UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

¥ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

OR

n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No.: 0-50231

Federal National Mortgage Association

(Exact name of registrant as specified in its charter)

Fannie Mae

Federally chartered corporation

(State or other jurisdiction of

incorporation or organization)

52-0883107

(I.R.S. Employer

Identification No.)

3900 Wisconsin Avenue, NW

Washington, DC

(Address of principal executive offices)

20016

(Zip Code)

Registrant’s telephone number, including area code:

(202) 752-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or

15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that

the registrant was required to file such reports), and (2) has been subject to such filing requirements for the

past 90 days. Yes ¥ No n

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 ¥ No n

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated 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. (Check one):

Large accelerated filer n Accelerated filer ¥ Non-accelerated filer n Smaller reporting company n

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes n No ¥

As of March 31, 2011, there were 1,119,602,427 shares of common stock of the registrant outstanding.
TABLE OF CONTENTS

Part I—Financial Information ...................................................... 1

Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Condensed Consolidated Statements of Operations and Comprehensive Loss . . . . . . . . . . . . . 85

Condensed Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Note 1—Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Note 2—Consolidations and Transfers of Financial Assets . . . . . . . . . . . . . . . . . . . . . . . . . 94

Note 3—Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

Note 4—Allowance for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

Note 5—Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

Note 6—Financial Guarantees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

Note 7—Acquired Property, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Note 8—Short-Term Borrowings and Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Note 9—Derivative Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

Note 10—Segment Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

Note 11—Regulatory Capital Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

Note 12—Concentration of Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

Note 13—Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

Note 14—Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . 1

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

Executive Summary ....................................................... 2

Legislative and Regulatory Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Critical Accounting Policies and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Consolidated Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Business Segment Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Consolidated Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Supplemental Non-GAAP Information—Fair Value Balance Sheets . . . . . . . . . . . . . . . . . . . . 42

Liquidity and Capital Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Off-Balance Sheet Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Impact of Future Adoption of New Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . 81

Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . 145

Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

i
PART II—Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 151

Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Item 4. [Removed and reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

ii
MD&A TABLE REFERENCE

Table Description Page

1 Expected Lifetime Profitability of Single-Family Loans Acquired in 1991 through the First

Quarter of 2011 ............................................................. 5

2 Single-Family Serious Delinquency Rates by Year of Acquisition ........................ 7

3 Credit Profile of Single-Family Conventional Loans Acquired ........................... 8

4 Credit Statistics, Single-Family Guaranty Book of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

5 Level 3 Recurring Financial Assets at Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

6 Summary of Condensed Consolidated Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

7 Analysis of Net Interest Income and Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

8 Rate/Volume Analysis of Changes in Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

9 Fair Value Gains (Losses), Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

10 Total Loss Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

11 Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves). . . . . . . 23

12 Nonperforming Single-Family and Multifamily Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

13 Credit Loss Performance Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

14 Single-Family Credit Loss Sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

15 Single-Family Business Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

16 Multifamily Business Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

17 Capital Markets Group Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

18 Capital Markets Group’s Mortgage Portfolio Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

19 Capital Markets Group’s Mortgage Portfolio Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

20 Summary of Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

21 Summary of Mortgage-Related Securities at Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

22 Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities. . . . . . . . . 39

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

Securities (Including Wraps) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

24 Changes in Risk Management Derivative Assets (Liabilities) at Fair Value, Net . . . . . . . . . . . . . . 42

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

Value of Net Assets (Net of Tax Effect) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

26 Supplemental Non-GAAP Consolidated Fair Value Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . 45

27 Activity in Debt of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

28 Outstanding Short-Term Borrowings and Long-Term Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

29 Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year . . . . . . . . . . . . . 51

30 Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year . . . . . . . . 52

31 Cash and Other Investments Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

32 Fannie Mae Credit Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

33 Composition of Mortgage Credit Book of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

34 Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

iii
Table Description Page

35 Delinquency Status of Single-Family Conventional Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

36 Serious Delinquency Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

37 Single-Family Conventional Serious Delinquency Rate Concentration Analysis . . . . . . . . . . . . . . 66

38 Statistics on Single-Family Loan Workouts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

39 Loan Modification Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

40 Single-Family Foreclosed Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

41 Single-Family Acquired Property Concentration Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

42 Multifamily Serious Delinquency Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

43 Multifamily Concentration Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

44 Multifamily Foreclosed Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

45 Mortgage Insurance Coverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

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

Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

47 Derivative Impact on Interest Rate Risk (50 Basis Points) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

iv
PART I—FINANCIAL INFORMATION

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

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

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

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

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

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

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

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

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

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

their impact on shareholders in our Annual Report on Form 10-K for the year ended December 31, 2010

(“2010 Form 10-K”) in “Business—Conservatorship and Treasury Agreements.”

