Accounting Fees and Services

The Audit Committee of our Board of Directors is directly responsible for the appointment, oversight and

evaluation of our independent registered public accounting firm, subject to conservator approval of matters

relating to retention and termination. In accordance with the Audit Committee’s charter, it must approve, in

advance of the service, all audit and permissible non-audit services to be provided by our independent registered

public accounting firm and establish policies and procedures for the engagement of the external auditor to

provide audit and permissible non-audit services. Our independent registered public accounting firm may not be

retained to perform non-audit services specified in Section 10A(g) of the Exchange Act.

Deloitte & Touche LLP was our independent registered public accounting firm for the years ended December 31,

2011 and 2010. Deloitte & Touche LLP has advised the Audit Committee that they are independent accountants

with respect to the company, within the meaning of standards established by the PCAOB and federal securities

laws administered by the SEC.

The following table displays the aggregate estimated or actual fees for professional services provided by

Deloitte & Touche LLP in 2011 and 2010, including fees for the 2011 and 2010 audits.

For the Year Ended

December 31,

Description of Fees 2011 2010

Audit fees .................................................. $34,400,000 $37,000,000

Audit-related fees(1) ........................................... 1,850,000 2,500,000

Tax fees ................................................... 25,000 —

All other fees(2) .............................................. 65,000 —

Total fees .................................................. $36,340,000 $39,500,000

(1) Consists of fees billed for attest-related services on debt offerings and securitization transactions.

(2) Consists of fees billed for an assessment of the finance organization.

Pre-Approval Policy

The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services to be provided by

the independent registered public accounting firm. The independent registered public accounting firm and

management are required to present reports on the nature of the services provided by the independent registered

public accounting firm for the past year and the fees for such services, categorized into audit services, auditrelated services, tax services and other services.

In connection with its approval of Deloitte & Touche as Fannie Mae’s independent registered public accounting

firm for Fannie Mae’s 2011 integrated audit, the Audit Committee delegated the authority to pre-approve any

additional audit and audit-related services to its Chairman, Mr. Beresford, who was required to report any such

pre-approvals at the next scheduled meeting of the Audit Committee. Additionally, any services provided by

Deloitte & Touche outside of the scope of the integrated audit must be approved by the Conservator.

In 2011, we paid no fees to the independent registered public accounting firm pursuant to the de minimis

exception established by the SEC, and all services were pre-approved.

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PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) Documents filed as part of this report

1. Consolidated Financial Statements

An index to financial statements has been filed as part of this report beginning on page F-1 and is incorporated

herein by reference.

2. Financial Statement Schedules

None.

3. Exhibits

An index to exhibits has been filed as part of this report beginning on page E-1 and is incorporated herein by

reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has

duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Federal National Mortgage Association

/s/ Michael J. Williams

Michael J. Williams

President and Chief Executive Officer

Date: February 29, 2012

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes

and appoints Michael J. Williams and Susan R. McFarland, and each of them severally, his or her true and lawful

attorney-in-fact with power of substitution and resubstitution to sign in his or her name, place and stead, in any

and all capacities, to do any and all things and execute any and all instruments that such attorney may deem

necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of

the U.S. Securities and Exchange Commission in connection with the Annual Report on Form 10-K and any and

all amendments hereto, as fully for all intents and purposes as he or she might or could do in person, and hereby

ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her substitute or

substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the

following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature Title Date

/s/ Philip A. Laskawy

Philip A. Laskawy

Chairman of the Board of Directors February 29, 2012

/s/ Michael J. Williams

Michael J. Williams

President and Chief Executive Officer

and Director

February 29, 2012

/s/ Susan R. McFarland

Susan R. McFarland

Executive Vice President and

Chief Financial Officer

February 29, 2012

/s/ Gregory A. Fink

Gregory A. Fink

Senior Vice President and

Controller

February 29, 2012

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Signature Title Date

/s/ Dennis R. Beresford

Dennis R. Beresford

Director February 29, 2012

/s/ William Thomas Forrester

William Thomas Forrester

Director February 29, 2012

/s/ Brenda J. Gaines

Brenda J. Gaines

Director February 29, 2012

/s/ Charlynn Goins

Charlynn Goins

Director February 29, 2012

/s/ Frederick B. Harvey III

Frederick B. Harvey III

Director February 29, 2012

/s/ Robert H. Herz

Robert H. Herz

Director February 29, 2012

/s/ Egbert L. J. Perry

Egbert L. J. Perry

Director February 29, 2012

/s/ Jonathan Plutzik

Jonathan Plutzik

Director February 29, 2012

/s/ David H. Sidwell

David H. Sidwell

Director February 29, 2012

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INDEX TO EXHIBITS

Item Description

3.1 Fannie Mae Charter Act (12 U.S.C. § 1716 et seq.) as amended through July 30, 2008 (Incorporated

by reference to Exhibit 3.1 to Fannie Mae’s Annual Report on Form 10-K for the year ended

December 31, 2010, filed February 24, 2011)

3.2 Fannie Mae Bylaws, as amended through January 30, 2009 (Incorporated by reference to Exhibit 3.2

to Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2008, filed

February 26, 2009.)

4.1 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series D (Incorporated by

reference to Exhibit 4.1 to Fannie Mae’s registration statement on Form 10, filed March 31, 2003.)

4.2 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series E (Incorporated by

reference to Exhibit 4.2 to Fannie Mae’s registration statement on Form 10, filed March 31, 2003.)

4.3 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series F (Incorporated by

reference to Exhibit 4.3 to Fannie Mae’s registration statement on Form 10, filed March 31, 2003.)

4.4 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series G (Incorporated by

reference to Exhibit 4.4 to Fannie Mae’s registration statement on Form 10, filed March 31, 2003.)

4.5 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series H (Incorporated by

reference to Exhibit 4.5 to Fannie Mae’s registration statement on Form 10, filed March 31, 2003.)

4.6 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series I (Incorporated by

reference to Exhibit 4.6 to Fannie Mae’s registration statement on Form 10, filed March 31, 2003.)

4.7 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series L (Incorporated by

reference to Exhibit 4.7 to Fannie Mae’s Quarterly Report on Form 10-Q, filed August 8, 2008.)

4.8 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series M (Incorporated by

reference to Exhibit 4.8 to Fannie Mae’s Quarterly Report on Form 10-Q, filed August 8, 2008.)

4.9 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series N (Incorporated by

reference to Exhibit 4.9 to Fannie Mae’s Quarterly Report on Form 10-Q, filed August 8, 2008.)

4.10 Certificate of Designation of Terms of Fannie Mae Non-Cumulative Convertible Preferred Stock,

Series 2004-1(Incorporated by reference to Exhibit 4.10 to Fannie Mae’s Annual Report on

Form 10-K for the year ended December 31, 2009, filed February 26, 2010.)

4.11 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series O (Incorporated by

reference to Exhibit 4.11 to Fannie Mae’s Annual Report on Form 10-K for the year ended

December 31, 2009, filed February 26, 2010.)

4.12 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series P (Incorporated by

reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed September 28, 2007.)

4.13 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series Q (Incorporated by

reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed October 5, 2007.)

4.14 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series R (Incorporated by

reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed November 21, 2007.)

4.15 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series S (Incorporated by

reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed December 11, 2007.)

4.16 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series T (Incorporated by

reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed May 19, 2008.)

E-1
Item Description

4.17 Certificate of Designation of Terms of Variable Liquidation Preference Senior Preferred Stock,

Series 2008-2 (Incorporated by reference to Exhibit 4.2 to Fannie Mae’s Current Report on Form 8-K,

filed September 11, 2008.)

4.18 Warrant to Purchase Common Stock, dated September 7, 2008 conservator (Incorporated by reference

to Exhibit 4.3 to Fannie Mae’s Current Report on Form 8-K, filed September 11, 2008.)

4.19 Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of September 26, 2008,

between the United States Department of the Treasury and Federal National Mortgage Association,

acting through the Federal Housing Finance Agency as its duly appointed conservator (Incorporated by

reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed October 2, 2008.)

4.20 Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of May 6,

2009, between the United States Department of the Treasury and Federal National Mortgage

Association, acting through the Federal Housing Finance Agency as its duly appointed conservator

(Incorporated by reference to Exhibit 4.21 to Fannie Mae’s Quarterly Report on Form 10-Q, filed

May 8, 2009.)

4.21 Second Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of

December 24, 2009, between the United States Department of the Treasury and Federal National

Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed

conservator (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K,

filed December 30, 2009.)

10.1 Fannie Mae’s Elective Deferred Compensation Plan, as amended effective November 15, 2004†

(Incorporated by reference to Exhibit 10.21 to Fannie Mae’s Annual Report on Form 10-K for the year

ended December 31, 2007, filed February 27, 2008.)

10.2 Amendment to Fannie Mae Elective Deferred Compensation Plan I, effective October 27, 2008†

(Incorporated by reference to Exhibit 10.7 to Fannie Mae’s Annual Report on Form 10-K for the year

ended December 31, 2008, filed February 26, 2009.)

10.3 Fannie Mae Elective Deferred Compensation Plan II† (Incorporated by reference to Exhibit 10.7 to

Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2007, filed February 27,

2008.)

10.4 Amendment to Fannie Mae Elective Deferred Compensation Plan II, effective April 29, 2008†

(Incorporated by reference to Exhibit 10.1 to Fannie Mae’s Quarterly Report on Form 10-Q, filed

August 8, 2008.)

10.5 Amendment to Fannie Mae Elective Deferred Compensation Plan II, effective October 27, 2008†

(Incorporated by reference to Exhibit 10.10 to Fannie Mae’s Annual Report on Form 10-K for the year

ended December 31, 2008, filed February 26, 2009.)

10.6 Compensation Repayment Provisions† (Incorporated by reference to Exhibit 99.1 to Fannie Mae’s

Current Report on Form 8-K, filed December 24, 2009.)

10.7 Long-Term Incentive Plan, effective December 16, 2009† (Incorporated by reference to Exhibit 10.9 to

Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2009, filed February 26,

2010.)

10.8 Deferred Pay Plan, effective December 16, 2009† (Incorporated by reference to Exhibit 10.10 to

Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2009, filed February 26,

2010.)

10.9 Fannie Mae Form of Indemnification Agreement for directors and officers of Fannie Mae (Incorporated

by reference to Exhibit 10.15 to Fannie Mae’s Annual Report on Form 10-K for the year ended

December 31, 2008, filed February 26, 2009.)

E-2
Item Description

10.10 Federal National Mortgage Association Supplemental Pension Plan, as amended November 20, 2007†

(Incorporated by reference to Exhibit 10.10 to Fannie Mae’s Annual Report on Form 10-K for the year

ended December 31, 2007, filed February 27, 2008.)

10.11 Amendment to Fannie Mae Supplemental Pension Plan for Internal Revenue Code Section 409A,

effective January 1, 2009† (Incorporated by reference to Exhibit 10.11 to Fannie Mae’s Annual Report

on Form 10-K for the year ended December 31, 2007, filed February 27, 2008.)

10.12 Amendment to Fannie Mae Supplemental Pension Plan, executed December 22, 2008† (Incorporated

by reference to Exhibit 10.18 to Fannie Mae’s Annual Report on Form 10-K for the year ended

December 31, 2008, filed February 26, 2009.)

10.13 Fannie Mae Supplemental Pension Plan of 2003, as amended November 20, 2007† (Incorporated by

reference to Exhibit 10.12 to Fannie Mae’s Annual Report on Form 10-K for the year ended

December 31, 2007, filed February 27, 2008.)

10.14 Amendment to Fannie Mae Supplemental Pension Plan of 2003 for Internal Revenue Code

Section 409A, effective January 1, 2009† (Incorporated by reference to Exhibit 10.13 to Fannie Mae’s

Annual Report on Form 10-K for the year ended December 31, 2007, filed February 27, 2008.)

10.15 Amendment to Fannie Mae Supplemental Pension Plan of 2003 for Internal Revenue Code

Section 409A, adopted December 22, 2008† (Incorporated by reference to Exhibit 10.21 to Fannie

Mae’s Annual Report on Form 10-K for the year ended December 31, 2008, filed February 26, 2009.)

10.16 Amendment to Fannie Mae Supplement Pension Plan of 2003, effective May 14, 2010† (Incorporated

by reference to Exhibit 10.1 to Fannie Mae’s Quarterly Report on Form 10-Q, filed August 5, 2010.)

10.17 Executive Pension Plan of the Federal National Mortgage Association as amended and restated†

(Incorporated by reference to Exhibit 10.10 to Fannie Mae’s registration statement on Form 10, filed

March 31, 2003)

10.18 Amendment to the Executive Pension Plan of the Federal National Mortgage Association, as amended

and restated, effective March 1, 2007† (Incorporated by reference to Exhibit 10.20 to Fannie Mae’s

Annual Report on Form 10-K for the year ended December 31, 2005, filed May 2, 2007.)

10.19 Amendment to Fannie Mae Executive Pension Plan, effective November 20, 2007† (Incorporated by

reference to Exhibit 10.16 to Fannie Mae’s Annual Report on Form 10-K for the year ended

December 31, 2007, filed February 27, 2008.)

10.20 Amendment to the Executive Pension Plan of the Federal National Mortgage Association, effective

January 1, 2008† (Incorporated by reference to Exhibit 10.25 to Fannie Mae’s Annual Report on

Form 10-K for the year ended December 31, 2008, filed February 26, 2009.)

10.21 Amendment to the Executive Pension Plan of the Federal National Mortgage Association, effective

December 16, 2009† (Incorporated by reference to Exhibit 10.23 to Fannie Mae’s Annual Report on

Form 10-K for the year ended December 31, 2009, filed February 26, 2010.)

10.22 Amendment to the Executive Pension Plan of the Federal National Mortgage Association, effective

January 1, 2010† (Incorporated by reference to Exhibit 10.22 to Fannie Mae’s Annual Report on Form

10-K for the year ended December 31, 2010, filed February 24, 2011.)

10.23 Fannie Mae Annual Incentive Plan, as amended December 10, 2007† (Incorporated by reference to

Exhibit 10.17 to Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2007,

filed February 27, 2008.)

E-3
Item Description

10.24 Fannie Mae Stock Compensation Plan of 2003, as amended through December 14, 2007† (Incorporated

by reference to Exhibit 10.18 to Fannie Mae’s Annual Report on Form 10-K for the year ended

December 31, 2007, filed February 27, 2008.)

10.25 Amendment to Fannie Mae Stock Compensation Plan of 2003, as amended, for Internal Revenue Code

Section 409A, adopted December 22, 2008† (Incorporated by reference to Exhibit 10.28 to Fannie

Mae’s Annual Report on Form 10-K for the year ended December 31, 2008, filed February 26, 2009.)

10.26 Fannie Mae Stock Compensation Plan of 1993†

10.27 2009 Amendment to Fannie Mae Stock Compensation Plans of 1993 and 2003† (Incorporated by

reference to Exhibit 10.1 to Fannie Mae’s Quarterly Report on Form 10-Q, filed November 5, 2009.)

10.28 Fannie Mae Procedures for Deferral and Diversification of Awards, as amended effective

December 10, 2007† (Incorporated by reference to Exhibit 10.30 to Fannie Mae’s Annual Report on

Form 10-K for the year ended December 31, 2008, filed February 26, 2009.)

10.29 Fannie Mae Supplemental Retirement Savings Plan, as amended through April 29, 2008† (Incorporated

by reference to Exhibit 10.2 to Fannie Mae’s Quarterly Report on Form 10-Q, filed August 8, 2008.)

10.30 Amendment to Fannie Mae Supplemental Retirement Savings Plan, effective October 8, 2008†

(Incorporated by reference to Exhibit 10.32 to Fannie Mae’s Annual Report on Form 10-K for the year

ended December 31, 2008, filed February 26, 2009.)

10.31 Amendment to Fannie Mae Supplemental Retirement Savings Plan, effective May 14, 2010†

(Incorporated by reference to Exhibit 10.2 to Fannie Mae’s Quarterly Report on Form 10-Q, filed

August 5, 2010.)

10.32 Form of Nonqualified Stock Option Grant Award Document† (Incorporated by reference to

Exhibit 10.33 to Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2009,

filed February 26, 2010.)

10.33 Form of Restricted Stock Award Document†

10.34 Form of Restricted Stock Units Award Document adopted January 23, 2008† (Incorporated by

reference to Exhibit 10.27 to Fannie Mae’s Annual Report on Form 10-K for the year ended

December 31, 2007, filed February 27, 2008.)

10.35 Form of Restricted Stock Units Award Document†

10.36 Senior Preferred Stock Purchase Agreement dated as of September 7, 2008, as amended and restated on

September 26, 2008, between the United States Department of the Treasury and Federal National

Mortgage Association (Incorporated by reference Exhibit 4.1 to Fannie Mae’s Current Report on

Form 8-K, filed October 2, 2008.)

10.37 Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of May 6,

2009, between the United States Department of the Treasury and Federal National Mortgage

Association, acting through the Federal Housing Finance Agency as its duly appointed conservator

(Incorporated by reference to Exhibit 4.21 to Fannie Mae’s Quarterly Report on Form 10-Q, filed

May 8, 2009.)

10.38 Second Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of

December 24, 2009, between the United States Department of the Treasury and Federal National

Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed

conservator (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K,

filed December 30, 2009.)

E-4
Item Description

10.39 Letters, dated September 1, 2005, setting forth an agreement between Fannie Mae and OFHEO

10.40 Letter Agreement between Fannie Mae and Timothy J. Mayopoulos, dated March 9, 2009†

(Incorporated by reference to Exhibit 10.44 to Fannie Mae’s Annual Report on Form 10-K for the

year ended December 31, 2009, filed February 26, 2010.)

10.41 Memorandum of Understanding among the Department of the Treasury, the Federal Housing

Finance Agency, the Federal National Mortgage Association, and the Federal Home Loan Mortgage

Corporation, dated October 19, 2009 (Incorporated by reference to Exhibit 99.1 to Fannie Mae’s

Current Report on Form 8-K, filed October 23, 2009.)

10.42 Omnibus Consent to HFA Initiative Program Modifications among the Department of Treasury, the

Federal Housing Finance Agency, Federal National Mortgage Association, and Federal Home Loan

Mortgage Corporation, dated November 23, 2011

12.1 Statement re: computation of ratio of earnings to fixed charges

12.2 Statement re: computation of ratio of earnings to combined fixed charges and preferred stock

dividends and issuance cost at redemption

31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)

31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

101. INS XBRL Instance Document*

101. SCH XBRL Taxonomy Extension Schema*

101. DEF XBRL Taxonomy Extension Definition*

101. LAB XBRL Taxonomy Extension Labels*

101. PRE XBRL Taxonomy Extension Presentation*

* The financial information contained in these XBRL documents is unaudited. The information in these exhibits

shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise

subject to the liabilities of Section 18, nor shall they be deemed incorporated by reference into any disclosure

document relating to Fannie Mae, except to the extent, if any, expressly set forth by specific reference in such

filing.

† This Exhibit is a management contract or compensatory plan or arrangement.

E-5
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Balance Sheets as of December 31, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31,

2011, 2010, and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010, and 2009 . . . . . . . F-5

Consolidated Statements of Equity (Deficit) for the years ended December 31, 2011, 2010 and 2009 . . . . F-6

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7

Note 1— Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7

Note 2— Consolidations and Transfers of Financial Assets .................................. F-38

Note 3— Mortgage Loans ............................................................ F-42

Note 4— Allowance for Loan Losses and Reserve for Guaranty Losses ........................ F-50

Note 5— Investments in Securities ..................................................... F-55

Note 6— Financial Guarantees ........................................................ F-63

Note 7— Acquired Property, Net ...................................................... F-67

Note 8— Short-Term Borrowings and Long-Term Debt .................................... F-68

Note 9— Derivative Instruments ....................................................... F-71

Note 10— Income Taxes .............................................................. F-75

Note 11— Loss Per Share ............................................................. F-78

Note 12— Stock-Based Compensation ................................................... F-79

Note 13— Employee Retirement Benefits ................................................ F-81

Note 14— Segment Reporting .......................................................... F-88

Note 15— Equity (Deficit) ............................................................ F-95

Note 16— Regulatory Capital Requirements .............................................. F-102

Note 17— Concentrations of Credit Risk ................................................. F-104

Note 18— Fair Value ................................................................. F-110

Note 19— Commitments and Contingencies .............................................. F-128

Note 20— Selected Quarterly Financial Information (Unaudited) .............................. F-132

F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Fannie Mae:

We have audited the accompanying consolidated balance sheets of Fannie Mae and consolidated entities (in

conservatorship) (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of

operations and comprehensive loss, cash flows, and changes in equity (deficit) for each of the three years in the

period ended December 31, 2011. These financial statements are the responsibility of the Company’s

management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board

(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about

whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,

evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the

accounting principles used and significant estimates made by management, as well as evaluating the overall

financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial

position of Fannie Mae and consolidated entities (in conservatorship) as of December 31, 2011 and 2010, and the

results of their operations and their cash flows for each of the three years in the period ended December 31, 2011,

in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, on January 1, 2010, the Company prospectively

adopted the Financial Accounting Standards Board (FASB) new accounting standards on the transfers of

financial assets and the consolidation of variable interest entities.

As also discussed in Note 1 to the consolidated financial statements, on April 1, 2009, the Company adopted the

FASB modified standard on the model for assessing other-than-temporary impairments, applicable to existing

and new debt securities.

As also discussed in Note 1 to the consolidated financial statements, the Company is currently under the control

of its conservator and regulator, the Federal Housing Finance Agency (“FHFA”). Further, the Company directly

and indirectly receives substantial support from various agencies of the United States Government, including the

United States Department of Treasury and FHFA. The Company is dependent upon the continued support of the

United States Government, various United States Government agencies and the Company’s conservator and

regulator, FHFA.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the Company’s internal control over financial reporting as of December 31, 2011, based on the

criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring

Organizations of the Treadway Commission and our report dated February 29, 2012 expressed an adverse

opinion on the Company’s internal control over financial reporting because of a material weakness.

/s/ Deloitte & Touche LLP

Washington, DC

February 29, 2012

F-2
FANNIE MAE

(In conservatorship)

Consolidated Balance Sheets

(Dollars in millions, except share amounts)

As of December 31,

2011 2010

ASSETS

Cash and cash equivalents (includes $2 and $348, respectively, related to consolidated trusts) .... $ 17,539 $ 17,297

Restricted cash (includes $45,900 and $59,619, respectively, related to consolidated trusts) ...... 50,797 63,678

Federal funds sold and securities purchased under agreements to resell or similar arrangements . . . 46,000 11,751

Investments in securities:

Trading, at fair value (includes $8 and $21, respectively, related to consolidated trusts) ..... 74,198 56,856

Available-for-sale, at fair value (includes $1,191 and $1,055, respectively, related to

consolidated trusts) ......................................................... 77,582 94,392

Total investments in securities .............................................. 151,780 151,248

Mortgage loans:

Loans held for sale, at lower of cost or fair value (includes $66 and $661, respectively,

related to consolidated trusts) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 915

Loans held for investment, at amortized cost:

Of Fannie Mae ............................................................ 380,134 407,228

Of consolidated trusts (includes $3,611 and $2,962, respectively, at fair value and loans

pledged as collateral that may be sold or repledged of $798 and $2,522, respectively) . . 2,590,332 2,577,133

Total loans held for investment ............................................... 2,970,466 2,984,361

Allowance for loan losses .................................................... (72,156) (61,556)

Total loans held for investment, net of allowance ............................... 2,898,310 2,922,805

Total mortgage loans ................................................... 2,898,621 2,923,720

Accrued interest receivable, net (includes $8,466 and $8,910, respectively, related to consolidated

trusts) ....................................................................... 10,000 11,279

Acquired property, net ............................................................ 11,373 16,173

Other assets (includes cash pledged as collateral of $1,109 and $884, respectively) ............ 25,374 26,826

Total assets ................................................................... $3,211,484 $3,221,972

LIABILITIES AND DEFICIT

Liabilities:

Accrued interest payable (includes $9,302 and $9,712, respectively, related to consolidated

trusts) ..................................................................... $ 12,648 $ 13,764

Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . — 52

Debt:

Of Fannie Mae (includes $838 and $893, respectively, at fair value) .................... 732,444 780,044

Of consolidated trusts (includes $3,939 and $2,271, respectively, at fair value) ............ 2,457,428 2,416,956

Other liabilities (includes $629 and $893, respectively, related to consolidated trusts) ........ 13,535 13,673

Total liabilities .............................................................. 3,216,055 3,224,489

Commitments and contingencies (Note 19) ............................................ — —

Fannie Mae stockholders’ equity (deficit):

Senior preferred stock, 1,000,000 shares issued and outstanding ....................... 112,578 88,600

Preferred stock, 700,000,000 shares are authorized—555,374,922 and 576,868,139 shares

issued and outstanding, respectively ............................................ 19,130 20,204

Common stock, no par value, no maximum authorization—1,308,762,703 and 1,270,092,708

shares issued, respectively; 1,157,767,400 and 1,118,504,194 shares outstanding,

respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 687 667

Accumulated deficit .......................................................... (128,381) (102,986)

Accumulated other comprehensive loss ........................................... (1,235) (1,682)

Treasury stock, at cost, 150,995,303 and 151,588,514 shares, respectively ............... (7,403) (7,402)

Total Fannie Mae stockholders’ deficit ........................................... (4,624) (2,599)

Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 82

Total deficit ................................................................. (4,571) (2,517)

Total liabilities and deficit ......................................................... $3,211,484 $3,221,972

See Notes to Consolidated Financial Statements

F-3
FANNIE MAE

(In conservatorship)

Consolidated Statements of Operations and Comprehensive Loss

(Dollars and shares in millions, except per share amounts)

For the Year Ended

December 31,

2011 2010 2009

Interest income:

Trading securities ................................................................... $ 1,087 $ 1,251 $ 3,859

Available-for-sale securities ........................................................... 3,277 5,290 13,618

Mortgage loans (includes $123,633, $132,591, and $6,143, respectively, related to consolidated

trusts) ........................................................................... 138,462 147,583 21,521

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 146 357

Total interest income ............................................................. 142,943 154,270 39,355

Interest expense:

Short-term debt (includes $9, $12, and $- , respectively, related to consolidated trusts) . . . . . . . . . . . . . 310 631 2,306

Long-term debt (includes $108,641, $118,373, and $344, respectively, related to consolidated

trusts) ........................................................................... 123,352 137,230 22,539

Total interest expense ............................................................ 123,662 137,861 24,845

Net interest income .................................................................... 19,281 16,409 14,510

Provision for loan losses ................................................................ (25,914) (24,702) (9,569)

Net interest (loss) income after provision for loan losses ....................................... (6,633) (8,293) 4,941

Investment gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506 346 1,458

Other-than-temporary impairments ........................................................ (614) (694) (9,057)

Noncredit portion of other-than-temporary impairments recognized in other comprehensive income . . . . . 306 (28) (804)

Net other-than-temporary impairments ..................................................... (308) (722) (9,861)

Fair value losses, net ................................................................... (6,621) (511) (2,811)

Debt extinguishment losses, net .......................................................... (232) (568) (325)

Fee and other income ................................................................... 1,163 1,084 7,984

Non-interest loss .................................................................... (5,492) (371) (3,555)

Administrative expenses:

Salaries and employee benefits ......................................................... 1,236 1,277 1,133

Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 736 942 684

Occupancy expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 170 205

Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 208 185

Total administrative expenses ........................................................ 2,370 2,597 2,207

Provision for guaranty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 804 194 63,057

Foreclosed property expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 780 1,718 910

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 866 927 8,219

Total expenses ...................................................................... 4,820 5,436 74,393

Loss before federal income taxes ......................................................... (16,945) (14,100) (73,007)

Benefit for federal income taxes .......................................................... (90) (82) (985)

Net loss ............................................................................. (16,855) (14,018) (72,022)

Other comprehensive income:

Changes in unrealized losses on available-for-sale securities, net of reclassification adjustments and

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 622 3,504 11,136

Other ............................................................................. (175) (60) 361

Total other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 3,444 11,497

Total comprehensive loss ............................................................... (16,408) (10,574) (60,525)

Less: Comprehensive loss attributable to the noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 4 53

Total comprehensive loss attributable to Fannie Mae .......................................... $ (16,408) $ (10,570) $(60,472)

Net loss ............................................................................. $ (16,855) $ (14,018) $(72,022)

Less: Net loss attributable to the noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 4 53

Net loss attributable to Fannie Mae ........................................................ (16,855) (14,014) (71,969)

Preferred stock dividends ............................................................... (9,614) (7,704) (2,474)

Net loss attributable to common stockholders ................................................ $ (26,469) $ (21,718) $(74,443)

Loss per share—Basic and Diluted ........................................................ $ (4.61) $ (3.81) $ (13.11)

Weighted-average common shares outstanding—Basic and Diluted .............................. 5,737 5,694 5,680

See Notes to Consolidated Financial Statements

F-4
FANNIE MAE

(In conservatorship)

Consolidated Statements of Cash Flows

(Dollars in millions)

For the Year Ended December 31,

2011 2010 2009

Cash flows used in operating activities:

Net loss ..................................................................... $ (16,855) $ (14,018) $ (72,022)

Reconciliation of net loss to net cash used in operating activities:

Amortization of cost basis adjustments ........................................... (369) 126 2,568

Provisions for loan and guaranty losses .......................................... 26,718 24,896 72,626

Valuation (gains) losses ....................................................... (408) (1,289) 3,425

(Gains) losses from partnership investments ....................................... (82) 74 6,735

Current and deferred federal income taxes ........................................ 1,044 258 (1,919)

Purchases of loans held for sale ................................................ (737) (81) (109,684)

Proceeds from repayments of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 88 2,413

Net change in trading securities, excluding non-cash transfers ........................ (17,048) (23,612) 11,976

Payments to servicers for foreclosed property expense and servicer incentive fees ......... (5,394) (5,658) (2,570)

Other, net .................................................................. (2,175) (8,179) 543

Net cash used in operating activities ............................................... (15,238) (27,395) (85,909)

Cash flows provided by investing activities:

Purchases of trading securities held for investment ................................. (2,951) (8,547) (48,659)

Proceeds from maturities of trading securities held for investment ..................... 2,591 2,638 12,918

Proceeds from sales of trading securities held for investment ......................... 1,526 21,556 39,261

Purchases of available-for-sale securities ......................................... (192) (413) (165,103)

Proceeds from maturities of available-for-sale securities ............................. 13,552 17,102 48,096

Proceeds from sales of available-for-sale securities ................................. 3,192 7,867 306,598

Purchases of loans held for investment ........................................... (78,099) (86,724) (52,148)

Proceeds from repayments of loans held for investment of Fannie Mae ................. 25,190 20,715 30,958

Proceeds from repayments of loans held for investment of consolidated trusts ............ 544,145 574,740 26,184

Net change in restricted cash ................................................... 12,881 (15,025) —

Advances to lenders .......................................................... (70,914) (74,130) (79,163)

Proceeds from disposition of acquired property and short sales ........................ 47,248 39,682 22,667

Contributions to partnership investments ......................................... (178) (351) (688)

Proceeds from partnership investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 129 87

Net change in federal funds sold and securities purchased under agreements to resell or

similar agreements ......................................................... (34,249) 41,471 4,230

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363 (531) (27,503)

Net cash provided by investing activities ........................................... 464,388 540,179 117,735

Cash flows used in financing activities:

Proceeds from the issuance of debt of Fannie Mae .................................. 766,598 1,155,993 1,930,907

Payments to redeem debt of Fannie Mae ......................................... (815,838) (1,146,363) (2,030,705)

Proceeds from issuance of debt of consolidated trusts ............................... 233,516 276,575 58

Payments to redeem debt of consolidated trusts .................................... (647,695) (808,502) (601)

Payments of cash dividends on senior preferred stock to Treasury ..................... (9,613) (7,706) (2,470)

Proceeds from senior preferred stock purchase agreement with Treasury ................ 23,978 27,700 59,900

Net change in federal funds purchased and securities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 49 (54)

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 (45) 18

Net cash used in financing activities ............................................... (448,908) (502,299) (42,947)

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 10,485 (11,121)

Cash and cash equivalents at beginning of period .................................... 17,297 6,812 17,933

Cash and cash equivalents at end of period .......................................... $ 17,539 $ 17,297 $ 6,812

Cash paid during the period for:

Interest ...................................................................... $ 128,806 $ 140,651 $ 26,344

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 876

Non-cash activities (excluding impact of the transition to the consolidation accounting

guidance):

Net mortgage loans acquired by assuming debt ...................................... $ 448,437 $ 484,699 $ —

Net transfers from (to) mortgage loans held for investment of Fannie Mae to (from) mortgage

loans held for investment of consolidated trusts .................................... 33,859 (121,852) —

Transfers from advances to lenders to investments in securities ......................... — — 77,191

Transfers from advances to lenders to loans held for investment of consolidated trusts ....... 69,223 68,385 —

Net transfers from mortgage loans to acquired property ................................

56,517 66,081 5,707

See Notes to Consolidated Financial Statements

F-5
FANNIE MAE

(In conservatorship)

Consolidated Statements of Changes in Equity (Deficit)

(Dollars and shares in millions, except per share amounts)

Fannie Mae Stockholders’ Equity (Deficit)

Shares Outstanding

Senior

Preferred

Preferred

Stock

Common

Stock

Additional

Paid-In

Capital

Retained

Earnings

(Accumulated

Deficit)

Accumulated

Other

Comprehensive

Loss

Treasury

Stock

Non

Controlling

Interest

Total

Equity

(Deficit)

Senior

Preferred Preferred Common

Balance as of December 31, 2008 . . . . . . . . . . . . . . . . . . . 1 597 1,085 $ 1,000 $21,222 $ 650 $ 3,621 $ (26,790) $ (7,673) $(7,344) $157 $(15,157)

Cumulative effect from the adoption of the accounting

guidance on other-than-temporary impairments, net of

tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — 8,520 (5,556) — — 2,964

Change in investment in noncontrolling interest ....... — — — — — — — — — — (13) (13)

Comprehensive loss:

Net loss ...................................... — — — — — — — (71,969) — — (53) (72,022)

Other comprehensive income, net of tax effect:

Changes in net unrealized losses on available-for-sale

securities (net of tax of $2,658) ................ — — — — — — — — 4,936 — — 4,936

Reclassification adjustment for other-than-temporary

impairments recognized in net loss (net of tax of

$3,441) ................................... — — — — — — — — 6,420 — — 6,420

Reclassification adjustment for gains included in net

loss (net of tax of $119) ...................... — — — — — — — — (220) — — (220)

Unrealized gains on guaranty assets and guaranty fee

buy-ups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — 245 — — 245

Amortization of net cash flow hedging gains ........ — — — — — — — — 9 — — 9

Prior service cost and actuarial gains, net of

amortization for defined benefit plans . . . . . . . . . . . — — — — — — — — 107 — — 107

Total comprehensive loss ........................ (60,525)

Senior preferred stock dividends ................... — — — — — — (2,470) — — — — (2,470)

Increase to senior preferred liquidation

preference ................................... — — — 59,900 — — — — — — — 59,900

Conversion of convertible preferred stock into common

stock ....................................... — (17) 27 — (874) 14 860 — — — — —

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1 — — — 72 2 — (54) — 20

Balance as of December 31, 2009 . . . . . . . . . . . . . . . . . . . 1 580 1,113 $ 60,900 $20,348 $ 664 $ 2,083 $ (90,237) $ (1,732) $(7,398) $ 91 $(15,281)

Cumulative effect from the adoption of the accounting

guidance on transfers of financial assets and

consolidation ................................. — — — — — — — 6,706 (3,394) — (14) 3,298

Balance as of January 1, 2010, adjusted . . . . . . . . . . . . . . 1 580 1,113 60,900 20,348 664 2,083 (83,531) (5,126) (7,398) 77 (11,983)

Change in investment in noncontrolling interest ....... — — — — — — — — — — 9 9

Comprehensive loss:

Net loss ...................................... — — — — — — — (14,014) — — (4) (14,018)

Other comprehensive income, net of tax effect:

Changes in net unrealized losses on available-for-sale

securities (net of tax of $1,644) ................ — — — — — — — — 3,054 — — 3,054

Reclassification adjustment for other-than-temporary

impairments recognized in net loss (net of tax of

$253) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — 469 — — 469

Reclassification adjustment for gains included in net

loss (net of tax of $10) ....................... — — — — — — — — (19) — — (19)

Unrealized gains on guaranty assets and guaranty fee

buy-ups ................................... — — — — — — — — 1 — — 1

Prior service cost and actuarial gains, net of

amortization for defined benefit plans ........... — — — — — — — — (61) — — (61)

Total comprehensive loss ........................ (10,574)

Senior preferred stock dividends ................... — — — — — — (2,265) (5,441) — — — (7,706)

Increase to senior preferred liquidation

preference ................................... — — — 27,700 — — — — — — — 27,700

Conversion of convertible preferred stock into common

stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (3) 5 — (144) 3 141 — — — — —

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1 — — — 41 — — (4) — 37

Balance as of December 31, 2010 . . . . . . . . . . . . . . . . . . . 1 577 1,119 88,600 20,204 667 — (102,986) (1,682) (7,402) 82 (2,517)

Change in investment in noncontrolling

interest ..................................... — — — — — — — — — — (29) (29)

Comprehensive loss:

Net loss ...................................... — — — — — — — (16,855) — — — (16,855)

Other comprehensive income, net of tax effect:

Changes in net unrealized losses on available-for-sale

securities (net of tax of $250) . . . . . . . . . . . . . . . . . — — — — — — — — 465 — — 465 Reclassification adjustment for other-than-temporary

impairments recognized in net loss (net of tax of

$99) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — 209 — — 209

Reclassification adjustment for gains included in net

loss (net of tax of $28) ....................... — — — — — — — — (52) — — (52)

Prior service cost and actuarial gains, net of

amortization for defined benefit plans ........... — — — — — — — — (175) — — (175)

Total comprehensive loss ........................ (16,408)

Senior preferred stock dividends ................... — — — — — — (1,072) (8,541) — — — (9,613)

Increase to senior preferred liquidation

preference .................................. — — — 23,978 — — — — — — — 23,978

Conversion of convertible preferred stock into common

stock ....................................... — (21) 39 — (1,074) 20 1,054 — — — — —

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — 18 1 — (1) — 18

Balance as of December 31, 2011 . . . . . . . . . . . . . . . . . . . 1 556 1,158 $112,578 $19,130 $ 687 $ — $(128,381) $ (1,235) $(7,403) $ 53 $ (4,571)

See Notes to Consolidated Financial Statements

F-6
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Organization

We are a stockholder-owned corporation organized and existing under the Federal National Mortgage

Association Charter Act (the “Charter Act” or our “charter”). We are a government-sponsored enterprise

(“GSE”), and we are subject to government oversight and regulation. Our regulators include the Federal Housing

Finance Agency (“FHFA”), the U.S. Department of Housing and Urban Development (“HUD”), the U.S.

Securities and Exchange Commission (“SEC”), and the U.S. Department of the Treasury (“Treasury”). The U.S.

government does not guarantee our securities or other obligations.

We operate in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities,

including mortgage-related securities guaranteed by us, from primary mortgage market institutions, such as

commercial banks, savings and loan associations, mortgage banking companies, securities dealers and other

investors. We do not lend money directly to consumers in the primary mortgage market. We provide additional

liquidity in the secondary mortgage market by issuing guaranteed mortgage-related securities.

We operate under three business segments: Single-Family Credit Guaranty (“Single-Family”), Multifamily and

Capital Markets. Our Single-Family segment generates revenue primarily from the guaranty fees on the mortgage

loans underlying guaranteed single-family Fannie Mae mortgage-backed securities (“Fannie Mae MBS”). Our

Multifamily segment generates revenue from a variety of sources, including guaranty fees on the mortgage loans

underlying multifamily Fannie Mae MBS, transaction fees associated with the multifamily business and bond

credit enhancement fees. Our Capital Markets segment invests in mortgage loans, mortgage-related securities and

other investments, and generates income primarily from the difference, or spread, between the yield on the

mortgage assets we own and the interest we pay on the debt we issue in the global capital markets to fund the

purchases of these mortgage assets.

Conservatorship

On September 7, 2008, the Secretary of the Treasury and the Director of FHFA announced several actions taken

by Treasury and FHFA regarding Fannie Mae, which included: (1) placing us in conservatorship and (2) the

execution of a senior preferred stock purchase agreement by our conservator, on our behalf, and Treasury,

pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase common stock.

Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Federal

Housing Finance Regulatory Reform Act of 2008, (together, the “GSE Act”), the conservator immediately

succeeded to (1) all rights, titles, powers and privileges of Fannie Mae, and of any stockholder, 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 has since delegated specified authorities to our Board of

Directors and has delegated to management the authority to conduct our day-to-day operations. The conservator

retains the authority to withdraw its delegations at any time.

We were directed by FHFA to voluntarily delist our common stock and each listed series of our preferred stock

from the New York Stock Exchange and the Chicago Stock Exchange. The last trading day for the listed

securities on the New York Stock Exchange and the Chicago Stock Exchange was July 7, 2010, and since July 8,

2010, the securities have been traded on the over-the-counter market.

The conservator has the power to transfer or sell any asset or liability of Fannie Mae (subject to limitations and

post-transfer notice provisions for transfers of qualified financial contracts) without any approval, assignment of

rights or consent of any party. The GSE Act, however, provides that mortgage loans and mortgage-related assets

F-7
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

that have been transferred to a Fannie Mae mortgage-backed securities (“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 Fannie Mae. As of February 29, 2012, FHFA has not exercised this power.

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. FHFA issued a

rule establishing a framework for conservatorship and receivership operations for the GSEs, which became

effective in July 2011. The rule established procedures for conservatorship and receivership, and priorities of

claims for contract parties and other claimants. This rule is part of FHFA’s implementation of the powers

provided by the Federal Housing Finance Regulatory Reform Act of 2008, and does not seek to anticipate or

predict future conservatorships or receiverships.

The conservatorship has no specified termination date and there continues to be uncertainty regarding the future

of our company, including how long the company will continue to exist in its current form, the extent of our role

in the market, 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. 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

or if we have not been paying our debts, in either case, for a period of 60 days. In addition, the Director of FHFA

may place us in receivership at his discretion at any time for other reasons, including conditions that FHFA has

already asserted existed at the time the former Director of FHFA placed us into conservatorship. Placement into

receivership would have a material adverse effect on holders of our common stock, preferred stock, 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. We are

not aware of any plans of FHFA to significantly change our business model or capital structure in the near-term.

Senior Preferred Stock and Warrant Issued to Treasury

On September 7, 2008, we, through FHFA in its capacity as conservator, entered into a senior preferred stock

purchase agreement with Treasury. The agreement was amended on September 26, 2008, May 6, 2009 and

December 24, 2009.

Pursuant to the amended senior preferred stock purchase agreement, Treasury has committed to provide us with

funding as needed to help us maintain a positive net worth thereby avoiding the mandatory receivership trigger

described above. As consideration for Treasury’s funding commitment, we issued one million shares of senior

preferred stock and a warrant to purchase shares of our common stock to Treasury.

The amended senior preferred stock purchase agreement provides that the $200 billion maximum amount of the

commitment from Treasury will increase as necessary to accommodate any net worth deficiencies attributable to

periods during 2010, 2011, and 2012. If we do not have a positive net worth as of December 31, 2012, then the

amount of funding available under the amended senior preferred stock purchase agreement after 2012 will be

$124.8 billion ($200 billion less $75.2 billion in cumulative draws for net worth deficiencies through

December 31, 2009).

In the event we have a positive net worth as of December 31, 2012, then the amount of funding available after

2012 under the amended senior preferred stock purchase agreement will depend on the size of that positive net

worth relative to the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011, and

2012, as follows:

• If our positive net worth as of December 31, 2012 is less than the cumulative draws for net worth

deficiencies attributable to periods during 2010, 2011, and 2012, then the amount of available funding will

be $124.8 billion less our positive net worth as of December 31, 2012.

F-8
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

• If our positive net worth as of December 31, 2012 is greater than the cumulative draws for net worth

deficiencies attributable to periods during 2010, 2011, and 2012, then the amount of available funding will

be $124.8 billion less the cumulative draws attributable to periods during 2010, 2011, and 2012.

We have received a total of $111.6 billion as of December 31, 2011 under Treasury’s funding commitment and

the Acting Director of FHFA will submit a request for an additional $4.6 billion from Treasury to eliminate our

net worth deficit as of December 31, 2011. The aggregate liquidation preference of the senior preferred stock was

$112.6 billion as of December 31, 2011 and will increase to $117.1 billion as a result of FHFA’s request on our

behalf for funds to eliminate our net worth deficit as of December 31, 2011.

We were scheduled to begin paying a quarterly commitment fee to Treasury under the senior preferred stock

purchase agreement beginning on March 31, 2011; however, Treasury waived the quarterly commitment fee for

each quarter of 2011 and the first quarter of 2012 due to the continued fragility of the U.S. mortgage market and

Treasury’s belief that the imposition of the quarterly commitment fee would not generate increased compensation

for taxpayers. In its notification to FHFA that it had waived the quarterly commitment fee for the first quarter of

2012, Treasury indicated that it will reevaluate the situation during the next calendar quarter to determine

whether the quarterly commitment fee should then be set. The agreement provides that Treasury may waive the

periodic commitment fee for up to one year at a time, in its sole discretion, based on adverse conditions in the

U.S. mortgage market.

The senior preferred stock purchase agreement provides that the amount of the quarterly commitment fee is to be

set no later than December 31, 2010 with respect to the ensuing five-year period, is to be reset for every five

years thereafter, and is to be determined with reference to the market value of Treasury’s funding commitment to

Fannie Mae as then in effect. The agreement also provides that the amount of the quarterly commitment fee is to

be mutually agreed by Treasury and Fannie Mae, subject to their reasonable discretion and in consultation with

the Chairman of the Federal Reserve. As of February 29, 2012, the quarterly commitment fee for the initial fiveyear period had not yet been established.

Treasury, as holder of the senior preferred stock, is entitled to receive, when, as and if directed by our

conservator, cumulative quarterly cash dividends at the annual rate of 10% per year on the current liquidation

preference of the senior preferred stock. If at any time we do not pay cash dividends in a timely manner, then all

dividend periods thereafter until the dividend period following the date on which we have paid in cash full

cumulative dividends, the dividend rate will be 12% per year.

On September 7, 2008, we issued a warrant to Treasury giving it the right to purchase, at a nominal price, shares

of our common stock equal to 79.9% of the total common stock outstanding on a fully diluted basis on the date

Treasury exercises the warrant. Treasury has the right to exercise the warrant, in whole or in part, at any time on

or before September 7, 2028. We recorded the warrant at fair value in our stockholders’ equity as a component of

additional paid-in-capital. The fair value of the warrant was calculated using the Black-Scholes Option Pricing

Model. Since the warrant has an exercise price of $0.00001 per share, the model is insensitive to the risk-free rate

and volatility assumptions used in the calculation and the share value of the warrant is equal to the price of the

underlying common stock. We estimated that the fair value of the warrant at issuance was $3.5 billion based on

the price of our common stock on September 8, 2008, which was after the dilutive effect of the warrant had been

reflected in the market price. Subsequent changes in the fair value of the warrant are not recognized in our

financial statements. If the warrant is exercised, the stated value of the common stock issued will be reclassified

as “Common stock” in our consolidated balance sheets. Because the warrant’s exercise price per share is

considered non-substantive (compared to the market price of our common stock), the warrant was determined to

have characteristics of non-voting common stock, and thus is included in the computation of basic and diluted

F-9
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

loss per share. The weighted-average shares of common stock outstanding for 2011, 2010 and 2009, included

shares of common stock that would be issuable upon full exercise of the warrant issued to Treasury.

Impact of U.S. Government Support

We are dependent upon the continued support of Treasury to eliminate our net worth deficit, which avoids our

being placed into receivership. Based on consideration of all the relevant conditions and events affecting our

operations, including our dependence on the U.S. government, we continue to operate as a going concern and in

accordance with our delegation of authority from FHFA.

We fund our business primarily through the issuance of short-term and long-term debt securities in the domestic

and international capital markets. Because debt issuance is our primary funding source, we are subject to “rollover,” or refinancing, risk on our outstanding debt. Our ability to issue long-term debt has been strong primarily

due to actions taken by the federal government to support us and the financial markets.

We believe that continued federal government support of our business and the financial markets, as well as our

status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in the

government’s support could materially adversely affect our ability to refinance our debt as it becomes due, which

could have a material adverse impact on our liquidity, financial condition and results of operations. In addition,

due to our reliance on the U.S. government’s support, our access to debt funding or the cost of debt funding also

could be materially adversely affected by a change or perceived change in the creditworthiness of the U.S.

government. A downgrade in our credit ratings could reduce demand for our debt securities and increase our

borrowing costs. Standard & Poor’s Ratings Services’ (“S&P”) downgrade of our credit rating on August 8,

2011, which was a result of a similar action on the U.S. government’s sovereign credit rating, has not adversely

affected our access to debt funding or the cost of our debt funding. Future changes or disruptions in the financial

markets could significantly change the amount, mix and cost of funds we obtain, which also could increase our

liquidity and roll-over risk and have a material adverse impact on our liquidity, financial condition and results of

operations.

In February 2011, Treasury and HUD released a report to Congress on reforming America’s housing finance

market. The report provides that the Administration will work with FHFA to determine the best way to

responsibly reduce Fannie Mae’s and Freddie Mac’s role in the market and ultimately wind down both

institutions. The report emphasizes the importance of proceeding with a careful transition plan and providing the

necessary financial support to Fannie Mae and Freddie Mac during the transition period. On February 2,

2012, Treasury Secretary Geithner stated that the Administration intended to release new details around

approaches to housing finance reform including winding down Fannie Mae and Freddie Mac in the spring of

2012 and to work with Congressional leaders to explore options for legislation, but that he does not expect

housing finance reform legislation to be enacted in 2012. We cannot predict the prospects for the enactment,

timing or content of legislative proposals regarding the future status of the GSEs.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting

principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated

financial statements include our accounts as well as the accounts of the other entities in which we have a

controlling financial interest. All intercompany balances and transactions have been eliminated.

Related Parties

As a result of our issuance to Treasury of the warrant to purchase shares of Fannie Mae common stock equal to

79.9% of the total number of shares of Fannie Mae common stock, we and Treasury are deemed related parties.

F-10
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2011, Treasury held an investment in our senior preferred stock with an aggregate

liquidation preference of $112.6 billion. Our administrative expenses were reduced by $106 million and $167

million for the years ended December 31, 2011 and 2010, respectively, due to reimbursements from Treasury and

Freddie Mac for expenses incurred as program administrator for Treasury’s Home Affordable Modification

Program (“HAMP”) and other initiatives under Treasury’s Making Home Affordable Program.

During 2011, we received a refund of $1.1 billion from the Internal Revenue Service (“IRS”) related to the

carryback of our 2009 operating loss to the 2008 and 2007 tax years. In addition, we effectively settled our 2007

and 2008 tax years with the IRS and as a result, we have recognized an income tax benefit of $90 million in our

consolidated statements of operations and comprehensive loss for the year ended December 31, 2011.

In 2010, we entered into an agreement with certain wholly-owned subsidiaries of Ally Financial, Inc. (“Ally”).

Under the agreement, we received $462 million in exchange for our release of specified Ally affiliates from

potential liability relating to certain private-label securities sponsored by the affiliates and for certain selling

representation and warranty liability related to mortgage loans sold and/or serviced by one of Ally’s subsidiaries

as of or prior to June 30, 2010. Treasury has majority ownership of Ally.

In 2009, we entered into a memorandum of understanding with Treasury, FHFA and Freddie Mac pursuant to

which we agreed to provide assistance to state and local housing finance agencies (“HFAs”) through two primary

programs: a temporary credit and liquidity facilities (“TCLF”) program and a new issue bond (“NIB”) program.

Pursuant to the TCLF program, Treasury has purchased participation interests in temporary credit and liquidity

facilities provided by us and Freddie Mac to the HFAs, which facilities create a credit and liquidity backstop for

the HFAs. Pursuant to the NIB program, Treasury has purchased new securities issued and guaranteed by us and

Freddie Mac, which are backed by new housing bonds issued by the HFAs.

In November 2011, we, Treasury, Freddie Mac and FHFA consented to specified modifications to the HFA

initiative programs, including a three-year extension of the expiration date of the TCLFs from December 2012 to

December 2015, and a one-year extension of the expiration date for release of escrowed funds for the NIB

program from December 31, 2011 to December 31, 2012.

Under the TCLF program, we had $3.0 billion and $3.7 billion outstanding, which include principal and interest,

of three-year standby credit and liquidity support as of December 31, 2011 and 2010, respectively. Under the

NIB program, we had $7.5 billion and $7.6 billion outstanding of pass-through securities backed by single-family

and multifamily housing bonds issued by HFAs as of December 31, 2011 and 2010, respectively. Treasury will

bear the initial losses of principal under the TCLF program and the NIB program up to 35% of the total original

principal on a combined program-wide basis, and thereafter we will bear the losses of principal that are

attributable to the TCLF and the securities we have issued. Treasury will bear all losses of unpaid interest under

the two programs. As of December 31, 2011, there had been no losses of principal or interest under the TCLF

program or the NIB program.

FHFA’s control of both us and Freddie Mac has caused us and Freddie Mac to be related parties. No transactions

outside of normal business activities have occurred between us and Freddie Mac. As of December 31, 2011 and

2010, we held Freddie Mac mortgage-related securities with a fair value of $15.6 billion and $18.3 billion,

respectively, and accrued interest receivable of $69 million and $93 million, respectively. We recognized interest

income on these securities held by us of $700 million, $1.1 billion and $2.0 billion for the years ended

December 31, 2011, 2010 and 2009, respectively. In addition, Freddie Mac may be an investor in variable

interest entities that we have consolidated, and we may be an investor in variable interest entities that Freddie

Mac has consolidated.

F-11
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Use of Estimates

Preparing consolidated financial statements in accordance with GAAP requires management to make estimates

and assumptions that affect our reported amounts of assets and liabilities, and disclosure of contingent assets and

liabilities as of the dates of our consolidated financial statements, as well as our reported amounts of revenues

and expenses during the reporting periods. Management has made significant estimates in a variety of areas

including, but not limited to, valuation of certain financial instruments, and other assets and liabilities, the

allowance for loan losses and reserve for guaranty losses, and other-than-temporary impairment of investment

securities. Actual results could be different from these estimates.

In the three months ended December 31, 2011, we updated the estimated probability, based on historical trends,

of a trial modification becoming a permanent modification. Permanent modifications are a better indicator of a

loan’s performance than loans that do not complete a trial modification period. The impact of applying a higher

probability of success to our trial modifications reduced our allowance for loan losses and credit-related expenses

by approximately $700 million. Additionally, we enhanced our process to estimate the recovery amount

incorporated in our allowance for loan losses related to repurchase requests. The recovery estimate takes into

account individual loan attributes such as the probability of default and severity on our individually impaired

loans and resulted in a reduction in our allowance for loan losses and our credit-related expenses of

approximately $800 million.

In the three months ended September 30, 2011, we updated our allowance for loan loss models for individually

impaired loans to incorporate more home price data at the regional level rather than at the national level. We

believe this approach provides a better estimation of possible home price paths and related default expectations;

it has resulted in a decrease to our allowance for loan losses and a reduction in our provision for loan losses of

approximately $800 million.

In the three months ended June 30, 2011, we updated our loan loss models to incorporate more recent data on

prepayments of modified loans, which contributed to an increase in our allowance for loan losses and an increase

in credit-related expenses of approximately $1.5 billion. The change resulted in slower expected prepayment

speeds, which extended the expected lives of modified loans and lowered the present value of cash flows on

those loans. Also in the three months ended June 30, 2011, we updated our estimate of the reserve for guaranty

losses related to private-label mortgage-related securities that we have guaranteed to increase our focus on earlier

stage delinquency, rather than foreclosure trends, as the primary driver in estimating incurred losses. We believe

delinquencies are a better indicator of incurred losses compared to foreclosure trends because the recent delays in

the foreclosure process have interrupted the normal flow of delinquent mortgages into foreclosure. This update

resulted in an increase in our reserve for guaranty losses included within “Other liabilities” and an increase in

credit related-expenses of approximately $700 million.

In addition, in the three months ended June 30, 2011, we revised our estimate for amounts due to us related to

outstanding repurchase requests to incorporate additional loan-level attributes which resulted in a decrease in our

provision for loan losses and foreclosed property expense of $1.5 billion.

Principles of Consolidation

Our consolidated financial statements include our accounts as well as the accounts of the other entities in which

we have a controlling financial interest. All intercompany balances and transactions have been eliminated. The

typical condition for a controlling financial interest is ownership of a majority of the voting interests of an entity.

A controlling financial interest may also exist in entities through arrangements that do not involve voting

interests, such as a variable interest entity (“VIE”).

F-12
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

VIE Assessment

We have interests in various entities that are considered VIEs. A VIE is an entity (1) that has total equity at risk

that is not sufficient to finance its activities without additional subordinated financial support from other entities,

(2) where the group of equity holders does not have the power to direct the activities of the entity that most

significantly impact the entity’s economic performance, or the obligation to absorb the entity’s expected losses or

the right to receive the entity’s expected residual returns, or both, or (3) where the voting rights of some investors

are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the

expected residual returns of the entity, or both, and substantially all of the entity’s activities either involve or are

conducted on behalf of an investor that has disproportionately few voting rights.

We determine if an entity is a VIE by performing a qualitative analysis, which requires certain subjective

decisions including, but not limited to, the design of the entity, the variability that the entity was designed to

create and pass along to its interest holders, the rights of the parties, and the purpose of the arrangement. If we

cannot conclude after a qualitative analysis whether an entity is a VIE, we perform a quantitative analysis.

The primary types of VIE entities with which we are involved are securitization trusts guaranteed by us via

lender swap and portfolio securitization transactions, limited partnership investments in low-income housing tax

credit (“LIHTC”) and other housing partnerships, as well as mortgage and asset-backed trusts that were not

created by us.

In 2009, the Financial Accounting Standards Board (“FASB”) concurrently revised the accounting guidance

related to the consolidation of VIEs (the “consolidation accounting guidance”) and the guidance related to

transfers of financial assets, and we adopted the revised guidance for these topics prospectively effective

January 1, 2010 (the “transition date”). Prior to the transition date, we were exempt from evaluating entities for

consolidation if they met the criteria of a qualifying special purpose entity (“QSPE”) and if we did not have

unilateral ability to cause the entity to liquidate or to change its QSPE status. The revisions to the accounting

guidance for these topics removed the concept of a QSPE and the related exemption from evaluating such entities

for consolidation from the accounting guidance, and thus all of our securitization entities that had previously

been QSPEs became subject to a consolidation assessment under the consolidation accounting guidance.

Primary Beneficiary Determination

If an entity is a VIE, we consider whether our variable interest in that entity causes us to be the primary

beneficiary. An enterprise is deemed to be the primary beneficiary of a VIE when the enterprise has both (1) the

power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and

(2) exposure to benefits and/or losses that could potentially be significant to the entity. The primary beneficiary

of the VIE is required to consolidate and account for the assets, liabilities, and noncontrolling interests of the VIE

in its consolidated financial statements. The assessment of the party that has the power to direct the activities of

the VIE may require significant management judgment when (1) more than one party has power or (2) more than

one party is involved in the design of the VIE but no party has the power to direct the ongoing activities that

could be significant.

We continually assess whether we are the primary beneficiary of the VIEs with which we are involved and

therefore may consolidate or deconsolidate a VIE through the duration of our involvement. Examples of certain

events that may change whether or not we consolidate the VIE include a change in the design of the entity or a

change in our ownership in the entity such that we no longer hold substantially all of the certificates issued by a

multi-class resecuritization trust.

F-13
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Measurement of Consolidated Assets and Liabilities

As of the transition date for the revised consolidation accounting guidance, we initially measured the assets and

liabilities of the consolidated securitization trusts at their unpaid principal balances and established a

corresponding valuation allowance and accrued interest, as it was not practicable to determine the carrying

amount of such assets and liabilities. The securitization assets and liabilities that did not qualify for the use of

this practical expedient were initially measured at fair value. As such, we recognized in our consolidated balance

sheets the mortgage loans underlying our consolidated trusts as “Mortgage loans held for investment of

consolidated trusts.” We also recognized securities issued by these trusts that are held by third parties in our

consolidated balance sheets as “Debt of consolidated trusts.”

Subsequent to the transition date, when we are the transferor of assets into a VIE that we consolidate at the time

of the transfer, we continue to recognize the assets and liabilities of the VIE at the amounts that they would have

been recognized if we had not transferred them, and no gain or loss is recognized. For all other VIEs that we

consolidate subsequent to transition (that is, those for which we are not the transferor), we recognize the assets

and liabilities of the VIE in our consolidated financial statements at fair value, and we recognize a gain or loss

for the difference between (1) the fair value of the consideration paid, fair value of noncontrolling interests and

the reported amount of any previously held interests, and (2) the net amount of the fair value of the assets and

liabilities consolidated. However, for the securitization trusts established under our lender swap program, no gain

or loss is recognized if the trust is consolidated at formation as there is no difference in the respective fair value

of (1) and (2) above. We record gains or losses that are associated with the consolidation of VIEs as “Investment

gains, net” in our consolidated statements of operations and comprehensive loss.

If we cease to be deemed the primary beneficiary of a VIE, we deconsolidate the VIE. We use fair value to

measure the initial cost basis for any retained interests that are recorded upon the deconsolidation of a VIE. Any

difference between the fair value and the previous carrying amount of our investment in the VIE is recorded as

“Investment gains, net” in our consolidated statements of operations and comprehensive loss.

Purchase/Sale of Fannie Mae Securities

We actively purchase and may subsequently sell guaranteed MBS that have been issued through our lender swap

and portfolio securitization transaction programs. The accounting for the purchase and sale of our guaranteed

MBS issued by the trusts differs based on the characteristics of the securitization trusts and whether the trusts are

consolidated.

Single-Class Securitization Trusts

We create single-class securitization trusts to issue single-class Fannie Mae MBS that evidence an undivided

interest in the mortgage loans held in the trust. Investors in single-class Fannie Mae MBS receive principal and

interest payments in proportion to their percentage ownership of the MBS issuance. We guarantee to each

single-class securitization trust that we will supplement amounts received by the single-class securitization trust

as required to permit timely payments of principal and interest on the related Fannie Mae MBS. This guaranty

exposes us to credit losses on the loans underlying Fannie Mae MBS.

Single-class securitization trusts are used for both our lender swap and portfolio securitization transaction

programs. A lender swap transaction occurs when a mortgage lender delivers a pool of single-family mortgage

loans to us, which we immediately deposit into an MBS trust. The MBS are then issued to the lender in exchange

for the mortgage loans. A portfolio securitization transaction occurs when we purchase mortgage loans from

third-party sellers for cash and later deposit these loans into an MBS trust. The securities issued through a

portfolio securitization are then sold to investors for cash. We consolidate single-class securitization trusts that

F-14
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

are issued under these programs when our role as guarantor and master servicer provides us with the power to

direct matters, such as the servicing of the mortgage loans, that impact the credit risk to which we are exposed. In

contrast, we do not consolidate single-class securitization trusts when other organizations have the power to

direct these activities (e.g., when the loan collateral is subject to an FHA guarantee and related servicing guide).

When we purchase single-class Fannie Mae MBS issued from a consolidated trust, we account for the transaction

as an extinguishment of the related debt in our consolidated financial statements. We record a gain or loss on the

extinguishment of such debt to the extent that the purchase price of the MBS does not equal the carrying value of

the related consolidated debt reported in our consolidated balance sheets (including unamortized premiums,

discounts or the other cost basis adjustments) at the time of purchase. We account for the sale of an MBS from

Fannie Mae’s portfolio to a third party that was issued from a consolidated trust as the issuance of debt in our

consolidated financial statements. We amortize the related premiums, discounts and other cost basis adjustments

into income over time.

To determine the order in which consolidated debt is extinguished, we have elected to use a daily convention in

the application of the last-issued first-extinguished method. Under this method, we record the net daily change in

each MBS holding as either the issuance of debt if there has been an increase in the position that is held by third

parties, or the extinguishment of the most recently issued related debt if there has been a decrease in the position

held by third parties. The impact of this method is that we record the net daily activity for an MBS as if it were a

single buy or sell trade, which results in a change in our beginning debt balance if the total unpaid principal

balance purchased does not match the total unpaid principal balance sold.

If a single-class securitization trust is not consolidated, we account for the purchase and subsequent sale of such

securities as the transfer of an investment security in accordance with the accounting guidance for transfers of

financial assets.

Single-Class Resecuritization Trusts

Single-class resecuritization trusts are created by depositing Fannie Mae MBS into a new securitization trust for

the purpose of aggregating multiple MBS into a single larger security. The cash flows from the new security

represent an aggregation of the cash flows from the underlying MBS. We guarantee to each single-class

resecuritization trust that we will supplement amounts received by the trust as required to permit timely payments

of principal and interest on the related Fannie Mae securities. However, we assume no additional credit risk in

such a resecuritization transaction, because the underlying assets are MBS for which we have already provided a

guaranty. Additionally, our involvement with these trusts does not provide any incremental rights or power that

would enable Fannie Mae to direct any activities of the trusts. As a result, we have concluded that we are not the

primary beneficiaries of, and therefore do not consolidate, our single-class resecuritization trusts.

As our single-class resecuritization securities pass through all of the cash flows of the underlying MBS directly

to the holders of the securities, they are deemed to be substantially the same as the underlying MBS. Therefore,

we account for purchases of our single-class resecuritization securities as an extinguishment of the underlying

MBS debt and the sale of these securities as an issuance of the underlying MBS debt.

Multi-Class Resecuritization Trusts

Multi-class resecuritization trusts are trusts we create to issue multi-class Fannie Mae securities, including Real

Estate Mortgage Investment Conduit (“REMIC”) and strip securities, in which the cash flows of the underlying

mortgage assets are divided, creating several classes of securities, each of which represents a beneficial

ownership interest in a separate portion of cash flows. We guarantee to each multi-class resecuritization trust that

F-15
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

we will supplement amounts received by the trusts as required to permit timely payments of principal and

interest, as applicable, on the related Fannie Mae securities. However, we assume no additional credit risk in

such a resecuritization transaction because the underlying assets are Fannie Mae MBS for which we have already

provided a guaranty. Although we may be exposed to prepayment risk via our ownership of the securities issued

by these trusts, we do not have the ability via our involvement with a multi-class resecuritization trust to impact

the economic risk to which we are exposed. Therefore, we do not consolidate such a multi-class resecuritization

trust until we hold a substantial portion of the outstanding beneficial interests that have been issued by the trust

and are therefore considered the primary beneficiary of the trust.

In contrast to our single-class resecuritization trust, the cash flows from the underlying MBS are divided between

the debt securities issued by the multi-class resecuritization trust, and therefore, the debt issued by a multi-class

resecuritization trust is not substantially the same as the consolidated MBS debt. As a result, if a multi-class

resecuritization trust is not consolidated, we account for the purchase and subsequent sale of such securities as

the transfer of an investment security rather than the issuance or extinguishment of the related multi-class debt in

accordance with the accounting guidance for the transfers of financial assets. However, if a multi-class

resecuritization trust is consolidated, we account for the purchase of the securities issued by consolidated

multi-class resecuritization trusts as an extinguishment of the debt issued by these trusts and the subsequent sale

of such securities as the issuance of multi-class debt.

When we do not consolidate a multi-class resecuritization trust, we recognize in our consolidated financial

statements both our investment in the trust and the mortgage loans of the Fannie Mae MBS trusts that we

consolidate that underlie the multi-class resecuritization trust. Additionally, we recognize the unsecured

corporate debt issued to third parties to fund the purchase of our investments in the multi-class resecuritization

trusts and the debt issued to third parties of the MBS trusts we consolidate that underlie the multi-class

resecuritization trusts. This results in the recognition of interest income from investments in multi-class

resecuritization trusts and interest expense from the unsecured debt issued to third parties to fund the purchase of

the investments in multi-class resecuritization trusts, as well as interest income from the mortgage loans and

interest expense from the debt issued to third parties from the MBS trusts we consolidate that underlie the

multi-class resecuritization trusts.

Portfolio Securitizations

We evaluate a transfer of financial assets in a portfolio securitization transaction to an entity that is not

consolidated to determine whether the transfer qualifies as a sale. If a portfolio securitization does not meet the

criteria for sale treatment, the transferred assets remain in our consolidated balance sheets and we record a

liability to the extent of any proceeds received in connection with such a transfer. Transfers of financial assets for

which we surrender control of the transferred assets are recorded as sales.

When a transfer that qualifies as a sale is completed, we derecognize all assets transferred and recognize all

assets obtained and liabilities incurred at fair value. The difference between the carrying basis of the assets

transferred and the fair value of the proceeds from the sale is recorded as a component of “Investment gains, net”

in our consolidated statements of operations and comprehensive loss. Retained interests are primarily in the form

of Fannie Mae MBS, REMIC certificates, guaranty assets and master servicing assets (“MSAs”). We separately

describe the subsequent accounting, as well as how we determine fair value, for our retained interests in the

“Investment in Securities,” and “Guaranty Accounting” sections of this note.

We also enter into repurchase agreements, including dollar roll transactions, which we account for as secured

borrowings. Refer to the “Securities Purchased under Agreements to Resell and Securities Sold under

Agreements to Repurchase” section of this note for discussion of our accounting policies related to these

transfers.

F-16
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Cash and Cash Equivalents and Statements of Cash Flows

Short-term investments that have a maturity at the date of acquisition of three months or less and are readily

convertible to known amounts of cash are generally considered cash equivalents. We may pledge as collateral

certain short-term investments classified as cash equivalents.

In the presentation of our consolidated statements of cash flows, we present cash flows from derivatives that do

not contain financing elements and mortgage loans held for sale as operating activities. We present cash flows

from federal funds sold and securities purchased under agreements to resell or similar arrangements as investing

activities and cash flows from federal funds purchased and securities sold under agreements to repurchase as

financing activities. We classify cash flows related to dollar roll transactions that do not meet the requirements to

be accounted for as secured borrowings as purchases and sales of securities in investing activities. We classify

cash flows from trading securities based on their nature and purpose. We classify cash flows from trading

securities that we intend to hold for investment (the majority of our mortgage-related trading securities) as

investing activities and cash flows from trading securities that we do not intend to hold for investment (primarily

our non-mortgage-related securities) as operating activities.

For consolidated trusts, we classify cash flows related to mortgage loans held by our consolidated trusts as either

investing activities (for principal repayments) or operating activities (for interest received from borrowers

included as a component of our net loss). Cash flows related to debt securities issued by consolidated trusts are

classified as either financing activities (for repayments of principal to certificateholders) or operating activities

(for interest payments to certificateholders included as a component of our net loss). We distinguish between the

payments and proceeds related to the debt of Fannie Mae and the debt of consolidated trusts, as applicable. We

present our non-cash activities in the consolidated statements of cash flows at the associated unpaid principal

balance.

F-17
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

To conform to our current period presentation, we have reclassified certain amounts reported in our consolidated

statements of cash flows. The following table displays the line item reclassifications made to our consolidated

statements of cash flows for the years ended December 31, 2010 and 2009.

For the Year Ended December 31,

2010 2009

Before

Reclassification

After

Reclassification

Before

Reclassification

After

Reclassification

(Dollars in millions)

Reclassified line items:

Cash flows used in operating activities:

Payments to servicers for foreclosed property

expense and servicer incentive fees ............ $ — $ (5,658) $ — $ (2,570)

Other, net ................................... (13,837) (8,179) (2,027) 543

Cash flows used in financing activities:

Proceeds from issuance of short-term debt of Fannie

Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 699,346 $ — $ 1,641,119 $ —

Proceeds from issuance of long-term debt of Fannie

Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456,602 — 289,806 —

Proceeds from issuance of debt of Fannie Mae ..... — 1,155,993 — 1,930,907

Other, net ................................... — (45) — 18

Payments to redeem short-term debt of Fannie

Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (748,550) — (1,773,977) —

Payments to redeem long-term debt of Fannie

Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (397,813) — (256,728) —

Payments to redeem debt of Fannie Mae .......... — (1,146,363) — (2,030,705)

Proceeds from issuance of short-term debt of

consolidated trusts .......................... 12,613 — — —

Proceeds from issuance of long-term debt of

consolidated trusts .......................... 263,962 — 58 —

Proceeds from issuance of debt of consolidated

trusts .................................... — 276,575 — 58

Payments to redeem short-term debt of consolidated

trusts .................................... (37,210) — — —

Payments to redeem long-term debt of consolidated

trusts .................................... (771,292) — (601) —

Payments to redeem debt of consolidated trusts ..... — (808,502) — (601)

Restricted Cash

We and our servicers advance payments on delinquent loans to consolidated Fannie Mae MBS trusts. We

recognize the cash advanced as “Restricted cash” in our consolidated balance sheets to the extent such amounts

are due to, but have not yet been remitted to, the MBS certificateholders. In addition, when we or our servicers

collect and hold cash that is due to certain Fannie Mae MBS trusts in advance of our requirement to remit these

amounts to the trusts, we recognize the collected cash amounts as “Restricted cash.”

We also recognize “Restricted cash” as a result of restrictions related to certain consolidated partnership funds as

well as for certain collateral arrangements for which we do not have the right to use the cash.

F-18
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase

Securities Issued By Consolidated Entities

We account for transfers of securities issued by consolidated MBS trusts, including securities purchased under

agreements to resell and securities sold under agreements to repurchase, as issuances or extinguishments of the

related consolidated MBS debt in our consolidated financial statements.

Securities Issued By Unconsolidated Entities

We evaluate repurchase agreements, including dollar roll transactions, involving contemporaneous purchase and

sale trades of securities issued by unconsolidated trusts to determine whether such agreements should be

recorded as secured financings or as purchases and sales of securities.

When we enter into such agreements, we first account for our forward commitments to buy and sell the

mortgage-related securities as derivatives in our financial statements at the trade date for both the purchase and

sale trades. Subsequent to the trade date, but prior to the contractual settlement date, we may fully or partially

settle the forward purchase or sale commitments such that all or a portion of the securities will not be delivered

according to the terms of the original trade. When such a settlement occurs, the contemporaneous purchase and

sale trades no longer meet the “substantially the same” criteria as necessary for secured financing treatment, and

the remaining transfers are accounted for as purchases or sales of securities as described in “Investments in

Securities,” below.

For those commitments that are not settled prior to the contractual settlement date for the first trade, we assess

whether both the purchase and sale trades have the same primary obligor, form and type, maturity, interest rate,

collateral, and unpaid principal balance, and thus meet all of the criteria to be considered substantially the same.

If the “substantially the same” criteria are met as of the settlement date for the first trade, we will account for the

transaction as a secured financing and extinguish both the purchase and sale commitments as of that date. The

fair value of securities purchased is classified in “Investments in securities” in our consolidated balance sheets.

Investments in Securities

Securities Classified as Available-for-Sale or Trading

We classify and account for our securities as either available-for-sale (“AFS”) or trading. We measure AFS

securities at fair value in our consolidated balance sheets, with unrealized gains and losses included in

“Accumulated other comprehensive loss” (“AOCI”), net of applicable income taxes. We recognize realized gains

and losses on AFS securities when securities are sold. We calculate the gains and losses using the specific

identification method and record them in “Investment gains, net” in our consolidated statements of operations

and comprehensive loss. We measure trading securities at fair value in our consolidated balance sheets with

unrealized and realized gains and losses included as a component of “Fair value losses, net” in our consolidated

statements of operations and comprehensive loss. We include interest and dividends on securities, including

amortization of the premium and discount at acquisition, in our consolidated statements of operations and

comprehensive loss. When we receive multiple deliveries of securities on the same day that are backed by the

same pools of loans, we calculate the specific cost of each security as the average price of the trades that

delivered those securities. Currently, we do not have any securities classified as held-to-maturity, although we

may elect to do so in the future.

Other-Than-Temporary Impairment of Debt Securities

We evaluate available-for-sale securities for other-than-temporary impairment on a quarterly basis. An otherthan-temporary impairment is considered to have occurred when the fair value of a debt security is below its

F-19
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

amortized cost basis and we intend to sell or it is more likely than not that we will be required to sell the security

before recovery. We recognize in our consolidated statements of operations and comprehensive loss, the entire

difference between the amortized cost basis of the security and its fair value. An other-than-temporary

impairment is also considered to have occurred if we do not expect to recover the entire amortized cost basis of a

debt security even if we do not intend or it is not more likely than not we will be required to sell the security

before recovery. We separate the difference between the amortized cost basis of the security and its fair value

into the amount representing the credit loss, which we recognize in our consolidated statements of operations and

comprehensive loss, and the amount related to all other factors, which we recognize in “Other comprehensive

loss,” net of applicable taxes. In determining whether a credit loss exists, we use our best estimate of cash flows

expected to be collected from the debt security.

We consider guarantees, insurance contracts or other credit enhancements (such as collateral) in determining our

best estimate of cash flows expected to be collected only if (1) such guarantees, insurance contracts or other

credit enhancements provide for payments to be made solely to reimburse us for failure of the issuer to satisfy its

required payment obligations, (2) such guarantees, insurance contracts or other credit enhancements are

contractually attached to the security and (3) collection of the amounts receivable under these agreements is

deemed probable. Guarantees, insurance contracts or other credit enhancements are considered contractually

attached if they are part of and trade with the security upon transfer of the security to a third party.

In periods after we recognize an other-than-temporary impairment of debt securities, we use the prospective

interest method to recognize interest income. Under the prospective interest method, we calculate a new effective

yield when we determine that there has been a significant increase in expected or actual cash flows. We consider

a significant increase in cash flows to be at least a ten percent increase over two consecutive quarters of the

expected or actual cash flows. We calculate the new effective yield by using the new cost basis and

the significantly increased actual or expected cash flows.

On April 1, 2009, the FASB modified guidance on the model for assessing other-than-temporary impairments,

applicable to existing and new debt securities held by us as of April 1, 2009. As a result of adopting the guidance,

we recorded a cumulative-effect adjustment of $8.5 billion on a pre-tax basis ($5.6 billion after tax) to reclassify

the noncredit portion of previously recognized other-than-temporary impairments from “Accumulated deficit” to

AOCI. We also reduced the “Accumulated deficit” and valuation allowance by $3.0 billion for the deferred tax

asset related to the amounts previously recognized as other-than-temporary impairments in our consolidated

statements of operations and comprehensive loss based upon the assertion of our intent and ability to hold certain

of these securities until recovery.

Prior to April 1, 2009, we considered a debt security to be other-than-temporarily impaired if its estimated fair

value was less than its amortized cost basis and we determined that it was probable that we would be unable to

collect all of the contractual principal and interest payments or we did not intend to hold the security until it

recovered to its previous carrying amount. When we determined an investment was other-than-temporarily

impaired, we wrote down the cost basis of the investment to its fair value and included the loss in “Other-thantemporary impairments” in our consolidated statements of operations and comprehensive loss. The fair value of

the investment then became its new cost basis.

Mortgage Loans

Loans Held for Investment

When we acquire mortgage loans that we have the ability and the intent to hold for the foreseeable future or until

maturity, we classify the loans as held for investment (“HFI”). When we consolidate a trust, we recognize the

loans underlying the trust in our consolidated balance sheets. The trusts do not have the ability to sell mortgage

F-20
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

loans and the use of such loans is limited exclusively to the settlement of obligations of the trusts. Therefore,

mortgages acquired when we have the intent to securitize via trusts that are consolidated will generally be

classified as HFI in our consolidated balance sheets both prior to and subsequent to their securitization.

We report HFI loans at their outstanding unpaid principal balance adjusted for any deferred and unamortized cost

basis adjustments, including purchase premiums, discounts and other cost basis adjustments. We recognize

interest income on HFI loans on an accrual basis using the interest method, including the amortization of any

deferred cost basis adjustments, unless we determine that the ultimate collection of contractual principal or

interest payments in full is not reasonably assured.

Loans Held for Sale

When we acquire mortgage loans that we intend to sell or securitize via trusts that will not be consolidated, we

classify the loans as held for sale (“HFS”). We report HFS loans at the lower of cost or fair value. Any excess of

an HFS loan’s cost over its fair value is recognized as a valuation allowance, with changes in the valuation

allowance recognized as “Investment gains, net” in our consolidated statements of operations and comprehensive

loss. We recognize interest income on HFS loans on an accrual basis, unless we determine that the ultimate

collection of contractual principal or interest payments in full is not reasonably assured. Purchase premiums,

discounts and other cost basis adjustments on HFS loans are deferred upon loan acquisition, included in the cost

basis of the loan, and not amortized. We determine any lower of cost or fair value adjustment on HFS loans on a

pool basis by aggregating those loans based on similar risks and characteristics, such as product types and

interest rates.

In the event that we reclassify HFS loans to HFI, we record the loans at lower of cost or fair value on the date of

reclassification. We recognize any lower of cost or fair value adjustment recognized upon reclassification as a

basis adjustment to the HFI loan.

Nonaccrual Loans

We discontinue accruing interest on loans when we believe collectibility of principal or interest is not reasonably

assured, which for single-family loans we have determined, based on our historical experience, to be when the

loan becomes two months or more past due according to its contractual terms. We generally place multifamily

loans on nonaccrual status when the loan is deemed to be individually impaired, unless the loan is well secured

such that collectibility of principal and accrued interest is reasonably assured.

When a loan is placed on nonaccrual status, interest previously accrued but not collected becomes part of our

recorded investment in the loan and is collectively reviewed for impairment. For single-family loans, we

recognize interest income for loans on nonaccrual status when cash is received. For multifamily loans, we apply

any payment received on a cost recovery basis to reduce principal on the mortgage loan unless the loan is

determined to be well secured.

We return a single-family loan to accrual status at the point that the borrower has made sufficient payments to

reduce their delinquency below our nonaccrual threshold. For modified single-family loans, the loan is not

returned to accrual status until the borrower successfully makes all required payments during the trial period

(generally three to four months) and the modification is made permanent. We generally return a multifamily loan

to accrual status when the borrower cures the delinquency of the loan or we otherwise determine that the loan is

well secured such that collectibility is reasonably assured.

F-21
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Restructured Loans

A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing

financial difficulties is considered a troubled debt restructuring (“TDR”). Our loss mitigation programs primarily

include modifications that result in the capitalization of past due amounts in combination with interest rate

reductions below market and/or the extension of the loan’s maturity date. Such restructurings are granted to

borrowers in financial difficulty on either a permanent or contingent basis, as in the case of modifications with a

trial period. We consider these types of loan restructurings to be TDRs.

We do not currently include principal or past due interest forgiveness as part of our loss mitigation programs, and

as a result, we do not charge off any outstanding principal or accrued interest amounts at the time of loan

modification. We believe that the loan underwriting activities we perform as a part of our loan modification

process coupled with the borrower’s successful performance during any required trial period provide us

reasonable assurance regarding the collectibility of the principal and interest due in accordance with the loan’s

modified terms, which include any past due interest amounts that are capitalized at the time of modification. As

such, the loan is returned to accrual status when the loan modification is completed (i.e., at the end of the trial

period), and we accrue interest thereafter in accordance with our interest accrual policy. If the loan was on

nonaccrual status prior to entering the trial period, it remains on nonaccrual status until the borrower

demonstrates performance via the trial period and the modification is finalized.

In addition to these loan modifications, we also engage in other loss mitigation activities with troubled

borrowers, which include repayment plans, forbearance arrangements, and the capitalization only of past due

amounts. Repayment plans and forbearance arrangements are informal agreements with the borrower that do not

result in the legal modification of the loan. For all of these activities, we consider the deferral or capitalization of

three or fewer missed payments to represent only an insignificant delay, and thus not a TDR. If we defer or

capitalize more than three missed payments, the delay is no longer considered insignificant, and the restructuring

is accounted for as a TDR.

We measure impairment of a loan restructured in a TDR individually based on the excess of the recorded

investment in the loan over the present value of the expected future cash inflows discounted at the loan’s original

effective interest rate. Costs incurred to complete a TDR are expensed as incurred. However, when foreclosure is

probable on an individually impaired loan, we measure impairment based on the difference between our recorded

investment in the loan and the fair value of the underlying property, adjusted for the estimated costs to sell the

property and estimated insurance or other proceeds we expect to receive.

In April 2011, FASB issued new guidance effective for the three months ended September 30, 2011 that applied

retrospectively to January 1, 2011. The new guidance clarified how to determine when a borrower is

experiencing financial difficulty, when a concession is granted by a creditor, and when a delay in payment is

considered insignificant. The primary impact to us of adopting this new guidance was the refinement of how we

define an insignificant delay. As a result, we lowered our threshold for an insignificant delay from approximately

nine missed payments to three missed payments and thus this type of additional loss mitigation activity that had

previously been excluded is now considered a TDR. This refinement was necessary in order to conform our

policy to the new guidance on insignificant delay provided by the FASB.

As a result of adopting the new TDR accounting guidance, we identified approximately 22,000 loan

restructurings for the nine months ended September 30, 2011 that had not defaulted as of September 30, 2011

and were not previously considered TDRs. The impact of this was an increase in our provision for loan losses of

$514 million in our condensed consolidated statements of operations and comprehensive loss for the three

F-22
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

months ended September 30, 2011. This amount reflects the net increase in our allowance for loan losses due to

identifying these restructurings as TDRs and measuring their impairment on an individual basis offset by the

elimination of our allowance for loan loss measured on a collective basis related to these loans.

Loans Purchased or Eligible to be Purchased from Trusts

For our single-class securitization trusts that include a Fannie Mae guaranty, we have the option to purchase a

loan from the trust after four or more consecutive monthly payments due under the loan are delinquent in whole

or in part. With respect to single-family mortgage loans in trusts with issue dates on or after January 1, 2009, we

also have the option to purchase a loan from the trust after the loan has been delinquent for at least one monthly

payment, if the delinquency has not been fully cured on or before the next payment date (that is, 30 days

delinquent), and it is determined that it is appropriate to execute loss mitigation activity that is not permissible

while the loan is held in a trust. Fannie Mae, as guarantor or as issuer, may also purchase mortgage loans when

other pre-defined contingencies have been met, such as when there is a material breach of a seller’s

representation and warranty. Under long-term standby commitments, we purchase credit-impaired loans from

lenders when the loans subject to these commitments meet certain delinquency criteria. This arrangement also

allows the lender to deliver qualified loans in exchange for our guaranteed Fannie Mae MBS.

When we purchase mortgage loans from consolidated trusts, we reclassify the loans from “Mortgage loans held

for investment of consolidated trusts” to “Mortgage loans held for investment by Fannie Mae” and, upon

settlement, we record an extinguishment of the corresponding portion of the debt of the consolidated trusts.

For unconsolidated trusts and long-term standby commitments, loans that are credit impaired at the time of

acquisition are recorded at the lower of their acquisition cost (unpaid principal balance plus accrued interest) or

fair value. A loan is considered credit impaired at acquisition when there is evidence of credit deterioration

subsequent to the loan’s origination and it is probable, at acquisition, that we will be unable to collect all

contractually required payments receivable (ignoring insignificant delays in contractual payments). We record

each acquired loan that does not meet these criteria at its acquisition cost.

For unconsolidated trusts where we are considered the transferor, we recognize the loan in our consolidated

balance sheets at fair value and record a corresponding liability to the unconsolidated trust when the contingency

on our option to purchase the loan from the trust has been met and we regain effective control over the

transferred loan.

We base our estimate of the fair value of delinquent loans purchased from unconsolidated trusts or long-term

standby commitments upon an assessment of what a market participant would pay for the loan at the date of

acquisition. We utilize indicative market prices from large, experienced dealers to estimate the initial fair value

of delinquent loans purchased from unconsolidated trusts or long-term standby commitments. We consider

acquired credit-impaired loans to be individually impaired at acquisition, and no valuation allowance is

established or carried over. We record the excess of the loan’s acquisition cost over its fair value as a charge-off

against our “Reserve for guaranty losses” at acquisition. We recognize any decreases in estimated future cash

flows to be collected subsequent to acquisition as provisions for loan losses through our “Allowance for loan

losses.”

We place credit-impaired loans that we acquire from unconsolidated trusts or long-term standby commitments on

nonaccrual status at acquisition in accordance with our nonaccrual policy. If we subsequently determine that the

collectibility of principal and interest is reasonably assured, we return the loan to accrual status. We determine

the initial accrual status of acquired loans that are not credit impaired in accordance with our nonaccrual policy.

F-23
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

When an acquired credit-impaired loan is returned to accrual status, the portion of the expected cash flows

(which incorporates changes in the timing and amount that are associated with credit and prepayment events) that

exceeds the recorded investment in the loan is accreted into interest income over the expected remaining life of

the loan. We prospectively recognize increases in future cash flows expected to be collected as interest income

over the remaining expected life of the loan through a yield adjustment. If we subsequently refinance or

restructure an acquired credit-impaired loan, other than through a TDR, the loan is not accounted for as a new

loan but continues to be accounted for under the accounting guidance for acquired credit-impaired loans.

Allowance for Loan Losses and Reserve for Guaranty Losses

The allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related to

our recorded investment in both single-family and multifamily HFI loans. This population includes both HFI

loans held by Fannie Mae and by consolidated Fannie Mae MBS trusts. When calculating our loan loss

allowance, we consider only our net recorded investment in the loan at the balance sheet date, which includes the

loan’s unpaid principal balance and accrued interest recognized while the loan was on accrual status and any

applicable cost basis adjustments.

The reserve for guaranty losses is a liability account in our consolidated balance sheets that reflects an estimate

of incurred credit losses related to our guaranty to each unconsolidated Fannie Mae MBS trust that we will

supplement amounts received by the Fannie Mae MBS trust as required to permit timely payments of principal

and interest on the related Fannie Mae MBS and our agreements to purchase credit-impaired loans from lenders

under the terms of our long-term standby commitments. As a result, the guaranty reserve considers not only the

principal and interest due on the loan at the current balance sheet date, but also any additional interest payments

due to the trust from the current balance sheet date until the point of loan acquisition or foreclosure.

We recognize incurred losses by recording a charge to the “Provision for loan losses” or the “Provision for

guaranty losses” in our consolidated statements of operations and comprehensive loss.

Single-Family Loans

We recognize credit losses related to groups of similar single-family HFI loans that are not individually impaired

when (1) available information as of each balance sheet date indicates that it is probable a loss has occurred and

(2) the amount of the loss can be reasonably estimated. We aggregate such loans, based on similar risk

characteristics, for purposes of estimating incurred credit losses and establish a collective single-family loss

reserve using an econometric model that derives an overall loss reserve estimate. The estimate takes into account

multiple factors which include but are not limited to origination year, loan product type, mark-to-market

loan-to-value (“LTV”) ratio; and delinquency status. Once loans are aggregated, there typically is not a single,

distinct event that would result in an individual loan or pool of loans being impaired. Accordingly, to determine

an estimate of incurred credit losses, we base our allowance and reserve methodology on historical events and

trends, such as loss severity (in event of default), default rates, and recoveries from mortgage insurance contracts

and other credit enhancements that provide loan level loss coverage and are either contractually attached to a

loan or that were entered into contemporaneously with and in contemplation of a guaranty or loan purchase

transaction. In determining our collective reserve, we use recent actual severity experienced in our real-estate

owned (“REO”) and loss mitigation operations, including the sales of our own foreclosed properties, to estimate

the loss given default. Our allowance calculation also incorporates a loss confirmation period (the anticipated

time lag between a credit loss event and the confirmation of the credit loss resulting from that event) to ensure

our allowance estimate captures credit losses that have been incurred as of the balance sheet date but have not

been confirmed. In addition, management performs a review of the observable data used in its estimate to ensure

it is representative of prevailing economic conditions and other events existing as of the balance sheet date.

F-24
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We record charge-offs as a reduction to the allowance for loan losses or reserve for guaranty losses when losses

are confirmed through the receipt of assets in full satisfaction of a loan, such as the underlying collateral upon

foreclosure or cash upon completion of a short sale. The excess of a loan’s unpaid principal balance, accrued

interest, and any applicable cost basis adjustments (“our total exposure”) over the fair value of the assets received

is treated as a charge-off loss that is deducted from the allowance for loan losses or reserve for guaranty losses.

The amount charged off also considers estimated proceeds from primary mortgage insurance or other credit

enhancements that are either contractually attached to a loan or that were entered into contemporaneously with

and in contemplation of a guaranty or loan purchase transaction as a recovery of our total exposure, up to the

amount of loss recognized as a charge-off. We record additional proceeds from primary mortgage insurance and

credit enhancements in excess of our total exposure as a recovery of any forgone contractually past due

interest, and then as an offset to the expenses recorded in “Foreclosed property expense” in our consolidated

statements of operations and comprehensive loss when received.

Individually Impaired Single-Family Loans

Individually impaired single-family loans currently include those restructured in a TDR and acquired creditimpaired loans. We consider a loan to be impaired when, based on current information, it is probable that we will

not receive all amounts due, including interest, in accordance with the contractual terms of the loan agreement.

When making our assessment as to whether a loan is impaired, we also take into account more than insignificant

delays in payment and shortfalls in amounts received. Determination of whether a delay in payment or shortfall

in amount is more than insignificant requires management’s judgment as to the facts and circumstances

surrounding the loan.

Our measurement of impairment on an individually impaired loan follows the method that is most consistent with

our expectations of recovery of our recorded investment in the loan. When a loan has been restructured, we

measure impairment using a cash flow analysis discounted at the loan’s original effective interest rate. If we

expect to recover our recorded investment in an individually impaired loan through probable foreclosure of the

underlying collateral, we measure impairment based on the fair value of the collateral, reduced by estimated

disposal costs on a discounted basis and adjusted for estimated proceeds from mortgage, flood, or hazard

insurance or similar sources. For individually impaired loans that we believe are probable of foreclosure, we take

into consideration the sales prices of foreclosed properties in determining the value of the underlying real estate

collateral.

We use internal models to project cash flows used to assess impairment of individually impaired loans, and

generally update the market and loan characteristic inputs we use in these models monthly, using month-end

data. Market inputs include information such as interest rates, volatility and spreads, while loan characteristic

inputs include information such as mark-to-market LTV ratios and delinquency status. The loan characteristic

inputs are key factors that affect the predicted rate of default for loans evaluated for impairment through our

internal cash flow models. We evaluate the reasonableness of our models by comparing the results with actual

performance and our assessment of current market conditions. In addition, we review our models at least

annually for reasonableness and predictive ability in accordance with our corporate model review policy.