You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations

(“MD&A”) in conjunction with our unaudited condensed consolidated financial statements and related notes

and the more detailed information in our 2010 Form 10-K.

This report contains forward-looking statements that are based on management’s current expectations and are

subject to significant uncertainties and changes in circumstances. Please review “Forward-Looking

Statements” for more information on the forward-looking statements in this report. Our actual results may

differ materially from those reflected in these forward-looking statements due to a variety of factors including,

but not limited to, those described in “Risk Factors” and elsewhere in this report and in “Risk Factors” in

our 2010 Form 10-K.

You can find a “Glossary of Terms Used in This Report” in the “MD&A” of our 2010 Form 10-K.

INTRODUCTION

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

liquidity, stability and affordability in the secondary mortgage market, where existing mortgage-related assets

are purchased and sold. Our charter does not permit us to originate loans or lend money directly to consumers

in the primary mortgage market. Our most significant activities are securitizing mortgage loans originated by

lenders into Fannie Mae mortgage-backed securities, which we refer to as Fannie Mae MBS, and purchasing

mortgage loans and mortgage-related securities for our mortgage portfolio. We use the term “acquire” in this

report to refer both to our securitization activity and our purchase activity.

We obtain funds to purchase mortgage-related assets for our mortgage portfolio by issuing a variety of debt

securities in the domestic and international capital markets. We also make other investments that increase the

supply of affordable housing.

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

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

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

specified conditions to maintain a positive net worth. The U.S. government does not guarantee our securities

or other obligations.

Our common stock was delisted from the New York Stock Exchange and the Chicago Stock Exchange on

July 8, 2010 and since then has been 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.

1
EXECUTIVE SUMMARY

Summary of Our Financial Performance for the First Quarter of 2011

Our financial results for the first quarter of 2011 reflect continued weakness in the housing and mortgage

markets, which remain under pressure from high levels of unemployment, underemployment and the

prolonged decline in home prices.

Comprehensive loss. Our total comprehensive loss for the first quarter of 2011 was $6.3 billion, consisting of

a net loss of $6.5 billion and other comprehensive income of $181 million. In comparison, we recognized a

total comprehensive loss of $435 million in the fourth quarter of 2010, consisting of net income of $65 million

and other comprehensive loss of $500 million, and a total comprehensive loss of $10.2 billion in the first

quarter of 2010, consisting of a net loss of $11.5 billion and other comprehensive income of $1.4 billion.

The change from net income in the fourth quarter of 2010 to net loss in the first quarter of 2011 was primarily

due to a $6.7 billion increase in credit-related expenses. Credit-related expenses consist of the provision for

loan losses, the provision for guaranty losses and foreclosed property expense. Our higher provision for loan

losses during the period was primarily driven by an increase in our total loss reserves due to: (1) a decline in

home prices and increase in initial charge-off severity during the period, (2) the number of loans that entered a

trial modification period during the quarter, (3) a decline in future expected home prices and (4) loans

continuing to remain delinquent for an extended period of time. In addition, the fourth quarter of 2010 reflects

a $1.2 billion reduction to credit-related expenses resulting from the resolution of outstanding repurchase

requests with Bank of America, N.A. and its affiliates.

The $5.1 billion decrease in our net loss in the first quarter of 2011 compared with the first quarter of 2010

was due primarily to a $2.2 billion increase in net interest income, driven by lower interest expense on debt;

$289 million in net fair value gains in the first quarter of 2011 compared with $1.7 billion in net fair value

losses in the first quarter of 2010, primarily due to fair value gains on derivatives and trading securities; and

an $842 million decrease in credit-related expenses, due to a decrease in our provision for loan losses. Other

comprehensive income in the first quarter of 2010 was primarily driven by a reduction in our unrealized loss

due to significantly improved fair value of available-for-sale securities.