Accordingly, we believe the projected cash flows generated by our models that we use to assess impairment

appropriately reflect the expected future performance of the loans.

Multifamily Loans

We identify multifamily loans for evaluation for impairment through a credit risk assessment process. Based on

this evaluation, we determine for loans that are not in homogeneous pools whether or not a loan is individually

impaired. We consider a loan to be individually impaired when, based on current information gathered in our risk

assessment process, it is probable that we will not receive all amounts due, including interest, in accordance with

F-25
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the contractual terms of the loan agreement. If we determine that a multifamily loan is individually impaired, we

generally measure impairment on that loan based on the fair value of the underlying collateral less estimated

costs to sell the property. If we determine that an individual loan that was specifically evaluated for impairment

is not individually impaired, we include the loan as part of a pool of loans with similar characteristics that are

evaluated collectively for incurred losses.

We stratify multifamily loans into different internal risk categories based on the credit risk inherent in each

individual loan. We categorize loan credit risk based on relevant observable data about a borrower’s ability to

pay, including multifamily market economic fundamentals, review of available current borrower financial

information, operating statements on the underlying collateral, current debt service coverage ratios, historical

payment experience, estimates of the current collateral values and other related credit documentation. As a result

of this analysis, multifamily loans are categorized based on management’s judgment into the following

categories: (1) Green (loan with acceptable risk); (2) Yellow (loan with signs of potential weakness); (3) Orange

(loan with a well-defined weakness that may jeopardize the timely full repayment); and (4) Red (loan with a

weakness that makes timely collection or liquidation in full more questionable based on existing conditions and

values). We evaluate loans in the orange and red risk categories to determine which ones are individually

impaired.

For each risk category, certain observed default probability and loss severity (in event of default) factors, based

on historical performance of loans in the same risk category, are applied against our recorded investment in the

loans, including recorded accrued interest associated with such loans, to determine an appropriate allowance.

Such performance data reflect historical delinquencies and charge-offs, as well as loan size. In addition, we

consider any credit enhancements such as letters of credit or loss sharing arrangements with our lenders.

Advances to Lenders

Advances to lenders represent our payments of cash in exchange for the receipt of mortgage loans from lenders

in a transfer that is accounted for as a secured lending arrangement. These transfers primarily occur when we

provide early funding to lenders for loans that they will subsequently either sell to us or securitize into a Fannie

Mae MBS that they will deliver to us. We individually negotiate early lender funding advances with our lender

customers. Early lender funding advances have terms up to 60 days and earn a short-term market rate of interest.

We report cash outflows from advances to lenders as an investing activity in our consolidated statements of cash

flows. Settlements of the advances to lenders, other than through lender repurchases of loans, are not collected in

cash, but rather in the receipt of either loans or Fannie Mae MBS. Accordingly, this activity is reflected as a

non-cash transfer in our consolidated statements of cash flows. Currently, in our consolidated statements of cash

flows, we include advances settled through receipt of securities in the non-cash activities line item entitled

“Transfers from advances to lenders to investments in securities” or, if the security is issued from a consolidated

Fannie Mae MBS trust, in the line item entitled “Transfers from advances to lenders to loans held for investment

of consolidated trusts.”

Acquired Property, Net

“Acquired property, net” includes foreclosed property and any receivable outstanding on short sales received in

full satisfaction of a loan. We recognize foreclosed property upon the earlier of the loan foreclosure event or

when we take physical possession of the property (i.e., through a deed-in-lieu of foreclosure transaction). We

initially measure foreclosed property at its fair value less its estimated costs to sell. We treat any excess of our

recorded investment in the loan over the fair value less estimated costs to sell the property as a charge-off to the

“Allowance for loan losses.” Any excess of the fair value less estimated costs to sell the property over our

F-26
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

recorded investment in the loan is recognized first to recover any forgone, contractually due interest, then to

“Foreclosed property expense” in our consolidated statements of operations and comprehensive loss.

We classify foreclosed properties as held for sale when we intend to sell the property and the following

conditions are met at either acquisition or within a relatively short period thereafter: we are actively marketing

the property and it is available for immediate sale in its current condition such that the sale is reasonably

expected to take place within one year. We report these properties at the lower of their carrying amount or fair

value less estimated selling costs, on a discounted basis if the sale is expected to occur beyond one year from the

date of foreclosure. We do not depreciate these properties.

We recognize a loss for any subsequent write-down of the property to its fair value less its estimated costs to sell

through a valuation allowance with an offsetting charge to “Foreclosed property expense” in our consolidated

statements of operations and comprehensive loss. We recognize a recovery for any subsequent increase in fair

value less estimated costs to sell up to the cumulative loss previously recognized through the valuation

allowance. We recognize gains or losses on sales of foreclosed property through “Foreclosed property expense”

in our consolidated statements of operations and comprehensive loss.

Properties that do not meet the criteria to be classified as held for sale are classified as held for use and are

recorded in “Other assets” in our consolidated balance sheets. These properties are depreciated and are evaluated

for impairment when circumstances indicate that the carrying amount of the property is no longer recoverable.

Guaranty Accounting

Our primary guaranty transactions result from mortgage loan securitizations in which we issue Fannie Mae MBS.

The majority of our Fannie Mae MBS issuances fall within two broad categories: (1) lender swap transactions,

where a lender delivers mortgage loans to us to deposit into a trust in exchange for our guaranteed Fannie Mae

MBS backed by those mortgage loans and (2) portfolio securitizations, where we securitize loans that were

previously included in our consolidated balance sheets, and create guaranteed Fannie Mae MBS backed by those

loans. As guarantor, we guaranty to each MBS trust that we will supplement amounts received by the MBS trust

as required to permit timely payments of principal and interest on the related Fannie Mae MBS. This obligation

represents an obligation to stand ready to perform over the term of the guaranty. Therefore, our guaranty exposes

us to credit losses on the loans underlying Fannie Mae MBS.

The majority of our guaranty obligations have historically arisen from lender swap transactions. In a lender swap

transaction, we receive a monthly guaranty fee for our unconditional guaranty to the Fannie Mae MBS trust. The

guaranty fee we receive varies depending on factors such as the risk profile of the securitized loans and the level

of credit risk we assume. In lieu of charging a higher guaranty fee for loans with greater credit risk, we may

require that the lender pay an upfront fee to compensate us for assuming additional credit risk. We refer to this

payment as a risk-based pricing adjustment. In addition, we may charge a lower guaranty fee if the lender

assumes a portion of the credit risk through recourse or other risk-sharing arrangements. We refer to these

arrangements as credit enhancements. We also adjust the monthly guaranty fee so that the pass-through coupon

rates on Fannie Mae MBS are in more easily tradable increments of a whole or half percent by making an upfront

payment to the lender (“buy-up”) or receiving an upfront payment from the lender (“buy-down”).

Upon adoption of the accounting guidance on the transfers of financial assets and the consolidation of VIE’s on

January 1, 2010, we consolidated most of the single-class securitization trusts that are issued under our guaranty

accounting programs. As such, a significant portion of our guaranty-related assets and liabilities have been

derecognized from our consolidated balance sheets.

F-27
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For those trusts that are not consolidated, we initially recognize a liability for the fair value of our obligation to

stand ready to perform over the term of the guaranty as a component of “Other liabilities” in our consolidated

balance sheets. We also record an offsetting guaranty asset (a retained interest for portfolio securitizations) that

represents the present value of cash flows expected to be received as compensation over the life of the guaranty

as a component of “Other assets” in our consolidated balance sheets.

For lender swap transactions, we initially recognize our guaranty obligation at fair value using the transaction

price, as a practical expedient, upon initial recognition. Specifically, we estimate the compensation that we would

require to issue the same guaranty in a standalone arm’s-length transaction with an unrelated party. Because the

fair value of those guaranty obligations equals the fair value of the total compensation we receive, we do not

recognize losses or record deferred profit in our consolidated financial statements at inception of our guaranty

contracts. As such, all upfront cash received for buy-downs and risk-based price adjustments are included as a

component of our guaranty obligation at inception.

For portfolio securitizations, we initially recognize our guaranty obligation at fair value using an estimate of a

hypothetical transaction price that we would receive if we were to issue our guaranty to an unrelated party in a

standalone arm’s-length transaction at the measurement date. We recognize any difference between the fair value

of the guaranty asset and the fair value of the guaranty obligation as a component of the gain or loss on the sale

of mortgage-related assets and record the difference as “Investment gains, net” in our consolidated statements of

operations and comprehensive loss.

Subsequent to initial recognition, we account for the guaranty asset on lender swap transactions at amortized

cost. As we collect monthly guaranty fees, we reduce guaranty assets to reflect cash payments received and

recognize imputed interest income on guaranty assets as a component of “Guaranty fee income” under the

prospective interest method. We reduce the corresponding guaranty obligation in proportion to the reduction in

guaranty assets and recognize this reduction in our consolidated statements of operations and comprehensive loss

as an additional component of “Guaranty fee income.” We assess guaranty assets for other-than-temporary

impairment based on changes in our estimate of the cash flows to be received. When we determine a guaranty

asset is other-than-temporarily impaired, we write down the cost basis of the guaranty asset to its fair value and

include the amount written-down in “Guaranty fee income” in our consolidated statements of operations and

comprehensive loss. Any other-than-temporary impairment recorded on guaranty assets results in a proportionate

reduction in the corresponding guaranty obligations. For portfolio securitizations, we subsequently account for

the retained guarantee asset in the same manner as a trading security, with unrealized gains and losses included in

“Guaranty fee income” in our consolidated statements of operations and comprehensive loss.

We record buy-ups in our consolidated balance sheets at fair value in “Other assets” in our consolidated balance

sheets. We subsequently account for buy-ups in the same manner as a trading security. We account for our

guaranty related to a long term standby commitment in the same manner as our guaranty resulting from an

unconsolidated lender swap transaction as described above.

In addition to our guaranty assets and obligations, we recognize a liability for estimable and probable losses for the

credit risk we assume on loans underlying unconsolidated Fannie Mae MBS and long term standby commitments

based on management’s estimate of probable losses incurred on those loans as of each balance sheet date. We

record this contingent liability in our consolidated balance sheets as “Reserve for guaranty losses.”

Fannie Mae MBS included in “Investments in securities”

When we own unconsolidated Fannie Mae MBS, we do not derecognize any components of the guaranty assets,

guaranty obligations, reserve for guaranty losses, or any other outstanding recorded amounts associated with the

F-28
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

guaranty transaction because our contractual obligation to the MBS trust remains in force until the trust is

liquidated. We value Fannie Mae MBS based on their legal terms, which includes the Fannie Mae guaranty to the

MBS trust, and continue to reflect the unamortized obligation to stand ready to perform over the term of our

guaranty and any incurred credit losses in our “Other liabilities” and “Reserve for guaranty losses,” respectively.

We disclose the aggregate amount of Fannie Mae MBS held as “Investments in securities” in our consolidated

balance sheets as well as the amount of our “Reserve for guaranty losses” and “Other liabilities” that relates to

Fannie Mae MBS held as “Investments in securities.” Upon subsequent sale of a Fannie Mae MBS, we continue

to account for any outstanding recorded amounts associated with the guaranty transaction on the same basis of

accounting as prior to the sale of Fannie Mae MBS, as no new assets were retained and no new liabilities have

been assumed upon the subsequent sale.

Amortization of Cost Basis Adjustments

We amortize cost basis adjustments, including premiums and discounts on mortgage loans and securities, as a

yield adjustment using the interest method over the contractual or estimated life of the loan or security. We

amortize these cost basis adjustments into interest income for mortgage securities and for loans we classify as

HFI. We do not amortize cost basis adjustments for loans that we classify as HFS, but include them in the

calculation of the gain or loss on the sale of those loans.

We have elected to use the contractual payment terms to determine the amortization of cost basis adjustments on

mortgage loans and mortgage securities initially recognized on or after January 1, 2010 in our consolidated

balance sheets.

For substantially all mortgage loans and mortgage securities initially recorded on or before December 31, 2009,

we use prepayment estimates in determining the periodic amortization of cost basis adjustments under the

interest method using a constant effective yield. For those mortgage loans and mortgage securities for which we

did not estimate prepayments, we used the contractual payment terms of the loan or security to apply the interest

method. When we anticipate prepayments for the application of the interest method to mortgage loans initially

recognized before January 1, 2010, we aggregate individual mortgage loans based upon coupon rate, product

type and origination year and consider Fannie Mae MBS to be aggregations of similar loans for the purpose of

estimating prepayments. We also recalculate the constant effective yield each reporting period to reflect the

actual payments and prepayments we have received to date and our new estimate of future prepayments. We then

adjust our net investment in the mortgage loans and mortgage securities to the amount the investment would have

been had we applied the recalculated constant effective yield since their acquisition, with a corresponding charge

or credit to interest income.

We cease amortization of cost basis adjustments during periods in which we are not recognizing interest income

on a loan because the collection of the principal and interest payments is not reasonably assured (that is, when the

loan is placed on nonaccrual status).

We had $16.2 billion and $16.5 billion in net unamortized discounts and other cost basis adjustments of loans of

Fannie Mae included in our consolidated balance sheets as of December 31, 2011 and 2010, respectively, that we

may record in net interest income in future periods, and $1.3 billion and $938 million in net unamortized

premiums and other cost basis adjustments in investments in securities of Fannie Mae included in our

consolidated balance sheets as of December 31, 2011 and 2010, respectively, that we may record in net interest

income in future periods. We had $20.7 billion and $11.8 billion in net unamortized premiums in loans of

consolidated trusts included in our consolidated balance sheets as of December 31, 2011 and 2010, respectively,

that we may record in net interest income in future periods, and $29.5 billion and $16.8 billion in net

unamortized premiums in debt of consolidated trusts included in our consolidated balance sheets as of

December 31, 2011 and 2010, respectively, that we may record in net interest income in future periods.

F-29
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We had $1.9 billion and $3.1 billion of other-than-temporary impairments of investments in securities as of

December 31, 2011 and 2010, respectively, that represent the increase in expected cash flows since original

impairment that we may record in net interest income in future periods. We had $1.7 billion and $3.2 billion of

unamortized discounts on acquired credit-impaired loans as of December 31, 2011 and 2010, respectively, that

we may record in net interest income in future periods if the loans are on accrual status.

Commitments to Purchase and Sell Mortgage Loans and Securities

We enter into commitments to purchase and sell mortgage-backed securities and to purchase single-family and

multifamily mortgage loans. Commitments to purchase or sell some mortgage-backed securities and to purchase

single-family mortgage loans are generally accounted for as derivatives. Our commitments to purchase

multifamily loans are not accounted for as derivatives because they do not meet the criteria for net settlement.

When derivative purchase commitments settle, we include the fair value on the settlement date in the cost basis

of the loan or unconsolidated security we purchase. When derivative commitments to sell securities settle, we

include the fair value of the commitment on the settlement date in the cost basis of the security we sell. Purchases

and sales of securities issued by our consolidated MBS trusts are treated as extinguishment or issuance of debt,

respectively. For commitments to purchase and sell securities issued by our consolidated MBS trusts, we

recognize the fair value of the commitment on the settlement date as a component of debt extinguishment gains

and losses or in the cost basis of the debt issued, respectively.

Regular-way securities trades provide for delivery of securities within the time generally established by

regulations or conventions in the market in which the trade occurs and are exempt from application of the

derivative accounting literature. Commitments to purchase or sell securities that we account for on a trade-date

basis are also exempt from the derivative accounting requirements. We record the purchase and sale of an

existing security on its trade date when the commitment to purchase or sell the existing security settles within the

period of time that is customary in the market in which those trades take place.

Additionally, contracts for the forward purchase or sale of when-issued and to-be-announced (“TBA”) securities

are exempt from the derivative accounting requirements if there is no other way to purchase or sell that security,

delivery of that security and settlement will occur within the shortest period possible for that type of security, and

it is probable at inception and throughout the term of the individual contract that physical delivery of the security

will occur. Since our commitments for the purchase of when-issued and TBA securities can be net settled and we

do not document that physical settlement is probable, we account for all such commitments as derivatives.

Commitments to purchase securities that we do not account for as derivatives and do not require trade-date

accounting are accounted for as forward contracts to purchase securities. We designate these commitments as

AFS or trading at inception and account for them in a manner consistent with that category of securities.

Derivative Instruments

We recognize all derivatives as either assets or liabilities in our consolidated balance sheets at their fair value on

a trade date basis. We report derivatives in a gain position after offsetting by counterparty in “Other assets” and

derivatives in a loss position after offsetting by counterparty in “Other liabilities” in our consolidated balance

sheets.

We offset the carrying amounts of derivatives (other than commitments) that are in gain positions and loss

positions with the same counterparty, as well as cash collateral receivables and payables associated with

derivative positions in master netting arrangements. We offset these amounts because the derivative contracts

have determinable amounts, we have the legal right to offset amounts with each counterparty, that right is

enforceable by law, and we intend to offset the amounts to settle the contracts.

F-30
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We evaluate financial instruments that we purchase or issue and other financial and non-financial contracts for

embedded derivatives. To identify embedded derivatives that we must account for separately, we determine if:

(1) the economic characteristics of the embedded derivative are not clearly and closely related to the economic

characteristics of the financial instrument or other contract; (2) the financial instrument or other contract (i.e., the

hybrid contract) itself is not already measured at fair value with changes in fair value included in earnings; and

(3) a separate instrument with the same terms as the embedded derivative would meet the definition of a

derivative. If the embedded derivative meets all three of these conditions we elect to carry the hybrid financial

instrument in its entirety at fair value with changes in fair value recorded in earnings.

Collateral

We enter into various transactions where we pledge and accept collateral, the most common of which are our

derivative transactions. Required collateral levels vary depending on the credit rating and type of counterparty.

We also pledge and receive collateral under our repurchase and reverse repurchase agreements. In order to reduce

potential exposure to repurchase counterparties, a third-party custodian typically maintains the collateral and any

margin. We monitor the fair value of the collateral received from our counterparties, and we may require

additional collateral from those counterparties, as we deem appropriate.

Cash Collateral

We record cash collateral accepted from a counterparty that we have the right to use as “Cash and cash

equivalents” and cash collateral accepted from a counterparty that we do not have the right to use as “Restricted

cash” in our consolidated balance sheets. We net our obligation to return cash collateral pledged to us against the

fair value of derivatives in a gain position recorded in “Other assets” in our consolidated balance sheets as part of

our counterparty netting calculation.

For derivative positions with the same counterparty under master netting arrangements where we pledge cash

collateral, we remove it from “Cash and cash equivalents” and net the right to receive it against the fair value of

derivatives in a loss position recorded in “Other liabilities” in our consolidated balance sheets as a part of our

counterparty netting calculation.

Non-Cash Collateral

We classify securities pledged to counterparties as either “Investments in securities” or “Cash and cash equivalents”

in our consolidated balance sheets. Securities pledged to counterparties that have been consolidated with the

underlying assets recognized as loans are included as “Mortgage loans” in our consolidated balance sheets.

Our liability to third-party holders of Fannie Mae MBS that arises as the result of a consolidation of a

securitization trust is collateralized by the underlying loans and/or mortgage-related securities.

We had reverse repurchase agreements outstanding of $49.5 billion and $12.3 billion as of December 31, 2011

and 2010, respectively. The fair value of non-cash collateral we accepted was $50.1 billion and $12.3 billion as

of December 31, 2011 and 2010, respectively, of which we were permitted to sell or repledge $20.0 billion and

$7.5 billion as of December 31, 2011 and 2010, respectively. None of the underlying collateral was sold or

repledged as of December 31, 2011 and 2010. We had no repurchase agreements outstanding as of December 31,

2011 and $49 million in repurchase agreements outstanding as of December 31, 2010.

Debt

Our consolidated balance sheets contain debt of Fannie Mae as well as debt of consolidated trusts. Effective

January 1, 2011, we reported debt issued by us as “Debt of Fannie Mae” and by consolidated trusts as “Debt of

F-31
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

consolidated trusts.” Debt issued by us represents debt that we issue to third parties to fund our general business

activities. The debt of consolidated trusts represents the amount of Fannie Mae MBS issued from such trusts

which is held by third-party certificateholders and prepayable without penalty at any time. We report deferred

items, including premiums, discounts and other cost basis adjustments, as adjustments to the related debt

balances in our consolidated balance sheets. We remeasure the carrying amount, accrued interest and basis

adjustments of debt denominated in a foreign currency into U.S. dollars using foreign exchange spot rates as of

the balance sheet dates and report any associated gains or losses as “Debt foreign exchange gains (losses), net”

which is a component of “Fair value losses, net” in our consolidated statements of operations and comprehensive

loss.

We classify interest expense as either short-term or long-term based on the contractual maturity of the related

debt. We recognize the amortization of premiums, discounts and other cost basis adjustments through interest

expense using the effective interest method usually over the contractual term of the debt. Amortization of

premiums, discounts and other cost basis adjustments begins at the time of debt issuance. We remeasure interest

expense for debt denominated in a foreign currency into U.S. dollars using the daily spot rates. The difference in

rates arising from the month-end spot exchange rate used to calculate the interest accruals and the daily spot rates

used to record the interest expense is a foreign currency transaction gain or loss for the period and is recognized

as “Debt foreign exchange gains (losses), net” which is a component of “Fair value losses, net” in our

consolidated statements of operations and comprehensive loss.

When we purchase a Fannie Mae MBS issued from a consolidated single-class securitization trust, we extinguish

the related debt of the consolidated trust as the MBS debt is no longer owed to a third-party. We record debt

extinguishment gains or losses related to debt of consolidated trusts to the extent that the purchase price of the

MBS does not equal the carrying value of the related consolidated MBS debt reported on our balance sheets

(including unamortized premiums, discounts and other cost basis adjustments) at the time of purchase.

Income Taxes

We recognize deferred tax assets and liabilities for the difference in the bases of assets and liabilities for financial

accounting and tax purposes. We measure deferred tax assets and liabilities using enacted tax rates that are

expected to be applicable to the taxable income or deductions in the period(s) the assets are realized or the

liabilities are settled. We adjust deferred tax assets and liabilities for the effects of changes in tax laws and rates

on the date of enactment. We recognize investment and other tax credits through our effective tax rate calculation

assuming that we will be able to realize the full benefit of the credits. We reduce our deferred tax asset by an

allowance if, based on the weight of available positive and negative evidence, it is more likely than not that we

will not realize some portion, or all, of the deferred tax asset.

We account for income tax uncertainty using a two-step approach whereby we recognize an income tax benefit

if, based on the technical merits of a tax position, it is more likely than not (a probability of greater than 50%)

that the tax position would be sustained upon examination by the taxing authority, which includes all related

appeals and litigation. We then recognize a tax benefit equal to the largest amount of tax benefit that is greater

than 50% likely to be realized upon settlement with the taxing authority, considering all information available at

the reporting date. We recognize interest expense and penalties on unrecognized tax benefits as “Other expenses”

in our consolidated statements of operations and comprehensive loss.

Pension and Other Postretirement Benefits

We provide pension and postretirement benefits and account for these benefit costs on an accrual basis. We

determine pension and postretirement benefit amounts recognized in our consolidated financial statements on an

actuarial basis using several different assumptions. The two most significant assumptions used in the valuation

F-32
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

are the discount rate and the long-term rate of return on assets. In determining our net periodic benefit cost, we

apply a discount rate in the actuarial valuation of our pension and postretirement benefit obligations. In

determining the discount rate as of each balance sheet date, we consider the current yields on high-quality,

corporate fixed-income debt instruments with maturities corresponding to the expected duration of our benefit

obligations. Additionally, the net periodic benefit cost recognized in our consolidated financial statements for our

qualified pension plan is impacted by the long-term rate of return on plan assets. We base our assumption of the

long-term rate of return on the current investment portfolio mix, actual long-term historical return information

and the estimated future long-term investment returns for each class of assets. We measure plan assets and

obligations as of the date of our consolidated financial statements. We recognize the over-funded or underfunded status of our benefit plans as a prepaid benefit cost (an asset) in “Other assets” or an accrued benefit cost

(a liability) in “Other liabilities,” respectively, in our consolidated balance sheets. We recognize actuarial gains

and losses and prior service costs and credits when incurred as adjustments to the prepaid benefit cost or accrued

benefit cost with a corresponding offset in other comprehensive income (loss).

Earnings (Loss) per Share

Earnings (loss) per share (“EPS”) is presented for both basic EPS and diluted EPS. We compute basic EPS by

dividing net income (loss) available to common stockholders by the weighted-average number of shares of

common stock outstanding during the year. In addition to common shares outstanding, the computation of basic

EPS includes instruments for which the holder has (or is deemed to have) the present rights as of the end of the

reporting period to share in current period earnings (loss) with common stockholders (i.e., participating securities

and common shares that are currently issuable for little or no cost to the holder). We include in the denominator

of our basic EPS computation the weighted-average shares of common stock that would be issued upon the full

exercise of the warrant issued to Treasury. Diluted EPS is computed by dividing net income (loss) available to

common stockholders by the weighted-average number of shares of common stock outstanding during the year,

plus the dilutive effect of common stock equivalents such as convertible securities, stock options and other

performance awards. We exclude these common stock equivalents from the calculation of diluted EPS when the

effect of inclusion, assessed individually, would be anti-dilutive.

Other Comprehensive Income (Loss)

Other comprehensive income (loss) is the change in equity, net of tax, resulting from transactions that we record

directly to stockholders’ deficit. These transactions include: unrealized gains and losses on AFS securities and

certain commitments whose underlying securities are classified as AFS; deferred hedging gains and losses from

cash flow hedges; unrealized gains and losses on guaranty assets resulting from portfolio securitization transactions;

buy-ups resulting from lender swap transactions; and change in prior service costs and credits and actuarial gains

and losses associated with pension and postretirement benefits in other comprehensive income (loss).

As of December 31, 2011, 2010 and 2009, we recorded a valuation allowance for our deferred tax asset for the

portion of the future tax benefit that we more likely than not will not utilize in the future. We established no

valuation allowance for the deferred tax asset amount related to unrealized losses recorded through AOCI on our

AFS securities. We believe this deferred tax amount is recoverable because we have the intent and ability to hold

these securities until recovery of the unrealized loss amounts.

F-33
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Reclassifications

To conform to our current period presentation, we have reclassified certain amounts reported in our consolidated

financial statements. The following table displays the line items that were reclassified in our consolidated balance

sheet as of December 31, 2010.

As of December 31, 2010

Before

Reclassification

After

Reclassification

(Dollars in millions)

Reclassified lines to:

Assets:

Servicer and MBS trust receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 951 $

Other assets ........................................................... 25,875 26,826

Liabilities:

Short-term debt:

Of Fannie Mae ....................................................... 151,884

Of consolidated trusts ................................................. 5,359

Long-term debt:

Of Fannie Mae ....................................................... 628,160

Of consolidated trusts ................................................. 2,411,597

Debt:

Of Fannie Mae ....................................................... 780,044

Of consolidated trusts ................................................. 2,416,956

Reserve for guaranty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323

Servicer and MBS trust payable ........................................... 2,950

Other liabilities ........................................................ 10,400 13,673

F-34
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table represents the line items that we reclassified in our consolidated statements of operations and

comprehensive loss for the years ended December 31, 2010 and 2009.

For the Year Ended December 31,

2010 2009

Before

Reclassification

After

Reclassification

Before

Reclassification

After

Reclassification

(Dollars in millions)

Reclassified lines to:

Interest income:

Mortgage loans:

Of Fannie Mae ........................... $ 14,992 $ $15,378 $

Of consolidated trusts ..................... 132,591 6,143

Mortgage loans (includes $132,591 and $6,143,

respectively, related to consolidated trusts) .... 147,583 21,521

Interest expense:

Short-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . 619 2,306

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . 12 —

Short-term debt (includes $12 and $-, respectively,

related to consolidated trusts) . . . . . . . . . . . . . . . 631 2,306

Long-term debt:

Of Fannie Mae ........................... 18,857 22,195

Of consolidated trusts ..................... 118,373 344

Long-term debt (includes $118,373 and $344,

respectively, related to consolidated trusts) .... 137,230 22,539

Guaranty fee income . . . . . . . . . . . . . . . . . . . . . . . . . . 202 7,211

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . 882 1,084 773 7,984

Losses from partnership investments ............. (74) (6,735)

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 853 927 1,484 8,219

New Accounting Pronouncements

In May 2011, FASB issued amendments to the guidance pertaining to fair value measurement and disclosure.

The amendments create a common definition of fair value for GAAP and International Financial Reporting

Standards (“IFRS”) and align the measurement and disclosure requirements. These amendments provide further

guidance on some of the principles for measuring fair value and expand the disclosure requirements specifically

for Level 3 fair value measurements. The new requirements became effective for us on January 1, 2012 and we

are applying them prospectively. We do not expect that the adoption of these amendments will have a material

impact on our consolidated financial statements.

In December 2011, FASB issued amendments to the guidance on disclosures about offsetting assets and

liabilities. The amendments require additional disclosures about financial instruments that have been offset and

related arrangements to enable investors to understand the effect or potential effect of those arrangements on the

company’s financial positions. The newly required disclosures will enhance comparability between companies

that prepare their financial statements in accordance with GAAP and those that follow IFRS. The updated

guidance does not change existing offsetting eligibility criteria or the permitted balance sheet presentation for

F-35
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

those instruments that meet the eligibility criteria. The new guidance is effective for us on January 1, 2013, and

the new disclosures will be applied retrospectively. We do not expect that the adoption of these amendments will

have a material impact on our consolidated financial statements.

Adoption of the Accounting Guidance on the Transfers of Financial Assets and Consolidation of Variable

Interest Entities

Effective January 1, 2010, we prospectively adopted the revised accounting guidance related to transfers of

financial assets and the consolidation of VIEs for all VIEs existing as of January 1, 2010. The revisions to the

accounting guidance for these topics removed the scope exception for QSPEs and replaced the previous

accounting model with a qualitative model focused on power and exposure when determining the primary

beneficiary of a VIE. For substantially all of our single-class securitization trusts, our role as guarantor and

master servicer provides us with the power to direct matters (primarily the servicing of the mortgage loans) that

impact the credit risk to which we are exposed; therefore we consolidated these trusts upon adoption of the

revised accounting guidance. In contrast, we do not consolidate single-class securitization trusts when other

organizations have the power to direct these activities.

The mortgage loans and debt reported in our consolidated balance sheets increased significantly at the transition

date because we recognized the underlying assets and liabilities of the newly consolidated trusts. We recorded

the trusts’ mortgage loans and the debt held by third parties at their unpaid principal balance at the transition

date. Prospectively, we recognized the interest income on the trusts’ mortgage loans and interest expense on the

trusts’ debt, resulting in an increase in the interest income and interest expense reported in our consolidated

statements of operations and comprehensive loss compared to prior periods. Another significant impact was the

elimination of our guaranty accounting for the newly consolidated trusts. We derecognized the previously

recorded guaranty-related assets and liabilities associated with the newly consolidated trusts from our

consolidated balance sheets. We also eliminated our reserve for guaranty losses and recognized an allowance for

loan losses for such trusts.

In our consolidated statements of operations and comprehensive loss, we no longer recognize guaranty fee

income for the newly consolidated trusts, as the revenue is now recorded as a component of loan interest income.

When we recognized the newly consolidated trusts’ assets and liabilities at the transition date, we also

derecognized our investments in these trusts, resulting in a decrease in our investments in MBS that are classified

as trading and AFS securities. Instead of being recorded as an asset, our investments in Fannie Mae MBS reduce

the debt reported in our consolidated balance sheets. Accordingly, the purchase and subsequent sale of MBS

issued by consolidated trusts are accounted for in our consolidated financial statements as the extinguishment and

issuance of the debt of consolidated trusts, respectively. Furthermore, under the revised accounting guidance on

transfers of financial assets, a transfer of mortgage loans from our portfolio to a trust will generally not qualify

for sale treatment. The accounting guidance does not change the economic risk to our business, specifically our

exposure to liquidity, credit, and interest rate risks. We continue to securitize mortgage loans originated by

lenders in the primary mortgage market into Fannie Mae MBS.

Summary of Transition Adjustments

The cumulative impact of our adoption of the revised accounting guidance was a decrease to our total deficit of

$3.3 billion at the transition date. This amount includes:

• A net decrease in our accumulated deficit of $6.7 billion, primarily driven by the reversal of the guaranty

assets and guaranty obligations related to the newly consolidated trusts; and

• A net increase in our accumulated other comprehensive loss of $3.4 billion primarily driven by the reversal

of net unrealized gains related to our investments in Fannie Mae MBS classified as AFS.

F-36
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We describe in this section the impact of the implementation of the revised accounting guidance on our

consolidated statements of operations and comprehensive loss. The substantial majority of the transition impact

related to non-cash activity, which has not been included in our consolidated statement of cash flows.

Impact on Statements of Operations and Comprehensive loss

Our adoption of accounting guidance related to transfers of financial assets and consolidation of VIEs affected

how certain income and expense items are reported in our consolidated statements of operations and

comprehensive loss on an ongoing basis. We explain the key impacts below.

Interest Income on Mortgage Loans

The interest income earned on mortgage loans held by the newly consolidated trusts is recorded in our

consolidated statements of operations and comprehensive loss as loan interest income. This interest income was

not recorded in our consolidated statements of operations and comprehensive loss prior to the transition date as

the trusts were not consolidated.

Interest Expense on Short-Term and Long-Term Debt

The interest expense incurred on debt of newly consolidated trusts is recorded in our consolidated statements of

operations and comprehensive loss as interest expense on short-term and long-term debt. This interest expense

was not recorded in our consolidated statements of operations and comprehensive loss prior to the transition date

as the trusts were not consolidated.

Provision for Loan Losses and Provision for Guaranty Losses

Since the majority of our MBS trusts were consolidated at the transition date, the provision for loan losses

recorded in periods after the transition date reflects the increase in the mortgage loans reported in our

consolidated balance sheets. The provision for guaranty losses recorded in periods after the transition date

reflects the subsequent decrease in unconsolidated trusts. The portion of the reserve for guaranty losses relating

to loans in previously unconsolidated MBS trusts that were consolidated at the transition date was derecognized,

and we recognized an allowance for loan losses as the loans are now reflected in our consolidated balance sheets.

Guaranty Fee Income

We do not recognize the guaranty fee income earned from consolidated trusts. Guaranty fees from consolidated

trusts are reported as a component of interest income on mortgage loans. As our guaranty-related assets and

liabilities pertaining to consolidated trusts were also eliminated, we no longer record amortization income or fair

value adjustments related to these trusts. The guaranty fee income that continues to be recognized in our

consolidated statements of operations and comprehensive loss relates to guarantees to unconsolidated trusts and

other credit enhancements that we have provided.

Debt Extinguishment Gains (Losses)

Upon purchase of Fannie Mae MBS debt securities issued from a consolidated trust for our mortgage portfolio,

we extinguish the related debt issued by the consolidated trust as we now own the debt securities instead of a

third party. We record debt extinguishment gains or losses related to debt of consolidated trusts to the extent that

the purchase price of the debt security does not equal the carrying value of the related consolidated debt reported

in our consolidated balance sheets at the time of purchase.

F-37
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Consolidations and Transfers of Financial Assets

We have interests in various entities that are considered to be VIEs. The primary types of entities are

securitization trusts guaranteed by us via lender swap and portfolio securitization transactions, mortgage and

asset-backed trusts that were not created by us, as well as housing partnerships that are established to finance the

acquisition, construction, development or rehabilitation of affordable multifamily and single-family housing.

These interests include investments in securities issued by VIEs, such as Fannie Mae MBS created pursuant to

our securitization transactions and our guaranty to the entity. We consolidate the substantial majority of our

single-class securitization trusts.

Types of VIEs

Securitization Trusts

Under our lender swap and portfolio securitization transactions, mortgage loans are transferred to a trust

specifically for the purpose of issuing a single class of guaranteed securities that are collateralized by the

underlying mortgage loans. The trust’s permitted activities include receiving the transferred assets, issuing

beneficial interests, establishing the guaranty and servicing the underlying mortgage loans. In our capacity as

issuer, master servicer, trustee and guarantor, we earn fees for our obligations to each trust. Additionally, we may

retain or purchase a portion of the securities issued by each trust. We have securitized mortgage loans since 1981.

In our structured securitization transactions, we earn fees for assisting lenders and dealers with the design and

issuance of structured mortgage-related securities. The trusts created in these transactions have permitted

activities that are similar to those for our lender swap and portfolio securitization transactions. The assets of these

trusts may include mortgage-related securities and/or mortgage loans. The trusts created for Fannie Mae Mega

securities issue single-class securities while the trusts created for REMIC, grantor trust and stripped mortgagebacked securities (“SMBS”) issue single-class and multi-class securities, the latter of which separate the cash

flows from underlying assets into separately tradable interests. Our obligations and continued involvement in

these trusts are similar to those described for lender swap and portfolio securitization transactions. We have

securitized mortgage assets in structured transactions since 1986.

We also invest in mortgage-backed and asset-backed securities that have been issued via private-label trusts.

These trusts are structured to provide investors with a beneficial interest in a pool of receivables or other

financial assets, typically mortgage loans, credit card receivables, auto loans or student loans. The trusts act as

vehicles to allow loan originators to securitize assets. Securities are structured from the underlying pool of assets

to provide for varying degrees of risk. The originators of the financial assets or the underwriters of the

transaction create the trusts and typically own the residual interest in the trusts’ assets. Our involvement in these

entities is typically limited to our recorded investment in the beneficial interests that we have purchased. We

have invested in these vehicles since 1987.

Limited Partnerships

We have historically made equity investments in various limited partnerships that sponsor affordable housing

projects utilizing the low-income housing tax credit pursuant to Section 42 of the Internal Revenue Code. The

purpose of these investments is to increase the supply of affordable housing in the United States and to serve

communities in need. In addition, our investments in LIHTC partnerships generate both tax credits and net

operating losses that may reduce our federal income tax liability. Our LIHTC investments primarily represent

limited partnership interests in entities that have been organized by a fund manager who acts as the general

partner. These fund investments seek out equity investments in LIHTC operating partnerships that have been

established to identify, develop and operate multifamily housing that is leased to qualifying residential tenants.

F-38
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During 2009, we explored options to sell or otherwise transfer our LIHTC investments for value consistent with

our mission. FHFA informed us that, after consultation with Treasury, generally we are not authorized to sell or

transfer our LIHTC partnership interests. Some exceptions to this rule exist in very limited circumstances and, in

most cases, only with FHFA consent. The carrying value of our LIHTC partnership investments was reduced to

zero in the consolidated financial statements as of December 31, 2009, as we no longer had both the intent and

ability to sell or otherwise transfer our LIHTC investments for value.

We recognized $61 million, $145 million and $5.9 billion for the years ended December 31, 2011, 2010 and

2009, respectively, of other-than-temporary impairment losses related to our limited partnerships in “Other

expenses” in our consolidated statements of operations and comprehensive loss. We no longer recognize net

operating losses or impairment on our LIHTC investments, since the carrying value was reduced to zero.

As of December 31, 2011, we have an obligation to fund $193 million in capital contributions related to our

LIHTC investments. This obligation has been recorded as a component of “Other liabilities” in our consolidated

balance sheets. As a result of our current tax position, we did not make any LIHTC investments in 2011 other

than pursuant to existing prior commitments. We are not currently recognizing the tax benefits associated with

the tax credits and net operating losses in our consolidated financial statements.

Consolidated VIEs

If an entity is a VIE, we consider whether our variable interest in that entity causes us to be the primary

beneficiary. The primary beneficiary of the VIE is required to consolidate and account for the assets, liabilities

and noncontrolling interests of the VIE in its consolidated financial statements. An enterprise is deemed to be the

primary beneficiary when the enterprise has the power to direct the activities of the VIE that most significantly

impact the entity’s economic performance and exposure to benefits and/or losses could potentially be significant

to the entity. In general, the investors in the obligations of consolidated VIEs have recourse only to the assets of

those VIEs and do not have recourse to us, except where we provide a guaranty to the VIE.

As of December 31, 2011, we consolidated certain VIEs that were not consolidated as of December 31, 2010,

generally due to increases in the amount of the certificates issued by the entity that are held in our portfolio (for

example, when we hold a substantial portion of the securities issued by Fannie Mae multi-class resecuritization

trusts). As a result of consolidating these entities, which had combined total assets of $4.1 billion in unpaid

principal balance as of December 31, 2011, we derecognized our investment in these entities and recognized the

assets and liabilities of the consolidated entities at fair value.

As of December 31, 2011, we also deconsolidated certain VIEs that were consolidated as of December 31, 2010,

generally due to decreases in the amount of the certificates issued by the entity that are held in our portfolio. As a

result of deconsolidating these entities, which had combined total assets of $477 million in unpaid principal

balance as of December 31, 2010, we derecognized the assets and liabilities of the entities and recognized at fair

value our retained interests as securities in our consolidated balance sheets.

Unconsolidated VIEs

We also have interests in VIEs that we do not consolidate because we are not deemed to be the primary

beneficiary. These unconsolidated VIEs include securitization trusts, as well as other investment entities. The

following table displays the carrying amount and classification of our assets and liabilities that relate to our

involvement with unconsolidated VIEs as of December 31, 2011 and 2010, as well as our maximum exposure to

loss and the total assets of those unconsolidated VIEs.

F-39
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2011

MortgageBacked

Trusts

AssetBacked

Trusts

Limited

Partnership

Investments

(Dollars in millions)

Assets and liabilities recorded in our consolidated balance sheets:

Assets:

Available-for-sale securities(1) ......................................... $ 69,101 $ — $ —

Trading securities(1) .................................................. 24,292 2,111 —

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 — 145

Other liabilities ....................................................... (1,347) — (153)

Net carrying amount ................................................. $ 92,317 $ 2,111 $ (8)

Maximum exposure to loss(1) ............................................. $100,146 $ 2,111 $ 137

Total assets of unconsolidated VIEs(1) ...................................... $641,346 $256,845 $12,256

As of December 31, 2010(2)

MortgageBacked

Trusts

AssetBacked

Trusts

Limited

Partnership

Investments

(Dollars in millions)

Assets and liabilities recorded in our consolidated balance sheets:

Assets:

Available-for-sale securities(1) ......................................... $ 84,770 $ — $ —

Trading securities(1) .................................................. 24,021 5,321 —

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 — 94

Other liabilities ....................................................... (773) — (170)

Net carrying amount ................................................. $108,275 $ 5,321 $ (76)

Maximum exposure to loss(1) ............................................. $111,004 $ 5,321 $ 319

Total assets of unconsolidated VIEs(1) ...................................... $740,387 $363,721 $13,102

(1) Contains securities recognized in our consolidated balance sheets due to consolidation of certain multiclass

resecuritization trusts.

(2) Certain prior period amounts have been reclassified to conform to the current period presentation.

Our maximum exposure to loss generally represents the greater of our recorded investment in the entity or the

unpaid principal balance of the assets covered by our guaranty. However, our securities issued by Fannie Mae

multi-class resecuritization trusts that are not consolidated do not give rise to any additional exposure to loss as

we already consolidate the underlying collateral.

Transfers of Financial Assets

We issue Fannie Mae MBS through portfolio securitization transactions by transferring pools of mortgage loans

or mortgage-related securities to one or more trusts or special purpose entities. We are considered to be the

transferor when we transfer assets from our own portfolio in a portfolio securitization transaction. For the years

ended December 31, 2011, 2010, and 2009 the unpaid principal balance of portfolio securitizations was $118.5

billion, $120.0 billion and $216.1 billion, respectively.

F-40
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table displays some key characteristics of the securities retained in unconsolidated portfolio

securitization trusts.

Fannie Mae

Single-class

MBS & Fannie

Mae Megas

REMICS &

SMBS

(Dollars in millions)

As of December 31, 2011

Unpaid principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 588 $ 12,697

Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654 14,043

Weighted-average coupon ............................................ 6.21% 5.86%

Weighted-average loan age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 years 4.5 years

Weighted-average maturity ........................................... 23.5 years 18.6 years

As of December 31, 2010

Unpaid principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63 $ 15,771

Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 16,745

Weighted-average coupon ............................................ 6.58% 6.28%

Weighted-average loan age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 years 4.4 years

Weighted-average maturity ........................................... 25.6 years 22.0 years

For the years ended December 31, 2011, 2010, and 2009, the principal and interest received on retained interests

was $3.0 billion, $3.5 billion and $9.7 billion, respectively.

Managed Loans

We define “managed loans” as on-balance sheet mortgage loans as well as mortgage loans that we have

securitized in unconsolidated portfolio securitization trusts. The following table displays the unpaid principal

balances of managed loans, including those managed loans that are delinquent as of December 31, 2011 and

2010.

As of December 31,

2011 2010

Unpaid

Principal

Balance

Principal Amount

of Delinquent

Loans(1)

Unpaid

Principal

Balance

Principal Amount

of Delinquent

Loans(1)

(Dollars in millions)

Loans held for investment

Of Fannie Mae ................................. $ 396,276 $122,392 $ 423,686 $141,342

Of consolidated trusts ........................... 2,570,339 24,893 2,565,347 34,080

Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 57 964 127

Securitized loans ................................. 2,273 71 2,147 78

Total loans managed ............................ $2,969,200 $147,413 $2,992,144 $175,627

(1) Represents the unpaid principal balance of loans held for investment, loans held for sale and securitized loans for which

we are no longer accruing interest and loans 90 days or more delinquent which are continuing to accrue interest.

F-41
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Qualifying Sales of Portfolio Securitizations

The gain or loss on a portfolio securitization transaction that qualifies as a sale depends, in part, on the carrying

amount of the financial assets sold. Prior to January 1, 2010, we allocated the carrying amount of the financial

assets sold between the assets sold and the interests retained, if any, based on their relative fair value at the date

of sale. Further, we recognized our recourse obligations at their full value at the date of sale, which reduced sale

proceeds in the gain or loss calculation.

Subsequent to January 1, 2010, the majority of our portfolio securitization transactions do not qualify for sale

treatment. We report the assets and liabilities of consolidated trusts created via portfolio securitization

transactions that do not qualify as sales in our consolidated balance sheets.

We recognize assets obtained and liabilities incurred in a portfolio securitization that qualifies for sale treatment

at fair value. We recorded a net gain on securitizations from portfolio of $146 million, $26 million and $1.0

billion for the years ended December 31, 2011, 2010, and 2009, respectively. We recognize these amounts as a

component of “Investment gains, net” in our consolidated statements of operations and comprehensive loss.

Proceeds from the initial sale of securities from portfolio securitizations were $1.0 billion, $660 million, and

$85.7 billion for the years ended December 31, 2011, 2010, and 2009, respectively. Our continuing involvement

in the form of guaranty assets and guaranty liabilities with assets that were transferred into unconsolidated trusts

is not material to our consolidated financial statements.

3. Mortgage Loans

We own both single-family mortgage loans, which are secured by four or fewer residential dwelling units, and

multifamily mortgage loans, which are secured by five or more residential dwelling units. We classify these loans

as either HFI or HFS. We report HFI loans at the unpaid principal balance, net of unamortized premiums and

discounts, other cost basis adjustments, and an allowance for loan losses. We report HFS loans at the lower of

cost or fair value determined on a pooled basis, and record valuation changes in our consolidated statements of

operations and comprehensive loss.

The following table displays our mortgage loans as of December 31, 2011 and 2010.