Net worth. Our net worth deficit of $8.4 billion as of March 31, 2011 reflects the recognition of our total

comprehensive loss of $6.3 billion and our payment to Treasury of $2.2 billion in senior preferred stock

dividends during the first quarter of 2011. In May 2011, the Acting Director of FHFA submitted a request to

Treasury on our behalf for $8.5 billion to eliminate our net worth deficit.

In the first quarter of 2011, we received $2.6 billion in funds from Treasury to eliminate our net worth deficit

as of December 31, 2010. Upon receipt of the additional funds requested to eliminate our net worth deficit as

of March 31, 2011, the aggregate liquidation preference on the senior preferred stock will be $99.7 billion,

which will require an annualized dividend payment of $10.0 billion. This amount exceeds our reported annual

net income for each year since our inception. Through March 31, 2011, we have paid an aggregate of

$12.4 billion to Treasury in dividends on the senior preferred stock.

Total loss reserves. Our total loss reserves, which reflect our estimate of the probable losses we have

incurred in our guaranty book of business, increased to $72.1 billion as of March 31, 2011 from $66.3 billion

as of December 31, 2010. Our total loss reserve coverage to total nonperforming loans was 34.66% as of

March 31, 2011, compared with 30.85% as of December 31, 2010. The continued stress on a broad segment

of borrowers from persistent 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 several quarters. Further, the shift

in our nonperforming loan balance from loans in our collective reserve to loans that are individually impaired

has caused our coverage ratio to increase.

2
Providing Liquidity, Our Strong New Book of Business and Expected Losses on Single-Family Loans We

Acquired before 2009 (Our “Legacy” Book of Business)

In the first quarter of 2011, we continued our work to provide liquidity to the mortgage market, grow the

strong new book of business we have acquired since January 1, 2009, shortly after we entered into

conservatorship, and minimize our losses from delinquent loans.

• From January 1, 2009 to March 31, 2011, we acquired approximately 6,595,000 single-family

conventional loans, excluding delinquent loans we purchased from our MBS trusts, and we acquired

multifamily loans secured by multifamily properties with approximately 761,000 units.

• The single-family loans we have acquired since the beginning of 2009, which we refer to in this

discussion as our “new single-family book of business,” have a strong overall credit profile and are

performing well. We expect these loans will be profitable over their lifetime, by which we mean they will

generate more fee income than credit losses and administrative costs, as we discuss below in “Building a

Strong New Single-Family Book of Business—Expected Profitability of Our Single-Family Acquisitions.”

For further information, see “Table 2: Single-Family Serious Delinquency Rates by Year of Acquisition”

and “Table 3: Credit Profile of Single-Family Conventional Loans Acquired.”

• The vast majority of our realized credit losses in 2009, 2010 and the first quarter of 2011 were

attributable to single-family loans that we purchased or guaranteed from 2005 through 2008. While these

loans 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, we expect that our credit-related expenses will be

higher in 2011 than in 2010 as weakness in the housing and mortgage markets continues. We are taking a

number of actions to reduce our credit losses, which we discuss in our 2010 Form 10-K in “Business—

Executive Summary—Our Strategies and Actions to Reduce Credit Losses on Loans in our Single-Family

Guaranty Book of Business” and in “Risk Management—Credit Risk Management—Single-Family

Mortgage Credit Risk Management.”

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. Our future estimates of these amounts, as well as the actual amounts, may

differ materially from our current estimates and expectations as a result of home price changes, changes in

interest rates, unemployment, 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, other macro-economic variables, 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, or many other factors, including those discussed in “Risk Factors,”

“Forward-Looking Statements” and elsewhere in this report and in “Risk Factors” in our 2010 Form 10-K. For

example, if the economy were to enter a deep recession, we would expect actual outcomes to differ

substantially from our current expectations.