As of December 31,

2011 2010

Of

Fannie

Mae

Of

Consolidated

Trusts Total

Of

Fannie

Mae

Of

Consolidated

Trusts Total

(Dollars in millions)

Single-family ............................. $319,496 $2,470,533 $2,790,029 $328,824 $2,490,623 $2,819,447

Multifamily .............................. 77,026 99,872 176,898 95,157 75,393 170,550

Total unpaid principal balance of mortgage

loans ................................ 396,522 2,570,405 2,966,927 423,981 2,566,016 2,989,997

Cost basis and fair value adjustments, net ....... (16,143) 19,993 3,850 (16,498) 11,777 (4,721)

Allowance for loan losses for loans held for

investment ............................. (57,309) (14,847) (72,156) (48,530) (13,026) (61,556)

Total mortgage loans ................... $323,070 $2,575,551 $2,898,621 $358,953 $2,564,767 $2,923,720

For the year ended December 31, 2011, we redesignated loans with a carrying value of $561 million from HFI to

HFS. For the year ended December 31, 2010, we did not redesignate loans between HFI and HFS other than at the

transition date. For the year ended December 31, 2009, we redesignated loans with a carrying value of $1.2 billion

from HFS to HFI and loans with a carrying value of $8.5 billion from HFI to HFS.

F-42
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables display an aging analysis of the total recorded investment in our HFI mortgage loans,

excluding loans for which we have elected the fair value option, by portfolio segment and class as of

December 31, 2011 and 2010.

As of December 31, 2011(1)

30 - 59

Days

Delinquent

60 - 89

Days

Delinquent

Seriously

Delinquent(2)

Total

Delinquent Current Total

Recorded

Investment

in Loans

Over 90

Days

Delinquent

and

Accruing

Interest

Recorded

Investment

in

Nonaccrual

Loans

(Dollars in millions)

Single-family:

Primary(3) .............. $43,516 $15,282 $ 80,712 $139,510 $2,341,646 $2,481,156 $111 $ 95,959

Government(4) . . . . . . . . . . 109 49 327 485 51,391 51,876 327 —

Alt-A ................ 7,155 3,054 28,323 38,532 138,880 177,412 14 31,356

Other(5) ............... 3,403 1,431 11,277 16,111 73,115 89,226 96 12,533

Total single-family .... 54,183 19,816 120,639 194,638 2,605,032 2,799,670 548 139,848

Multifamily(6) . . . . . . . . . . . . 210 NA 1,105 1,315 177,906 179,221 — 2,764

Total ............. $54,393 $19,816 $121,744 $195,953 $2,782,938 $2,978,891 $548 $142,612

As of December 31, 2010(1)

30 - 59

Days

Delinquent

60 - 89

Days

Delinquent

Seriously

Delinquent(2)

Total

Delinquent Current Total

Recorded

Investment

in Loans

Over 90

Days

Delinquent

and

Accruing

Interest

Recorded

Investment

in

Nonaccrual

Loans

(Dollars in millions)

Single-family:

Primary(3) .............. $47,048 $18,055 $ 93,302 $158,405 $2,299,080 $2,457,485 $139 $110,758

Government(4) . . . . . . . . . . 125 58 371 554 51,930 52,484 354 —

Alt-A ................. 8,547 4,097 37,557 50,201 156,951 207,152 21 41,566

Other(5) ............... 3,785 1,831 15,290 20,906 84,473 105,379 80 17,022

Total single-family .... 59,505 24,041 146,520 230,066 2,592,434 2,822,500 594 169,346

Multifamily(6) ............ 382 NA 1,132 1,514 171,000 172,514 — 1,012

Total ............. $59,887 $24,041 $147,652 $231,580 $2,763,434 $2,995,014 $594 $170,358

(1) Recorded investment consists of unpaid principal balance, unamortized premiums, discounts and other cost basis

adjustments, and accrued interest receivable.

(2) Single-family seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process.

Multifamily seriously delinquent loans are loans that are 60 days or more past due.

(3) Consists of mortgage loans that are not included in other loan classes.

(4) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies that

are not Alt-A. Primarily consists of reverse mortgages which due to their nature are not aged and are included in the

current column.

F-43
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(5) Includes loans with higher-risk loan characteristics, such as interest-only loans and negative-amortizing loans that are

neither government nor Alt-A.

(6) Multifamily loans 60-89 days delinquent are included in the seriously delinquent column.

The following table displays the total recorded investment in our single-family HFI loans, excluding loans for

which we have elected the fair value option, by class and credit quality indicator as of December 31, 2011 and

2010. The single-family credit quality indicator is updated quarterly.

As of December 31,

2011(1)(2) 2010(1)(2)

Primary(3) Alt-A Other(4) Primary(3) Alt-A Other(4)

(Dollars in millions)

Estimated mark-to-market LTV ratio:(5)

Less than or equal to 80% .................. $1,464,348 $ 61,618 $23,414 $1,561,202 $ 79,305 $ 29,854

Greater than 80% and less than 90% ......... 412,342 21,369 9,224 376,414 27,472 13,394

Greater than 90% and less than 100% ........ 246,648 19,790 9,445 217,193 24,392 12,935

Greater than 100% and less than 110% ....... 128,428 16,164 8,951 112,376 18,022 11,400

Greater than 110% and less than 120% ....... 73,836 12,534 7,912 62,283 12,718 8,967

Greater than 120% and less than 125% ....... 25,750 5,087 3,557 21,729 5,083 3,733

Greater than 125% ....................... 129,804 40,850 26,723 106,288 40,160 25,096

Total ................................ $2,481,156 $177,412 $89,226 $2,457,485 $207,152 $105,379

(1) Recorded investment consists of unpaid principal balance, unamortized premiums, discounts and other cost basis

adjustments, and accrued interest receivable.

(2) Excludes $51.9 billion and $52.5 billion as of December 31, 2011 and 2010, respectively, of mortgage loans guaranteed

or insured, in whole or in part, by the U.S. government or one of its agencies that are not Alt-A loans. The segment class

is primarily reverse mortgages for which we do not calculate an estimated mark-to-market LTV.

(3) Consists of mortgage loans that are not included in other loan classes.

(4) Includes loans with higher-risk loan characteristics, such as interest-only loans and negative-amortizing loans that are

neither government nor Alt-A.

(5) The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of

each reported period divided by the estimated current value of the property, which we calculate using an internal

valuation model that estimates periodic changes in home value.

The following table displays the total recorded investment in our multifamily HFI loans, excluding loans for

which we have elected the fair value option, by credit quality indicator as of December 31, 2011 and 2010. The

multifamily credit quality indicator is updated quarterly.

As of December 31,

2011(1) 2010(1)

(Dollars in millions)

Credit risk profile by internally assigned grade:(2)

Green ............................................................... $131,740 $117,388

Yellow(3) ............................................................. 28,354 34,651

Orange .............................................................. 17,355 18,075

Red . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,772 2,400

Total ............................................................ $179,221 $172,514

F-44
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(1) Recorded investment consists of unpaid principal balance, unamortized premiums, discounts and other cost basis

adjustments, and accrued interest receivable.

(2) Green (loan with acceptable risk); Yellow (loan with signs of potential weakness); Orange (loan with a well defined

weakness that may jeopardize the timely full repayment); and Red (loan with a weakness that makes timely collection or

liquidation in full more questionable based on existing conditions and values).

(3) Includes approximately $6.9 billion and $9.7 billion of unpaid principal balance as of December 31, 2011 and 2010,

respectively, classified due to no financial information.

Individually Impaired Loans

Individually impaired loans include TDRs, acquired credit-impaired loans, and other multifamily loans regardless

of whether we are currently accruing interest. The following tables display the total recorded investment, unpaid

principal balance, and related allowance as of December 31, 2011 and 2010 and interest income recognized and

average recorded investment for the years ended December 31, 2011 and 2010 for individually impaired loans.

As of December 31, 2011 For the Year Ended December 31, 2011

Unpaid

Principal

Balance

Total

Recorded

Investment(1)

Related

Allowance

for Loan

Losses

Related

Allowance

for

Accrued

Interest

Receivable

Average

Recorded

Investment

Total

Interest

Income

Recognized(2)

Interest

Income

Recognized

on a Cash

Basis

(Dollars in millions)

Individually impaired loans:

With related allowance recorded:

Single-family:

Primary(3) ................... $116,825 $109,684 $29,598 $ 674 $100,797 $3,735 $ 733

Government(4) . . . . . . . . . . . . . . . 258 258 67 8 229 12 —

Alt-A ...................... 34,318 31,516 11,121 268 29,561 982 186

Other(5) ..................... 16,181 15,363 5,353 99 14,431 435 90

Total single-family ......... 167,582 156,821 46,139 1,049 145,018 5,164 1,009

Multifamily ................. 2,832 2,855 718 32 2,430 103 5

Total individually impaired loans

with related allowance

recorded .................. 170,414 159,676 46,857 1,081 147,448 5,267 1,014

With no related allowance recorded: (6)

Single-family:

Primary(3) ................... 9,370 6,471 — — 6,884 606 204

Government(4) . . . . . . . . . . . . . . . 25 17 — — 12 7 —

Alt-A ...................... 3,056 1,538 — — 1,771 205 63

Other(5) . . . . . . . . . . . . . . . . . . . . . 680 367 — — 467 57 19

Total single-family ......... 13,131 8,393 — — 9,134 875 286

Multifamily ................... 1,759 1,771 — — 993 48 8

Total individually impaired loans

with no related allowance

recorded .................... 14,890 10,164 — — 10,127 923 294

Total individually impaired loans(7) . . . $185,304 $169,840 $46,857 $1,081 $157,575 $6,190 $1,308

F-45
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2010 For the Year Ended December 31, 2010

Unpaid

Principal

Balance

Total

Recorded

Investment(1)

Related

Allowance

for Loan

Losses

Related

Allowance

for

Accrued

Interest

Receivable

Average

Recorded

Investment

Total Interest

Income

Recognized(2)

Interest Income

Recognized on a

Cash Basis

(Dollars in millions)

Individually impaired loans:

With related allowance recorded:

Single-family:

Primary(3) ................ $ 99,838 $ 93,024 $23,565 $ 772 $ 81,258 $3,314 $1,470

Government(4) . . . . . . . . . . . . 240 248 38 7 141 9 —

Alt-A ................... 30,932 28,253 9,592 368 25,361 897 407

Other(5) .................. 14,429 13,689 4,479 137 12,094 384 204

Total single-family ...... 145,439 135,214 37,674 1,284 118,854 4,604 2,081

Multifamily ................ 2,372 2,371 556 23 1,496 202 10

Total individually impaired

loans with related allowance

recorded ................ 147,811 137,585 38,230 1,307 120,350 4,806 2,091

With no related allowance

recorded:(6)

Single-family:

Primary(3) ................ 10,586 7,237 — — 7,860 336 55

Government(4) . . . . . . . . . . . . 19 13 — — 11 8 —

Alt-A ................... 3,600 1,884 — — 2,091 121 20

Other(5) . . . . . . . . . . . . . . . . . . 879 512 — — 589 36 7

Total single-family ...... 15,084 9,646 — — 10,551 501 82

Multifamily . . . . . . . . . . . . . . . . 789 811 — — 642 71 5

Total individually impaired

loans with no related

allowance recorded ........ 15,873 10,457 — — 11,193 572 87

Total individually impaired

loans(7) .................... $163,684 $148,042 $38,230 $1,307 $131,543 $5,378 $2,178

(1) Recorded investment consists of unpaid principal balance, unamortized premiums, discounts and other cost basis

adjustments, and accrued interest receivable.

(2) Total single-family interest income recognized of $6.0 billion for the year ended December 31, 2011 consists of $4.5

billion of contractual interest and $1.6 billion of effective yield adjustments. Total single-family interest income

recognized of $5.1 billion for the year ended December 31, 2010 consists of $3.9 billion of contractual interest and $1.3

billion of effective yield adjustments.

(3) Consists of mortgage loans that are not included in other loan classes.

(4) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies that

are not Alt-A.

(5) Includes loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans that are neither

government nor Alt-A.

(6) The discounted cash flows or collateral value equals or exceeds the carrying value of the loan and, as such, no valuation

allowance is required.

F-46
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(7) Includes single-family loans restructured in a TDR with a recorded investment of $161.9 billion and $140.1 billion as of

December 31, 2011 and 2010, respectively. Includes multifamily loans restructured in a TDR with a recorded investment

of $956 million and $939 million as of December 31, 2011 and 2010, respectively.

The average recorded investment in impaired loans was $13.3 billion for the year ended December 31, 2009.

Interest income recognized on impaired loans was $532 million for the year ended December 31, 2009.

Troubled Debt Restructurings

A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing

financial difficulties is considered a TDR. In addition to formal loan modifications, we also engage in other loss

mitigation activities with troubled borrowers, which include repayment plans and forbearance arrangements, both

of which represent informal agreements with the borrower that do not result in the legal modification of the

loan’s contractual terms. As described in our “Summary of Significant Accounting Policies,” we account for

these informal restructurings as a TDR if we defer more than three missed payments. The substantial majority of

the loan modifications we complete result in term extensions, interest rate reductions or a combination of both.

During the year ended December 31, 2011, the average term extension of a modified loan was 90 months and the

average interest rate reduction was 2.95 percentage points.

As a result of adopting the new TDR accounting guidance, we reassessed all modifications, forbearance

arrangements, and repayment plans that occurred on or after January 1, 2011 through June 30, 2011 that were not

previously considered TDRs and for which the allowance for loan losses was measured on a collective basis (“the

transition population”). As of September 30, 2011, the recorded investment related to restructurings in the

transition population that were not previously considered TDRs was $2.3 billion and the individually impaired

allowance for loan losses on this population was $605 million.

The following table displays the number of loans and recorded investment in loans restructured in a TDR for the

year ended December 31, 2011.

For the Year Ended

December 31, 2011

Number of

Loans

Recorded

Investment(1)

(Dollars in millions)

Single-family

Primary(2) ......................................................... 160,227 $28,329

Government(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497 86

Alt-A ............................................................ 33,416 7,108

Other(4) ........................................................... 14,724 3,644

Total single-family ............................................... 208,864 39,167

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 223

Total troubled debt restructurings ........................................ 208,911 $39,390

(1) Recorded investment consists of unpaid principal balance, unamortized premiums, discounts and other cost basis

adjustments, and accrued interest receivable. Based on the nature of our modification programs, which do not include

principal or interest forgiveness, there is not a material difference between the recorded investment in our loans pre- and

post- modification, therefore amounts represent recorded investment post-modification.

(2) Consists of mortgage loans that are not included in other loan classes.

F-47
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(3) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies that

are not Alt-A.

(4) Includes loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans that are neither

government nor Alt-A.

The following table displays the number of loans and recorded investment in loans restructured in a TDR that

had a payment default for the year ended December 31, 2011 and were modified in a TDR in the twelve months

prior to the payment default. For purposes of this disclosure, we define loans that had a payment default as

single-family and multifamily loans with completed TDRs that liquidated during the period, either through

foreclosure, deed-in-lieu of foreclosure or a short sale, single-family loans with completed modifications that are

two or more months delinquent during the period or multifamily loans with completed modifications that are one

or more months delinquent during the period.

For the Year Ended

December 31, 2011

Number of

Loans

Recorded

Investment(1)

(Dollars in millions)

Single-family

Primary(2) .................................................................... 66,088 $11,585

Government(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376 95

Alt-A ....................................................................... 14,223 3,045

Other(4) ...................................................................... 6,843 1,670

Total single-family .......................................................... 87,530 16,395

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 49

Total TDRs that subsequently defaulted .............................................. 87,538 $16,444

(1) Recorded investment consists of unpaid principal balance, unamortized premiums, discounts and other cost basis

adjustments, and accrued interest receivable. Represents our recorded investment in the loan at time of payment default.

(2) Consists of mortgage loans that are not included in other loan classes.

(3) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies that

are not Alt-A.

(4) Includes loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans that are neither

government nor Alt-A.

F-48
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Loans Acquired in a Transfer

We acquired delinquent loans from unconsolidated trusts and long-term standby commitments with an unpaid

principal balance plus accrued interest of $192 million, $279 million and $36.4 billion for the years ended

December 31, 2011, 2010, and 2009, respectively. The following table displays the outstanding unpaid principal

balance and accrued interest receivable, carrying amount by accrual status of acquired credit-impaired loans as of

December 31, 2011 and 2010, excluding loans that were modified as TDRs subsequent to their acquisition from

MBS trusts.

As of December 31,

2011 2010

(Dollars in millions)

Outstanding contractual balance ............................................ $5,029 $8,519

Carrying amount:(1)

Loans on accrual status ................................................. $1,660 $2,029

Loans on nonaccrual status .............................................. 1,225 2,449

Total carrying amount of loans ............................................. $2,885 $4,478

(1) Carrying amount consists of unpaid principal balance, unamortized premiums, discounts and other cost basis adjustments,

impairment and accrued interest receivable.

The following table displays details on acquired credit-impaired loans at their acquisition dates for the years

ended December 31, 2011, 2010 and 2009.

For the Year Ended December 31,

2011 2010 2009

(Dollars in millions)

Contractually required principal and interest payments at acquisition(1) . . . $272 $321 $39,197

Nonaccretable difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 154 9,234

Cash flows expected to be collected at acquisition(1) . . . . . . . . . . . . . . . . . . 115 167 29,963

Accretable yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 76 13,852

Initial investment in acquired credit-impaired loans at acquisition . . . . . . . $ 73 $ 91 $16,111

(1) Contractually required principal and interest payments at acquisition and cash flows expected to be collected at

acquisition are adjusted for the estimated timing and amount of prepayments.

F-49
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table displays activity for the accretable yield of all outstanding acquired credit-impaired loans for

the years ended December 31, 2011, 2010 and 2009. Accreted effective interest is shown for only those loans that

we were still accounting for as acquired credit-impaired loans for the respective periods.

For the Year Ended

December 31,

2011 2010 2009

(Dollars in millions)

Beginning balance, January 1 ....................................... $2,412 $10,117 $ 1,559

Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 76 13,852

Accretion ...................................................... (269) (314) (215)

Reductions(1) .................................................... (833) (6,067) (13,693)

Changes in estimated cash flows(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 (1,163) 8,729

Reclassifications to nonaccretable difference(3) ......................... (51) (237) (115)

Ending balance, December 31 ...................................... $1,466 $ 2,412 $ 10,117

(1) Reductions are the result of liquidations and loan modifications due to TDRs.

(2) Represents changes in expected cash flows due to changes in prepayment and other assumptions.

(3) Represents changes in expected cash flows due to changes in credit quality or credit assumptions.

The following table displays interest income recognized and the impact to the “Provision for loan losses” related

to loans that are still being accounted for as acquired credit-impaired loans, as well as loans that have been

subsequently modified as a TDR, for the years ended December 31, 2011, 2010 and 2009.

For the Year Ended

December 31,

2011 2010 2009

(Dollars in millions)

Accretion of fair value discount(1) ........................................ $1,031 $1,024 $405

Interest income on loans returned to accrual status or subsequently modified as

TDRs ............................................................ 1,026 1,148 214

Total interest income recognized on acquired credit-impaired loans ........... $2,057 $2,172 $619

Increase in “Provision for loan losses” subsequent to the acquisition of creditimpaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 710 $ 963 $691

(1) Represents accretion of the fair value discount that was recorded on acquired credit-impaired loans.

4. Allowance for Loan Losses and Reserve for Guaranty Losses

We maintain an allowance for loan losses for loans held for investment in our mortgage portfolio and loans

backing Fannie Mae MBS issued from consolidated trusts and a reserve for guaranty losses related to loans

backing Fannie Mae MBS issued from unconsolidated trusts and loans that we have guaranteed under long-term

standby commitments. We refer to our allowance for loan losses and reserve for guaranty losses collectively as

our combined loss reserves. When calculating our reserve for guaranty losses, we consider all contractually past

due interest income including payments expected to be missed between the balance sheet date and the point of

loan acquisition or foreclosure. When calculating our loan loss allowance, we consider only our net recorded

investment in the loan at the balance sheet date, which includes interest income only while the loan was on

accrual status.

F-50
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Determining the adequacy of our allowance for loan losses and reserve for guaranty losses is complex and

requires judgment about the effect of matters that are inherently uncertain.

Upon recognition of the mortgage loans held by newly consolidated trusts and the associated accrued interest

receivable at the transition date of our adoption of the consolidation accounting guidance on January 1, 2010, we

increased our “Allowance for loan losses” by $43.6 billion, increased our “Allowance for accrued interest

receivable” by $7.0 billion and decreased our “Reserve for guaranty losses” by $54.1 billion. The net decrease of

$3.5 billion reflects the difference in the methodology used to estimate incurred losses for our allowance for loan

losses and accrued interest receivable versus our reserve for guaranty losses.

F-51
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Allowance for Loan Losses

The following table displays changes in both single-family and multifamily allowance for loan losses for the

years ended December 31, 2011 and 2010 and the total allowance for loan losses for the years ended

December 31, 2011, 2010, and 2009.

For the Year Ended December 31,

2011 2010 2009

Of

Fannie

Mae

Of

Consolidated

Trusts Total

Of

Fannie

Mae

Of

Consolidated

Trusts Total

(Dollars in millions)

Single-family allowance for loan losses:

Beginning balance, January 1 ....... $ 47,377 $12,603 $ 59,980 $ 6,721 $ 1,749 $ 8,470

Adoption of consolidation

accounting guidance ........... — — — — 43,170 43,170

Provision for loan losses ......... 13,940 11,683 25,623 12,923 11,592 24,515

Charge-offs(1)(2) ................. (19,026) (1,772) (20,798) (15,438) (7,026) (22,464)

Recoveries .................... 3,636 1,636 5,272 1,913 1,164 3,077

Transfers(3) ..................... 9,901 (9,901) — 44,599 (44,599) —

Other(4) . . . . . . . . . . . . . . . . . . . . . . . . 466 90 556 (3,341) 6,553 3,212

Ending balance, December 31 ....... $ 56,294 $14,339 $ 70,633 $ 47,377 $ 12,603 $ 59,980

Multifamily allowance for loan losses:

Beginning balance, January 1 ....... $ 1,153 $ 423 $ 1,576 $ 1,357 $ 98 $ 1,455

Adoption of consolidation

accounting guidance . . . . . . . . . . . — — — — 406 406

Provision for loan losses . . . . . . . . . 140 151 291 144 43 187

Charge-offs(2) ................... (372) — (372) (414) — (414)

Transfers(3) . . . . . . . . . . . . . . . . . . . . . 79 (79) — 115 (115) —

Other(4) . . . . . . . . . . . . . . . . . . . . . . . . 15 13 28 (49) (9) (58)

Ending balance, December 31 ....... $ 1,015 $ 508 $ 1,523 $ 1,153 $ 423 $ 1,576

Total allowance for loan losses:

Beginning balance, January 1 ....... $ 48,530 $13,026 $ 61,556 $ 8,078 $ 1,847 $ 9,925 $ 2,772

Adoption of consolidation

accounting guidance ........... — — — — 43,576 43,576 —

Provision for loan losses ......... 14,080 11,834 25,914 13,067 11,635 24,702 9,569

Charge-offs(1)(2) ................. (19,398) (1,772) (21,170) (15,852) (7,026) (22,878) (2,245)

Recoveries .................... 3,636 1,636 5,272 1,913 1,164 3,077 214

Transfers(3) ..................... 9,980 (9,980) — 44,714 (44,714) — —

Other(4) . . . . . . . . . . . . . . . . . . . . . . . . 481 103 584 (3,390) 6,544 3,154 (385)

Ending balance, December 31(5)(6) .... $ 57,309 $14,847 $ 72,156 $ 48,530 $ 13,026 $ 61,556 $ 9,925

(1) While we purchase the substantial majority of loans that are four or more months delinquent from our MBS trusts, we do

not exercise this option to purchase loans during a forbearance period. Accordingly, charge-offs of consolidated trusts

generally represent loans that remained in our consolidated trusts at the time of default.

F-52
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(2) Total charge-offs include accrued interest of $1.4 billion, $2.4 billion and $1.5 billion for the years ended December 31,

2011, 2010 and 2009, respectively. Single-family charge-offs include accrued interest of $1.4 billion and $2.3 billion for

the years ended December 31, 2011 and 2010, respectively. Multifamily charge-offs include accrued interest of $46

million and $64 million for the years ended December 31, 2011 and 2010, respectively.

(3) Includes transfers from trusts for delinquent loan purchases.

(4) Amounts represent the net activity recorded in our allowances for accrued interest receivable and preforeclosure property

taxes and insurance receivable from borrowers. The provision for credit losses, charge-offs, recoveries and transfer

activity included in this table reflects all changes for both the allowance for loan losses and the valuation allowances for

accrued interest and preforeclosure property taxes and insurance receivable that relate to the mortgage loans.

(5) Total allowance for loan losses includes $375 million, $385 million, and $726 million as of December 31, 2011, 2010,

and 2009, respectively, for acquired credit-impaired loans.

(6) Total single-family allowance for loan losses was $8.5 billion as of December 31, 2009. Total multifamily allowance for

loan losses was $1.4 billion as of December 31, 2009.

As of December 31, 2011, the allowance for accrued interest receivable for loans of Fannie Mae was $2.2 billion

and for loans of consolidated trusts was $336 million. As of December 31, 2010, the allowance for accrued

interest receivable for loans of Fannie Mae was $3.0 billion and for loans of consolidated trusts was $439

million.

The following table displays the allowance for loan losses and total recorded investment in our HFI loans,

excluding loans for which we have elected the fair value option, by impairment or reserve methodology and

portfolio segment as of December 31, 2011 and 2010.

As of December 31,

2011 2010

Single-Family Multifamily Total Single-Family Multifamily Total

(Dollars in millions)

Allowance for loan losses by segment:

Individually impaired loans ............ $ 45,765 $ 717 $ 46,482 $ 37,296 $ 549 $ 37,845

Collectively reserved loans ............. 24,494 805 25,299 22,306 1,020 23,326

Acquired credit-impaired loans . . . . . . . . . 374 1 375 378 7 385

Total allowance for loan losses ........ $ 70,633 $ 1,523 $ 72,156 $ 59,980 $ 1,576 $ 61,556

Recorded investment in loans by segment:(1)

Individually impaired loans ............ $ 161,942 $ 4,579 $ 166,521 $ 140,062 $ 3,074 $ 143,136

Collectively reserved loans ............. 2,634,456 174,595 2,809,051 2,677,640 169,332 2,846,972

Acquired credit-impaired loans ......... 3,272 47 3,319 4,798 108 4,906

Total recorded investment in loans ..... $2,799,670 $179,221 $2,978,891 $2,822,500 $172,514 $2,995,014

(1) Recorded investment consists of unpaid principal balance, unamortized premiums, discounts and other cost basis

adjustments, and accrued interest receivable.

On December 31, 2010, we entered into an agreement with Bank of America, N.A., and its affiliates, BAC Home

Loans Servicing, LP, and Countrywide Home Loans, Inc., to address outstanding repurchase requests for

residential mortgage loans with an unpaid principal balance of $3.9 billion delivered to us by affiliates of

Countrywide Financial Corporation. Bank of America agreed, among other things, to a resolution amount of $1.5

billion, consisting of a cash payment of $1.3 billion and other payments recently made or to be made by them.

We recognized $930 million as a recovery of charge-offs resulting in a reduction to “Provision for loan losses”

F-53
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and “Allowance for loan losses,” $266 million as a reduction to “Foreclosed property expense” and $142 million

as receipt of amounts receivable due to the rescission of mortgage insurance coverage included in “Other

Assets.”

The agreement substantially resolved or addressed then outstanding repurchase requests on loans sold to us by

Countrywide and permits us to bring claims for any additional breaches of our representations and warranties that

are identified with respect to some of those loans. We continue to work with Bank of America to resolve

repurchase requests that remain outstanding, including requests relating to loans delivered to us by Bank of

America, N.A. For additional information regarding outstanding repurchase requests, refer to “Note 17,

Concentrations of Credit Risk.”

The year ended December 31, 2010 includes an out-of-period adjustment of $1.1 billion to our consolidated

statement of operations and comprehensive loss reflecting our assessment of the collectibility of receivables from

our borrowers. We identified that for a portion of our delinquent loans we had not estimated and recorded our

obligation to reimburse servicers for advances they made on our behalf for preforeclosure property taxes and

insurance. We also did not record a receivable from borrowers for these payments or assess the collectibility of

that receivable.

Reserve for Guaranty Losses

The following table displays changes in the reserve for guaranty losses for the years ended December 31, 2011,

2010, and 2009.

For the Year Ended December 31,

2011 2010 2009

(Dollars in millions)

Reserve for guaranty losses:

Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 323 $ 54,430 $ 21,830

Adoption of consolidation accounting guidance ............................... — (54,103) —

Provision for guaranty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 804 194 63,057

Charge-offs(1)(2) ......................................................... (138) (203) (31,142)

Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5 685

Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 994 $ 323 $ 54,430

(1) Includes charges of $228 million for the year ended December 31, 2009 related to unsecured HomeSaver Advance loans.

There were no charges related to unsecured HomeSaver Advance loans for the years ended December 31, 2011 and 2010,

respectively.

(2) Includes charges recorded at the date of acquisition of $116 million, $180 million and $20.3 billion for the years ended

December 31, 2011, 2010 and 2009, respectively, for acquired credit-impaired loans where the acquisition cost exceeded

the fair value of the acquired loan.

F-54
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. Investments in Securities

Trading Securities

Trading securities are recorded at fair value with subsequent changes in fair value recorded as “Fair value losses,

net” in our consolidated statements of operations and comprehensive loss. The following table displays our

investments in trading securities and the cumulative amount of net losses recognized from holding these

securities as of December 31, 2011 and 2010.

As of December 31,

2011 2010

(Dollars in millions)

Mortgage-related securities:

Fannie Mae ............................................................. $ 7,424 $ 7,398

Freddie Mac ............................................................ 2,732 1,326

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287 590

Alt-A private-label securities ............................................... 1,349 1,683

Subprime private-label securities ............................................ 1,280 1,581

CMBS ................................................................. 10,411 10,764

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 724 609

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 152

Total ................................................................ 24,350 24,103

Non-mortgage-related securities:

U.S. Treasury securities ................................................... 47,737 27,432

Asset-backed securities ................................................... 2,111 5,321

Total ................................................................ 49,848 32,753

Total trading securities ...................................................... $74,198 $56,856

Losses in trading securities held in our portfolio, net .............................. $ 1,787 $ 2,149

The following table displays information about our net trading gains and losses for the years ended December 31,

2011, 2010, and 2009.

For the Year Ended

December 31,

2011 2010 2009

(Dollars in millions)

Net trading gains (losses):

Mortgage-related securities ................................... $274 $2,607 $2,457

Non-mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) 85 1,287

Total ................................................... $266 $2,692 $3,744

Net trading gains (losses) recorded in the period related to securities still

held at period end:

Mortgage-related securities ................................... $268 $2,485 $1,974

Non-mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 56 1,146

Total ................................................... $267 $2,541 $3,120

F-55
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Available-for-Sale Securities

We measure AFS securities at fair value with unrealized gains and losses recorded as a component of “Other

comprehensive (loss) income,” net of tax, and we record realized gains and losses from the sale of AFS securities

in “Investment gains, net” in our consolidated statements of operations and comprehensive loss.

The following table displays the gross realized gains, losses and proceeds on sales of AFS securities for the years

ended December 31, 2011, 2010, and 2009.

For the Year Ended

December 31,

2011 2010 2009

(Dollars in millions)

Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 182 $ 566 $ 4,521

Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 293 3,080

Total proceeds(1) .............................................. 2,152 7,207 226,664

(1) Excludes proceeds from the initial sale of securities from new portfolio securitizations included in “Note 2,

Consolidations and Transfers of Financial Assets.”

The following tables display the amortized cost, gross unrealized gains and losses and fair value by major

security type for AFS securities we held as of December 31, 2011 and 2010.

As of December 31, 2011

Total

Amortized

Cost(1)

Gross

Unrealized

Gains

Gross

Unrealized

Losses -

OTTI(2)

Gross

Unrealized

Losses -

Other(3)

Total

Fair

Value

(Dollars in millions)

Fannie Mae .......................... $15,486 $1,381 $ (3) $ (14) $16,850

Freddie Mac ......................... 11,906 917 — — 12,823

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . 775 127 — — 902

Alt-A private-label securities ............ 13,314 233 (1,618) (246) 11,683

Subprime private-label securities ......... 9,556 17 (1,534) (453) 7,586

CMBS(4) ............................. 13,949 181 — (104) 14,026

Mortgage revenue bonds ............... 10,172 202 (56) (64) 10,254

Other mortgage-related securities ......... 3,687 92 (39) (282) 3,458

Total ............................... $78,845 $3,150 $(3,250) $(1,163) $77,582

F-56
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2010

Total

Amortized

Cost(1)

Gross

Unrealized

Gains

Gross

Unrealized

Losses -

OTTI(2)

Gross

Unrealized

Losses -

Other(3)

Total

Fair

Value

(Dollars in millions)

Fannie Mae .......................... $21,428 $1,453 $ (9) $ (44) $22,828

Freddie Mac ......................... 15,986 1,010 — — 16,996

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . 909 130 — — 1,039

Alt-A private-label securities ............ 15,789 177 (1,791) (285) 13,890

Subprime private-label securities ......... 11,323 54 (997) (448) 9,932

CMBS(4) ............................. 15,273 25 — (454) 14,844

Mortgage revenue bonds ............... 11,792 47 (64) (734) 11,041

Other mortgage-related securities ......... 4,098 106 (44) (338) 3,822

Total ............................... $96,598 $3,002 $(2,905) $(2,303) $94,392

(1) Amortized cost includes unamortized premiums, discounts and other cost basis adjustments as well as the credit

component of other-than-temporary impairments (“OTTI”) recognized in our consolidated statements of operations and

comprehensive loss.

(2) Represents the noncredit component of other-than-temporary impairment losses recorded in “Accumulated other

comprehensive loss” as well as cumulative changes in fair value for securities for which we previously recognized the

credit component of an other-than-temporary impairment.

(3) Represents the gross unrealized losses on securities for which we have not recognized an other-than-temporary

impairment.

(4) Amortized cost includes $686 million and $848 million as of December 31, 2011 and 2010, respectively, of increase to

the carrying amount from previous fair value hedge accounting.

The following tables display additional information regarding gross unrealized losses and fair value by major

security type for AFS securities in an unrealized loss position that we held as of December 31, 2011 and 2010.

As of December 31, 2011

Less Than 12

Consecutive Months

12 Consecutive

Months or Longer

Gross

Unrealized

Losses

Fair

Value

Gross

Unrealized

Losses

Fair

Value

(Dollars in millions)

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4) $ 519 $ (13) $ 208

Alt-A private-label securities ........................... (133) 1,414 (1,731) 6,525

Subprime private-label securities ........................ (73) 471 (1,914) 6,686

CMBS ............................................ (20) 1,458 (84) 2,790

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) 114 (116) 1,971

Other mortgage-related securities ....................... (21) 547 (300) 1,588

Total .............................................. $(255) $4,523 $(4,158) $19,768

F-57
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2010

Less Than 12

Consecutive Months

12 Consecutive

Months or Longer

Gross

Unrealized

Losses

Fair

Value

Gross

Unrealized

Losses

Fair

Value

(Dollars in millions)

Fannie Mae ........................................ $ (35) $ 1,461 $ (18) $ 211

Alt-A private-label securities .......................... (104) 1,915 (1,972) 9,388

Subprime private-label securities ....................... (47) 627 (1,398) 8,493

CMBS ........................................... (15) 1,774 (439) 10,396

Mortgage revenue bonds ............................. (206) 5,009 (592) 3,129

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . (2) 262 (380) 2,014

Total ............................................. $(409) $11,048 $(4,799) $33,631

Other-Than-Temporary Impairments

We recognize the credit component of other-than-temporary impairments of our debt securities in “Net otherthan-temporary impairments” and the noncredit component in “Other comprehensive (loss) income” in our

consolidated statements of operations and comprehensive loss for those securities that we do not intend to sell

and for which it is not more likely than not that we will be required to sell before recovery.

The fair value of our securities varies from period to period due to changes in interest rates, in the performance of

the underlying collateral and in the credit performance of the underlying issuer, among other factors. $4.2 billion

of the $4.4 billion of gross unrealized losses on AFS securities as of December 31, 2011 have existed for a period

of 12 consecutive months or longer. Gross unrealized losses on AFS securities as of December 31, 2011 include

unrealized losses on securities with other-than-temporary impairment in which a portion of the impairment

remains in “Accumulated other comprehensive loss.” The securities with unrealized losses for 12 consecutive

months or longer, on average, had a fair value as of December 31, 2011 that was 83% of their amortized cost

basis. Based on our review for impairments of AFS securities, which includes an evaluation of the collectibility

of cash flows and any intent or requirement to sell the securities, we have concluded that we do not have an

intent to sell and we believe it is not more likely than not that we will be required to sell the securities.

Additionally, our projections of cash flows indicate that we will recover these unrealized losses over the lives of

the securities.

In the three months ended December 31, 2011, we identified an error in the rate used to calculate interest income

and other-than-temporary impairments on AFS securities, which resulted in an overstatement of income and

amortized cost. We have evaluated the effects of this misstatement, both quantitatively and qualitatively, and

concluded that the misstatement is not material to our 2011 loss or to any prior consolidated financial statements.

To correct the above misstatement, we recorded an out-of-period adjustment of $506 million comprised of $727

million to reduce “Interest Income: Available-for-sale securities” offset by a $221 million reduction to “Otherthan-temporary impairments” in our consolidated statement of operations and comprehensive loss for the year

ended December 31, 2011.

F-58
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table displays our net other-than-temporary impairments by major security type recognized in our

consolidated statements of operations and comprehensive loss for the years ended December 31, 2011, 2010, and

2009.

For the Year Ended

December 31,

2011 2010(1) 2009(1)

(Dollars in millions)

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 563 $327 $3,956

Subprime private-label securities ........................................ (303) 368 5,660

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 27 245

Net other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 308 $722 $9,861

(1) Certain prior period amounts have been reclassified to conform to the current period presentation.

For the year ended December 31, 2011, we recorded net other-than-temporary impairment of $308 million. The

net other-than-temporary impairment charges recorded in the year ended December 31, 2011 were primarily

driven by an increase in collateral losses on certain Alt-A private-label securities, which resulted in a decrease in

the present value of our cash flow projections on these Alt-A private-label securities, offset by the out-of-period

adjustment of $221 million as discussed above.

The following table displays activity related to the unrealized credit component on debt securities held by us and

recognized in our consolidated statements of operations and comprehensive loss for the years ended

December 31, 2011 and 2010. A related unrealized non-credit component has been recognized in “Other

comprehensive (loss) income.”

For the Year Ended

December 31,

2011 2010

(Dollars in millions)

Balance, January 1 ....................................................... $8,215 $8,191

Additions for the credit component on debt securities for which OTTI was not

previously recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 29

Additions for credit losses on debt securities for which OTTI was previously

recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 693

Reductions for securities no longer in portfolio at period end . . . . . . . . . . . . . . . . . . . . . (7) (154)

Additions (reductions) for amortization resulting from changes in cash flows expected

to be collected over the remaining life of the securities(1) . . . . . . . . . . . . . . . . . . . . . . . 399 (544)

Balance, December 31 .................................................... $8,915 $8,215

(1) Amount includes out-of-period adjustment of $727 million in 2011 due to an overstatement of income and amortized

cost.

As of December 31, 2011, those debt securities with other-than-temporary impairment for which we recognized

in our consolidated statements of operations and comprehensive loss only the amount of loss related to credit

consisted predominantly of Alt-A and subprime securities. We evaluate Alt-A (including option adjustable rate

mortgage (“ARM”)) and subprime private-label securities for other-than-temporary impairment by discounting

the projected cash flows from econometric models to estimate the portion of loss in value attributable to credit.

Separate components of a third-party model project regional home prices, unemployment and interest rates. The

F-59
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

model combines these factors with available current information regarding attributes of loans in pools backing

the private-label mortgage-related securities to project prepayment speeds, conditional default rates, loss

severities and delinquency rates. It incorporates detailed information on security-level subordination levels and

cash flow priority of payments to project security level cash flows. We have recorded other-than-temporary

impairments for the year ended December 31, 2011 based on this analysis, with amounts related to credit loss

recognized in our consolidated statements of operations and comprehensive loss. For securities we determined

were not other-than-temporarily impaired, we concluded that either the bond had no projected credit loss or if we

projected a loss, that the present value of expected cash flows was greater than the security’s cost basis.

The following table displays the modeled attributes, including default rates and severities, which are used to

determine whether our senior interests in certain non-agency mortgage-related securities will experience a cash

shortfall. Assumption of voluntary prepayment rates is also an input to the present value of expected losses.

As of December 31, 2011

Alt-A

Subprime Option ARM Fixed Rate Variable Rate Hybrid Rate

(Dollars in millions)

Vintage Year

2004 & Prior:

Unpaid principal balance ..................... $ 1,642 $ 479 $3,369 $ 487 $2,242

Weighted average collateral default(1) ............ 38.8% 37.8% 11.1% 32.1% 16.6%

Weighted average collateral severities(2) .......... 61.1 54.0 49.4 43.6 40.5

Weighted average voluntary prepayment rates(3) . . . 6.2 11.0 12.6 9.2 12.7

Average credit enhancement(4) ................. 51.3 15.5 12.1 22.5 10.4

2005

Unpaid principal balance . . . . . . . . . . . . . . . . . . . . . $ 170 $1,297 $1,171 $ 525 $2,325

Weighted average collateral default(1) ............ 71.7% 56.1% 40.1% 53.7% 38.8%

Weighted average collateral severities(2) .......... 72.9 61.6 64.4 59.5 48.8

Weighted average voluntary prepayment rates(3) . . . 2.2 6.3 8.9 7.3 9.1

Average credit enhancement(4) ................. 65.8 23.4 1.3 16.9 5.1

2006

Unpaid principal balance ..................... $11,532 $1,192 $ 518 $1,576 $1,662

Weighted average collateral default(1) ............ 76.9% 68.9% 40.9% 59.0% 32.5%

Weighted average collateral severities(2) .......... 73.4 64.1 65.8 59.1 51.4

Weighted average voluntary prepayment rates(3) . . . 2.1 3.7 8.0 6.3 9.8

Average credit enhancement(4) ................. 17.3 17.3 1.6 1.5 0.3

2007 & After:

Unpaid principal balance . . . . . . . . . . . . . . . . . . . . . $ 602 $ — $ — $ — $ 117

Weighted average collateral default(1) ............ 77.9% N/A N/A N/A 40.7%

Weighted average collateral severities(2) .......... 68.0 N/A N/A N/A 59.6

Weighted average voluntary prepayment rates(3) . . . 1.7 N/A N/A N/A 9.0

Average credit enhancement(4) ................. 33.3 N/A N/A N/A 25.9

Total

Unpaid principal balance ..................... $13,946 $2,968 $5,058 $2,588 $6,346

Weighted average collateral default(1) ............ 72.4% 58.3% 20.9% 52.8% 29.3%

Weighted average collateral severities(2) .......... 71.8 61.4 54.6 56.3 46.7

Weighted average voluntary prepayment rates(3) . . . 2.6 6.0 11.3 7.0 10.5

Average credit enhancement(4) ................. 22.6 19.7 8.5 8.6 6.1

F-60
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(1) The expected remaining cumulative default rate of the collateral pool backing the securities, as a percentage of the current

collateral unpaid principal balance, weighted by security unpaid principal balance.

(2) The expected remaining loss given default of the collateral pool backing the securities, calculated as the ratio of

remaining cumulative loss divided by cumulative defaults, weighted by security unpaid principal balance.

(3) The average monthly voluntary prepayment rate, weighted by security unpaid principal balance.

(4) The average percent current credit enhancement provided by subordination of other securities. Excludes excess interest

projections and monoline bond insurance.

For mortgage revenue bonds, where we cannot utilize credit-sensitized cash flows, we perform a qualitative and

quantitative analysis to assess whether a bond is other-than-temporarily impaired. If a bond is deemed to be

other-than-temporarily impaired, the projected contractual cash flows of the security are reduced by a default loss

amount based on the security’s lowest credit rating as provided by the major nationally recognized statistical

rating organizations. The lower the security’s credit rating, the larger the amount by which the contractual cash

flows are reduced. These adjusted cash flows are then used in the present value calculation to determine the

credit portion of the other-than-temporary impairment. While we have recognized other-than-temporary

impairment on these bonds, we expect to realize no credit losses on the vast majority of our holdings due to the

inherent financial strength of the issuers, or in some cases, the amount of external credit support from mortgage

collateral or financial guarantees. The fair values of these bonds are impacted by the low levels of market

liquidity and greater expected yield, which has led to unrealized losses in the portfolio that we deem to be

temporary.

Other mortgage-related securities include manufactured housing securities, some of which have been other-thantemporarily impaired in 2011. For manufactured housing securities, we utilize models that incorporate recent

historical performance information and other relevant public data to run cash flows and assess for other-thantemporary impairment. Given the significant seasoning of these securities we expect that the future performance

will be in line with how the securities are currently performing. We model securities assuming the benefit of

those external financial guarantees that are deemed creditworthy. If we determined that securities were not otherthan-temporarily impaired, we concluded that either the bond had no projected credit loss or, if a loss was

projected, that present value of expected cash flows was greater than the security’s cost basis.

We analyzed commercial mortgage-backed securities (“CMBS”) using a CMBS loss forecast model

that incorporates a loan level loss forecast. This forecast takes into account loan performance, loan status, loan

attributes, structures, metropolitan area, property type and macroeconomic expectations. Given the current

high level of credit enhancement and collateral loss expectations, no single bond is expected to experience a

principal write-down or interest shortfall. Our CMBS loss forecast expectations may change as macroeconomic

conditions and the commercial real estate market evolve. As of December 31, 2011, we had no other-thantemporary impairments in our holdings of CMBS as we projected the remaining subordination to be more than

sufficient to absorb the level of projected losses. While downgrades have occurred in this sector, all of our

holdings remained investment grade as of December 31, 2011.

F-61
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Maturity Information

The following table displays the amortized cost and fair value of our AFS securities by major security type and

remaining maturity, assuming no principal prepayments, as of December 31, 2011. Contractual maturity of

mortgage-backed securities is not a reliable indicator of their expected life because borrowers generally have the

right to prepay their obligations at any time.

As of December 31, 2011

Total

Amortized

Cost

Total

Fair

Value

One Year or Less

After One Year

Through Five Years

After Five Years

Through Ten Years After Ten Years

Amortized

Cost

Fair

Value

Amortized

Cost

Fair

Value

Amortized

Cost

Fair

Value

Amortized

Cost

Fair

Value

(Dollars in millions)

Fannie Mae ............ $15,486 $16,850 $ — $ — $ 22 $ 23 $1,810 $1,924 $13,654 $14,903

Freddie Mac ............ 11,906 12,823 1 1 43 45 1,222 1,316 10,640 11,461

Ginnie Mae . . . . . . . . . . . . 775 902 — — 1 1 5 5 769 896

Alt-A private-label

securities ............. 13,314 11,683 — — 1 1 235 239 13,078 11,443

Subprime private-label

securities ............ 9,556 7,586 — — — — — — 9,556 7,586

CMBS ................ 13,949 14,026 62 64 8,469 8,581 5,116 5,099 302 282

Mortgage revenue bonds . . 10,172 10,254 63 64 351 361 751 766 9,007 9,063

Other mortgage-related

securities ............ 3,687 3,458 — — — — — 13 3,687 3,445

Total .................. $78,845 $77,582 $ 126 $129 $8,887 $9,012 $9,139 $9,362 $60,693 $59,079

Weighted average

yield(1) ............... 4.67% 5.39% 4.18% 4.64% 4.75%

(1) Yields are determined by dividing interest income (including the amortization and accretion of premiums, discounts and

other cost basis adjustments) by amortized cost balances as of year-end. Yields on tax exempt obligations have been

computed on a tax equivalent basis. Interest income excludes out-of-period adjustment of $727 million.

Accumulated Other Comprehensive Loss

The following table displays our accumulated other comprehensive loss by major categories as of December 31,

2011, 2010 and 2009.

As of December 31,

2011 2010(1) 2009

(Dollars in millions)

Net unrealized gains on available-for-sale securities for which we have not

recorded other-than-temporary impairment, net of tax ................... $ 1,152 $ 304 $ 1,337

Net unrealized losses on available-for-sale securities for which we have

recorded other-than-temporary impairment, net of tax ................... (1,953) (1,736) (3,059)

Other losses ...................................................... (434) (250) (10)

Accumulated other comprehensive loss .............................. $(1,235) $(1,682) $(1,732)

(1) Includes a net increase of $3.4 billion from the adoption of the new accounting guidance.

F-62
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. Financial Guarantees

We generate revenue by absorbing the credit risk of mortgage loans in unconsolidated trusts in exchange for a

guaranty fee. We also provide credit enhancements on taxable or tax-exempt mortgage revenue bonds issued by

state and local governmental entities to finance multifamily housing for low- and moderate-income families.

Additionally, we issue long-term standby commitments that generally require us to purchase loans from lenders

if the loans meet certain delinquency criteria.

For our guarantees to unconsolidated trusts and other guaranty arrangements, we recognize a guaranty obligation

for our obligation to stand ready to perform on these guarantees. These guarantees expose us to credit losses on

the mortgage loans or, in the case of mortgage-related securities, the underlying mortgage loan of the related

securities. The contractual terms of our guarantees range from 30 days to 40 years. However, the actual term of

each guaranty may be significantly less than the contractual term based on the prepayment characteristics of the

related mortgage loans. For those guarantees recognized in our consolidated balance sheets, our maximum

potential exposure under these guarantees is primarily comprised of the unpaid principal balance of the

underlying mortgage loans, which totaled $59.4 billion and $52.4 billion as of December 31, 2011 and 2010,

respectively. The maximum amount we could recover through available credit enhancements and recourse with

third parties on guarantees recognized in our consolidated balance sheets was $14.1 billion and $12.6 billion as of

December 31, 2011 and 2010, respectively. In addition, we had exposure of $9.3 billion and $10.3 billion for

other guarantees not recognized in our consolidated balance sheets as of December 31, 2011 and 2010,

respectively. The maximum amount we could recover through available credit enhancements and recourse with

third parties on guarantees not recognized in our consolidated balance sheets was $4.0 billion and $3.9 billion as

of December 31, 2011 and 2010, respectively. Recoverability of such credit enhancements and recourse is

subject to, among other factors, our mortgage insurers’ and financial guarantors’ ability to meet their obligations

to us.

Risk Characteristics of our Book of Business

We gauge our performance risk under our guaranty based on the delinquency status of the mortgage loans we

hold in portfolio, or in the case of mortgage-backed securities, the mortgage loans underlying the related

securities.

For single family loans, management monitors the serious delinquency rate, which is the percentage of singlefamily loans three or more months past due or in the foreclosure process, and loans that have higher risk

characteristics, such as high mark-to-market loan-to-value ratios.

For multifamily loans, management monitors the serious delinquency rate, which is the percentage of loans 60

days or more past due, of loans that have higher risk characteristics, to determine the overall credit quality

indicator, including original debt service coverage ratios (“DSCR”) on loans below 1.10 as well as current DSCR

on loans below 1.0 and high original and current estimated loan to value ratios. We stratify multifamily loans into

different internal risk categories based on the credit risk inherent in each individual loan.

For single and multifamily loans, we use this information, in conjunction with housing market and economic

conditions, to structure our pricing and our eligibility and underwriting criteria to reflect the current risk of loans

with these higher-risk characteristics, and in some cases we decide to significantly reduce our participation in

riskier loan product categories. Management also uses this data together with other credit risk measures to

identify key trends that guide the development of our loss mitigation strategies.

F-63
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables display the current delinquency status and certain higher risk characteristics of our singlefamily conventional and total multifamily guaranty book of business as of December 31, 2011 and 2010.

As of December 31, 2011(1) As of December 31, 2010(1)

30 Days

Delinquent

60 Days

Delinquent

Seriously

Delinquent(2)

30 Days

Delinquent

60 Days

Delinquent

Seriously

Delinquent(2)

Percentage of single-family conventional

guaranty book of business(3) ........... 1.98% 0.73% 4.47% 2.19% 0.89% 5.37%

Percentage of single-family conventional

loans(4) ............................ 2.17 0.74 3.91 2.32 0.87 4.48

As of December 31,

2011(1) 2010(1)

Percentage of

Single-Family

Conventional

Guaranty Book

of Business(3)

Percentage

Seriously

Delinquent(2)(4)

Percentage of

Single-Family

Conventional

Guaranty Book

of Business(3)

Percentage

Seriously

Delinquent(2)(4)

Estimated mark-to-market loan-to-value ratio:

Less than 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82% 2.24% 84% 2.62%

100.01% to 110% .............................. 6 8.73 5 11.60

110.01% to 120% .............................. 4 11.37 3 14.74

120.01% to 125% .............................. 1 13.25 1 16.86

Greater than 125% .............................. 7 19.08 7 24.71

Geographical distribution:

Arizona ...................................... 2 3.65 2 6.23

California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.46 18 3.89

Florida ....................................... 6 11.80 7 12.31

Nevada ....................................... 1 7.42 1 10.66

Select Midwest states(5) . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.39 11 4.80

All other states . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 3.18 61 3.46

Product distribution (not mutually exclusive):(6)

Alt-A ........................................ 7 12.43 8 13.87

Subprime ..................................... * 23.18 * 28.20

Negatively amortizing adjustable rate ............... * 7.57 * 9.02

Interest only ................................... 4 15.27 6 17.85

Investor property ............................... 6 4.20 6 4.79

Condo/Coop .................................. 9 4.59 9 5.37

Original loan-to-value ratio >90%(7) . . . . . . . . . . . . . . . . 10 8.08 10 10.04

FICO credit score <620(7) ......................... 3 13.47 4 14.63

Original loan-to-value ratio >90% and FICO credit score

<620(7) ...................................... 1 18.67 1 21.41

Vintages:

2005 ......................................... 7 7.27 9 7.20

2006 ......................................... 7 11.81 8 12.19

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 12.62 12 13.24

2008 ......................................... 7 5.64 9 4.88

All other vintages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 1.59 62 1.73

* Represents less than 0.5% of the single-family conventional guaranty book of business.

(1) Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan level

information, which constituted approximately 99% of our total single-family conventional guaranty book of business as

of December 31, 2011 and 2010.

F-64
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(2) Consists of single-family conventional loans that were three months or more past due or in the foreclosure process, as of

the periods indicated.

(3) Calculated based on the aggregate unpaid principal balance of single-family conventional loans for each category divided

by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business.

(4) Calculated based on the number of single-family conventional loans that were delinquent divided by the total number of

loans in our single-family conventional guaranty book of business.

(5) Consists of Illinois, Indiana, Michigan, and Ohio.

(6) Categories are not mutually exclusive. Loans with multiple product features are included in all applicable categories.

(7) Includes housing goals-oriented products such as MyCommunityMortgage® and Expanded Approval.®

As of December 31,

2011(1)(2) 2010(1)(2)

30 Days

Delinquent

Seriously

Delinquent(3)

30 Days

Delinquent

Seriously

Delinquent(3)

Percentage of multifamily guaranty book of business ............. 0.11% 0.59% 0.21% 0.71%

As of December 31,

2011(1)(2) 2010(1)(2)

Percentage of

Multifamily

Guaranty

Book of Business

Percentage

Seriously

Delinquent(3)

Percentage of

Multifamily

Guaranty

Book of Business

Percentage

Seriously

Delinquent(3)

Original loan-to-value ratio:

Greater than 80% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5% 2.51% 5% 0.59%

Less than or equal to 80% . . . . . . . . . . . . . . . . . . . . . . . 95 0.49 95 0.71

Original debt service coverage ratio:

Less than or equal to 1.10 ........................ 8 0.24 9 0.27

Greater than 1.10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 0.62 91 0.75

Current debt service coverage ratio:

Less than 1.0(4) ................................. 7 3.66 10 4.25

Acquisition loan size distribution:

Less than or equal to $750,000 .................... 2 1.24 2 1.61

Greater than $750,000 and less than or equal to

$3 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.04 12 1.17

Greater than $3 million and less than or equal to

$5 million .................................. 9 0.66 9 0.88

Greater than $5 million and less than or equal to

$25 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 0.64 42 0.88

Greater than $25 million . . . . . . . . . . . . . . . . . . . . . . . . . 36 0.33 35 0.24

Maturing dates:

Maturing in 2012 .............................. 5 0.59 7 0.42

Maturing in 2013 .............................. 9 0.43 11 0.54

Maturing in 2014 .............................. 8 0.82 8 0.67

Maturing in 2015 .............................. 9 0.57 9 0.57

Maturing in 2016 .............................. 9 0.78

(1) Consists of the portion of our multifamily guaranty book of business for which we have detailed loan level information,

which constituted approximately 99% of our total multifamily guaranty book of business as of December 31, 2011 and

2010 excluding loans that have been defeased.

(2) Calculated based on the aggregate unpaid principal balance of multifamily loans for each category divided by the

aggregate unpaid principal balance of loans in our multifamily guaranty book of business.

(3) Consists of multifamily loans that were 60 days or more past due as of the periods indicated.

F-65
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(4) Our estimates of current DSCRs are based on the latest available income information for these properties. Although we

use the most recently available results of our multifamily borrowers, there is a lag in reporting, which typically can range

from 6 to 18 months as they prepare their results in the normal course of business.

Guaranty Obligations

The following table displays changes in our guaranty obligations recognized in “Other liabilities” in our

consolidated balance sheets for the years ended December 31, 2011, 2010, and 2009. We derecognized the

majority of our guaranty obligations and deferred profit from our consolidated balance sheets on January 1, 2010

upon adoption of the consolidation accounting guidance.

For the Year Ended December 31,

2011 2010 2009

(Dollars in millions)

Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 769 $ 13,996 $12,147

Adoption of consolidation accounting guidance ..................... — (13,320) —

Additions to guaranty obligations(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 225 7,577

Amortization of guaranty obligations into guaranty fee income ......... (170) (132) (5,260)

Impact of consolidation activity(2) ................................ — — (468)

Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 811 $ 769 $13,996

(1) Represents the fair value of our contractual obligation at issuance of new guarantees.

(2) Represents the derecognition of guaranty obligations during the period due to consolidations excluding the impact of

adopting the consolidation accounting guidance.

Deferred profit is a component of guaranty obligations in “Other liabilities” in our consolidated balance sheets

and is included in the table above. Deferred profit had a carrying amount of $31 million and $35 million as of

December 31, 2011 and 2010, respectively. We recognized deferred profit amortization of $4 million, $6 million

and $830 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Guaranty Assets

As guarantor at inception of a guaranty to an unconsolidated entity, we recognize a non-contingent liability for

the fair value of our obligation to stand ready to perform over the term of the guaranty in the event that specified

triggering events or conditions occur. We also record a guaranty asset that represents the present value of cash

flows expected to be received as compensation over the life of the guaranty.

The following table displays changes in guaranty assets recognized in “Other assets” in our consolidated balance

sheets for the years ended December 31, 2011, 2010 and 2009.

For the Year Ended

December 31,

2011 2010 2009

(Dollars in millions)

Beginning balance, January 1 ................................... $457 $ 8,356 $ 7,043

Adoption of consolidation accounting guidance ................... — (8,014) —

Fair value of expected cash flows at issuance for new guaranteed

Fannie Mae MBS issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 182 4,135

Net change in fair value of guaranty assets from portfolio

securitizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (1) 511

Impact of amortization on guaranty contracts ..................... (72) (59) (2,719)

Other-than-temporary impairments ............................. (33) (7) (347)

Impact of consolidation of MBS trusts(1) ......................... — — (267)

Ending balance, December 31 ................................... $503 $ 457 $ 8,356

F-66
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(1) Represents the derecognition of guaranty assets during the period due to consolidations excluding the impact of adopting

the consolidation accounting guidance.

Fannie Mae MBS Included in Investments in Securities

For Fannie Mae MBS included in “Investments in securities” in our consolidated balance sheets, we do not

eliminate or extinguish the guaranty arrangement because it is a contractual arrangement with the unconsolidated

MBS trusts. We determine the fair value of Fannie Mae MBS based on observable market prices because most

Fannie Mae MBS are actively traded. Fannie Mae MBS receive high credit quality ratings primarily because of

our guaranty. Absent our guaranty, Fannie Mae MBS would be subject to the credit risk on the underlying loans.

We continue to recognize a guaranty obligation and a reserve for guaranty losses associated with these securities

because we carry these securities in our consolidated financial statements as guaranteed Fannie Mae MBS. The

fair value of the guaranty obligation, net of deferred profit, associated with Fannie Mae MBS included in

“Investments in securities” approximates the fair value of the credit risk that exists on these Fannie Mae MBS

absent our guaranty. The fair value of our guaranty obligations associated with the Fannie Mae MBS included in

“Investments in securities” was $2.2 billion and $2.0 billion as of December 31, 2011 and 2010, respectively.

7. Acquired Property, Net

Acquired property, net consists of held for sale foreclosed property received in full satisfaction of a loan net of a

valuation allowance for declines in the fair value of foreclosed properties after initial acquisition. We classify as

held for sale those properties that we intend to sell and are actively marketed for sale. The following table

displays the activity in acquired property and the related valuation allowance for the years ended December 31,

2011, 2010 and 2009.

Acquired

Property

Valuation

Allowance(1)

Acquired

Property, Net

(Dollars in millions)

Balance, January 1, 2009 ...................................... $ 8,040 $(1,122) $ 6,918

Additions ................................................... 14,165 (79) 14,086

Disposals ................................................... (12,489) 1,379 (11,110)

Write-downs, net of recoveries .................................. — (752) (752)

Balance, December 31, 2009 ................................... 9,716 (574) 9,142

Additions ................................................... 25,982 (783) 25,199

Disposals ................................................... (17,644) 1,407 (16,237)

Write-downs, net of recoveries .................................. — (1,931) (1,931)

Balance, December 31, 2010 ................................... 18,054 (1,881) 16,173

Additions ................................................... 18,599 (550) 18,049

Disposals ................................................... (24,252) 2,635 (21,617)

Write-downs, net of recoveries .................................. — (1,232) (1,232)

Balance, December 31, 2011 ................................... $ 12,401 $(1,028) $ 11,373

(1) Reflects activities in the valuation allowance for acquired properties held primarily by our single-family segment.

F-67
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We classify as held for use those properties that we do not intend to sell or that are not ready for immediate sale

in their current condition, which are reflected in “Other assets” in our consolidated balance sheets. The following

table displays the activity and carrying amount of acquired properties held for use for the years ended

December 31, 2011, 2010 and 2009.

For the Year Ended

December 31,

2011 2010 2009

(Dollars in millions)

Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 889 $ 44 $ 11

Transfers in from held for sale, net and additions ........................ 1,045 977 45

Transfers to held for sale, net ....................................... (547) (64) (11)

Depreciation, asset write-downs, and other ............................ (552) (68) (1)

Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 835 $889 $ 44

8. Short-Term Borrowings and Long-Term Debt

Short-Term Borrowings

The following table displays our outstanding short-term borrowings (borrowings with an original contractual maturity

of one year or less) and weighted-average interest rates of these borrowings as of December 31, 2011 and 2010.

As of December 31,

2011 2010

Outstanding

WeightedAverage

Interest

Rate(1) Outstanding

WeightedAverage

Interest

Rate(1)

(Dollars in millions)

Federal funds purchased and securities sold under

agreements to repurchase(2) . . . . . . . . . . . . . . . . . . . . . . . . $ — —% $ 52 2.20%

Fixed-rate short-term debt:

Discount notes(3) ................................. $146,301 0.13% $151,500 0.32%

Foreign exchange discount notes(4) . . . . . . . . . . . . . . . . . . . 371 1.88 384 2.43

Other(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 0.04 — —

Total short-term debt of Fannie Mae ............... 146,752 0.13 151,884 0.32

Debt of consolidated trusts .......................... 4,973 0.09 5,359 0.23

Total short-term debt ............................. $151,725 0.13% $157,243 0.32%

(1) Includes the effects of discounts, premiums, and other cost basis adjustments.

(2) Represents agreements to repurchase securities from banks with excess reserves on a particular day for a specified price,

with repayment generally occurring on the following day.

(3) Represents unsecured general obligations with maturities ranging from overnight to 360 days from the date of issuance.

(4) Represents foreign exchange discount notes we issue in the Euro commercial paper market with maturities ranging from

5 to 360 days which enable investors to hold short-term investments in different currencies. We do not incur foreign

exchange risk on these transactions, as we simultaneously enter into foreign currency swaps that have the effect of

converting debt that we issue in foreign denominated currencies into U.S. dollars.

(5) Includes foreign exchange discount notes denominated in U.S. dollars.

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Intraday Lines of Credit

We periodically use secured and unsecured intraday funding lines of credit provided by several large financial

institutions. We post collateral which, in some circumstances, the secured party has the right to repledge to third

parties. As these lines of credit are uncommitted intraday loan facilities, we may be unable to draw on them if

and when needed. We had secured uncommitted lines of credit of $25.0 billion and unsecured uncommitted lines

of credit of $500 million as of December 31, 2011 and 2010. We had no borrowings outstanding from these lines

of credit as of December 31, 2011.

Long-Term Debt

Long-term debt represents borrowings with an original contractual maturity of greater than one year. The

following table displays our outstanding long-term debt as of December 31, 2011 and 2010.

As of December 31,

2011 2010

Maturities Outstanding

WeightedAverage

Interest

Rate(1) Maturities Outstanding

WeightedAverage

Interest

Rate(1)

(Dollars in millions)

Senior fixed:

Benchmark notes and bonds .......... 2012 - 2030 $ 277,146 2.81% 2011 - 2030 $ 300,344 3.20%

Medium-term notes(2) ................ 2012 - 2021 176,886 1.61 2011 - 2020 199,266 2.13

Foreign exchange notes and bonds ..... 2021 - 2028 662 5.44 2017 - 2028 1,177 6.21

Other(3)(4) .......................... 2012 - 2040 50,912 5.29 2011 - 2040 44,893 5.64

Total senior fixed ................ 505,606 2.64 545,680 3.02

Senior floating:

Medium-term notes(2) ................ 2012 - 2016 71,855 0.32 2011 - 2015 72,039 0.31

Other(3)(4) .......................... 2020 - 2037 420 8.01 2020 - 2037 386 4.92

Total senior floating .............. 72,275 0.35 72,425 0.34

Subordinated fixed:

Qualifying subordinated(5) ............ 2012 - 2014 4,894 5.08 2011 - 2014 7,392 5.47

Subordinated debentures ............. 2019 2,917 9.91 2019 2,663 9.91

Total subordinated fixed ........... 7,811 6.88 10,055 6.65

Total long-term debt of Fannie Mae(6) . . . 585,692 2.42 628,160 2.77

Debt of consolidated trusts(4) ............ 2012 -2051 2,452,455 4.18 2011 - 2051 2,411,597 4.59

Total long-term debt ................ $3,038,147 3.84% $3,039,757 4.22%

(1) Includes the effects of discounts, premiums and other cost basis adjustments.

(2) Includes long-term debt with an original contractual maturity of greater than 1 year and up to 10 years, excluding zerocoupon debt.

(3) Includes long-term debt that is not included in other debt categories.

(4) Includes a portion of structured debt instruments that is reported at fair value.

(5) Consists of subordinated debt issued with an interest deferral feature.

(6) Reported amounts include a net discount and other cost basis adjustments of $9.2 billion and $12.4 billion as of

December 31, 2011 and 2010, respectively.

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Our long-term debt includes a variety of debt types. We issue both fixed and floating-rate medium-term notes

with maturities greater than one year that are issued through dealer banks. We also offer Benchmark Notes and

other bonds in large, regularly-scheduled issuances that provide increased efficiency, liquidity and tradability to

the market. Additionally, we have issued notes and bonds denominated in several foreign currencies and are able

to issue debt in numerous other currencies. We effectively convert all foreign currency-denominated transactions

into U.S. dollars through the use of foreign currency swaps for the purpose of funding our mortgage assets.

Our other long-term debt includes callable and non-callable securities, which include all long-term

non-Benchmark securities, such as zero-coupon bonds, fixed rate and other long-term securities, and are

generally negotiated underwritings with one or more dealers or dealer banks.

Debt of Consolidated Trusts

Debt of consolidated trusts represents the amount of Fannie Mae MBS issued from consolidated trusts and held

by third-party certificateholders.

Characteristics of Debt

As of December 31, 2011 and 2010, the face amount of our debt securities of Fannie Mae was $741.6 billion and

$792.6 billion, respectively. As of December 31, 2011 and 2010, we had zero-coupon debt with a face amount of

$165.8 billion and $174.2 billion, respectively, which had an effective interest rate of 0.68% and 0.83%,

respectively.

We issue callable debt instruments to manage the duration and prepayment risk of expected cash flows of the

mortgage assets we own. Our outstanding debt as of December 31, 2011 and 2010 included $187.9 billion and

$219.8 billion, respectively, of callable debt that could be redeemed in whole or in part at our option or the

option of the investor any time on or after a specified date.

The following table displays the amount of our long-term debt as of December 31, 2011 by year of maturity for

each of the years 2012 through 2016 and thereafter. The first column assumes that we pay off this debt at

maturity or on the call date if the call has been announced, while the second column assumes that we redeem our

callable debt at the next available call date.

Long-Term Debt by

Year of Maturity

Assuming Callable Debt

Redeemed at Next

Available Call Date

(Dollars in millions)

2012 .................................................. $ 134,277 $ 303,912

2013 .................................................. 128,714 109,707

2014 .................................................. 117,898 78,259

2015 .................................................. 43,673 21,904

2016 .................................................. 70,752 33,945

Thereafter ............................................. 90,378 37,965

Total debt of Fannie Mae(1) .............................. 585,692 585,692

Debt of consolidated trusts(2) ............................... 2,452,455 2,452,455

Total long-term debt(3) .................................. $3,038,147 $3,038,147

(1) Reported amount includes a net discount and other cost basis adjustments of $9.2 billion.

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(2) Contractual maturity of debt of consolidated trusts is not a reliable indicator of expected maturity because borrowers of

the underlying loans generally have the right to prepay their obligations at any time.

(3) Includes a portion of structured debt instruments that is reported at fair value.

The following table displays the amount of our debt of Fannie Mae that was called and repurchased and the

associated weighted-average interest rates for the years ended December 31, 2011, 2010 and 2009.

For the Year Ended December 31,

2011 2010 2009

(Dollars in millions)

Debt called ................................................... $201,651 $289,770 $166,777

Weighted-average interest rate of debt called ......................... 2.4% 3.1% 4.2%

Debt repurchased ............................................... $ 2,887 $ 1,333 $ 6,919

Weighted-average interest rate of debt repurchased .................... 3.1% 3.3% 4.3%

9. Derivative Instruments

Derivative instruments are an integral part of our strategy in managing interest rate risk. Derivative instruments

may be privately negotiated contracts, which are often referred to as over-the-counter derivatives, or they may be

listed and traded on an exchange. When deciding whether to use derivatives, we consider a number of factors,

such as cost, efficiency, the effect on our liquidity, results of operations, and our overall interest rate risk

management strategy. We choose to use derivatives when we believe they will provide greater relative value or

more efficient execution of our strategy than debt securities. We typically do not settle the notional amount of

our risk management derivatives; rather, notional amounts provide the basis for calculating actual payments or

settlement amounts. The derivatives we use for interest rate risk management purposes consist primarily of

contracts that fall into four broad categories:

• Interest rate swap contracts. An interest rate swap is a transaction between two parties in which each party

agrees to exchange payments tied to different interest rates or indices for a specified period of time, generally

based on a notional amount of principal. The types of interest rate swaps we use include pay-fixed swaps,

receive-fixed swaps and basis swaps.

• Interest rate option contracts. These contracts primarily include pay-fixed swaptions, receive-fixed

swaptions, cancelable swaps and interest rate caps. A swaption is an option contract that allows us or a

counterparty to enter into a pay-fixed or receive-fixed swap at some point in the future.

• Foreign currency swaps. These swaps convert debt that we issue in foreign-denominated currencies into

U.S. dollars. We enter into foreign currency swaps only to the extent that we issue foreign currency debt.

• Futures. These are standardized exchange-traded contracts that either obligate a buyer to buy an asset at a

predetermined date and price or a seller to sell an asset at a predetermined date and price. The types of futures

contracts we enter into include Eurodollar, U.S. Treasury and swaps.

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Notional and Fair Value Position of our Derivatives

The following table displays the notional amount and estimated fair value of our asset and liability derivative

instruments as of December 31, 2011 and 2010.

As of December 31,

2011 2010

Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

(Dollars in millions)

Risk management derivatives:

Swaps:

Pay-fixed ................... $ 30,950 $ 102 $155,807 $(17,391) $ 49,085 $ 1,812 $228,142 $(14,115)

Receive-fixed ................ 170,668 8,118 59,027 (93) 172,174 6,493 52,003 (578)

Basis . . . . . . . . . . . . . . . . . . . . . . . 382 122 9,240 (44) 435 29 50 —

Foreign currency . . . . . . . . . . . . . 581 155 451 (62) 1,274 164 286 (51)

Swaptions:

Pay-fixed ................... 48,600 165 47,750 (194) 66,200 482 30,950 (1,773)

Receive-fixed ................ 33,695 6,371 47,750 (3,238) 48,340 4,992 30,275 (673)

Other(1) 8,214 52 75 — 7,909 99 25 (1)

Total gross risk management

derivatives ................ 293,090 15,085 320,100 (21,022) 345,417 14,071 341,731 (17,191)

Accrued interest receivable

(payable) . . . . . . . . . . . . . . . . . — 920 — (1,238) — 1,288 — (1,805)

Netting adjustment(2) ........... — (15,829) — 21,898 — (15,175) — 18,023

Total net risk management

derivatives .............. $293,090 $ 176 $320,100 $ (362) $345,417 $ 184 $341,731 $ (973)

Mortgage commitment derivatives:

Mortgage commitments to

purchase whole loans ........ $ 9,710 $ 73 $ 422 $ — $ 2,880 $ 19 $ 4,435 $ (105)

Forward contracts to purchase

mortgage-related securities . . . 32,707 309 2,570 (6) 19,535 123 27,697 (468)

Forward contracts to sell

mortgage-related securities . . . 1,370 3 54,656 (548) 40,761 811 24,562 (169)

Total mortgage commitment

derivatives .............. $ 43,787 $ 385 $ 57,648 $ (554) $ 63,176 $ 953 $ 56,694 $ (742)

Derivatives at fair value ...... $336,877 $ 561 $377,748 $ (916) $408,593 $ 1,137 $398,425 $ (1,715)

(1) Includes interest rate caps, futures, swap credit enhancements and mortgage insurance contracts that we account for as

derivatives. The mortgage insurance contracts have payment provisions that are not based on a notional amount.

(2) The netting adjustment represents the effect of the legal right to offset under legally enforceable master netting

agreements to settle with the same counterparty on a net basis, as well as cash collateral posted and received. Cash

collateral posted was $6.8 billion and $3.5 billion as of December 31, 2011 and 2010, respectively. Cash collateral

received was $779 million and $604 million as of December 31, 2011 and 2010, respectively.

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A majority of our derivative instruments contain provisions that require our senior unsecured debt to maintain a

minimum credit rating from S&P and Moody’s. If our senior unsecured debt were to fall below established

thresholds in our governing agreements, which range from A- to BBB+, we could be required to provide

additional collateral to or terminate transactions with certain counterparties. The aggregate fair value of all

derivatives with credit-risk-related contingent features that were in a net liability position as of December 31,

2011 was $7.2 billion, for which we posted collateral of $6.8 billion in the normal course of business. Had all of

the credit-risk-related contingency features underlying these agreements been triggered, an additional

$362 million of collateral would have been required to be posted as collateral or to immediately settle our

positions based on the individual agreements and our fair value position as of December 31, 2011.

The aggregate fair value of all derivatives with credit risk-related contingent features that were in a net liability

position as of December 31, 2010 was $4.4 billion, for which we posted collateral of $3.5 billion in the normal

course of business. Had all of the credit risk-related contingency features underlying these agreements been

triggered, an additional $891 million would have been required to be posted as collateral or to immediately settle

our positions based on the individual agreements and our fair value position as of December 31, 2010.

We record all derivative gains and losses, including accrued interest, in “Fair value losses, net” in our

consolidated statements of operations and comprehensive loss. The following table displays, by type of

derivative instrument, the fair value gains and losses, net on our derivatives for the years ended December 31,

2011, 2010, and 2009.

For the Year Ended December 31,

2011 2010 2009

(Dollars in millions)

Risk management derivatives:

Swaps:

Pay-fixed .................................................. $(18,040) $(17,573) $ 15,012

Receive-fixed ............................................... 7,939 14,382 (11,737)

Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 17 96

Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 157 166

Swaptions:

Pay-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 860 (2,026) 453

Receive-fixed ............................................... 2,932 3,327 (8,706)

Other(1) ...................................................... (72) (91) 20

Total risk management derivatives fair value losses, net ............. (6,139) (1,807) (4,696)

Mortgage commitment derivatives fair value losses, net ............... (423) (1,193) (1,654)

Total derivatives fair value losses, net ............................ $ (6,562) $ (3,000) $ (6,350)

(1) Includes interest rate caps, futures, swap credit enhancements and mortgage insurance contracts.

Derivative Counterparty Credit Exposure

Our derivative counterparty credit exposure relates principally to interest rate and foreign currency derivative

contracts. We are exposed to the risk that a counterparty in a derivative transaction will default on payments due

to us. If there is a default, we may need to acquire a replacement derivative from a different counterparty at a

higher cost or may be unable to find a suitable replacement. We estimate our exposure to credit loss on derivative

instruments by calculating the replacement cost, on a present value basis, to settle at current market prices all

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

outstanding derivative contracts in a net gain position at the counterparty level where the right of legal offset

exists. For derivative instruments where the right of legal offset does not exist, we calculate the replacement cost

of the outstanding derivative contracts in a gain position at the transaction level. We manage our exposure by

requiring counterparties to post collateral, which includes cash, U.S. Treasury securities, agency debt and agency

mortgage-related securities.

The table below displays our counterparty credit exposure on outstanding risk management derivative

instruments in a gain position by counterparty credit ratings, as well as the notional amount outstanding and the

number of counterparties for all risk management derivatives as of December 31, 2011 and 2010.

As of December 31, 2011

Credit Rating(1)

AA+/AA/AA- A+/A Subtotal(2) Other(3) Total

(Dollars in millions)

Credit loss exposure(4) . . . . . . . . . . . . . . . . . . $ — $ 885 $ 885 $ 51 $ 936

Less: Collateral held(5) . . . . . . . . . . . . . . . . . . — 840 840 — 840

Exposure net of collateral . . . . . . . . . . . . . . . $ — $ 45 $ 45 $ 51 $ 96

Additional information:

Notional amount .................... $63,294 $546,967 $610,261 $2,929 $613,190

Number of counterparties . . . . . . . . . . . . . 6 10 16

As of December 31, 2010

Credit Rating(1)

AA+/AA/AA- A+/A Subtotal(2) Other(3) Total

(Dollars in millions)

Credit loss exposure(4) . . . . . . . . . . . . . . . . . . $ 350 $ 325 $ 675 $ 75 $ 750

Less: Collateral held(5) . . . . . . . . . . . . . . . . . . 273 325 598 — 598

Exposure net of collateral . . . . . . . . . . . . . . . $ 77 $ — $ 77 $ 75 $ 152

Additional information:

Notional amount .................... $208,898 $476,766 $685,664 $1,484 $687,148

Number of counterparties . . . . . . . . . . . . . 7 8 15

(1) We manage collateral requirements based on the lower credit rating of the legal entity, as issued by S&P and Moody’s.

The credit rating reflects the equivalent S&P’s rating for any ratings based on Moody’s scale.

(2) We had exposure to 4 and 3 interest rate and foreign currency derivative counterparties in a net gain position as of

December 31, 2011 and 2010, respectively. Those interest rate and foreign currency derivatives had notional balances of

$127.5 billion and $106.5 billion as of December 31, 2011 and 2010, respectively.

(3) Includes defined benefit mortgage insurance contracts and swap credit enhancements accounted for as derivatives where

the right of legal offset does not exist. Also includes exchange-traded derivatives, such as futures and interest rate swaps,

which are settled daily through a clearinghouse.

(4) Represents the exposure to credit loss on derivative instruments, which we estimate using the fair value of all outstanding

derivative contracts in a gain position. We net derivative gains and losses with the same counterparty where a legal right

of offset exists under an enforceable master netting agreement. This table excludes mortgage commitments accounted for

as derivatives.

(5) Represents both cash and non-cash collateral posted by our counterparties to us. Does not include collateral held in excess

of exposure. We reduce the value of non-cash collateral in accordance with the counterparty agreements to help ensure

recovery of any loss through the disposition of the collateral.

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Income Taxes

Benefit for Income Taxes

We operate as a government-sponsored enterprise. We are subject to federal income tax, but we are exempt from

state and local income taxes. The following table displays the components of our benefit for federal income taxes

for the years ended December 31, 2011, 2010 and 2009.

For the Year Ended

December 31,

2011 2010 2009

(Dollars in millions)

Current income tax benefit ............................................... $(90) $(82) $(999)

Deferred income tax expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 14

Benefit for federal income taxes ........................................... $(90) $(82) $(985)

(1) Amount excludes the income tax effect of items recognized directly in “Fannie Mae stockholders’ equity (deficit)” where

we did not establish a valuation allowance.

During 2011, we received a refund of $1.1 billion from the IRS related to the carryback of our 2009 operating

loss to the 2008 and 2007 tax years. In addition, we effectively settled our 2007 and 2008 tax years with the IRS

and as a result, we have recognized an income tax benefit of $90 million in our consolidated statements of

operations and comprehensive loss for 2011.

The following table displays the difference between our effective tax rates and the statutory federal tax rates for

the years ended December 31, 2011, 2010 and 2009, respectively.

For the Year Ended

December 31,

2011 2010 2009

Statutory corporate tax rate ................................................ 35.0% 35.0% 35.0%

Tax-exempt interest and dividends received deductions . . . . . . . . . . . . . . . . . . . . . . . . . 0.9 1.3 0.3

Equity investments in affordable housing projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 6.3 1.3

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 0.1 —

Valuation allowance ..................................................... (41.2) (42.1) (35.2)

Effective tax rate ........................................................ 0.5% 0.6% 1.4%

Our effective tax rate is the benefit for federal income taxes expressed as a percentage of income or loss before

federal income taxes. Our effective tax rates were different from the federal statutory rate of 35% for the years

ended December 31, 2011, 2010 and 2009 due primarily to the increase to our valuation allowance for our net

deferred tax assets that resulted in the recognition of $7.0 billion, $5.9 billion and $25.7 billion, respectively, in

our provision for income taxes. In addition, our effective tax rate for the year ended December 31, 2011, was

impacted by the reversal of a portion of the valuation allowance for deferred tax assets resulting from a

settlement agreement reached with the IRS for our unrecognized tax benefits for the tax years 2007 through

2008.

F-75
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Deferred Tax Assets and Liabilities

The following table displays our deferred tax assets, deferred tax liabilities, and valuation allowance as of

December 31, 2011 and 2010.

As of December 31,

2011 2010

(Dollars in millions)

Deferred tax assets:

Allowance for loan losses and basis in acquired property, net .................... $ 29,935 $ 27,063

Mortgage and mortgage-related assets, including acquired credit-impaired loans .... 12,358 10,825

Debt and derivative instruments ........................................... 6,562 6,627

Partnership credits ...................................................... 5,473 4,500

Partnership and other equity investments .................................... 1,809 2,175

Unrealized losses on AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442 772

Net operating loss and alternative minimum tax credit carry forwards ............. 5,904 3,341

Other, net ............................................................ 2,053 1,818

Total deferred tax assets ............................................... 64,536 57,121

Deferred tax liabilities: ....................................................

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 53

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 53

Valuation allowance ...................................................... (64,080) (56,314)

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 433 $ 754

We recognize deferred tax assets and liabilities for the future tax consequences related to differences between the

financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net

operating loss and tax credit carryforwards. We recorded an increase in our valuation allowance in 2011 that

resulted in the recognition of $7.0 billion in our provision for income taxes. This amount offsets the tax effect

associated with a portion of our pre-tax loss. Our deferred tax assets, net of a valuation allowance, totaled $433

million and $754 million as of December 31, 2011 and 2010, respectively. We recorded an increase in our

valuation allowance in 2010 that resulted in the recognition of $5.9 billion in our provision for income taxes.

This amount represented the tax effect associated with a portion of the pre-tax loss in 2010. The change in our

2010 valuation allowance also includes a $2.4 billion reduction primarily due to our adoption of consolidation

accounting guidance for amounts originally recognized in “Accumulated deficit.” We recorded an increase in our

valuation allowance in 2009 of $25.7 billion in our provision for income taxes. The change in our 2009 valuation

allowance also includes a $3.0 billion reduction primarily due to our adoption of the accounting guidance for

assessing other-than-temporary-impairments for amounts originally recognized in “Accumulated deficit.”

We evaluate our deferred tax assets for recoverability using a consistent approach which considers the relative

impact of both negative and positive evidence, including our historical profitability and projections of future

taxable income. We are required to establish a valuation allowance for deferred tax assets and record a charge in

our consolidated statements of operations and comprehensive loss or in “Fannie Mae stockholders’ deficit” if we

determine, based on available evidence at the time the determination is made, that it is more likely than not that

some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation

F-76
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

allowance, we estimate future taxable income or loss based on management-approved business plans and

ongoing tax planning strategies. This process involves significant management judgment about assumptions that

are subject to change from period to period based on changes in tax laws or variances between our projected

operating performance, our actual results and other factors.

We are in a cumulative book taxable loss position and have been for more than a three-year period. For purposes

of establishing a deferred tax valuation allowance, this cumulative book taxable loss position is considered

significant, objective evidence that we may not be able to realize some portion of our deferred tax assets in the

future. Our cumulative book taxable loss position was caused by the negative impact on our results from the

weak housing and credit market conditions that deteriorated dramatically during 2008 and continued through

2011. Because of the volatile economic conditions, our projections of future credit losses are uncertain.

During 2008, we concluded that it was more likely than not that we would not generate sufficient future taxable

income in the foreseeable future to realize all of our deferred tax assets. Our conclusion was based on our

consideration of the relative weight of the available evidence, including the rapid deterioration of market

conditions discussed above, the uncertainty of future market conditions on our results of operations, and

significant uncertainty surrounding our future business model as a result of the placement of the company into

conservatorship by FHFA. As a result, we recorded a valuation allowance on our net deferred tax asset for the

portion of the future tax benefit that more likely than not will not be utilized in the future. We did not, however,

establish a valuation allowance for the deferred tax asset amount that is related to unrealized losses recorded

through AOCI for certain available-for-sale securities. We believe this deferred tax amount is recoverable

because we have the intent and ability to hold these securities until recovery of the unrealized loss amounts.

There have been no changes to our conclusion as of December 31, 2011.

As of December 31, 2011, we had $18.7 billion of net operating loss carryforwards that expire in 2029 through

2031, $1.6 billion of capital loss carryforwards that expire in 2014 through 2016, $5.5 billion of partnership tax

credit carryforwards that expire in various years through 2031, and $128 million of alternative minimum tax

credit carryforwards that have an indefinite carryforward period.

Unrecognized Tax Benefits

We had $758 million, $864 million, and $911 million of unrecognized tax benefits as of December 31, 2011,

2010 and 2009, respectively. Of these amounts, we had $60 million and $29 million as of December 31, 2010

and 2009, which was resolved favorably in 2011 and 2010 respectively, and reduced our effective tax rate for

those years. There are no unrecognized tax benefits as of December 31, 2011 that would reduce our effective tax

rate in future periods. As of December 31, 2011, we had no accrued interest payable related to unrecognized tax

benefits. As of December 31, 2010, we had accrued interest payable related to unrecognized tax benefits of $5

million. For the year ended December 31, 2011, we had no interest expense related to unrecognized tax benefits

and did not have any tax expense related to tax penalties. For the years ended December 31, 2010 and 2009, we

had total interest expense related to unrecognized tax benefits of $2 million and $32 million, respectively, and

did not have any tax expense related to tax penalties.

In 2011, the IRS effectively settled our federal income tax returns for the tax years 2007 and 2008, which

resulted in a $105 million reduction in our gross balance of unrecognized tax benefits. During 2010, we and the

IRS appeals division reached an agreement for all issues related to the tax years 1999 through 2004, which

resulted in a $99 million reduction in our gross balance of unrecognized tax benefits for the tax years 1999

through 2004. Similarly, during 2009, we reached an agreement of $1.2 billion, net of tax credits, with the IRS on

the audits of our 2005 and 2006 federal income tax returns. The decrease in our unrecognized tax benefits during

the year ended December 31, 2009 is due to our settlement reached with the IRS regarding certain tax positions

F-77
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

related to fair market value losses and the settlement of tax years 2005 through 2006. It is reasonably possible

that changes in our gross balance of unrecognized tax benefits may occur within the next 12 months. In

connection with applications for accounting method changes filed with the IRS, it is reasonably possible that a

$110 million reduction in our gross balance of unrecognized tax benefits may occur in the next 12 months.

The following table displays the changes in our unrecognized tax benefits for the years ended December 31,

2011, 2010 and 2009, respectively.

For the Year Ended

December 31,

2011 2010 2009

(Dollars in millions)

Unrecognized tax benefits as of January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 864 $911 $ 1,745

Gross increases—tax positions in prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 83 38

Gross decreases—tax positions in prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (31) (1)

Gross increases—tax positions in current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 761

Settlements .............................................................. (105) (99) (1,632)

Unrecognized tax benefits as of December 31(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 758 $864 $ 911

(1) Amounts exclude tax credits and net operating losses of $758 million, $804 million and $716 million as of December 31,

2011, 2010 and 2009, respectively.

11. Loss Per Share

The following table displays the computation of basic and diluted loss per share of common stock for the years

ended December 31, 2011, 2010 and 2009.

For the Year Ended

December 31,

2011 2010 2009

(Dollars and shares in millions,

except per share amounts)

Net loss ...................................................... $(16,855) $(14,018) $(72,022)

Less: Net loss attributable to the noncontrolling interest . . . . . . . . . . . . . . — 4 53

Net loss attributable to Fannie Mae ................................. (16,855) (14,014) (71,969)

Preferred stock dividends ........................................ (9,614) (7,704) (2,474)

Net loss attributable to common stockholders-Basic and Diluted .......... $(26,469) $(21,718) $(74,443)

Weighted-average common shares outstanding-Basic and Diluted(1) ....... 5,737 5,694 5,680

Loss per share—Basic and Diluted ................................. $ (4.61) $ (3.81) $ (13.11)

(1) Amounts include 4.6 billion for the years ended December 31, 2011, 2010 and 2009 of weighted-average shares of

common stock, that would be issued upon the full exercise of the warrant issued to Treasury from the date the warrant

was issued through December 31, 2011, 2010 and 2009, respectively.

Weighted-average options and performance awards to purchase approximately 5 million, 8 million and

14 million shares of common stock were outstanding for the years ended December 31, 2011, 2010 and 2009,

respectively, and were excluded from the computation of diluted EPS in the table above as they would have been

anti-dilutive.

F-78
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Stock-Based Compensation

We have two stock-based compensation plans, the 1985 Employee Stock Purchase Plan and the Stock

Compensation Plan of 2003. Under these plans, we previously offered various stock-based compensation

programs where we provided employees an opportunity to purchase Fannie Mae common stock or periodically

made stock awards to certain employees in the form of nonqualified stock options, performance share awards,

restricted stock awards, restricted stock units or stock bonus awards. Under the senior preferred stock purchase

agreement with Treasury, we may not issue Fannie Mae equity securities without the consent of Treasury, other

than the senior preferred stock, the Treasury warrant, common stock issuable upon exercise of the warrant, or as

required by the terms of any binding agreement in effect on the date of the senior preferred stock purchase

agreement. As such, we currently do not intend to grant equity compensation to employees under these plans.

In connection with our stock-based compensation plans for shares or awards issued prior to conservatorship, we

recorded compensation expense of $17 million, $39 million, and $52 million for 2011, 2010 and 2009,

respectively.

Stock-Based Compensation Plans

The 1985 Employee Stock Purchase Plan (the “1985 Purchase Plan”) provided employees an opportunity to

purchase shares of Fannie Mae common stock at a discount to the fair market value of the stock during specified

purchase periods. Our Board of Directors sets the terms and conditions of offerings under the 1985 Purchase

Plan, including the number of available shares and the size of the discount. There were no offerings under the

1985 Purchase Plan in any year presented. The aggregate maximum number of shares of common stock available

for employee purchase is 50 million. Since inception, we have made available 38,039,742 shares for purchase by

employees under this plan.

The Stock Compensation Plan of 2003 (the “2003 Plan”) is the successor to the Stock Compensation Plan of

1993 (the “1993 Plan”). The 2003 Plan enabled us to make stock awards in various forms and combinations,

including stock options, stock appreciation rights, restricted stock, restricted stock units, performance share

awards and stock bonus awards. The aggregate maximum number of shares of common stock available for award

to employees and non-management directors under the 2003 Plan is 40 million. Including the effects of share

cancellations, we have awarded 10,850,062 shares under this plan since its inception. The shares awarded under

the 2003 Plan were authorized and unissued shares, treasury shares or shares purchased on the open market.

Restricted Stock Program

Under the 1993 and 2003 Plans, prior to conservatorship, employees could have received restricted stock awards

(“RSAs”) and, under the 2003 Plan, employees may have received restricted stock units (“RSUs”). The type of

award employees received under the 2003 Plan generally depended upon years of service and age at the time of

grant. Each RSU represented the right to receive a share of common stock at the time of vesting. As a result,

RSUs are generally similar to restricted stock, except that RSUs do not confer voting rights on their holders. By

contrast, holders of the RSAs do have voting rights. Vesting of the grants was based on continued employment.

In general, grants vested in equal annual installments over three or four years beginning on the first anniversary

of the date of grant. Based on the fair value of our common stock on the respective grant dates, the fair value of

restricted stock that vested in 2011, 2010 and 2009 was $38 million, $51 million, and $83 million, respectively.

The compensation expense related to restricted stock is based on the grant date fair value of our common stock.

We recorded compensation expense for these restricted stock grants of $17 million, $39 million, and $52 million

for 2011, 2010 and 2009, respectively.

F-79
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table displays restricted stock activity for 2011, 2010 and 2009.

For the Year Ended December 31,

2011 2010 2009

Number of

Shares

Weighted

Average Fair

Value at

Grant Date

Number of

Shares

Weighted

Average Fair

Value at

Grant Date

Number of

Shares

Weighted

Average Fair

Value at

Grant Date

(Shares in thousands)

Nonvested as of January 1 ........... 1,510 $37.34 2,873 $39.53 5,934 $41.19

Vested ......................... (944) 40.39 (1,199) 42.58 (1,858) 44.78

Forfeited ....................... (81) 32.89 (164) 37.34 (1,203) 39.61

Nonvested as of December 31 . . . . . . . . 485 $32.14 1,510 $37.34 2,873 $39.53

The following table displays information related to unvested restricted stock as of December 31, 2011, 2010 and

2009.

For the Year Ended December 31,

2011 2010 2009

(Dollars in millions)

Unrecognized compensation cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 19 $ 56

Expected weighted-average life of unvested restricted stock . . . . . . . . . . 0.1 years 1.0 years 1.6 years

Nonqualified Stock Options

Under the 2003 Plan and prior to conservatorship, we could have granted stock options. Generally, these options

may not be exercised until at least one year subsequent to the grant date, and the options expire ten years from

the date of grant. Typically, options vest 25% per year beginning on the first anniversary of the date of grant. The

exercise price of each option is equal to the fair market value of our common stock on the date we grant the

option.

The following table displays nonqualified stock option activity for 2011, 2010 and 2009.

For the Year Ended December 31,

2011 2010 2009

Options

WeightedAverage

Exercise

Price

WeightedAverage

Fair

Value at

Grant Date Options

WeightedAverage

Exercise

Price

WeightedAverage

Fair

Value at

Grant Date Options

WeightedAverage

Exercise

Price

WeightedAverage

Fair

Value at

Grant Date

(Shares in thousands)

Beginning balance, January 1 ....... 4,799 $75.07 $23.01 8,759 $72.39 $23.60 12,293 $72.12 $23.62

Forfeited and/or expired ........... (1,720) 79.96 27.49 (3,960) 69.15 25.26 (3,534) 71.45 23.66

Ending balance, December 31(1) ..... 3,079 $72.34 $20.50 4,799 $75.07 $23.01 8,759 $72.39 $23.60

Options exercisable, December 31 . . . 3,079 $72.34 $20.50 4,799 $75.07 $23.01 8,759 $72.39 $23.60

(1) All options outstanding are fully vested.

F-80
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13. Employee Retirement Benefits

We sponsor both defined benefit plans and defined contribution plans for our employees, as well as a healthcare

plan that provides certain health benefits for retired employees and their dependents. Net periodic benefit costs

for defined benefit and healthcare plans, which are determined on an actuarial basis, and expenses for our defined

contribution plans, are included in “Salaries and employee benefits expense” in our consolidated statements of

operations and comprehensive loss. For the years ended December 31, 2011, 2010 and 2009, we recognized net

periodic benefit costs for our defined benefit and healthcare plans and expenses for our defined contributions

plans of $118 million, $112 million and $131 million, respectively.

Defined Benefit Pension Plans and Postretirement Health Care Plan

Our defined benefit pension plans include qualified and nonqualified noncontributory plans. Pension plan

benefits are based on years of credited service and a percentage of eligible compensation. In 2007, the defined

benefit pension plans were amended to cease benefits accruals for employees that did not meet certain criteria to

be grandfathered under the plan and to vest those employees in their frozen accruals.

We fund our qualified pension plan through employer contributions to a qualified irrevocable trust that is

maintained for the sole benefit of plan participants and their beneficiaries. Contributions to our qualified pension

plan are subject to a minimum funding requirement and maximum funding limit under the Employee Retirement

Income Security Act of 1974 (“ERISA”) and IRS regulations.

Our nonqualified defined benefit pension plans consist of an Executive Pension Plan, Supplemental Pension Plan

and the Supplemental Pension Plan of 2003. These plans cover certain employees and supplement the benefits

payable under the qualified pension plan. The Executive Pension Plan was frozen in 2009. Benefits under the

Executive Pension Plan are paid through a rabbi trust.

The Supplemental Pension Plan provides retirement benefits to employees who participate in our qualified

pension plan and do not receive a benefit from the Executive Pension Plan, and whose salary exceeds the

statutory compensation cap applicable to the qualified plan or whose benefit is limited by the statutory benefit

cap. The Supplemental Pension Plan of 2003 provides additional benefits to our officers based on eligible

incentive compensation, if any, received by an officer, but the amount of incentive compensation considered is

limited to 50% of the officer’s base salary. We pay benefits under our unfunded defined benefit Supplemental

Pension Plans from our cash and cash equivalents.

We also sponsor a postretirement Health Care Plan that covers substantially all regular full-time employees who

meet the applicable age and service requirements. We subsidize premium costs for medical coverage for some

employees who meet the age and service requirements. Employees hired after 2007 receive access to our retiree

medical plan, when eligible, but they do not qualify for the subsidy. We accrue and pay the benefits for our

unfunded postretirement Health Care Plan from our cash and cash equivalents.

F-81
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table displays components of our net periodic benefit cost for our qualified and nonqualified

pension plans and other postretirement plan for the years ended December 31, 2011, 2010 and 2009. The net

periodic benefit cost for each period is calculated based on assumptions at the end of the prior year.

For the Year Ended December 31,

2011 2010 2009

Pension

Plans

Other PostRetirement

Plan

Pension

Plans

Other PostRetirement

Plan

Pension

Plans

Other PostRetirement

Plan

(Dollars in millions)

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39 $ 6 $ 37 $ 6 $ 37 $ 5

Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 9 66 9 62 9

Other ....................................... (57) (7) (51) (2) (22) (2)

Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . $ 54 $ 8 $ 52 $13 $ 77 $12

Prior service costs, which are changes in benefit obligations due to plan amendments, are amortized over the

average remaining service period for active employees for our pension plans and prior to the full eligibility date

for the other postretirement Health Care Plan.

The following table displays amounts recorded in AOCI that have not been recognized as a component of net

periodic benefit cost for the years ended December 31, 2011 and 2010.

As of December 31,

2011 2010

Pension

Plans

Other PostRetirement

Plan

Pension

Plans

Other PostRetirement

Plan

(Dollars in millions)

Net actuarial loss ................................................ $393 $ 36 $218 $ 42

Net prior service cost (credit) ...................................... 4 (46) 6 (56)

Net transition obligation .......................................... — 2 — 4

After-tax amount recorded in AOCI ................................. $397 $ (8) $224 $(10)

F-82
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table displays the changes in the pre-tax amounts recognized in AOCI for the years ended

December 31, 2011 and 2010.

For the Year Ended December 31,

2011 2010

Pension

Plans

Other PostRetirement

Plan

Pension

Plans

Other PostRetirement

Plan

(Dollars in millions)

Actuarial Loss

Beginning balance, January 1 ..................................... $218 $ 42 $162 $ 39

Current year actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 (5) 64 4

Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) (1) (8) (1)

Ending balance, December 31 .................................... $393 $ 36 $218 $ 42

Prior Service Cost (Credit)

Beginning balance, January 1 ..................................... $ 6 $(56) $ 7 $(61)

Prior service credit due to curtailments ............................. — 5 — —

Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 5 (1) 5

Ending balance, December 31 .................................... $ 4 $(46) $ 6 $(56)

The following table displays pre-tax amounts in AOCI as of December 31, 2011 that are expected to be

recognized as components of net periodic benefit cost in 2012.

As of December 31, 2011

Pension

Plans

Other PostRetirement

Plan

(Dollars in millions)

Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31 $ 1

Net prior service cost (credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (5)

Net transition obligation .................................................. — 2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32 $(2)

F-83
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table displays the status of our pension and other postretirement plans as of December 31, 2011

and 2010.

As of December 31,

2011 2010

Pension

Plans

Other PostRetirement

Plan

Pension

Plans

Other PostRetirement

Plan

(Dollars in millions)

Change in Benefit Obligation

Benefit obligation at beginning of year ............................. $1,257 $ 180 $1,055 $ 166

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 6 37 6

Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 9 66 9

Plan participants’ contributions ................................... — 2 — 2

Net actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 (1) 130 4

Curtailment gain .............................................. (14) (5) — —

Benefits paid ................................................. (33) (8) (31) (7)

Benefit obligation at end of year .................................. 1,452 183 1,257 180

Change in Plan Assets

Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . 942 — 799 —

Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 — 125 —

Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 6 49 6

Plan participants’ contributions ................................... — 2 — 2

Benefits paid ................................................. (33) (8) (31) (8)

Fair value of plan assets at end of year ............................. 1,042 — 942 —

Funded status at end of year(1) .................................... $ (410) $(183) $ (315) $(180)

(1) Included in other liabilities of our Consolidated Balance Sheets as of December 31, 2011 and 2010.

Actuarial gains or losses reflect annual changes in the amount of either the benefit obligation or the fair value of

plan assets that result from the difference between actual experience and projected amounts or from changes in

assumptions.

The following table displays the amount of the projected benefit obligation, accumulated benefit obligation and

fair value of plan assets for our pension plans as of December 31, 2011 and 2010.

As of December 31,

2011 2010

(Dollars in millions)

Projected benefit obligation ................................................ $1,452 $1,257

Accumulated benefit obligation ............................................. 1,326 1,111

Fair value of plan assets ................................................... 1,042 942

F-84
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Contributions

Contributions to the qualified pension plan increase the plan assets while contributions to the unfunded plans are

made to fund current period benefit payments or to fulfill annual funding requirements. We were not required to

make minimum contributions to our qualified pension plan for each of the years in the three-year period ended

December 31, 2011 since we met the minimum funding requirements as prescribed by ERISA. However, we did

make a discretionary contribution to our qualified pension plan of $124 million, $42 million and $76 million

during 2011, 2010 and 2009, respectively.

During 2011, we contributed $124 million to our qualified pension plan, $7 million to our nonqualified pension

plans and $6 million to our other postretirement benefit plan. During 2012, we anticipate contributing $60

million to our benefit plans, consisting of $45 million to our qualified pension plan, $7 million to our

nonqualified pension plans and $8 million to our other postretirement plan.

The fair value of plan assets of our funded qualified pension plan was less than our accumulated benefit

obligation by $100 million and $5 million as of December 31, 2011 and 2010, respectively. There were no plan

assets returned to us as of February 29, 2012 and we do not expect any plan assets to be returned to us during the

remainder of 2012.

Assumptions

Pension and other postretirement benefit amounts recognized in our consolidated financial statements are

determined on an actuarial basis using several different assumptions that are measured as of December 31, 2011,

2010 and 2009. The following table displays the actuarial assumptions for our plans used in determining the net

periodic benefit costs and the projected accumulated benefit obligations as of December 31, 2011, 2010 and

2009.

As of December 31,

Pension Benefits Postretirement Benefits

2011 2010 2009 2011 2010 2009

Weighted-average assumptions used to determine net periodic benefit

costs:

Discount rate ................................................... 5.65% 6.10% 6.15% 5.40% 5.75% 6.15%

Average rate of increase in future compensation ........................ 4.00 4.00 4.00

Expected long-term weighted-average rate of return on plan assets ......... 7.25 7.50 7.50

Weighted-average assumptions used to determine benefit obligation at

year-end:

Discount rate ................................................... 4.95% 5.65% 6.10% 4.75% 5.40% 5.75%

Average rate of increase in future compensation ........................ 4.00 4.00 4.00

Health care cost trend rate assumed for next year:

Pre-65 ......................................................... 8.00% 8.00% 8.00%

Post-65 ........................................................ 8.00 8.00 8.00

Rate that cost trend rate gradually declines to and remains at: 5.00 5.00 5.00

Year that rate reaches the ultimate trend rate ........................... 2018 2018 2018

As of December 31, 2011, the effect of a 1% increase or decrease in the assumed health care cost trend rate

would change the accumulated postretirement benefit obligation by less than $1 million.

F-85
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We review our pension and other postretirement benefit plan assumptions on an annual basis. We calculate the

net periodic benefit cost each year based on assumptions established at the end of the previous calendar year,

unless we remeasure as a result of a curtailment. In determining our net periodic benefit costs, we assess the

discount rate to be used in the annual actuarial valuation of our pension and other postretirement benefit

obligations at year-end. We consider the current yields on high-quality, corporate fixed-income debt instruments

with maturities corresponding to the expected duration of our benefit obligations and supported by cash flow

matching analysis based on expected cash flows specific to the characteristics of our plan participants, such as

age and gender. As of December 31, 2011, the discount rate used to determine our obligation decreased by 70

basis points for pension and 65 basis points for postretirement, reflecting a corresponding rate decrease in

corporate-fixed income debt instruments during 2011. We also assess the long-term rate of return on plan assets

for our qualified pension plan. The return on asset assumption reflects our expectations for plan-level returns

over a term of approximately seven to ten years. Given the longer-term nature of the assumption and a stable

investment policy, it may or may not change from year to year. However, if longer-term market cycles or other

economic developments impact the global investment environment, or asset allocation changes are made, we

may adjust our assumption accordingly. Changes in assumptions used in determining pension and other

postretirement benefit plan expense resulted in an increase in expense of $17 million and $4 million for the years

ended December 31, 2011 and 2010, respectively, and a decrease in expense of $4 million in our consolidated

statements of operations for the year ended December 31, 2009.

Qualified Pension Plan Assets

The following table displays our qualified pension plan assets by asset category at their fair value as of

December 31, 2011 and 2010. The fair value of assets in Level 1 have been determined based on quoted prices of

identical assets in active markets as of year end, while the fair value of assets in Level 2 have been determined

based on the net asset value per share of the investments as of year end. None of the fair values for plan assets

were determined by using significant unobservable inputs, or Level 3.

Fair Value Measurements as of December 31,

2011 2010

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2) Total

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2) Total

(Dollars in millions)

Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 22 $ 22 $ — $ 13 $ 13

Equity securities:

U.S. large-cap(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 — 353 329 — 329

U.S. mid/small cap(2) . . . . . . . . . . . . . . . . . . . . . . . . 91 — 91 83 — 83

International(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 167 167 — 255 255

Fixed income securities:

Investment grade credit(4) . . . . . . . . . . . . . . . . . . . . — 409 409 — 262 262

Total plan assets at fair value .................. $444 $598 $1,042 $412 $530 $942

(1) Consists of a publicly traded equity index fund that tracks the S&P 500.

(2) Consists of a publicly traded equity index fund that tracks all regularly traded U.S. stocks except those in the S&P 500.

F-86
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(3) Consists of an international equity fund that tracks an index that consists of approximately 6,400 and 6,500 securities for

2011 and 2010, respectively, across over 40 countries. United Kingdom has the largest share with 16% in 2011. Japan

had the largest share with 15% in 2010.

(4) Consists of a bond fund that tracks a broadly diversified investment grade index that consists of approximately 3,000 and

2,700 issuances of investment grade bonds for 2011 and 2010, respectively, from diverse industries. International markets

represent 20% and 19% of the fund in 2011 and 2010, respectively.

Our investment strategy is to diversify our plan assets in order to reduce our concentration risk, reflect the plan’s

profile over time, and maintain an asset allocation that allows us to meet current and future benefit obligations.

The assets of the qualified pension plan consist of exchange-listed stocks, held in broadly diversified index funds.

We also invest in a broadly diversified indexed fixed income account. In addition, the plan holds liquid shortterm investments that provide for monthly pension payments, plan expenses and, from time to time, may

represent uninvested contributions or reallocation of plan assets. The target allocations for plan assets are from

55% to 65% for equity securities, 35% to 45% for fixed income securities and up to 2% for all other types of

investments. The plan fiduciary periodically assesses our asset allocation to assure it is consistent with our plan

objective.

Expected Benefit Payments

The following table displays the benefits we expect to pay in each of the next five years and in the aggregate for

the subsequent five years for our pension plans and other postretirement plan and are based on the same

assumptions used to measure our benefit obligation as of December 31, 2011.

Expected Retirement Plan Benefit Payments

Other Postretirement Benefits

Pension

Benefits

Before Medicare

Part D Subsidy

Medicare

Part D Subsidy

(Dollars in millions)

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36 $ 8 $1

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 9 1

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 10 1

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 10 1

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 11 1

2017—2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 71 7

Defined Contribution Plans

Retirement Savings Plan

The Retirement Savings Plan is a defined contribution plan that includes a 401(k) before-tax feature, a regular

after-tax feature and a Roth after-tax feature. Under the plan, eligible employees may allocate investment

balances to a variety of investment options.

We match employee contributions in cash up to 6% of eligible compensation (base salary, overtime pay and

eligible incentive compensation) for employees who are not active in our defined benefit pension plan and up to

3% of eligible compensation (base salary only) for employees who are active in our defined benefit pension plan.

Matching contributions for employees who are not active in our defined benefit pension plan are 100% vested

and matching contributions for employees who are active in our defined benefit pension plan are fully vested

after five years of service.

F-87
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

All employees, with the exception of those who participated in the Executive Pension Plan, receive a 2%

contribution regardless of employee contributions to this plan. Participants are fully vested in this 2%

contribution after three years of service.

For the years ended December 31, 2011, 2010 and 2009, the maximum employee contribution as established by

the IRS was $16,500, with additional “catch- up” contributions permitted for participants aged 50 and older of

$5,500.

There was no option to invest directly in our common stock for the years ended December 31, 2011, 2010 and

2009. We recorded expense for this plan of $55 million, $47 million and $42 million for the years ended

December 31, 2011, 2010 and 2009, respectively.

Supplemental Retirement Savings Plan

The Supplemental Retirement Savings Plan is an unfunded, nonqualified defined contribution plan. This plan

supplements our Retirement Savings Plan to provide benefits to employees who are not grandfathered under our

defined benefit pension plan and whose annual eligible earnings exceed the IRS annual limit on eligible

compensation for 401(k) plans.

We credit to the plan 8% of a participant’s eligible compensation that exceeds the IRS annual limit of $245,000

in 2011. Eligible compensation consists of base salary plus eligible incentive compensation earned, if any, up to a

combined maximum of two times base salary. The 8% credit consists of (1) a 6% credit that vests immediately,

and (2) a 2% credit that vests after three years of service.

For the year ended December 31, 2011, we recognized expense related to this plan of $1 million; for the years

ended December 31, 2010 and 2009, we recognized expense related to this plan of less than $1 million in each

year.

14. Segment Reporting

Our three reportable segments are: Single-Family, Multifamily, and Capital Markets. We use these three

segments to generate revenue and manage business risk, and each segment is based on the type of business

activities it performs. We are working on reorganizing our company by function rather than by business in order

to improve our operational efficiencies and effectiveness. In future periods, we may change some of our

management reporting and how we report our business segment results.

Segment Reporting for 2011 and 2010

Our prospective adoption in 2010 of revised accounting guidance on the consolidation of VIE’s and transfers of

financial assets had a significant impact on the presentation and comparability of our consolidated financial

statements due to the consolidation of the substantial majority of our single-class securitization trusts and the

elimination of previously recorded deferred revenue from our guaranty arrangements. We continue to manage

Fannie Mae based on the same three business segments. However, effective in 2010, we changed the presentation

of segment financial information that is currently evaluated by management.

Under the current segment reporting, the sum of the results for our three business segments does not equal our

consolidated statements of operations and comprehensive loss, as we separate the activity related to our

consolidated trusts from the results generated by our three segments. In addition, we include an eliminations/

adjustments category to reconcile our business segment results and the activity related to our consolidated trusts

to our consolidated statements of operations and comprehensive loss.

F-88
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

While some line items in our segment results were not impacted by either the change from the consolidation

accounting guidance or changes to our segment presentation, others were impacted significantly, which reduces

the comparability of our segment results with years prior to 2010. We have neither restated results prior to 2010

nor presented 2011 and 2010 results under the old presentation as we determined that it was impracticable to do

so; therefore, our segment results reported in the 2011 and 2010 are not comparable with years prior to 2010.

The section below provides a discussion of the three business segments and how each segment’s financial

information reconciles to our consolidated financial statements for those line items that were impacted

significantly as a result of changes to our segment presentation.

Single-Family

Revenue for our Single-Family business is from the guaranty fees the segment receives as compensation for

assuming the credit risk on the mortgage loans underlying single-family Fannie Mae MBS, most of which are

held within consolidated trusts, and on the single-family mortgage loans held in our mortgage portfolio. The

primary source of profit for the Single-Family segment is the difference between the guaranty fees earned and the

costs of providing the guaranty, including credit-related losses.

Our current segment reporting presentation differs from our consolidated balance sheets and statements of

operations and comprehensive loss in order to reflect the activities and results of the Single-Family segment. The

significant differences from the consolidated statements of operations and comprehensive loss are as follows:

• Guaranty fee income—Guaranty fee income reflects (1) the cash guaranty fees paid by MBS trusts to

Single-Family, (2) the amortization of deferred cash fees (both the previously recorded deferred cash fees

that were eliminated from our consolidated balance sheets at transition and deferred guaranty fees received

subsequent to transition that are currently recognized in our consolidated financial statements through

interest income), such as buy-ups, buy-downs, and risk-based pricing adjustments, and (3) the guaranty fees

from the Capital Markets group on single-family loans in our mortgage portfolio. To reconcile to our

consolidated statements of operations and comprehensive loss, we eliminate guaranty fees and the

amortization of deferred cash fees related to consolidated trusts as they are now reflected as a component of

interest income. However, such accounting continues to be reflected for the segment reporting presentation.

• Net interest income (loss)—Net interest loss within the Single-Family segment reflects interest expense to

reimburse Capital Markets and consolidated trusts for contractual interest not received on mortgage loans,

when interest income is no longer recognized in accordance with our nonaccrual accounting policy in our

consolidated statements of operations and comprehensive loss. Net interest income (loss), also includes an

allocated cost of capital charge among the three segments that is not included in net interest income in the

consolidated statement of operations and comprehensive loss.

Multifamily

The primary sources of revenue for our Multifamily business are (1) guaranty fees the segment receives as

compensation for assuming the credit risk on the mortgage loans underlying multifamily Fannie Mae MBS, most

of which are held within consolidated trusts, (2) guaranty fees on the multifamily mortgage loans held in our

mortgage portfolio, (3) transaction fees associated with the multifamily business and (4) bond credit

enhancement fees. Investments in rental and for-sale housing generate revenue and losses from operations and

the eventual sale of the assets. In the fourth quarter of 2009, we reduced the carrying value of our LIHTC

investments to zero. As a result, we no longer recognize net operating losses or other-than-temporary impairment

on our LIHTC investments. While the Multifamily guaranty business is similar to our Single-Family business,

neither the economic return nor the nature of the credit risk is similar to that of Single-Family.

F-89
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Our current segment reporting presentation differs from our consolidated balance sheets and statements of

operations and comprehensive loss in order to reflect the activities and results of the Multifamily segment. The

significant differences from the consolidated statements of operations and comprehensive loss are as follows:

• Guaranty fee income—Guaranty fee income reflects the cash guaranty fees paid by MBS trusts to

Multifamily and the guaranty fees from the Capital Markets group on multifamily loans in Fannie Mae’s

portfolio. To reconcile to our consolidated statements of operations and comprehensive loss, we eliminate

guaranty fees related to consolidated trusts.

• Gains (losses) from partnership investments—Gains (losses) from partnership investments primarily reflect

losses on investments in affordable rental and for-sale housing partnerships measured under the equity

method of accounting. To reconcile to our consolidated statements of operations and comprehensive loss,

we adjust the losses to reflect the consolidation of certain partnership investments.

Capital Markets Group

Our Capital Markets group generates most of its revenue from the difference, or spread, between the interest we

earn on our mortgage assets and the interest we pay on the debt we issue to fund these assets. We refer to this

spread as our net interest yield. Changes in the fair value of the derivative instruments and trading securities we

hold impact the net income or loss reported by the Capital Markets group. The net income or loss reported by our

Capital Markets group is also affected by the impairment of AFS securities.

Our current segment reporting presentation differs from our consolidated balance sheets and statements of

operations and comprehensive loss in order to reflect the activities and results of the Capital Markets group. The

significant differences from the consolidated statements of operations and comprehensive loss are as follows:

• Net interest income—Net interest income reflects the interest income on mortgage loans and securities

owned by Fannie Mae and interest expense on funding debt issued by Fannie Mae, including accretion and

amortization of any cost basis adjustments. To reconcile to our consolidated statements of operations and

comprehensive loss, we adjust for the impact of consolidated trusts and intercompany eliminations as

follows:

• Interest income: Interest income consists of interest on the segment’s interest-earning assets, which

differs from interest-earning assets in our consolidated balance sheets. We exclude loans and securities

that underlie the consolidated trusts from our Capital Markets group balance sheets. The net interest

income reported by the Capital Markets group excludes the interest income earned on assets held by

consolidated trusts. As a result, we report interest income and amortization of cost basis adjustments only

on securities and loans that are held in our portfolio. For mortgage loans held in our portfolio, when

interest income is no longer recognized in accordance with our nonaccrual accounting policy, the Capital

Markets group recognizes interest income for reimbursement from Single-Family and Multifamily for the

contractual interest due under the terms of our intracompany guaranty arrangement.

• Interest expense: Interest expense consists of contractual interest on the Capital Markets group’s

interest-bearing liabilities, including the accretion and amortization of any cost basis adjustments. It

excludes interest expense on debt issued by consolidated trusts. Therefore, the interest expense

recognized on the Capital Markets group income statement is limited to our funding debt, which is

reported as “Debt of Fannie Mae” in our consolidated balance sheets. Net interest expense also includes

an allocated cost of capital charge among the three business segments that is not included in net interest

income in our consolidated statements of operations and comprehensive loss.

F-90
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

• Investment gains or losses, net—Investment gains or losses, net reflects the gains and losses on

securitizations and sales of available-for-sale securities from our portfolio. To reconcile to our consolidated

statements of operations and comprehensive loss, we eliminate gains and losses on securities that have been

consolidated to loans.

• Fair value gains or losses, net—Fair value gains or losses, net for the Capital Markets group includes

derivative gains and losses, foreign exchange gains and losses, and the fair value gains and losses on certain

debt securities in our portfolio. To reconcile to our consolidated statements of operations and

comprehensive loss, we eliminate fair value gains or losses on Fannie Mae MBS that have been

consolidated to loans.

• Other expenses, net—Debt extinguishment gains or losses recorded on the segment statements of operations

relate exclusively to our funding debt, which is reported as “Debt of Fannie Mae” in our consolidated

balance sheets. To reconcile to our consolidated statements of operations and comprehensive loss, we

include debt extinguishment gains or losses related to consolidated trusts to arrive at our total recognized

debt extinguishment gains or losses.

Segment Allocations and Results

Our segment financial results include directly attributable revenues and expenses. Additionally, we allocate to

each of our segments: (1) capital using FHFA minimum capital requirements adjusted for over- or undercapitalization; (2) indirect administrative costs; and (3) a provision or benefit for federal income taxes. In

addition, we allocate intracompany guaranty fee income as a charge from the Single-Family and Multifamily

segments to Capital Markets for managing the credit risk on mortgage loans held by the Capital Markets group.

With the adoption of the consolidation accounting guidance, we have prospectively revised the presentation of

our results for these segments to better reflect how we operate and oversee these businesses.

F-91
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables display our segment results under our current segment reporting presentation for the years

ended December 31, 2011 and 2010.

For the Year Ended December 31, 2011

Business Segments Other Activity/Reconciling Items

SingleFamily MultifamilyCapital

Markets

Consolidated

Trusts(1)

Eliminations/

Adjustments(2)

Total

Results

(Dollars in millions)

Net interest (loss) income ....................$ (2,411) $ (38) $13,920 $ 5,765 $ 2,045(3) $ 19,281

Provision for loan losses ..................... (25,623) (291) — — — (25,914)

Net interest (loss) income after provision for loan

losses .................................. (28,034) (329) 13,920 5,765 2,045 (6,633)

Guaranty fee income (expense) ............... 7,507 884 (1,497) (4,486)(4) (2,181)(4) 227(4)

Investment (losses) gains, net . . . . . . . . . . . . . . . . . (2) 18 3,711 (315) (2,906)(5) 506

Net other-than-temporary impairments ......... — — (306) (2) — (308)

Fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . (7) — (6,596) (226) 208(6) (6,621)

Debt extinguishment (losses) gains, net ......... — — (254) 22 — (232)

Gains from partnership investments . . . . . . . . . . . . — 81 — — — 81(7)

Fee and other income (expense) . . . . . . . . . . . . . . . 579 218 478 (329) (10) 936

Administrative expenses ..................... (1,638) (264) (468) — — (2,370)

(Provision) benefit for guaranty losses .......... (830) 26 — — — (804)

Foreclosed property expense ................. (765) (15) — — — (780)

Other (expense) income ..................... (857) 25 (34) — (81) (947)

(Loss) income before federal income taxes ...... (24,047) 644 8,954 429 (2,925) (16,945)

Benefit (provision) for federal income taxes . . . . . 106 (61) 45 — — 90

Net (loss) income attributable to Fannie Mae . . . $(23,941) $ 583 $ 8,999 $ 429 $(2,925) $(16,855)

F-92
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Year Ended December 31, 2010

Business Segments

Other Activity/Reconciling

Items

SingleFamily MultifamilyCapital

Markets

Consolidated

Trusts(1)

Eliminations/

Adjustments(2)

Total

Results

(Dollars in millions)

Net interest (loss) income ....................... $ (5,386) $ 3 $14,321 $ 5,073 $ 2,398(3) $ 16,409

Provision for loan losses ........................ (24,503) (199) — — — (24,702)

Net interest (loss) income after provision for loan

losses ..................................... (29,889) (196) 14,321 5,073 2,398 (8,293)

Guaranty fee income (expense) .................. 7,206 791 (1,440) (4,525)(4) (1,830)(4) 202(4)

Investment gains (losses), net .................... 9 6 4,047 (418) (3,298)(5) 346

Net other-than-temporary impairments ............ — — (720) (2) — (722)

Fair value gains (losses), net . . . . . . . . . . . . . . . . . . . . — — 239 (155) (595)(6) (511)

Debt extinguishment losses, net .................. — — (459) (109) — (568)

Losses from partnership investments .............. — (70) — — (4) (74)(7)

Fee and other income (expense) . . . . . . . . . . . . . . . . . . 306 146 519 (88) (1) 882

Administrative expenses ........................ (1,628) (384) (585) — — (2,597)

(Provision) benefit for guaranty losses ............. (237) 43 — — — (194)

Foreclosed property expense .................... (1,680) (38) — — — (1,718)

Other (expenses) income ....................... (836) (68) 125 — (74) (853)

(Loss) income before federal income taxes ......... (26,749) 230 16,047 (224) (3,404) (14,100)

Benefit (provision) for federal income taxes . . . . . . . . 69 (14) 27 — — 82

Net (loss) income ........................... (26,680) 216 16,074 (224) (3,404) (14,018)

Less: Net loss attributable to noncontrolling

interests ................................. — — — — 4(8) 4

Net (loss) income attributable to Fannie Mae ..... $(26,680) $ 216 $16,074 $ (224) $(3,400) $(14,014)

(1) Represents activity related to the assets and liabilities of consolidated trusts in our consolidated balance sheets.

(2) Represents the elimination of intercompany transactions occurring between the three business segments and our

consolidated trusts, as well as other adjustments to reconcile to our consolidated results.

(3) Represents the amortization expense of cost basis adjustments on securities that we own in our portfolio that on a GAAP

basis are eliminated.

(4) Represents the guaranty fees paid from consolidated trusts to the Single-Family and Multifamily segments. The

adjustment to guaranty fee income in the Eliminations/Adjustments column represents the elimination of the amortization

of deferred cash fees related to consolidated trusts that were re-established for segment reporting. Total guaranty fee

income is included in fee and other income in our consolidated statements of operations and comprehensive loss.

(5) Primarily represents the removal of realized gains and losses on sales of Fannie Mae MBS classified as available-for-sale

securities that are issued by consolidated trusts and retained in the Capital Markets portfolio. The adjustment also

includes the removal of securitization gains (losses) recognized in the Capital Markets segment relating to portfolio

securitization transactions that do not qualify for sale accounting under GAAP.

(6) Represents the removal of fair value adjustments on consolidated Fannie Mae MBS classified as trading that are retained

in the Capital Markets portfolio.

(7) Gains (losses) from partnership investments are included in other expenses in our consolidated statements of operations

and comprehensive loss.

F-93
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(8) Represents the adjustment from equity method accounting to consolidation accounting for partnership investments that

are consolidated in our consolidated balance sheets.

The following table displays our segment results under our previous reporting presentation for the year ended

December 31, 2009.

For the Year Ended December 31, 2009

SingleFamily MultifamilyCapital

Markets Total

(Dollars in millions)

Net interest income (expense)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 428 $ (193) $14,275 $ 14,510

Guaranty fee income (expense)(2) ................................... 8,002 675 (1,466) 7,211

Investment (losses) gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) — 1,460 1,458

Net other-than-temporary impairments ............................... — — (9,861) (9,861)

Fair value losses, net ............................................. — — (2,811) (2,811)

Debt extinguishment losses, net .................................... — — (325) (325)

Losses from partnership investments ................................ — (6,735) — (6,735)

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354 100 319 773

Administrative expenses .......................................... (1,419) (363) (425) (2,207)

Provision for credit losses ......................................... (70,463) (2,163) — (72,626)

Foreclosed property expense ....................................... (857) (53) — (910)

Other expenses ................................................. (1,216) (38) (230) (1,484)

(Loss) income before federal income taxes ........................... (65,173) (8,770) 936 (73,007)

Benefit (provision) for federal income taxes .......................... 1,375 (311) (79) 985

Net (loss) income ............................................. (63,798) (9,081) 857 (72,022)

Less: Net loss attributable to noncontrolling interest . . . . . . . . . . . . . . . . . . — 53 — 53

Net (loss) income attributable to Fannie Mae ........................ $(63,798) $(9,028) $ 857 $(71,969)

(1) Includes cost of capital charge.

(2) The charge to Capital Markets represents an intercompany guaranty fee expense allocated to Capital Markets from

Single-Family and Multifamily for absorbing the credit risk on mortgage loans held in our portfolio.

The following table displays total assets by segment as of December 31, 2011 and 2010.

As of December 31,

2011 2010

(Dollars in millions)

Single-Family ........................................................ $ 11,822 $ 14,843

Multifamily .......................................................... 5,747 4,881

Capital Markets ...................................................... 836,700 873,052

Consolidated trusts .................................................... 2,676,952 2,673,937

Eliminations/adjustments ............................................... (319,737) (344,741)

Total assets ........................................................ $3,211,484 $3,221,972

F-94
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We operate our business solely in the United States and its territories, and accordingly, we generate no revenue

from and have no assets in geographic locations other than the United States and its territories.

15. Equity (Deficit)

Common Stock

Shares of common stock outstanding, net of shares held as treasury stock, totaled 1.2 billion and 1.1 billion as of

December 31, 2011 and 2010, respectively.

During the conservatorship, the rights and powers of shareholders are suspended. Accordingly, our common

shareholders have no ability to elect directors or to vote on other matters during the conservatorship unless FHFA

elects to delegate this authority to them. The senior preferred stock purchase agreement with Treasury prohibits

the payment of dividends on common stock without the prior written consent of Treasury. The conservator also

has eliminated common stock dividends. In addition, we issued a warrant to Treasury that provides Treasury with

the right to purchase for a nominal price shares of our common stock equal to 79.9% of the total number of

shares of common stock outstanding on a fully diluted basis on the date of exercise, which would substantially

dilute the ownership in Fannie Mae of our common stockholders at the time of exercise. Refer to “Senior

Preferred Stock and Common Stock Warrant” section of this note.

F-95
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Preferred Stock

The following table displays our senior preferred stock and preferred stock outstanding as of December 31, 2011 and

2010.

Title

Issue

Date

Issued and Outstanding as of

December 31,

Stated

Value

per Share

Annual

Dividend

Rate as of

December 31,

2011

Redeemable on

or After

2011 2010

Shares Amount Shares Amount

(Dollars and shares in millions, except per share amounts)

Senior Preferred Stock

Series 2008-2 ........ September 8, 2008 1 $112,578 1 $88,600 $112,578(1) 10.000%(2) N/A(3)

Total .............. 1 $112,578 1 $88,600

Preferred Stock

Series D ............ September 30, 1998 3 $ 150 3 $ 150 $ 50 5.250% September 30, 1999

Series E ............ April 15, 1999 3 150 3 150 50 5.100 April 15, 2004

Series F ............ March 20, 2000 14 690 14 690 50 0.890(4) March 31, 2002(5)

Series G ............ August 8, 2000 6 288 6 288 50 0.270(6) September 30, 2002(5)

Series H ............ April 6, 2001 8 400 8 400 50 5.810 April 6, 2006

Series I ............ October 28, 2002 6 300 6 300 50 5.375 October 28, 2007

Series L ............ April 29, 2003 7 345 7 345 50 5.125 April 29, 2008

Series M ........... June 10, 2003 9 460 9 460 50 4.750 June 10, 2008

Series N ............ September 25, 2003 5 225 5 225 50 5.500 September 25, 2008

Series O ............ December 30, 2004 50 2,500 50 2,500 50 7.000(7) December 31, 2007

Convertible

Series 2004-1(8) .... December 30, 2004 — 2,492 — 2,492 100,000 5.375 January 5, 2008

Series P ............ September 28, 2007 40 1,000 40 1,000 25 4.500(9) September 30, 2012

Series Q ............ October 4, 2007 15 375 15 375 25 6.750 September 30, 2010

Series R(10) .......... November 21, 2007 21 530 21 530 25 7.625 November 21, 2012

Series S ............ December 11, 2007 280 7,000 280 7,000 25 7.750(11) December 31, 2010(12)

Mandatory Convertible

Series 2008-1 . . . . . . May 14, 2008 — — 21 1,074 50 8.750 N/A

Series T(13) . . . . . . . . . . May 19, 2008 89 2,225 89 2,225 25 8.250 May 20, 2013

Total . . . . . . . . . . . . 556 $ 19,130 577 $20,204

(1) Initial Stated Value per share was $1,000. Based on our draws of funds under the Senior Preferred Stock Variable Liquidation

Preference agreement with Treasury, the Stated Value per share on December 31, 2011 was $112,578.

(2) Rate effective September 9, 2008. If at any time we fail to pay cash dividends in a timely manner, then immediately following

such failure and for all dividend periods thereafter until the dividend period following the date on which we have paid in cash

full cumulative dividends (including any unpaid dividends added to the liquidation preference), the dividend rate will be

12% per year.

(3) Any liquidation preference of our senior preferred stock in excess of $1.0 billion may be repaid through an issuance of common

or preferred stock. The initial $1.0 billion investment may be repaid only in conjunction with termination of the senior preferred

stock purchase agreement. The provisions for termination under the senior preferred stock purchase agreement are very

restrictive and cannot occur while we are in conservatorship.

(4) Rate effective March 31, 2010. Variable dividend rate resets every two years at a per annum rate equal to the two-year Maturity

U.S. Treasury Rate (“CMT”) minus 0.16% with a cap of 11% per year. As of December 31, 2011, the annual dividend rate was

0.89%.

F-96
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(5) Represents initial call date. Redeemable every two years thereafter.

(6) Rate effective September 30, 2010. Variable dividend rate resets every two years at a per annum rate equal to the

two-year CMT rate minus 0.18% with a cap of 11% per year. As of December 31, 2011, the annual dividend rate was

0.27%.

(7) Rate effective December 31, 2011. Variable dividend rate resets quarterly thereafter at a per annum rate equal to the

greater of 7.00% or 10-year CMT rate plus 2.375%. As of December 31, 2011, the annual dividend rate was 7.00%.

(8) Issued and outstanding shares were 24,922 as of December 31, 2011 and 2010, respectively.

(9) Rate effective December 31, 2011. Variable dividend rate resets quarterly thereafter at a per annum rate equal to the

greater of 4.50% or 3-Month LIBOR plus 0.75%. As of December 31, 2011, the annual dividend rate was 4.50%.

(10) On November 21, 2007, we issued 20 million shares of preferred stock in the amount of $500 million. Subsequent to the

initial issuance, we issued an additional 1.2 million shares in the amount of $30 million on December 14, 2007 under the

same terms as the initial issuance.

(11) Rate effective December 31, 2011. Variable dividend rate resets quarterly thereafter at a per annum rate equal to the

greater of 7.75% or 3-Month LIBOR plus 4.23%. As of December 31, 2011, the annual dividend rate was 7.75%.

(12) Represents initial call date. Redeemable every five years thereafter.

(13) On May 19, 2008, we issued 80 million shares of preferred stock in the amount of $2.0 billion. Subsequent to the initial

issuance, we issued an additional 8 million shares in the amount of $200 million on May 22, 2008 and one million shares

in the amount of $25 million on June 4, 2008 under the same terms as the initial issuance.

As described under “Senior Preferred Stock and Common Stock Warrant” we issued senior preferred stock that

ranks senior to all other series of preferred stock as to both dividends and distributions upon dissolution,

liquidation or winding up of the company. During the conservatorship, the rights and powers of preferred

stockholders (other than holders of senior preferred stock) are suspended. The senior preferred stock purchase

agreement with Treasury also prohibits the payment of dividends on preferred stock (other than the senior

preferred stock) without the prior written consent of Treasury. The conservator also has eliminated preferred

stock dividends, other than dividends on the senior preferred stock.

Each series of our preferred stock has no par value, is non-participating, is non-voting and has a liquidation

preference equal to the stated value per share. None of our preferred stock is convertible into or exchangeable for

any of our other stock or obligations, with the exception of the Convertible Series 2004-1.

Shares of the Convertible Series 2004-1 Preferred Stock are convertible at any time, at the option of the holders,

into shares of Fannie Mae common stock at a conversion price of $94.31 per share of common stock (equivalent

to a conversion rate of 1,060.3329 shares of common stock for each share of Series 2004-1 Preferred Stock). The

conversion price is adjustable, as necessary, to maintain the stated conversion rate into common stock. Events

which may trigger an adjustment to the conversion price include certain changes in our common stock dividend

rate, subdivisions of our outstanding common stock into a greater number of shares, combinations of our

outstanding common stock into a smaller number of shares and issuances of any shares by reclassification of our

common stock. No such events have occurred.

Holders of preferred stock (other than the senior preferred stock) are entitled to receive non-cumulative, quarterly

dividends when, and if, declared by our Board of Directors, but have no right to require redemption of any shares

of preferred stock. Payment of dividends on preferred stock (other than the senior preferred stock) is not

mandatory, but has priority over payment of dividends on common stock, which are also declared by the Board

of Directors. If dividends on the preferred stock are not paid or set aside for payment for a given dividend period,

dividends may not be paid on our common stock for that period. There were no dividends declared or paid on

preferred stock (other than the senior preferred stock) for the years ended December 31, 2011 or 2010.

F-97
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

After a specified period, we have the option to redeem preferred stock (other than the senior preferred stock) at

its redemption price plus the dividend (whether or not declared) for the then-current period accrued to, but

excluding, the date of redemption. The redemption price is equal to the stated value for all issues of preferred

stock except Series O, which has a redemption price of $50 to $52.50 depending on the year of redemption and

Convertible Series 2004-1, which has a redemption price of $105,000 per share.

Our preferred stock is traded in the over-the-counter market.

Conversions of Preferred Stock to Common Stock

During 2011, 38,669,995 shares of common stock were issued upon conversion of 21,493,217 shares of 8.75%

Non-Cumulative Mandatory Convertible Preferred Stock, Series 2008-1 at the option of the holders pursuant to

the terms of the preferred stock. On May 13, 2011, the mandatory conversion date, 36,398,449 shares of common

stock were issued upon the mandatory conversion of all remaining outstanding shares (20,018,947 shares) of

8.75% Non-Cumulative Mandatory Convertible Preferred Stock, Series 2008-1, in accordance with its terms. In

2010, 2,867,318 shares of Mandatory Convertible Series 2008-1 were converted to 4,417,947 shares of common

stock. In 2009, 17,335,866 shares of Mandatory Convertible Series 2008-1 were converted to 26,711,068 shares

of common stock and 78 shares of Mandatory Convertible Series 2004-1 were converted to 82,705 shares of

common stock.

Senior Preferred Stock and Common Stock Warrant

On September 8, 2008, we issued one million shares of Variable Liquidation Preference Senior Preferred Stock,

Series 2008-2 (“senior preferred stock”), with an aggregate stated value and initial liquidation preference of

$1.0 billion. On September 7, 2008, we issued a warrant to purchase common stock to Treasury. The warrant

gives Treasury the right to purchase shares of our common stock equal to 79.9% of the total number of shares of

common stock outstanding on a fully diluted basis on the date of exercise. The senior preferred stock and the

warrant were issued in consideration for the initial commitment from Treasury to provide up to $100.0 billion in

cash to us under the terms set forth in the senior preferred stock purchase agreement prior to subsequent

amendments. We did not receive any cash proceeds as a result of issuing these shares or the warrant. We have

assigned a value of $4.5 billion to Treasury’s commitment, which has been recorded as a reduction to additional

paid-in-capital and was partially offset by the aggregate fair value of the warrant. There was no impact to the

total balance of stockholders’ equity (deficit) as a result of the issuance.

Variable Liquidation Preference Senior Preferred Stock, Series 2008-2

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. The liquidation preference of the senior preferred stock is subject to adjustment. To the

extent dividends are not paid in cash for any dividend period, the dividends will accrue and be added to the

liquidation preference of the senior preferred stock. In addition, any amounts paid by Treasury to us pursuant to

Treasury’s funding commitment provided in the senior preferred stock purchase agreement and any quarterly

commitment fee payable under the senior preferred stock purchase agreement that is not paid in cash to or

waived by Treasury will be added to the liquidation preference of the senior preferred stock. As of February 29,

2012, we have received a total of $111.6 billion under Treasury’s funding commitment and the Acting Director

of FHFA will request an additional $4.6 billion from Treasury to eliminate our net worth deficit as of

December 31, 2011.

Holders of the senior preferred stock are entitled to receive when, as and if declared by our Board of Directors,

out of legally available funds, cumulative quarterly cash dividends at an annual rate of 10% per year based on the

then-current liquidation preference of the senior preferred stock. As conservator and under our Charter, FHFA

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(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

also has authority to declare dividends on the senior preferred stock. If at any time we fail to pay cash dividends

in a timely manner, then immediately following such failure and for all dividend periods thereafter until the

dividend period following the date on which we have paid in cash full cumulative dividends (including any

unpaid dividends added to the liquidation preference), the dividend rate will be 12% per year. Dividends declared

and paid on our senior preferred stock were $9.6 billion, $7.7 billion and $2.5 billion for the years ended

December 31, 2011, 2010 and 2009, respectively.

The senior preferred stock ranks prior to our common stock and all other outstanding series of our preferred stock

as to both dividends and rights upon liquidation. We may not 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 without the prior written consent of Treasury.

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.

We are not permitted to redeem the senior preferred stock in full prior to the termination of Treasury’s funding

commitment under the senior preferred stock purchase agreement. However, we are permitted to pay down the

liquidation preference of the outstanding shares of senior preferred stock to the extent of (1) accrued 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 the

extent we issue any shares of capital stock for cash at any time the senior preferred stock is outstanding (which

requires Treasury’s approval), we are required to use the net proceeds of the issuance to pay down the liquidation

preference of the senior preferred stock; however, 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. If we pay down the liquidation

preference of each outstanding share of senior preferred stock in full, the shares will be considered redeemed as

of the payment date.

Common Stock Warrant

The warrant gives Treasury the right to purchase shares of our common stock equal to 79.9% of the total number

of shares of common stock outstanding on a fully diluted basis on the date of exercise. The warrant may be

exercised in whole or in part at any time on or before September 7, 2028, by delivery to Fannie Mae of: (a) a

notice of exercise; (b) payment of the exercise price of $0.00001 per share; and (c) the warrant. If the market

price of one share of common stock is greater than the exercise price, in lieu of exercising the warrant by

payment of the exercise price, Treasury may elect to receive shares equal to the value of the warrant (or portion

thereof being canceled) pursuant to the formula specified in the warrant. Upon exercise of the warrant, Treasury

may assign the right to receive the shares of common stock issuable upon exercise to any other person. If the

warrant is exercised, the stated value of the common stock issued will be reclassified as “Common stock” in our

consolidated balance sheets. As of February 29, 2012, Treasury had not exercised the warrant.

Senior Preferred Stock Purchase Agreement with Treasury

Commitment Fee

We were scheduled to begin paying Treasury a quarterly commitment fee beginning on March 31, 2011;

however, Treasury has waived the quarterly commitment fee under the senior preferred stock purchase agreement

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

for each quarter of 2011 and the first quarter of 2012 due to the continued fragility of the U.S. mortgage market

and Treasury’s belief that imposing the commitment fee would not generate increased compensation for

taxpayers. Treasury stated that it will reevaluate the situation to determine whether to set the quarterly

commitment fee for the remaining quarters of 2012. We may elect to pay the periodic commitment fee in cash or

add the amount of the fee to the liquidation preference of the senior preferred stock.

Funding Commitment

Treasury’s funding commitment under the senior preferred stock purchase agreement is intended to ensure that

we maintain a positive net worth. On December 24, 2009, the maximum amount of Treasury’s funding

commitment to us under the senior preferred stock purchase agreement was increased pursuant to an amendment

to the agreement. The amendment provides that the $200 billion maximum amount of the commitment from

Treasury will increase as necessary to accommodate any net worth deficiencies attributable to periods during

2010, 2011 and 2012. If we do not have a positive net worth as of December 31, 2012, then the amount of

funding available under the senior preferred stock purchase agreement after 2012 will be $124.8 billion

($200 billion less $75.2 billion in cumulative draws for net worth deficiencies through December 31, 2009). In

the event we have a positive net worth as of December 31, 2012, then the amount of funding available after 2012

under the senior preferred stock purchase agreement will depend on the size of that positive net worth relative to

the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011 and 2012, as follows:

• If our positive net worth as of December 31, 2012 is less than the cumulative draws for net worth

deficiencies attributable to periods during 2010, 2011 and 2012, then the amount of available funding will

be $124.8 billion less our positive net worth as of December 31, 2012.

• If our positive net worth as of December 31, 2012 is greater than the cumulative draws for net worth

deficiencies attributable to periods during 2010, 2011 and 2012, then the amount of available funding will

be $124.8 billion less the cumulative draws attributable to periods during 2010, 2011 and 2012.

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. The deficiency amount may be increased above

the otherwise applicable amount upon our mutual written agreement with Treasury. In addition, if the Director of

FHFA determines that the Director will be mandated by law to appoint a receiver for us unless our capital is

increased by receiving funds under the commitment in an amount up to the deficiency amount (subject to the

maximum amount that may be funded under the agreement), then FHFA, in its capacity as our conservator, may

request that Treasury provide funds to us in such amount. The senior preferred stock purchase agreement also

provides that, if we have a deficiency amount as of the date of completion of the liquidation of our assets, we

may request funds from Treasury in an amount up to the deficiency amount (subject to the maximum amount that

may be funded under the agreement). Any amounts that we draw under the senior preferred stock purchase

agreement will be added to the liquidation preference of the senior preferred stock. No additional shares of senior

preferred stock are required to be issued under the senior preferred stock purchase agreement.

Covenants

The senior preferred stock purchase agreement, as amended, provides that, until the senior preferred stock is

repaid or redeemed in full, we may not, without the prior written consent of Treasury:

• Declare or pay any dividend (preferred or otherwise) or make any other distribution with respect to any

Fannie Mae equity securities (other than with respect to the senior preferred stock or warrant);

• Redeem, purchase, retire or otherwise acquire any Fannie Mae equity securities (other than the senior

preferred stock or warrant);

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

• Sell or issue any Fannie Mae equity securities (other than the senior preferred stock, the warrant and the

common stock issuable upon exercise of the warrant and other than as required by the terms of any binding

agreement in effect on the date of the senior preferred stock purchase agreement);

• Terminate the conservatorship (other than in connection with a receivership);

• Sell, transfer, lease or otherwise dispose of any assets, other than dispositions for fair market value: (a) to a

limited life regulated entity (in the context of receivership); (b) of assets and properties in the ordinary

course of business, consistent with past practice; (c) in connection with a liquidation of Fannie Mae by a

receiver; (d) of cash or cash equivalents for cash or cash equivalents; or (e) to the extent necessary to

comply with the covenant described below relating to the reduction of our mortgage assets beginning in

2010;

• Incur indebtedness that would result in our aggregate indebtedness exceeding $972 billion through

December 31, 2011. For every year thereafter, our debt cap will equal 120% of the amount of mortgage

assets we are allowed to own on December 31 of the immediately preceding calendar year;

• Issue any subordinated debt;

• Enter into a corporate reorganization, recapitalization, merger, acquisition or similar event; or

• Engage in transactions with affiliates unless the transaction is (a) pursuant to the senior preferred stock

purchase agreement, the senior preferred stock or the warrant, (b) upon arm’s-length terms or (c) a

transaction undertaken in the ordinary course or pursuant to a contractual obligation or customary

employment arrangement in existence on the date of the senior preferred stock purchase agreement.

The agreement also provides that we may not own mortgage assets in excess of $729 billion as of December 31,

2011. On each December 31 thereafter, we are required to reduce our mortgage assets to 90% of the maximum

allowable amount that we were permitted to own as of December 31 of the immediately preceding calendar year,

until the amount of our mortgage assets reaches $250 billion.

Under the agreement, the effect of changes in generally accepted accounting principles that occurred subsequent

to the date of the agreement and that require us to recognize additional mortgage assets in our consolidated

balance sheets were not considered for purposes of evaluating our compliance with the limitation on the amount

of mortgage assets we may own. In addition, the definition of indebtedness in the agreement was revised to

clarify that it also does not give effect to any change that may be made in respect of the FASB guidance on

accounting for transfers of financial assets or any similar accounting guidance.

In addition, the agreement provides that we may not enter into any new compensation arrangements or increase

amounts or benefits payable under existing compensation arrangements with our named executive officers (as

defined by SEC rules) without the consent of the Director of FHFA, in consultation with the Secretary of the

Treasury. As of December 31, 2011, we were in compliance with the senior preferred stock purchase agreement

covenants.

Termination Provisions

The senior preferred stock purchase agreement provides that Treasury’s funding commitment will terminate

under any 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 under the agreement. In addition, Treasury may terminate its funding

commitment and declare the senior preferred stock purchase agreement null and void if a court vacates, modifies,

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

amends, conditions, enjoins, stays or otherwise affects the appointment of the conservator or otherwise curtails

the conservator’s powers. Treasury may not terminate its funding commitment solely by reason of our being in

conservatorship, receivership or other insolvency proceeding, or due to our financial condition or any adverse

change in our financial condition.

Waivers and Amendments

The senior preferred stock purchase agreement provides that most provisions of the agreement may be waived or

amended by mutual written agreement of the parties. No waiver or amendment of the agreement, however, may

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.

Third-party Enforcement Rights

If we default on payments with respect to our debt securities or guaranteed Fannie Mae MBS and Treasury fails

to perform its obligations under its funding commitment, and if we and/or the conservator are not diligently

pursuing remedies in respect of that failure, the holders of these debt securities or Fannie Mae MBS may file a

claim for relief in the United States Court of Federal Claims. The relief, if granted, would require Treasury to

fund to us the lesser of (1) the amount necessary to cure the payment defaults on our debt and Fannie Mae MBS

and (2) the lesser of (a) the deficiency amount and (b) the maximum amount available under the agreement less

the aggregate amount of funding previously provided under the commitment. Any payment that Treasury makes

under those circumstances would be treated for all purposes as a draw under the senior preferred stock purchase

agreement that would increase the liquidation preference of the senior preferred stock.

16. Regulatory Capital Requirements

FHFA has announced that our existing statutory and FHFA-directed regulatory capital requirements will not be

binding during the conservatorship, and that FHFA will not issue quarterly capital classifications during the

conservatorship. We submit capital reports to FHFA during the conservatorship and FHFA monitors our capital

levels. FHFA has stated that it does not intend to report our critical capital, risk-based capital or subordinated

debt levels during the conservatorship. As of December 31, 2011 and 2010, we had a minimum capital deficiency

of $148.4 billion and $123.2 billion, respectively. Our minimum capital deficiency was determined based on

guidance from FHFA, in which FHFA (1) directed us, for loans backing Fannie Mae MBS held by third parties,

to continue reporting our minimum capital requirements based on 0.45% of the unpaid principal balance and

critical capital based on 0.25% of the unpaid principal balance, regardless of whether these loans have been

consolidated pursuant to accounting rules, and (2) issued a regulatory interpretation stating that our minimum

capital requirements are not automatically affected by the consolidation accounting guidance. Additionally, our

minimum capital deficiency excludes the funds provided to us by Treasury pursuant to the senior preferred stock

purchase agreement, as the senior preferred stock does not qualify as core capital due to its cumulative dividend

provisions.

Pursuant to the GSE Act, if the Director of FHFA makes a written determination that our total assets are less than

our total obligations (a net worth deficit) for a period of 60 days, FHFA is mandated by law to appoint a receiver

for Fannie Mae. Treasury’s funding commitment under the senior preferred stock purchase agreement is intended

to ensure that we avoid a net worth deficit, in order to avoid this mandatory trigger of receivership. In order to

avoid a net worth deficit, our conservator may request funds on our behalf from Treasury under the senior

preferred stock purchase agreement.

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FHFA has directed us, during the time we are under conservatorship, to focus on managing to a positive net

worth. As of December 31, 2011 and 2010, we had a net worth deficit of $4.6 billion and $2.5 billion,

respectively.

The following table displays our regulatory capital classification measures as of December 31, 2011 and 2010.

As of December 31,

2011(1) 2010 (1)

(Dollars in millions)

Core capital(2) .......................................................... $(115,967) $ (89,516)

Statutory minimum capital requirement(3) .................................... 32,463 33,676

Deficit of core capital over statutory minimum capital requirement ............... $(148,430) $(123,192)

(1) Amounts as of December 31, 2011 and 2010 represent estimates that we have submitted to FHFA.

(2) The sum of (a) the stated value of our outstanding common stock (common stock less treasury stock); (b) the stated value

of our outstanding non-cumulative perpetual preferred stock; (c) our paid-in capital; and (d) our retained earnings

(accumulated deficit). Core capital does not include: (a) accumulated other comprehensive income (loss) or (b) senior

preferred stock.

(3) Generally, the sum of (a) 2.50% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third

parties; (b) 0.45% of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and (c) up to

0.45% of other off-balance sheet obligations, which may be adjusted by the Director of FHFA under certain

circumstances (See 12 CFR 1750.4 for existing adjustments made by the Director).

Our critical capital requirement is generally equal to the sum of: (1) 1.25% of on-balance sheet assets, except

those underlying Fannie Mae MBS held by third parties; (2) 0.25% of the unpaid principal balance of outstanding

Fannie Mae MBS held by third parties; and (3) 0.25% of other off-balance sheet obligations, which may be

adjusted by the Director of FHFA under certain circumstances.

Restrictions on Capital Distributions and Dividends

Under the terms of the senior preferred stock purchase agreement, we are required to comply with certain

restrictions and covenants. Set forth below are additional restrictions related to our capital requirements:

Restrictions Under GSE Act. Under the GSE Act, FHFA has the authority to prohibit capital distributions,

including payment of dividends, if we fail to meet our capital requirements. If FHFA classifies us as significantly

undercapitalized, we must obtain the approval of the Director of FHFA for any dividend payment. Under the

GSE Act, we are not permitted to make a capital distribution if, after making the distribution, we would be

undercapitalized. The Director of FHFA, however, may permit us to repurchase shares if the repurchase is made

in connection with the issuance of additional shares or obligations in at least an equivalent amount and will

reduce our financial obligations or otherwise improve our financial condition.

Restrictions Relating to Subordinated Debt. During any period in which we defer payment of interest on

qualifying subordinated debt, we may not declare or pay dividends on, or redeem, purchase or acquire, our

common stock or preferred stock. Our qualifying subordinated debt provides for the deferral of the payment of

interest for up to five years if either: our core capital is below 125% of our critical capital requirement; or our

core capital is below our statutory minimum capital requirement, and the U.S. Secretary of the Treasury, acting

on our request, exercises his or her discretionary authority pursuant to Section 304(c) of the Charter Act to

purchase our debt obligations. As of December 31, 2011 and 2010, our core capital was below 125% of our

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

critical capital requirement; however, we have been directed by FHFA to continue paying principal and interest

on our outstanding subordinated debt during the conservatorship and thereafter until directed otherwise,

regardless of our existing capital levels.

Prior to conservatorship, we were subject to certain regulatory capital requirements, including minimum capital

requirements, under the terms of various agreements and consent orders with OFHEO. We were in compliance

with these regulatory capital requirements until they were suspended October 9, 2008 following our entry into

conservatorship.

17. Concentrations of Credit Risk

Concentrations of credit risk arise when a number of customers and counterparties engage in similar activities or

have similar economic characteristics that make them susceptible to similar changes in industry conditions,

which could affect their ability to meet their contractual obligations. Based on our assessment of business

conditions that could impact our financial results, including those conditions arising through February 29, 2012,

we have determined that concentrations of credit risk exist among single-family and multifamily borrowers

(including geographic concentrations and loans with certain higher-risk characteristics), mortgage insurers,

mortgage servicers, financial guarantors, lenders with risk sharing, derivative counterparties and parties

associated with our off-balance sheet transactions. Concentrations for each of these groups are discussed below.

Single-Family Loan Borrowers

Regional economic conditions may affect a borrower’s ability to repay his or her mortgage loan and the property

value underlying the loan. Geographic concentrations increase the exposure of our portfolio to changes in credit

risk. Single-family borrowers are primarily affected by home prices and interest rates. The geographic dispersion

of our Single-Family business has been consistently diversified over the years ended December 31, 2011 and

2010, with our largest exposures in the Western region of the United States, which represented 27% of our

single-family conventional guaranty book of business as of December 31, 2011 and 2010. Except for California,

where 19% and 18% of the gross unpaid principal balance of our single-family conventional mortgage loans held

or securitized in Fannie Mae MBS as of December 31, 2011 and 2010, respectively, were located, no other

significant concentrations existed in any state.

To manage credit risk and comply with legal requirements, we typically require primary mortgage insurance or

other credit enhancements if the current LTV ratio (i.e., the ratio of the unpaid principal balance of a loan to the

current value of the property that serves as collateral) of a single-family conventional mortgage loan is greater

than 80% when the loan is delivered to us. We may also require credit enhancements if the original LTV ratio of

a single-family conventional mortgage loan is less than 80%. As of December 31, 2011, 44% of our singlefamily conventional guaranty book of business consists of loans with an estimated mark-to-market LTV greater

than 80% compared with 40% as of December 31, 2010.

Multifamily Loan Borrowers

Numerous factors affect a multifamily borrower’s ability to repay his or her loan and the value of the property

underlying the loan. The most significant factors affecting credit risk are rental rates and capitalization rates for

the mortgaged property. Rental rates vary among geographic regions of the United States. The average mortgage

amounts for multifamily loans are significantly larger than those for single-family borrowers and, therefore,

individual defaults for multifamily borrowers can be more significant to us. However, these loans, while

individually large, represent a small percentage of our total loan portfolio. Our multifamily geographic

concentrations have been consistently diversified over the years ended December 31, 2011 and 2010, with our

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(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

largest exposure in the Western region of the United States, which represented 34% of our multifamily guaranty

book of business as of December 31, 2011. Except for California and New York, no other significant

concentrations existed in any states as of December 31, 2011 and 2010. As of December 31, 2011 and 2010, 26%

and 13% of the gross unpaid principal balance of our portfolio of multifamily mortgage loans held by us or

securitized in Fannie Mae MBS were located in California and New York, respectively.

As part of our multifamily risk management activities, we perform detailed loan reviews that evaluate borrower

and geographic concentrations, lender qualifications, counterparty risk, property performance and contract

compliance. We generally require servicers to submit periodic property operating information and condition

reviews, allowing us to monitor the performance of individual loans. We use this information to evaluate the

credit quality of our portfolio, identify potential problem loans and initiate appropriate loss mitigation activities.

The following table displays the regional geographic concentration of single-family and multifamily loans in our

mortgage portfolio and those loans held or securitized in Fannie Mae MBS as of December 31, 2011 and 2010.

Geographic Concentration(1)

Percentage of

Conventional

Single-Family Guaranty

Book of Business(2)

Percentage of

Multifamily Guaranty

Book of Business(3)

As of December 31, As of December 31,

2011 2010 2011 2010

Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15% 15% 8% 8%

Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 19 21 22

Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 24 20 20

Southwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 15 17 16

West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 27 34 34

Total ............................................ 100% 100% 100% 100%

(1) Midwest includes IL, IN, IA, MI, MN, NE, ND, OH, SD, WI; Northeast includes CT, DE, ME, MA, NH, NJ, NY, PA,

PR, RI, VT, VI; Southeast includes AL, DC, FL, GA, KY, MD, NC, MS, SC, TN, VA, WV; Southwest includes AZ, AR,

CO, KS, LA, MO, NM, OK, TX, UT; West includes AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.

(2) Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan level

information, which constituted over 99% of our total single-family conventional guaranty book of business as of

December 31, 2011 and 2010.

(3) Consists of the portion of our multifamily guaranty book of business for which we have detailed loan level information,

which constituted 99% of our total multifamily guaranty book of business as of December 31, 2011 and 2010.

Alt-A and Subprime Loans and Securities

We own and guarantee Alt-A and subprime mortgage loans and mortgage-related securities. An Alt-A mortgage

loan generally refers to a mortgage loan that has been underwritten with reduced or alternative documentation than

that required for a full documentation mortgage loan but may also include other alternative product features. As a

result, Alt-A mortgage loans generally have a higher risk of default than non-Alt-A mortgage loans. In reporting our

Alt-A exposure, we have classified mortgage loans as Alt-A if the lenders that deliver the mortgage loans to us have

classified the loans as Alt-A based on documentation or other product features. We have classified private-label

mortgage-related securities held in our investment portfolio as Alt-A if the securities were labeled as such when

issued. A subprime mortgage loan generally refers to a mortgage loan made to a borrower with a weaker credit

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

profile than that of a prime borrower. As a result of the weaker credit profile, subprime borrowers have a higher

likelihood of default than prime borrowers. Subprime mortgage loans were typically originated by lenders

specializing in this type of business or by subprime divisions of large lenders, using processes unique to subprime

loans. In reporting our subprime exposure, we have classified mortgage loans as subprime if the mortgage loans

were originated by one of these specialty lenders or a subprime division of a large lender. We exclude loans

originated by these lenders if we acquired the loans in accordance with our standard underwriting criteria, which

typically require compliance by the seller with our Selling Guide (including standard representations and

warranties) and/or evaluation of the loans through our Desktop Underwriter system. We apply our classification

criteria in order to determine our Alt-A and subprime loan exposures; however, we have other loans with some

features that are similar to Alt-A and subprime loans that we have not classified as Alt-A or subprime because they

do not meet our classification criteria. We have classified private-label mortgage-related securities held in our

investment portfolio as subprime if the securities were labeled as such when issued. We reduce our risk associated

with some of these loans through credit enhancements, as described below under “Mortgage Insurers.”

The following table displays information regarding our Alt-A and subprime mortgage loans and mortgage-related

securities in our single-family mortgage credit book of business as of December 31, 2011 and 2010.

As of December 31,

2011 2010

Unpaid

Principal

Balance

Percent

of

Book of

Business(1)

Unpaid

Principal

Balance

Percent

of

Book of

Business(1)

(Dollars in millions)

Loans and Fannie Mae MBS:

Alt-A(2) ....................................................... $183,829 6% $213,597 7%

Subprime(3) .................................................... 14,167 ** 15,266 **

Total ....................................................... $197,996 7% $228,863 8%

Private-label securities:

Alt-A(4) ....................................................... $ 19,670 ** $ 22,283 **

Subprime(5) .................................................... 16,538 ** 18,410 **

Total ...................................................... $ 36,208 1% $ 40,693 1%

** Represent less than 1% of single-family mortgage credit book of business.

(1) Calculated based on total unpaid principal balance of our single-family mortgage credit book of business.

(2) Represents Alt-A mortgage loans held in our portfolio and Fannie Mae MBS backed by Alt-A mortgage loans.

(3) Represents subprime mortgage loans held in our portfolio and Fannie Mae MBS backed by subprime mortgage loans.

(4) Represents private-label mortgage-related securities backed by Alt-A mortgage loans.

(5) Represents private-label mortgage-related securities backed by subprime mortgage loans.

Other Concentrations

Mortgage Seller/Servicers. Mortgage servicers collect mortgage and escrow payments from borrowers, pay

taxes and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required

activities on our behalf. Our business with mortgage servicers is concentrated. Our ten largest single-family

mortgage servicers, including their affiliates, serviced 75% of our single-family guaranty book of business as of

F-106
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2011, compared with 77% as of December 31, 2010. Our ten largest multifamily mortgage

servicers, including their affiliates, serviced 67% of our multifamily guaranty book of business as of

December 31, 2011, compared with 70% as of December 31, 2010.

In addition to their other responsibilities our mortgage seller/servicers are obligated to repurchase loans or

foreclosed properties, or reimburse us for losses if the foreclosed property has been sold, under certain

circumstances, such as if it is determined that the mortgage loan did not meet our underwriting or eligibility

requirements, if loan representations and warranties are violated or if mortgage insurers rescind coverage. We

refer to our demands that seller/servicers meet these obligations collectively as “repurchase requests.”

We continue to work with our mortgage seller/servicers to fulfill outstanding repurchase requests. Failure by a

significant seller/servicer counterparty, or a number of seller/servicers, to fulfill repurchase obligations in

addition to their other obligations to us could result in a significant increase in our credit losses and have a

material adverse effect on our results of operations and financial condition. In addition, actions we take to pursue

our contractual remedies could increase our costs, reduce our revenues, or otherwise have a material, adverse

effect on our results of operations or financial condition.

Mortgage Insurers. Mortgage insurance “risk in force” represents our maximum potential loss recovery under

the applicable mortgage insurance policies. We had total mortgage insurance coverage risk in force of $91.2

billion on the single-family mortgage loans in our guaranty book of business as of December 31, 2011, which

represented 3% of our single-family guaranty book of business. Our primary and pool mortgage insurance

coverage risk in force on single-family mortgage loans in our guaranty book of business represented $87.3 billion

and $3.9 billion, respectively, as of December 31, 2011, compared with $91.2 billion and $4.7 billion,

respectively, as of December 31, 2010. Nine mortgage insurance companies provided over 99% of our mortgage

insurance as of December 31, 2011 and 2010.

Increases in mortgage insurance claims due to higher defaults and credit losses in recent periods have adversely

affected the financial results and financial condition of many mortgage insurers. Three of our mortgage insurers

(Triad, RMIC and PMI) have publicly disclosed that they are in run-off. One mortgage insurer, Genworth

Mortgage Insurance Corporation, has publicly disclosed that absent a waiver they estimate that they would not

meet state regulatory capital requirements for their main insurance writing entity as of December 31, 2011. An

additional two of our mortgage insurers (Mortgage Guaranty Insurance Corporation and Radian Guaranty, Inc.)

have disclosed that, in the absence of additional capital contributions to their insurance writing entity, their

capital might fall below state regulatory capital requirements in the future. These six mortgage insurers provided

a combined $74.1 billion, or 81%, of our risk in force mortgage insurance coverage of our single-family guaranty

book of business as of December 31, 2011. During 2011, we notified PMI Mortgage Insurance Co. (“PMI”) and

Republic Mortgage Insurance Company (“RMIC”), two of our mortgage insurer counterparties, that they were

suspended nationwide as approved mortgage insurers.

We notified RMIC that both RMIC and its affiliate, Republic Mortgage Insurance Company of North Carolina

(“RMIC-NC”), were suspended nationwide as approved mortgage insurers. We also notified our mortgage sellers

and servicers that we would not accept any mortgage loan insured by RMIC or RMIC-NC that is delivered after

November 30, 2011, except for refinanced Fannie Mae loans where continuation of the coverage is effected

through modification of an existing mortgage insurance certificate. RMIC and RMIC-NC each voluntarily

entered into an agreement with their regulator to discontinue writing or assuming any new mortgage guaranty

insurance business in all states. In January 2012, RMIC’s parent company announced that RMIC has been

ordered into supervision by its regulator. Pursuant to the order, effective January 20, 2012, RMIC is paying 50%

of all valid claims for an initial period not to exceed one year, with the remaining 50% deferred.

F-107
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

PMI received from its regulator an order under which the regulator now has full possession, management and

control of PMI. The regulator is also seeking to place PMI into receivership. Pursuant to the order, the regulator

instituted a partial claim payment plan whereby all valid claims under PMI mortgage guaranty insurance policies

will be paid 50% in cash and 50% deferred as a policyholder claim. It is uncertain when, and if, PMI’s regulator

will allow PMI to begin paying its deferred policyholder claims and/or increase the amount of cash PMI pays on

claims.

The current weakened financial condition of our mortgage insurer counterparties creates an increased risk that

these counterparties will fail to fulfill their obligations to reimburse us for claims under insurance policies. If we

determine that it is probable that we will not collect all of our claims from one or more of these mortgage insurer

counterparties, it could result in an increase in our loss reserves, which could adversely affect our earnings,

liquidity, financial condition and net worth.

We evaluate the financial condition of our mortgage insurer counterparties and adjust the contractually due

recovery amounts to ensure that only probable losses as of the balance sheet date are included in our loss reserve

estimate. The following table displays our estimated benefit from mortgage insurers as of December 31, 2011

and 2010 that reduce our total loss reserves.

As of December 31,

2011 2010

(Dollars in millions)

Contractual mortgage insurance benefit(1) ....................................... $15,099 $17,507

Less: Collectability adjustment(2) .............................................. 2,867 1,150

Estimated benefit included in total loss reserves .................................. $12,232 $16,357

(1) Relates to loans that are individually measured for impairment and those that are collectively reserved.

(2) Represents an adjustment that reduces the contractual benefit for our assessment of our mortgage insurer counterparties’

inability to fully pay the contractual mortgage insurance claims.

We had outstanding receivables of $3.6 billion recorded in “Other assets” in our consolidated balance sheets as

of December 31, 2011 and $4.4 billion as of December 31, 2010 related to amounts claimed on insured, defaulted

loans that we have not yet received, of which $639 million as of December 31, 2011 and $648 million as of

December 31, 2010 was due from our mortgage seller/servicers. We assessed the total outstanding receivables

for collectibility, and they are recorded net of a valuation allowance of $570 million as of December 31, 2011

and $317 million as of December 31, 2010. These mortgage insurance receivables are short-term in nature,

having an average duration of approximately six months, and the valuation allowance reduces our claim

receivable to the amount which is considered probable of collection as of December 31, 2011 and 2010.

We received proceeds under our primary and pool mortgage insurance policies for single-family loans of $5.8

billion during 2011 and $6.4 billion during 2010. We negotiated the cancellation and restructurings of some of

our mortgage insurance coverage in exchange for a fee. The cash fees received of $796 million during 2010 are

included in our total insurance proceeds amount; there were no such cash fees received during 2011. These fees

represented an acceleration of, and discount on, claims to be paid pursuant to the coverage in order to reduce

future exposure to our mortgage insurers and were recorded as a reduction to our “Foreclosed property expense”

in our consolidated statements of operations and comprehensive loss.

F-108
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Financial Guarantors. We are the beneficiary of financial guarantees on non-agency securities held in our

investment portfolio and on non-agency securities that have been resecuritized to include a Fannie Mae guaranty

and sold to third parties. The following table displays the total unpaid principal balance of guaranteed

non-agency securities in our portfolio as of December 31, 2011 and 2010.

As of December 31,

2011 2010

(Dollars in millions)

Alt-A private-label securities .................................................. $1,279 $1,544

Subprime private-label securities ............................................... 1,398 1,487

Mortgage revenue bonds ...................................................... 4,931 5,264

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317 347

Non mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 172

Total ..................................................................... $7,971 $8,814

If a financial guarantor fails to meet its obligations to us with respect to the securities for which we have obtained

financial guarantees, it could reduce the fair value of our mortgage-related securities and result in financial losses

to us, which could have a material adverse effect on our earnings, liquidity, financial condition and net

worth. With the exception of Ambac Assurance Corporation (“Ambac”), none of our non-governmental financial

guarantor counterparties has failed to repay us for claims under guaranty contracts. Ambac provided coverage on

$3.3 billion, or 41%, of our total non-governmental guarantees, as of December 31, 2011. We are also the

beneficiary of financial guarantees included in securities issued by Freddie Mac, the federal government and its

agencies that totaled $31.4 billion as of December 31, 2011 and $25.7 billion as of December 31, 2010.

We model our securities without assuming the benefit of non-governmental financial guarantees. We then adjust

results for those external financial guarantees from guarantors that we determine are creditworthy, although we

continue to seek collection of any amounts due to us from all counterparties. As of December 31, 2011, when

modeling our securities for impairments we did not assume the benefit of external financial guarantees from

non-governmental counterparties.

Lenders with Risk Sharing. We enter into risk sharing agreements with lenders pursuant to which the lenders

agree to bear all or some portion of the credit losses on the covered loans. Our maximum potential loss recovery

from lenders under these risk sharing agreements on single-family loans was $12.8 billion as of December 31,

2011 and $15.6 billion as of December 31, 2010. As of December 31, 2011, 58% of our maximum potential loss

recovery on single-family loans was from three lenders. As of December 31, 2010, 56% of our maximum

potential loss recovery on single-family loans was from the same three lenders. Our maximum potential loss

recovery from lenders under these risk sharing agreements on both Delegated Underwriting and Servicing

(“DUS”) and non-DUS multifamily loans was $32.1 billion as of December 31, 2011 and $30.3 billion as of

December 31, 2010. As of December 31, 2011, 40% of our maximum potential loss recovery on multifamily

loans was from three DUS lenders. As of December 31, 2010, 41% of our maximum potential loss recovery on

multifamily loans was from the same three DUS lenders.

Derivatives Counterparties. For information on credit risk associated with our derivatives transactions refer to

“Note 9, Derivative Instruments and Hedging Activities.”

Parties Associated with Our Off-Balance Sheet Transactions. We enter into financial instrument transactions

that create off-balance sheet credit risk in the normal course of our business. These transactions are designed to

meet the financial needs of our customers, and manage our credit, market or liquidity risks.

F-109
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We have entered into guarantees for which we have not recognized a guaranty obligation in our consolidated

balance sheets relating to periods prior to 2003, the effective date of accounting pronouncements related to

guaranty accounting. Our maximum potential exposure under these guarantees is $9.3 billion as of December 31,

2011, and $10.3 billion as of December 31, 2010. If we were required to make payments under these guarantees,

we would pursue recovery through our right to the collateral backing the underlying loans, available credit

enhancements and recourse with third parties that provide a maximum coverage of $4.0 billion as of

December 31, 2011 and $3.9 billion as of December 31, 2010.

18. Fair Value

We use fair value measurements for the initial recording of certain assets and liabilities and periodic

remeasurement of certain assets and liabilities on a recurring or nonrecurring basis.

Fair Value Measurement

Fair value measurement guidance defines fair value, establishes a framework for measuring fair value and

expands disclosures around fair value measurements. This guidance applies whenever other accounting guidance

requires or permit assets or liabilities to be measured at fair value. The guidance establishes a three-level fair

value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The fair value

hierarchy gives the highest priority, Level 1, to measurements based on unadjusted quoted prices in active

markets for identical assets or liabilities. The next highest priority, Level 2, is given to measurements of assets

and liabilities based on limited observable inputs or observable inputs for similar assets and liabilities. The

lowest priority, Level 3, is given to measurements based on unobservable inputs.

F-110
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Recurring Changes in Fair Value

The following tables display our assets and liabilities measured in our consolidated balance sheets at fair value

on a recurring basis subsequent to initial recognition, including instruments for which we have elected the fair

value option as of December 31, 2011 and 2010. Specifically, total assets measured at fair value on a recurring

basis and classified as Level 3 were $36.3 billion, or 1% of “Total assets,” and $39.0 billion, or 1% of “Total

assets,” in our consolidated balance sheets as of December 31, 2011 and 2010, respectively.

Fair Value Measurements as of December 31, 2011

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Netting

Adjustment(1)

Estimated

Fair Value

(Dollars in millions)

Assets:

Cash equivalents(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600 $ — $ — $— $ 600

Trading securities:

Mortgage-related securities:

Fannie Mae ............................. — 5,687 1,737 — 7,424

Freddie Mac ............................ — 2,732 — — 2,732

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 278 9 — 287

Alt-A private-label securities ............... — 1,004 345 — 1,349

Subprime private-label securities ............ — — 1,280 — 1,280

CMBS ................................. — 10,411 — — 10,411

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . — — 724 — 724

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 143 — 143

Non-mortgage-related securities:

U.S. Treasury securities ................... 47,737 — — — 47,737

Asset-backed securities .................... — 2,111 — — 2,111

Total trading securities ........................ 47,737 22,223 4,238 — 74,198

Available-for-sale securities:

Mortgage-related securities:

Fannie Mae ............................. — 15,904 946 — 16,850

Freddie Mac ............................ — 12,811 12 — 12,823

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 902 — — 902

Alt-A private-label securities ............... — 4,427 7,256 — 11,683

Subprime private-label securities ............ — — 7,586 — 7,586

CMBS ................................. — 14,026 — — 14,026

Mortgage revenue bonds ................... — 7 10,247 — 10,254

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 13 3,445 — 3,458

Total available-for-sale securities ................ — 48,090 29,492 — 77,582

Mortgage loans of consolidated trusts ............ — 1,292 2,319 — 3,611

F-111
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value Measurements as of December 31, 2011

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Netting

Adjustment(1)

Estimated

Fair Value

(Dollars in millions)

Other assets:

Risk management derivatives:

Swaps ................................. — 9,247 170 — 9,417

Swaptions .............................. — 6,536 — — 6,536

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1 51 — 52

Netting adjustment ....................... — — — (15,829) (15,829)

Mortgage commitment derivatives . . . . . . . . . . . . . — 368 17 — 385

Total other assets ............................ — 16,152 238 (15,829) 561

Total assets at fair value ................... $48,337 $87,757 $36,287 $(15,829) $156,552

Liabilities:

Long-term debt:

Of Fannie Mae:

Senior fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 432 $ — $ — $ 432

Senior floating . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 406 — 406

Total of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . — 432 406 — 838

Of consolidated trusts ....................... — 3,174 765 — 3,939

Total long-term debt .......................... — 3,606 1,171 — 4,777

Other liabilities:

Risk management derivatives:

Swaps ................................. — 18,661 167 — 18,828

Swaptions .............................. — 3,432 — — 3,432

Netting adjustment ....................... — — — (21,898) (21,898)

Mortgage commitment derivatives . . . . . . . . . . . . . — 548 6 — 554

Total other liabilities .......................... — 22,641 173 (21,898) 916

Total liabilities at fair value ................ $ — $26,247 $ 1,344 $(21,898) $ 5,693

F-112
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value Measurements as of December 31, 2010

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Netting

Adjustment(1)

Estimated

Fair Value

(Dollars in millions)

Assets:

Cash equivalents(2) ............................ $ 4,049 $ 2,300 $ — $ — $ 6,349

Trading securities:

Mortgage-related securities:

Fannie Mae ............................. — 5,196 2,202 — 7,398

Freddie Mac ............................ — 1,326 — — 1,326

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 590 — — 590

Alt-A private-label securities ............... — 1,663 20 — 1,683

Subprime private-label securities ............ — — 1,581 — 1,581

CMBS ................................. — 10,764 — — 10,764

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . — — 609 — 609

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 152 — 152

Non-mortgage-related securities:

U.S. Treasury securities ................... 27,432 — — — 27,432

Asset-backed securities .................... — 5,309 12 — 5,321

Total trading securities ........................ 27,432 24,848 4,576 — 56,856

Available-for-sale securities:

Mortgage-related securities:

Fannie Mae ............................. — 22,714 114 — 22,828

Freddie Mac ............................ — 16,993 3 — 16,996

Ginnie Mae ............................. — 1,039 — — 1,039

Alt-A private-label securities ............... — 6,841 7,049 — 13,890

Subprime private-label securities ............ — — 9,932 — 9,932

CMBS ................................. — 14,844 — — 14,844

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . — 11 11,030 — 11,041

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 16 3,806 — 3,822

Total available-for-sale securities ................ — 62,458 31,934 — 94,392

Mortgage loans of consolidated trusts . . . . . . . . . . . . — 755 2,207 — 2,962

Other assets:

Risk management derivatives:

Swaps ................................. — 9,623 163 — 9,786

Swaptions .............................. — 5,474 — — 5,474

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 24 72 — 99

Netting adjustment ....................... — — — (15,175) (15,175)

Mortgage commitment derivatives . . . . . . . . . . . . . — 941 12 — 953

Total other assets ............................ 3 16,062 247 (15,175) 1,137

Total assets at fair value ................... $31,484 $106,423 $38,964 $(15,175) $161,696

F-113
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value Measurements as of December 31, 2010

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Netting

Adjustment(1)

Estimated

Fair Value

(Dollars in millions)

Liabilities:

Long-term debt:

Of Fannie Mae:

Senior fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ 472 $ — $ — $ 472

Senior floating . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 421 — 421

Total of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . — 472 421 — 893

Of consolidated trusts ....................... — 1,644 627 — 2,271

Total long-term debt .......................... — 2,116 1,048 — 3,164

Other liabilities:

Risk management derivatives:

Swaps ................................. — 16,436 113 — 16,549

Swaptions .............................. — 2,446 — — 2,446

Other .................................. 1 — — — 1

Netting adjustment ....................... — — — (18,023) (18,023)

Mortgage commitment derivatives . . . . . . . . . . . . . — 712 30 — 742

Total other liabilities .......................... 1 19,594 143 (18,023) 1,715

Total liabilities at fair value ................ $ 1 $21,710 $1,191 $(18,023) $ 4,879

(1) Derivative contracts are reported on a gross basis by level. The netting adjustment represents the effect of the legal right

to offset under legally enforceable master netting agreements to settle with the same counterparty on a net basis, as well

as cash collateral.

(2) Cash equivalents is comprised of U.S. Treasuries that are classified as Level 1 as well as money market funds that are

classified as Level 2.

The following tables display a reconciliation of all assets and liabilities measured at fair value on a recurring

basis using significant unobservable inputs (Level 3) for the years ended December 31, 2011, 2010 and 2009.

The tables also display gains and losses due to changes in fair value, including both realized and unrealized gains

and losses, recorded in our consolidated statements of operations and comprehensive loss for Level 3 assets and

liabilities for the years ended December 31, 2011, 2010 and 2009. When assets and liabilities are transferred

between levels, we recognize the transfer as of the end of the period transferred.

F-114
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

For the Year Ended December 31, 2011

Balance,

December 31,

2010

Total Gains or

(Losses) (Realized/

Unrealized)

Purchases(1) Sales(1) Issuances(2) Settlements(2)

Transfers

out of

Level 3(3)

Transfers

into

Level 3(3)

Balance,

December 31,

2011

Net

Unrealized

Gains

(Losses)

Included in

Net Loss

Related to

Assets and

Liabilities

Still Held

as of

December 31,

2011(4)

Included

in Net

Loss

Included

in

Other

Compre

hensive

(Loss)

Income

(Dollars in millions)

Trading securities:

Mortgage-related:

Fannie Mae ......... $ 2,202 $ 14 $ — $ 663 $(161) $ — $ (433) $ (600) $ 52 $ 1,737 $ 36

Ginnie Mae . . . . . . . . . — — — 9 (9) — — (27) 36 9 —

Alt-A private-label

securities . . . . . . . . . 20 19 — — — — (32) (188) 526 345 (1)

Subprime private-label

securities ......... 1,581 (125) — — — — (176) — — 1,280 (125)

Mortgage revenue

bonds . . . . . . . . . . . . 609 141 — — — — (26) — — 724 144

Other . . . . . . . . . . . . . . 152 1 — — — — (6) (147) 143 143 —

Non-mortgage-related:

Asset-backed

securities . . . . . . . . . 12 — — — — — (5) (9) 2 — —

Total trading securities .... $ 4,576 $ 50 $ — $ 672 $(170) $ — $ (678) $ (971) $ 759 $ 4,238 $ 54

Available-for-sale securities:

Mortgage-related:

Fannie Mae . . . . . . . . . $ 114 $ — $ 44 $1,756 $(383) $ — $ (22) $(1,023) $ 460 $ 946 $ —

Freddie Mac . . . . . . . . . 3 — — — — — (1) — 10 12 —

Alt-A private-label

securities ......... 7,049 (100) 119 — — — (974) (1,684) 2,846 7,256 —

Subprime private-label

securities ......... 9,932 (386) (580) — (363) — (1,017) — — 7,586 —

Mortgage revenue

bonds ............ 11,030 (22) 834 — (109) — (1,486) — — 10,247 —

Other .............. 3,806 (7) 50 — — — (404) — — 3,445 —

Total available-for-sale

securities ............. $31,934 $(515) $ 467 $1,756 $(855) $ — $(3,904) $(2,707) $3,316 $29,492 $ —

Mortgage loans of

consolidated trusts ...... $ 2,207 $ 8 $ — $ 184 $ — $ — $ (339) $ (106) $ 365 $ 2,319 $ 9

Net derivatives . . . . . . . . . . . 104 123 — — — (4) (87) (71) — 65 59

Long-term debt:

Of Fannie Mae:

Senior floating ....... $ (421) $ (88) $ — $ — $ — $ — $ 103 $ — $ — $ (406) $ (88)

Of consolidated trusts . . . (627) (35) — — 4 (70) 89 185 (311) (765) (19)

Total long-term debt ...... $ (1,048) $(123) $ — $ — $ 4 $(70) $ 192 $ 185 $ (311) $ (1,171) $(107)

F-115
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

For the Year Ended December 31, 2010

Balance,

December 31,

2009

Impact of

the transition

to the

Consolidation

Accounting

Guidance

Total Gains or (Losses)

(Realized/Unrealized)

Purchases,

Sales,

Issuances,

and

Settlements,

Net

Transfers

out of

Level 3(3)

Transfers

into

Level 3(3)

Balance,

December 31,

2010

Net

Unrealized

Gains

(Losses)

Included in

Net Loss

Related to

Assets and

Liabilities

Still Held

as of

December 31,

2010(4)

Included

in Net

Loss

Included in

Other

Comprehensive

(Loss) Income

(Dollars in millions)

Trading securities:

Mortgage-related:

Fannie Mae ........... $ 5,656 $ (2) $ (1) $ — $ (223) $(5,551) $2,323 $ 2,202 $ 13

Freddie Mac . . . . . . . . . . . — — — — (1) (3) 4 — —

Alt-A private-label

securities . . . . . . . . . . . 564 62 226 — (77) (1,069) 314 20 4

Subprime private-label

securities ........... 1,780 — 41 — (240) — — 1,581 41

Mortgage revenue

bonds . . . . . . . . . . . . . . 600 — 67 — (58) — — 609 66

Other . . . . . . . . . . . . . . . . 154 — 6 — (8) — — 152 5

Non-mortgage-related:

Asset-backed

securities . . . . . . . . . . . 107 — 1 — (62) (47) 13 12 —

Total trading securities ...... $ 8,861 $ 60 $ 340 $ — $ (669) $(6,670) $2,654 $ 4,576 $129

Available-for-sale securities:

Mortgage-related:

Fannie Mae . . . . . . . . . . . $ 596 $ (203) $ (1) $ 2 $ 181 $ (580) $ 119 $ 114 $ —

Freddie Mac . . . . . . . . . . . 27 — — (1) (29) — 6 3 —

Ginnie Mae . . . . . . . . . . . 123 — — 2 (125) — — — —

Alt-A private-label

securities ........... 8,312 471 (54) 1,240 (1,322) (4,951) 3,353 7,049 —

Subprime private-label

securities ........... 10,746 (118) (70) 1,078 (1,704) — — 9,932 —

Mortgage revenue

bonds .............. 12,820 21 11 82 (1,902) (2) — 11,030 —

Other ................ 3,530 366 (3) 402 (489) — — 3,806 —

Total available-for-sale

securities ............... $36,154 $ 537 $(117) $2,805 $(5,390) $(5,533) $3,478 $31,934 $ —

Mortgage loans of

consolidated trusts ........ $ — $ — $ (29) $ — $ 2,188 $ (11) $ 59 $ 2,207 $ (29)

Guaranty assets and

buy-ups ................ 2,577 (2,568) 1 1 (11) — — — —

Net derivatives . . . . . . . . . . . . . 123 — 61 — (74) (1) (5) 104 (33)

Long-term debt:

Of Fannie Mae:

Senior floating ......... $ (601) $ — $ 20 $ — $ 160 $ — $ — $ (421) $ 24

Of consolidated trusts ..... — (77) 19 — (631) 92 (30) (627) 2

Total long-term debt ........ $ (601) $ (77) $ 39 $ — $ (471) $ 92 $ (30) $ (1,048) $ 26

F-116
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

For the Year Ended December 31, 2009

Balance,

January 1,

2009

Total Gains or (Losses)

(Realized/Unrealized)

Purchases,

Sales,

Issuances,

and

Settlements,

Net

Transfers

in/out of

Level 3,

Net(3)

Balance,

December 31,

2009

Net Unrealized

Gains (Losses)

Included in

Net Loss

Related to

Assets and

Liabilities Still

Held as of

December 31,

2009(4)

Included

in Net

Loss

Included in

Other

Comprehensive

(Loss) Income

(Dollars in millions)

Trading securities:

Mortgage-related:

Fannie Mae ............. $ 6,935 $ 278 $ — $(1,277) $ (280) $ 5,656 $274

Alt-A private-label

securities ............. 1,118 57 — (154) (457) 564 (25)

Subprime private-label

securities ............. 2,318 (83) — (455) — 1,780 (74)

Mortgage revenue bonds . . . 695 (75) — (20) — 600 (75)

Other . . . . . . . . . . . . . . . . . . 167 (1) — (12) — 154 (1)

Non-mortgage-related:

Asset-backed securities .... 1,475 (38) — (108) (1,222) 107 2

Corporate debt securities . . 57 3 — (116) 56 — —

Total trading securities ........ $12,765 $ 141 $ — $(2,142) $(1,903) $ 8,861 $101

Available-for-sale securities:

Mortgage-related:

Fannie Mae ............. $ 5,609 $ (47) $ 191 $ (569) $(4,588) $ 596 $ —

Freddie Mac . . . . . . . . . . . . 80 3 (6) (21) (29) 27 —

Ginnie Mae . . . . . . . . . . . . . 190 — 1 (7) (61) 123 —

Alt-A private-label

securities ............. 11,675 (1,717) 2,192 (1,554) (2,284) 8,312 —

Subprime private-label

securities ............. 14,318 (5,290) 4,862 (3,144) — 10,746 —

Mortgage revenue bonds . . . 12,456 (16) 1,349 (969) — 12,820 —

Other .................. 3,509 (81) 651 (549) — 3,530 —

Total available-for-sale

securities ................. $47,837 $(7,148) $9,240 $(6,813) $(6,962) $36,154 $ —

Guaranty assets and buy-ups .... $ 1,083 $ 466 $ 243 $ 785 $ — $ 2,577 $783

Net derivatives . . . . . . . . . . . . . . 310 (42) — (48) (97) 123 3

Long-term debt .............. (2,898) (18) — 1,791 524 (601) (49)

(1) Purchases and sales include activity related to the consolidation and deconsolidation of assets of securitization trusts.

(2) Issuances and settlements include activity related to the consolidation and deconsolidation of liabilities of securitization

trusts.

(3) Transfers out of Level 3 consisted primarily of Fannie Mae guaranteed mortgage-related securities and private-label

mortgage-related securities backed by Alt-A loans. Prices for these securities were obtained from multiple third-party

vendors supported by market observable inputs. Transfers into Level 3 consisted primarily of Fannie Mae guaranteed

mortgage-related securities and private-label mortgage-related securities backed by Alt-A loans. Prices for these

securities are based on inputs from a single source or inputs that were not readily observable.

(4) Amount represents temporary changes in fair value. Amortization, accretion and other-than-temporary impairments are

not considered unrealized and are not included in this amount.

F-117
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables display realized and unrealized gains and losses included in our consolidated statements of

operations and comprehensive loss for the years ended December 31, 2011, 2010 and 2009, for our Level 3 assets

and liabilities measured in our consolidated balance sheets at fair value on a recurring basis.

For the Year Ended December 31, 2011

Interest

Income

Fair Value

Losses, net

Net

Other-thanTemporary

Impairments Other Total

(Dollars in millions)

Total realized and unrealized (losses) gains included in net loss ...... $(327) $86 $(229) $13 $(457)

Net unrealized (losses) gains related to Level 3 assets and liabilities

still held as of December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3) $18 $ — $— $ 15

For the Year Ended December 31, 2010

Interest

Income

Fair Value

Losses, net

Net

Other-thanTemporaryImpairments Other Total

(Dollars in millions)

Total realized and unrealized gains (losses) included in net loss ....... $319 $416 $(480) $40 $295

Net unrealized gains related to Level 3 assets and liabilities still held as

of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 93 $ — $— $ 93

For the Year Ended December 31, 2009

Interest

Income

Investments

in Securities

Fee and

Other

Income

Fair Value

Losses, net

Net

Other-thanTemporaryImpairments Total

(Dollars in millions)

Total realized and unrealized gains (losses) included in net loss ..... $545 $466 $94 $(7,706) $(6,601)

Net unrealized gains related to level 3 assets and liabilities still held

as of December 31, 2009 .................................. $ — $783 $55 $ — $ 838

We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable

inputs. The following is a description of the valuation techniques we use for assets and liabilities measured at fair

value on a recurring basis, as well as our basis for classifying these assets and liabilities as Level 1, Level 2 or

Level 3. These valuation techniques are also used to estimate the fair value of financial instruments not carried at

fair value but disclosed as part of the fair value of financial instruments.

Cash Equivalents, Trading Securities and Available-for-Sale Securities—These securities are recorded in our

consolidated balance sheets at fair value on a recurring basis. Fair value is measured using quoted market prices

in active markets for identical assets, when available. Securities, such as U.S. Treasuries, whose value is based on

quoted market prices in active markets for identical assets are classified as Level 1. If quoted market prices in

active markets for identical assets are not available, we use prices provided by up to three third-party pricing

services that are calibrated to the quoted market prices in active markets for similar securities, and assets valued

in this manner are classified as Level 2. In the absence of prices provided by third-party pricing services

supported by observable market data, fair values are estimated using quoted prices of securities with similar

characteristics or discounted cash flow models that use inputs such as spread, prepayment speed, yield, and loss

severity based on market assumptions where available. Such instruments are generally classified as Level 2.

Where there is limited activity or less transparency around inputs to the valuation, securities are classified as

Level 3.

F-118
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Mortgage Loans Held for Investment—The majority of HFI performing loans and nonperforming loans that are

not individually impaired are reported in our consolidated balance sheets at the principal amount outstanding, net

of cost basis adjustments and an allowance for loan losses. We elected the fair value option for certain loans

containing embedded derivatives that would otherwise require bifurcation and consolidated loans of seniorsubordinate trust structures, which are recorded in our consolidated balance sheets at fair value on a recurring

basis.

Fair value of performing loans represents an estimate of the prices we would receive if we were to securitize

those loans and is determined based on comparisons to Fannie Mae MBS with similar characteristics, either on a

pool or loan level. We use the observable market values of our Fannie Mae MBS determined from third-party

pricing services and other observable market data as a base value, from which we add or subtract the fair value of

the associated guaranty asset, guaranty obligation and master servicing arrangement. We classify these valuations

primarily within Level 2 of the valuation hierarchy given that the market values of our Fannie Mae MBS are

calibrated to the quoted market prices in active markets for similar securities. To the extent that significant inputs

are not observable or determined by extrapolation of observable points, the loans are classified within Level 3.

Certain loans that do not qualify for Fannie Mae MBS securitization are valued using market-based data

including, for example, credit spreads, severities and prepayment speeds for similar loans, through third-party

pricing services or through a model approach incorporating both interest rate and credit risk simulating a loan

sale via a synthetic structure.

Fair value of single-family nonperforming loans represents an estimate of the prices we would receive if we were

to sell these loans in the nonperforming whole-loan market. We calculate the fair value of nonperforming loans

based on indicative bids received on a representative sample of nonperforming loans. The bids on the sample

loans are obtained from multiple active market participants. Fair value for loans that are four or more months

delinquent, in an open modification period, or in a closed modification and that have performed for nine or fewer

months are estimated by extrapolating from the indicative sample bids. Fair value for loans that are one to three

months delinquent is estimated by an interpolation method using three inputs: (1) the fair value estimate as

a performing loan; (2) the fair value estimate as a nonperforming loan; and (3) the delinquency transition rate

corresponding to the loan’s current delinquency status.

A portion of our single-family nonperforming loans are considered impaired and are measured at fair value in our

consolidated balance sheets on a nonrecurring basis. The fair value of these nonperforming loans is measured

using the value of the underlying collateral. These valuations leverage our proprietary distressed home price

model. The model assigns a value using comparable transaction data. In determining what comparables to use in

the calculations, the model measures three key characteristics relative to the target property: (1) distance from

target property, (2) time of the transaction and (3) comparability of the nondistressed value. These loans are

classified within Level 3 of the valuation hierarchy because significant inputs are unobservable.

Fair value of multifamily nonperforming loans is determined by external third-party valuations when available. If

third-party valuations are unavailable, we determine the value of the collateral based on a derived property value

estimation method using current net operating income of the property and capitalization rates.

Derivatives Assets and Liabilities (collectively “derivatives”)—Derivatives are recorded in our consolidated

balance sheets at fair value on a recurring basis. The valuation process for the majority of our risk management

derivatives uses observable market data provided by third-party sources, resulting in Level 2 classification.

Interest rate swaps are valued by referencing yield curves derived from observable interest rates and spreads to

project and discount swap cash flows to present value. Option-based derivatives use a model that projects the

probability of various levels of interest rates by referencing swaption and caplet volatilities provided by market

F-119
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

makers/dealers. The projected cash flows of the underlying swaps of these option-based derivatives are

discounted to present value using yield curves derived from observable interest rates and spreads. Exchangetraded futures are valued using market quoted prices, resulting in Level 1 classification. Certain highly complex

structured derivatives use only a single external source of price information due to lack of transparency in the

market and may be modeled using observable interest rates and volatility levels as well as significant

assumptions, resulting in Level 3 classification. Mortgage commitment derivatives use observable market data,

quotes and actual transaction price levels adjusted for market movement, and are typically classified as Level 2.

Adjustments for market movement based on internal model results that cannot be corroborated by observable

market data are classified as Level 3.

Guaranty Assets and Buy-ups—Guaranty assets related to our portfolio securitizations are recorded in our

consolidated balance sheets at fair value on a recurring basis and are classified within Level 3 of the valuation

hierarchy. Guaranty assets in lender swap transactions are recorded in our consolidated balance sheets at the

lower of cost or fair value. These assets, which are measured at fair value on a nonrecurring basis, are classified

within Level 3 of the fair value hierarchy.

We estimate the fair value of guaranty assets based on the present value of expected future cash flows of the

underlying mortgage assets using management’s best estimate of certain key assumptions, which include

prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. These cash

flows are projected using proprietary prepayment, interest rate and credit risk models. Because guaranty assets

are like an interest-only income stream, the projected cash flows from our guaranty assets are discounted using

one-month LIBOR plus the option-adjusted spread (“OAS”) for interest-only trust securities. The interest-only

OAS is calibrated using prices of a representative sample of interest-only trust securities. We believe the remitted

fee income is less liquid than interest-only trust securities and more like an excess servicing strip. We take a

further haircut of the present value for liquidity considerations. This discount is based on market quotes from

dealers.

The fair value of the guaranty assets includes the fair value of any associated buy-ups, which is estimated in the

same manner as guaranty assets but is recorded separately as a component of “Other assets” in our consolidated

balance sheets. While the fair value of the guaranty assets reflects all guaranty arrangements, the carrying value

primarily reflects only those arrangements entered into subsequent to our adoption of the accounting guidance on

guarantor’s accounting and disclosure requirements for guarantees.

Debt—The majority of debt of Fannie Mae is recorded in our consolidated balance sheets at the principal amount

outstanding, net of cost basis adjustments. We elected the fair value option for certain structured debt

instruments, which are recorded in our consolidated balance sheets at fair value on a recurring basis.

We use third-party pricing services that reference observable market data such as interest rates and spreads to

measure the fair value of debt, and thus classify that debt as Level 2. When third-party pricing is not available,

we use a discounted cash flow approach based on a yield curve derived from market prices observed for Fannie

Mae Benchmark Notes and adjusted to reflect fair values at the offer side of the market.

For structured debt instruments that are not valued by third-party pricing services, cash flows are evaluated

taking into consideration any structured derivatives through which we have swapped out of the structured

features of the notes. The resulting cash flows are discounted to present value using a yield curve derived from

market prices observed for Fannie Mae Benchmark Notes and adjusted to reflect fair values at the offer side of

the market. Market swaption volatilities are also referenced for the valuation of callable structured debt

instruments. Given that the derivatives considered in the valuations of these structured debt instruments are

classified as Level 3, the valuations of the structured debt instruments result in a Level 3 classification.

F-120
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Consolidated MBS debt is traded in the market as MBS assets. Accordingly, we estimate the fair value of our

consolidated MBS debt using quoted market prices in active markets for similar liabilities when traded as

assets. The valuation methodology and inputs used in estimating the fair value of MBS assets are described under

“Cash Equivalents, Trading Securities and Available-for-Sale Securities.” Certain consolidated MBS debt with

embedded derivatives is recorded in our consolidated balance sheets at fair value on a recurring basis.

Nonrecurring Changes in Fair Value

The following tables display assets and liabilities measured in our consolidated balance sheets at fair value on a

nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to

fair value adjustments in certain circumstances (for example, when we evaluate for impairment), and the gains or

losses recognized for these assets and liabilities for the years ended December 31, 2011, 2010 and 2009, as a

result of fair value measurements.

Fair Value Measurements

For the Year Ended December 31, 2011

For the Year

Ended

December 31, 2011

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Estimated

Fair

Value

Total Gains

(Losses)

(Dollars in millions)

Assets:

Mortgage loans held for sale, at lower of cost or

fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ 3 $ 197 $ 200(1) $ 12

Single-family mortgage loans held for

investment, at amortized cost:

Of Fannie Mae ....................... — — 44,592 44,592(2) (3,077)

Of consolidated trusts . . . . . . . . . . . . . . . . . . — — 882 882(2) (142)

Multifamily mortgage loans held for investment,

at amortized cost:

Of Fannie Mae ....................... — — 1,910 1,910(2) (348)

Acquired property, net:

Single-family .......................... — — 19,498 19,498(3) (2,639)

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 363 363(3) (87)

Other assets .............................. — — 1,537 1,537(4) (209)

Total assets at fair value . . . . . . . . . . . . . . . . . . $— $ 3 $68,979 $68,982 $(6,490)

F-121
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value Measurements

For the Year Ended December 31, 2010

For the Year

Ended

December 31, 2010

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Estimated

Fair

Value

Total

Losses

(Dollars in millions)

Assets:

Mortgage loans held for sale, at lower of cost or

fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $6,776 $ 535 $ 7,311(1)(5) $ (91)(5)

Single-family mortgage loans held for

investment, at amortized cost:

Of Fannie Mae ....................... — — 38,150 38,150(2) (2,244)

Of consolidated trusts .................. — — 1,294 1,294(2) (235)

Multifamily mortgage loans held for investment,

at amortized cost:

Of Fannie Mae ....................... — — 1,836 1,836(2) (481)

Acquired property, net:

Single-family .......................... — — 20,248 20,248(3) (2,617)

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 206 206(3) (65)

Other Assets:

Guaranty assets . . . . . . . . . . . . . . . . . . . . . . . . . — — 27 27 (6)

Partnership investments . . . . . . . . . . . . . . . . . . — — 107 107 (145)

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 597 597(4) (43)

Total assets at fair value . . . . . . . . . . . . . . . . . . $— $6,776 $63,000 $69,776 $(5,927)

F-122
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value Measurements

For the Year Ended December 31, 2009

For the Year

Ended

December 31, 2009

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Estimated

Fair

Value

Total

Losses

(Dollars in millions)

Assets:

Mortgage loans held for sale, at lower of cost or

fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $22,238 $ 3,557 $25,795(1) $(1,210)

Mortgage loans held for investment, at amortized

cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 330 4,820 5,150(2) (1,173)

Acquired property, net ..................... — — 10,132 10,132(3) (503)

Other assets:

Guaranty assets ......................... — — 2,327 2,327 (231)

Master servicing assets . . . . . . . . . . . . . . . . . . . — — 147 147 (546)

Partnership investments . . . . . . . . . . . . . . . . . . — — 212 212 (5,943)(6)

Total assets at fair value . . . . . . . . . . . . . . . . . . $— $22,568 $21,195 $43,763 $(9,606)

Liabilities:

Master servicing liabilities . . . . . . . . . . . . . . . . . . $— $ — $ 254 $ 254 $ (200)

Total liabilities at fair value . . . . . . . . . . . . . . . $— $ — $ 254 $ 254 $ (200)

(1) Includes $73 million, $7.1 billion and $15.1 billion of mortgage loans held for sale that were sold, liquidated,

deconsolidated, retained as a mortgage-related security or redesignated to mortgage loans held for investment as of

December 31, 2011, 2010 and 2009, respectively.

(2) Includes $8.1 billion, $3.4 billion and $1.1 billion of mortgage loans held for investment that were liquidated or

transferred to foreclosed properties as of December 31, 2011, 2010 and 2009, respectively.

(3) Includes $14.5 billion, $10.5 billion and $7.1 billion of acquired properties that were sold or transferred as of

December 31, 2011, 2010 and 2009, respectively.

(4) Includes $411 million and $22 million of other assets that were sold or transferred as of December 31, 2011 and 2010,

respectively.

(5) Includes $7.1 billion of estimated fair value and $68 million in losses due to the adoption of the consolidation accounting

guidance.

(6) Represents impairment charges related to LIHTC partnerships and other equity investments in multifamily properties. We

recognized other than temporary impairment losses of $5.5 billion related to LIHTC partnerships for the year ended

December 31, 2009.

The following is a description of the valuation techniques we use for assets and liabilities measured at fair value

on a nonrecurring basis under the accounting guidance for fair value measurements as well as our basis for

classifying these assets and liabilities as Level 1, Level 2 or Level 3. We also use these valuation techniques to

estimate the fair value of financial instruments not carried at fair value but disclosed as part of the fair value of

financial instruments.

F-123
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Mortgage Loans Held for Sale—Loans are reported at the lower of cost or fair value in our consolidated balance

sheets. The valuation methodology and inputs used in estimating the fair value of HFS loans are described under

“Mortgage Loans Held for Investment” and these loans are classified as Level 2 to the extent that significant

inputs are observable. To the extent that significant inputs are unobservable or determined by extrapolation of

observable points, the loans are classified within Level 3.

Acquired Property, Net and Other Assets—Acquired property, net mainly represents foreclosed property

received in full satisfaction of a loan net of a valuation allowance. Acquired property is initially recorded in our

consolidated balance sheets at its fair value less its estimated cost to sell. The initial fair value of foreclosed

properties is determined using a hierarchy based on the reliability of available information. The hierarchy

includes offers accepted, third-party interior appraisals, independent broker opinions, proprietary home price

model values and exterior broker price opinions. We consider an offer accepted on a specific foreclosed property

to be the best estimate of its fair value. If we have not accepted an offer on the property we use a third-party

valuation to determine fair value. Third-party valuation could be obtained from either an interior appraisal or an

interior broker price opinion. Interior appraisals and broker price opinions are performed by evaluating the

property based on both its interior and exterior condition. We obtain an updated third-party appraisal when a

material change has occurred to the condition of the property or when the property has been taken off the market

for an extended period of time.

When an accepted offer or a third-party valuation is not available, we generally utilize the home price values

using our proprietary model to determine fair value. Our proprietary home price model determines the value of a

property using comparable transactions after adjusting for factors such as location, time elapsed since the last

sale, and the condition of comparable properties. In certain cases where we do not have sufficient inputs to

generate model values, we obtain and rely on exterior third-party appraisals or exterior broker price opinions.

Exterior appraisals and exterior broker price opinions are performed by evaluating the property only from the

outside and are typically used when access to the property is restricted.

Appraisals and broker price opinions are kept current using a walk forward process that updates them for any

projected change in the value of the property. A majority of third-party values are updated by comparing the

difference in our proprietary home price model from the month of the original appraisal/broker price opinion to

the current period and by applying the resulting percentage change to the original value. If a price is not

determinable through our proprietary home price model, we use a home price index to update the appraisals. The

most commonly used methodologies in our valuation of acquired property are proprietary home price model and

both current and walked forward interior appraisals. Combined these comprise approximately 77% of the

population while accepted offers account for approximately 20% of the population.

Estimated cost to sell is based upon historical sales costs at a regional level. These costs primarily include broker

fees, title expenses, seller representation expenses, and recording and transfer expenses.

Subsequent to initial measurement, the foreclosed properties that we intend to sell are reported at the lower of the

carrying amount or fair value less estimated costs to sell. Foreclosed properties classified as held for use,

included in “Other assets” in our consolidated balance sheets, are depreciated and are impaired when

circumstances indicate that the carrying amount of the property is no longer recoverable. The fair values of our

single-family foreclosed properties are determined using the same hierarchy used at the point of determining

initial fair value. The fair value of our multifamily properties is derived using third-party valuations, including

appraisals and broker price opinions. When third-party valuations are not available, we estimate the fair value

using the current net operating income of the property and capitalization rates.

F-124
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Acquired property is classified within Level 3 of the valuation hierarchy because significant inputs are

unobservable.

Fair Value of Financial Instruments

The following table displays the carrying value and estimated fair value of our financial instruments as of

December 31, 2011 and 2010. The fair value of financial instruments we disclose includes commitments to

purchase multifamily and single-family mortgage loans which are off-balance sheet financial instruments that we do

not record in our consolidated balance sheets. The fair values of these commitments are included as “Mortgage

loans held for investment, net of allowance for loan losses.” The disclosure excludes certain financial instruments,

such as plan obligations for pension and postretirement health care benefits, employee stock option and stock

purchase plans, and also excludes all non-financial instruments. As a result, the fair value of our financial assets and

liabilities does not represent the underlying fair value of our total consolidated assets and liabilities.

As of

December 31, 2011 December 31, 2010

Carrying

Value

Estimated

Fair Value

Carrying

Value

Estimated

Fair Value

(Dollars in millions)

Financial assets:

Cash and cash equivalents and restricted cash ................... $ 68,336 $ 68,336 $ 80,975 $ 80,975

Federal funds sold and securities purchased under agreements to resell

or similar arrangements .................................. 46,000 46,000 11,751 11,751

Trading securities ......................................... 74,198 74,198 56,856 56,856

Available-for-sale securities ................................. 77,582 77,582 94,392 94,392

Mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 325 915 915

Mortgage loans held for investment, net of allowance for loan losses:

Of Fannie Mae .......................................... 322,825 294,996 358,698 319,367

Of consolidated trusts .................................... 2,575,485 2,652,025 2,564,107 2,610,145

Mortgage loans held for investment ........................... 2,898,310 2,947,021 2,922,805 2,929,512

Advances to lenders ....................................... 5,538 5,420 7,215 6,990

Derivative assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561 561 1,137 1,137

Guaranty assets and buy-ups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503 901 458 814

Total financial assets ....................................... $3,171,339 $3,220,344 $3,176,504 $3,183,342

Financial liabilities:

Federal funds purchased and securities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ 52 $ 51

Short-term debt:

Of Fannie Mae ......................................... 146,752 146,782 151,884 151,974

Of consolidated trusts .................................... 4,973 4,973 5,359 5,359

Long-term debt:

Of Fannie Mae ......................................... 585,692 613,983 628,160 649,684

Of consolidated trusts .................................... 2,452,455 2,596,657 2,411,597 2,514,929

Derivative liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 916 916 1,715 1,715

Guaranty obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 811 3,944 769 3,854

Total financial liabilities .................................... $3,191,599 $3,367,255 $3,199,536 $3,327,566

F-125
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following are valuation techniques for items not subject to the fair value hierarchy either because they are

not measured at fair value other than for the purpose of the above table or because they are only measured at fair

value at inception.

Financial Instruments for which fair value approximates carrying value—We hold certain financial instruments

that are not carried at fair value but for which the carrying value approximates fair value due to the short-term

nature and negligible credit risk inherent in them. These financial instruments include cash and cash equivalents,

federal funds and securities sold/purchased under agreements to repurchase/resell (exclusive of dollar roll

repurchase transactions) and the majority of advances to lenders.

Advances to Lenders—The carrying value for the majority of our advances to lenders approximates the fair value

due to the short-term nature of the specific instruments. Other instruments include loans for which the carrying

value does not approximate fair value. These loans are valued using collateral values of similar loans as a proxy.

Guaranty Obligations—The fair value of all guaranty obligations (“GO”), measured subsequent to their initial

recognition, is our estimate of a hypothetical transaction price we would receive if we were to issue our guaranty

to an unrelated party in a standalone arm’s-length transaction at the measurement date. We estimate the fair value

of the GO using our internal GO valuation models, which calculate the present value of expected cash flows

based on management’s best estimate of certain key assumptions such as current mark-to-market LTV ratios,

future house prices, default rates, severity rates and required rate of return. We further adjust the model values

based on our current market pricing when such transactions reflect credit characteristics that are similar to our

outstanding GO. While the fair value of the GO reflects all guaranty arrangements, the carrying value primarily

reflects only those arrangements entered into subsequent to our adoption of the accounting guidance on

guarantor’s accounting and disclosure requirements for guarantees.

Fair Value Option

We elected the fair value option for certain consolidated loans and debt instruments recorded in our consolidated

balance sheets as a result of consolidating VIEs. These instruments contain embedded derivatives that would

otherwise require bifurcation. Under the fair value option, we elected to carry these instruments at fair value

instead of bifurcating the embedded derivative from the respective loan or debt instrument.

We elected the fair value option for all long-term structured debt instruments that are issued in response to

specific investor demand and have interest rates that are based on a calculated index or formula and are

economically hedged with derivatives at the time of issuance. By electing the fair value option for these

instruments, we are able to eliminate the volatility in our results of operations that would otherwise result from

the accounting asymmetry created by recording these structured debt instruments at cost while recording the

related derivatives at fair value.

We elected the fair value option for the financial assets and liabilities of the consolidated senior-subordinate trust

structures. By electing the fair value option for these instruments, we are able to eliminate the volatility in our

results of operations that would otherwise result from different accounting treatment between loans at cost and

debt at cost.

Interest income for the mortgage loans is recorded in “Mortgage loans interest income” and interest expense for

the debt instruments is recorded in “Long-term debt interest expense” in our consolidated statements of

operations and comprehensive loss.

F-126
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table displays the fair value and unpaid principal balance of the financial instruments for which we

have made fair value elections as of December 31, 2011 and 2010.

As of December 31,

2011 2010

Loans of

Consolidated

Trusts(1)

Long-Term

Debt of

Fannie Mae

Long-Term

Debt of

Consolidated

Trusts(2)

Loans of

Consolidated

Trusts(1)

Long-Term

Debt of

Fannie Mae

Long-Term

Debt of

Consolidated

Trusts(2)

(Dollars in millions)

Fair value ...................... $3,611 $838 $3,939 $2,962 $893 $2,271

Unpaid principal balance ......... 4,122 712 4,012 3,456 829 2,572

(1) Includes nonaccrual loans with a fair value of $195 million and $219 million as of December 31, 2011 and 2010,

respectively. The difference between unpaid principal balance and the fair value of these nonaccrual loans as of

December 31, 2011 is $232 million. Includes loans that are 90 days past due with a fair value of $310 million and $369

million as of December 31, 2011 and 2010, respectively. The difference between unpaid principal balance and the fair

value of these 90 or more days past due loans as of December 31, 2011 is $262 million.

(2) Includes interest-only debt instruments with no unpaid principal balance and a fair value of $115 million and $151

million as of December 31, 2011 and 2010, respectively.

Changes in Fair Value under the Fair Value Option Election

The following table displays fair value gains and losses, net, including changes attributable to instrument-specific

credit risk, for loans and debt for which the fair value election was made. Amounts are recorded as a component

of “Fair value losses, net” in our consolidated statements of operations and comprehensive loss for the years

ended December 31, 2011, 2010 and 2009.

For the Year Ended December 31,

2011 2010 2009

Loans

Long-Term

Debt

Total

Losses Loans

Long-Term

Debt

Total

Losses

Long-Term

Debt

(Dollars in millions)

Changes in instrument-specific credit risk ...... $(215) $ 10 $(205) $ (58) $ (9) $ (67) $ 33

Other changes in fair value . . . . . . . . . . . . . . . . . . 79 (92) (13) (73) 14 (59) (64)

Fair value losses, net ..................... $(136) $(82) $(218) $(131) $ 5 $(126) $(31)

In determining the changes in the instrument-specific credit risk for loans, the changes in the associated creditrelated components of these loans, primarily the guaranty obligation, were taken into consideration with the

overall change in the fair value of the loans for which we elected the fair value option for financial instruments.

In determining the changes in the instrument-specific credit risk for debt, the changes in Fannie Mae debt spreads

to LIBOR that occurred during the period were taken into consideration with the overall change in the fair value

of the debt for which we elected the fair value option for financial instruments. Specifically, cash flows are

evaluated taking into consideration any derivatives through which Fannie Mae has swapped out of the structured

features of the notes and thus created a floating-rate LIBOR-based debt instrument. The change in value of these

LIBOR-based cash flows based on the Fannie Mae yield curve at the beginning and end of the period represents

the instrument-specific risk.

F-127
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

19. Commitments and Contingencies

We are party to various types of legal actions and proceedings, including actions brought on behalf of various

classes of claimants. We also are subject to regulatory examinations, inquiries and investigations and other

information gathering requests. In some of the matters, indeterminate amounts are sought. Modern pleading

practice in the U.S. permits considerable variation in the assertion of monetary damages or other relief.

Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state

only that the amount sought is sufficient to invoke the jurisdiction of the trial court. This variability in pleadings,

together with our and our counsel’s actual experience in litigating or settling claims, leads us to conclude that the

monetary relief that may be sought by plaintiffs bears little relevance to the merits or disposition value of claims.

On a quarterly and annual basis, we review relevant information about all pending legal actions and proceedings

for the purpose of evaluating and revising our contingencies, reserves and disclosures.

Legal actions and proceedings of all types are subject to many uncertain factors that generally cannot be

predicted with assurance. Accordingly, the outcome of any given matter and the amount or range of potential loss

at particular points in time is frequently difficult to ascertain. Uncertainties can include how fact finders will

evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and

appellate courts will apply the law. Disposition valuations are also subject to the uncertainty of how opposing

parties and their counsel view the evidence and applicable law. Further, FHFA adopted a regulation on June 20,

2011, which provides, in part, that while we are in conservatorship, FHFA will not pay claims by our current or

former shareholders, unless the Director of FHFA determines it is in the interest of the conservatorship. The

presence of this regulation and the Director of FHFA’s assertion that FHFA will not pay claims asserted in

certain cases discussed below while we are in conservatorship creates additional uncertainty in those cases.

We establish a reserve for those matters when a loss is probable and we can reasonably estimate the amount of

such loss. Reserves have been established for certain of the matters noted below. These reserves did not have a

material adverse effect on our financial statements. We note, however, that in light of the uncertainties involved

in such actions and proceedings, there is no assurance that the ultimate resolution of these matters will not

significantly exceed the reserves we have currently accrued.

For the remaining legal actions or proceedings, including those where there is only a reasonable possibility that a

loss may be incurred, we are not currently able to estimate the reasonably possible losses or ranges of losses and

we have not established a reserve with respect to those actions or proceedings. We are often unable to estimate

the possible losses or ranges of losses, particularly for proceedings that are in their early stages of development,

where plaintiffs seek substantial or indeterminate damages, where there may be novel or unsettled legal questions

relevant to the proceedings, or where settlement negotiations have not occurred or progressed. Further, as noted

above, FHFA’s regulation and the Director of FHFA’s assertion creates additional uncertainty with respect to

certain cases.

Given the uncertainties involved in any action or proceeding, regardless of whether we have established a

reserve, the ultimate resolution of certain of these matters may be material to our operating results for a particular

period, depending on, among other factors, the size of the loss or liability imposed and the level of our net

income or loss for that period. Based on our current knowledge with respect to the matters described below, we

believe we have valid defenses to the claims in these proceedings and intend to defend these matters vigorously

regardless of whether or not we have recorded a loss reserve.

In addition to the matters specifically described below, we are involved in a number of legal and regulatory

proceedings that arise in the ordinary course of business that we do not expect will have a material impact on our

F-128
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

business or financial condition. We have advanced fees and expenses of certain current and former officers and

directors in connection with various legal proceedings pursuant to indemnification agreements.

In re Fannie Mae Securities Litigation

Fannie Mae is a defendant in a consolidated class action lawsuit initially filed in 2004 and currently pending in

the U.S. District Court for the District of Columbia. In the consolidated complaint filed on March 4, 2005, lead

plaintiffs Ohio Public Employees Retirement System and State Teachers Retirement System of Ohio allege that

we and certain former officers, as well as our former outside auditor, made materially false and misleading

statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and SEC Rule 10b-5

promulgated thereunder. Plaintiffs contend that Fannie Mae’s accounting statements were inconsistent with

GAAP requirements relating to hedge accounting and the amortization of premiums and discounts, and seek

unspecified compensatory damages, attorneys’ fees, and other fees and costs. On January 7, 2008, the court

defined the class as all purchasers of Fannie Mae common stock and call options and all sellers of publicly traded

Fannie Mae put options during the period from April 17, 2001 through December 22, 2004. On October 17,

2008, FHFA, as conservator for Fannie Mae, intervened in this case. On August 18, 2011, the parties filed

various motions for summary judgment, which are fully briefed.

On October 7, 2011, FHFA, as conservator, filed a motion to stay this case for the duration of our

conservatorship based on a regulation FHFA adopted on June 20, 2011, which provides in part that while we are

in conservatorship, FHFA will not pay claims by our current or former shareholders, unless the Director of FHFA

determines it is in the interest of the conservatorship. The Acting Director of FHFA has determined it will not

pay the claims asserted in this case while we are in conservatorship. FHFA maintains, therefore, that continuing

litigation of this matter would be a waste of resources. FHFA’s motion was denied on November 14, 2011.

FHFA’s regulation has been challenged by lead plaintiffs in a separate lawsuit also pending in the U.S. District

Court for the District of Columbia.

In September and December, 2010, plaintiffs served expert reports claiming damages to plaintiffs under various

scenarios ranging cumulatively from $2.2 billion to $8.6 billion. Given the substantial and novel legal questions

that remain, including those raised by FHFA’s regulation and the Director of FHFA’s determination, we are

currently unable to estimate the reasonably possible loss or range of loss arising from this litigation.

2008 Class Action Lawsuits

Fannie Mae is a defendant in two consolidated class actions filed in 2008 and currently pending in the

U.S. District Court for the Southern District of New York—In re Fannie Mae 2008 Securities Litigation and In

re 2008 Fannie Mae ERISA Litigation. On February 11, 2009, the Judicial Panel on Multidistrict Litigation

ordered that the cases be coordinated for pretrial proceedings.

Given the early status of these matters, the absence of a specified demand or claim by the plaintiffs, and the

substantial and novel legal questions that remain, including those raised by FHFA’s regulation and the Director

of FHFA’s determination, we are currently unable to estimate the reasonably possible loss or range of loss arising

from these lawsuits.

In re Fannie Mae 2008 Securities Litigation

In a consolidated complaint filed on June 22, 2009, lead plaintiffs Massachusetts Pension Reserves Investment

Management Board and Boston Retirement Board (for common shareholders) and Tennessee Consolidated

Retirement System (for preferred shareholders) allege that we, certain of our former officers, and certain of our

underwriters violated Sections 12(a)(2) and 15 of the Securities Act of 1933. Lead plaintiffs also allege that we,

F-129
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

certain of our former officers, and our outside auditor, violated Sections 10(b) (and Rule 10b-5 promulgated

thereunder) and 20(a) of the Securities Exchange Act of 1934. Lead plaintiffs seek various forms of relief,

including rescission, damages, interest, costs, attorneys’ and experts’ fees, and other equitable and injunctive

relief. On October 13, 2009, the Court entered an order allowing FHFA to intervene.

On November 24, 2009, the Court granted the defendants’ motion to dismiss the Securities Act claims as to all

defendants. On September 30, 2010, the Court granted in part and denied in part the defendants’ motions to

dismiss the Securities Exchange Act claims. As a result of the partial denial, some of the Securities Exchange Act

claims remain pending against us and certain of our former officers. On October 14, 2010, we and certain other

defendants filed motions for reconsideration of those portions of the Court’s September 30, 2010 order denying

in part the defendants’ motions to dismiss. Fannie Mae filed its answer to the consolidated complaint on

December 31, 2010. Defendants’ motions for reconsideration were denied on April 11, 2011. On July 28, 2011

lead plaintiffs filed motions to certify a class of persons who, between November 8, 2006 and September 5, 2008,

inclusive, purchased or acquired (a) Fannie Mae common stock and options or (b) Fannie Mae preferred stock.

On February 1, 2012, plaintiffs sought leave to amend their complaint to add new factual allegations and the

court granted plaintiffs’ motion. Briefing on the pending motions for class certification will be held in abeyance

pending resolution of motions to dismiss the amended complaint.

In re 2008 Fannie Mae ERISA Litigation

In a consolidated complaint filed on September 11, 2009, plaintiffs allege that certain of our current and former

officers and directors, including former members of Fannie Mae’s Benefit Plans Committee and the

Compensation Committee of Fannie Mae’s Board of Directors, as fiduciaries of Fannie Mae’s Employee Stock

Ownership Plan (“ESOP”), breached their duties to ESOP participants and beneficiaries by investing ESOP funds

in Fannie Mae common stock when it was no longer prudent to continue to do so. Plaintiffs purport to represent a

class of participants and beneficiaries of the ESOP whose accounts invested in Fannie Mae common stock

beginning April 17, 2007. The plaintiffs seek unspecified damages, attorneys’ fees and other fees and costs, and

injunctive and other equitable relief. On November 2, 2009, defendants filed motions to dismiss these claims,

which are now fully briefed and remain pending. On November 2, 2011, we filed a letter notifying the court of

two recent decisions by the U.S. Court of Appeals for the Second Circuit that are relevant to defendants’ motions

to dismiss. On February 1, 2012, plaintiffs sought leave to amend their complaint to add new factual allegations

and the court granted plaintiffs’ motion.

Comprehensive Investment Services v. Mudd, et al.

This individual securities action was originally filed on May 13, 2009, by plaintiff Comprehensive Investment

Services, Inc. against certain of our former officers and directors, and certain of our underwriters in the U.S.

District Court for the Southern District of Texas. On July 7, 2009, this case was transferred to the Southern

District of New York for coordination with In re Fannie Mae 2008 Securities Litigation and In re 2008 Fannie

Mae ERISA Litigation. Plaintiff filed an amended complaint on May 11, 2011 against us, certain of our former

officers, and certain of our underwriters. The amended complaint alleges violations of Section 10(b) of the

Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; violations of Section 20(a) of the

Securities Exchange Act of 1934; and violations of the Texas Business and Commerce Code, common law fraud,

and negligent misrepresentation in connection with Fannie Mae’s May 2008 $2.0 billion offering of 8.25%

non-cumulative preferred Series T stock. Plaintiff seeks relief in the form of rescission, actual damages, punitive

damages, interest, costs, attorneys’ and experts’ fees, and other equitable and injunctive relief. On July 11, 2011,

defendants filed motions to dismiss the amended complaint, which are now fully briefed and remain pending. On

February 1, 2012, plaintiff sought leave to amend its complaint to add new factual allegations and the court

granted plaintiff’s motion.

F-130
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Given the preliminary stage of this lawsuit, the absence of a specified demand or claim by the plaintiff, and the

substantial and novel legal questions that remain, we are currently unable to estimate the reasonably possible loss

or range of loss arising from this litigation.

Smith v. Fannie Mae, et al.

This individual securities action was originally filed on February 25, 2010, by plaintiff Edward Smith against

Fannie Mae and certain of its former officers as well as several underwriters in the U.S. District Court for the

Central District of California. On April 12, 2010, this case was transferred to the Southern District of New York

for coordination with In re Fannie Mae 2008 Securities Litigation and In re 2008 Fannie Mae ERISA Litigation.

Plaintiff filed an amended complaint on April 19, 2011, which alleges violations of Section 10(b) of the

Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; violations of Section 20(a) of the

Securities Exchange Act of 1934; common law fraud and negligence claims; and California state law claims for

misrepresentation in connection with Fannie Mae’s December 2007 $7.0 billion offering of 7.75%

fixed-to-floating rate non-cumulative preferred Series S stock. Plaintiff seeks relief in the form of rescission,

actual damages (including interest), and exemplary and punitive damages. On July 11, 2011, defendants filed

motions to dismiss the amended complaint, which are now fully briefed and remain pending. On February 1,

2012, plaintiff sought leave to amend his complaint to add new factual allegations and the court granted

plaintiff’s motion.

Given the preliminary stage of this lawsuit, the absence of a specified demand or claim by the plaintiff, and the

substantial and novel legal questions that remain, we are currently unable to estimate the reasonably possible loss

or range of loss arising from this litigation.

Investigation by the Securities and Exchange Commission

On September 26, 2008, we received notice of an ongoing investigation into Fannie Mae by the SEC regarding

certain accounting and disclosure matters. On January 8, 2009, the SEC issued a formal order of investigation.

On December 15, 2011, we entered into a non-prosecution agreement with the SEC. The agreement requires us

to cooperate with the SEC in enforcement proceedings brought against certain of our former officers, but does

not require us to pay a monetary penalty.

Investigation by the Department of Justice

On March 15, 2010, we received a Grand Jury subpoena for documents in connection with a Department of

Justice investigation into Fannie Mae’s disclosure practices. Fannie Mae has completed its production of

documents in response to the subpoena.

Unconditional Purchase and Lease Commitments

We have unconditional commitments related to the purchase of loans and mortgage-related securities. These

include both on- and off-balance sheet commitments wherein a portion of these have been recorded as derivatives

in our consolidated balance sheets. Unfunded lending represents off-balance sheet commitments for the

unutilized portion of lending agreements entered into with multifamily borrowers.

We lease certain premises and equipment under agreements that expire at various dates through 2029. Some of

these leases provide for payment by the lessee of property taxes, insurance premiums, cost of maintenance and

other costs. Rental expenses for operating leases were $40 million, $35 million and $62 million for the years

ended December 31, 2011, 2010 and 2009, respectively.

F-131
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes by remaining maturity, non cancelable future commitments related to loan and

mortgage purchases, unfunded lending, operating leases, and other agreements as of December 31, 2011.

As of December 31, 2011

Loans and MortgageRelated Securities(1) Unfunded Lending Operating Leases Other(2)

(Dollars in millions)

2012 ...................................... $45,517 $66 $ 36 $ 92

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 17 25 43

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 18 11

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 4 15 —

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 11 —

Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 15 —

Total .................................... $45,530 $88 $120 $146

(1) Includes $45.4 billion, which have been accounted for as mortgage commitment derivatives.

(2) Includes purchase commitments for certain telecom services, computer software and services, and other agreements.

20. Selected Quarterly Financial Information (Unaudited)

The consolidated statements of operations for the quarterly periods in 2011 and 2010 are unaudited and in the

opinion of management include all adjustments, consisting of normal recurring adjustments, necessary for a fair

presentation of our consolidated statements of operations. The operating results for the interim periods are not

necessarily indicative of the operating results to be expected for a full year or for other interim periods.

F-132
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the 2011 Quarter Ended

March 31 June 30 September 30 December 31(1)

(Dollars and shares in millions, except per share amounts)

Interest income:

Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 284 $ 264 $ 274 $ 265

Available-for-sale securities .................................... 1,213 1,152 1,160 (248)

Mortgage loans .............................................. 35,590 35,333 34,334 33,205

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 25 26 38

Total interest income ........................................ 37,115 36,774 35,794 33,260

Interest expense:

Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 81 66 56

Long-term debt .............................................. 32,048 31,721 30,542 29,041

Total interest expense ....................................... 32,155 31,802 30,608 29,097

Net interest income ............................................. 4,960 4,972 5,186 4,163

Provision for loan losses ......................................... (10,587) (5,802) (4,159) (5,366)

Net interest (loss) income after provision for loan losses ................ (5,627) (830) 1,027 (1,203)

Investment gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 171 73 187

Other-than-temporary impairments ................................ (57) (28) (232) (297)

Noncredit portion of other-than-temporary impairments recognized in other

comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (28) (30) 351

Net other-than-temporary impairments ............................. (44) (56) (262) 54

Fair value gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 (1,634) (4,525) (751)

Debt extinguishment gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (43) (119) (83)

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 265 291 370

Non-interest income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570 (1,297) (4,542) (223)

Administrative expenses:

Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 310 323 283

Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 169 173 205

Occupancy expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 43 46 48

Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 47 49 69

Total administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605 569 591 605

(Benefit) provision for guaranty losses .............................. (33) 735 (8) 110

Foreclosed property expense (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 488 (478) 733 37

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 32 254 228

Total expenses ............................................... 1,412 858 1,570 980

Loss before federal income taxes .................................. (6,469) (2,985) (5,085) (2,406)

Provision (benefit) for federal income taxes .......................... 2 (93) — 1

Net loss ...................................................... (6,471) (2,892) (5,085) (2,407)

Less: Net (income) loss attributable to the noncontrolling interest . . . . . . — (1) — 1

Net loss attributable to Fannie Mae ................................ (6,471) (2,893) (5,085) (2,406)

Preferred stock dividends ........................................ (2,216) (2,282) (2,494) (2,622)

Net loss attributable to common stockholders ........................ $ (8,687) $ (5,175) $ (7,579) $ (5,028)

Loss per share—Basic and Diluted ................................. $ (1.52) $ (0.90) $ (1.32) $ (0.87)

Weighted-average common shares outstanding—Basic and Diluted ...... 5,698 5,730 5,760 5,760

(1) Includes an out-of-period adjustment of $933 million comprised of $1.2 billion to reduce “Interest Income:

Available-for-sale securities” offset by a $264 million reduction to “Other-than-temporary impairments” in our

consolidated statement of operations and comprehensive loss for the three months ended December 31, 2011.

F-133
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the 2010 Quarter Ended

March 31 June 30(1) September 30 December 31(2)

(Dollars and shares in millions, except per share amounts)

Interest income:

Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 315 $ 330 $ 310 $ 296

Available-for-sale securities ................................... 1,473 1,389 1,313 1,115

Mortgage loans ............................................. 37,619 37,632 36,666 35,666

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 41 31 35

Total interest income ....................................... 39,446 39,392 38,320 37,112

Interest expense:

Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 167 194 152

Long-term debt ............................................. 36,539 35,018 33,350 32,323

Total interest expense ...................................... 36,657 35,185 33,544 32,475

Net interest income ............................................ 2,789 4,207 4,776 4,637

Provision for loan losses ........................................ (11,939) (4,295) (4,696) (3,772)

Net interest (loss) income after provision for loan losses ............... (9,150) (88) 80 865

Investment gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 23 82 75

Other-than-temporary impairments ................................ (186) (48) (366) (94)

Noncredit portion of other-than-temporary impairments recognized in

other comprehensive loss ...................................... (50) (89) 40 71

Net other-than-temporary impairments ............................. (236) (137) (326) (23)

Fair value (losses) gains, net ..................................... (1,705) 303 525 366

Debt extinguishment losses, net .................................. (124) (159) (214) (71)

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 294 304 253

Non-interest (loss) income ..................................... (1,666) 324 371 600

Administrative expenses:

Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324 324 325 304

Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 260 305 183

Occupancy expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 40 43 46

Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 46 57 59

Total administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605 670 730 592

(Benefit) provision for guaranty losses ............................. (36) 69 78 83

Foreclosed property (income) expense ............................. (19) 487 787 463

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 224 196 277

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 780 1,450 1,791 1,415

(Loss) income before federal income taxes .......................... (11,596) (1,214) (1,340) 50

(Benefit) provision for federal income taxes ......................... (67) 9 (9) (15)

Net (loss) income .............................................. (11,529) (1,223) (1,331) 65

Less: Net (income) loss attributable to the noncontrolling interest . . . . . (1) 5 (8) 8

Net (loss) income attributable to Fannie Mae ........................ (11,530) (1,218) (1,339) 73

Preferred stock dividends ....................................... (1,527) (1,907) (2,116) (2,154)

Net loss attributable to common stockholders ........................ $(13,057) $ (3,125) $ (3,455) $ (2,081)

Loss per share—Basic and Diluted ................................ $ (2.29) $ (0.55) $ (0.61) $ (0.37)

Weighted-average common shares outstanding—Basic and Diluted ...... 5,692 5,694 5,695 5,696

(1) Includes out-of-period adjustment of $1.1 billion to provision for loan losses, reflecting our assessment of the

collectability of the receivable from the borrowers for preforeclosure property taxes and insurance.

(2) Includes settlement from Bank of America N.A. related to repurchase requests for residential mortgage loans of $1.3

billion.

F-134
FR009