Providing Mortgage Market Liquidity

We support liquidity and stability in the secondary mortgage market, serving as a stable source of funds for

purchases of homes and multifamily rental housing and for refinancing existing mortgages. We provide this

financing through the activities of our three complementary businesses: our Single-Family business (“SingleFamily”), our Multifamily Mortgage business (“Multifamily”) and our Capital Markets group. Our Single3
Family and Multifamily businesses work with our lender customers, who deliver mortgage loans that we

purchase and securitize into Fannie Mae MBS. Our Capital Markets group manages our investment activity in

mortgage-related assets, funding investments primarily through proceeds we receive from the issuance of debt

securities in the domestic and international capital markets. The Capital Markets group also works with lender

customers to provide funds to the mortgage market through short-term financing and other activities, making

short-term use of our balance sheet. These financing activities include whole loan conduit transactions, early

funding transactions, Real Estate Mortgage Investment Conduit (“REMIC”) and other structured securitization

activities, and dollar rolls, which we describe in more detail in our 2010 Form 10-K in “Business—Business

Segments—Capital Markets Group.”

In the first quarter of 2011, we purchased or guaranteed approximately $189 billion in loans, measured by

unpaid principal balance, which includes approximately $20 billion in delinquent loans we purchased from our

single-family MBS trusts. Excluding delinquent loans purchased from our MBS trusts, our purchases and

guarantees enabled our lender customers to finance approximately 759,000 single-family conventional loans

and multifamily loans secured by multifamily properties with approximately 83,000 units.

We remained the largest single issuer of mortgage-related securities in the secondary market, with an

estimated market share of new single-family mortgage-related securities issuances of 48.6% during the first

quarter of 2011. In comparison, our estimated market share of new single-family mortgage-related securities

issuances was 49.0% in the fourth quarter of 2010 and 40.8% in the first quarter of 2010. If the Federal

Housing Administration (“FHA”) continues to be the lower-cost option for some consumers, and in some

cases the only option, for loans with higher loan-to-value (“LTV”) ratios, our market share could be adversely

impacted if the market shifts away from refinance activity, which is likely to occur when interest rates rise.

We remain a constant source of liquidity in the multifamily market. Currently, we own or guarantee

approximately one-fifth of the outstanding debt on multifamily properties.

Building a Strong New Single-Family Book of Business

Our new single-family book of business has a strong overall credit profile and is performing well. In this

section, we discuss our expectations for these loans and their performance to date.

Expected Profitability of Our Single-Family Acquisitions

While it is too early to know how loans in our new single-family book of business will ultimately perform,

given their strong credit risk profile, low levels of payment delinquencies shortly after acquisition, and low

serious delinquency rates, we expect that, over their lifetime, these loans will be profitable. Table 1 provides

information about whether we expect loans we acquired in 1991 through the first quarter of 2011 to be

profitable, and the percentage of our single-family guaranty book of business represented by these loans as of

March 31, 2011. The expectations reflected in Table 1 are based on the credit risk profile of the loans we have

acquired, which we discuss in more detail in “Table 3: Credit Profile of Single-Family Conventional Loans

Acquired” and in “Table 34: Risk Characteristics of Single-Family Conventional Business Volume and

Guaranty Book of Business.” These expectations are also based on numerous other assumptions, including our

expectations regarding home price declines set forth below in “Outlook.” As shown in Table 1, we expect

loans we have acquired in 2009, 2010 and the first quarter of 2011 to be profitable. If future macroeconomic

conditions turn out to be significantly more adverse than our expectations, these loans could become

unprofitable. For example, we believe that these loans would become unprofitable if home prices declined

more than 15% from their March 2011 levels over the next five years based on our home price index, which

would be an approximately 34% decline from their peak in the third quarter of 2006.

4
Table 1: Expected Lifetime Profitability of Single-Family Loans Acquired in 1991 through the First Quarter

of 2011

Acquisition Year

Expectation for 

Percentage of

Single-Family Guaranty

Book of Business

Profitability as of March 31, 2011

2010 Profitable

2011 to date

(three months)

Profitable

1991 to 2000 Profitable

2001 Profitable

2002 Profitable

2003 Profitable

2004 Break-even

2005 Not Profitable

2006 Not Profitable

2007 Not Profitable

2008 Not Profitable

2009 Profitable

Profitable

Profitable

19%

36%

45%

As Table 1 shows, the key years in which we acquired loans that we expect will be unprofitable are 2005

through 2008. The vast majority of our realized credit losses since the beginning of 2009 were attributable to

these loans. Although loans we acquired in 2004 were originated under more conservative acquisition policies

than loans we acquired from 2005 through 2008, our 2004 acquisitions were made during a time when home

prices were rapidly increasing, and their performance has suffered from the subsequent decline in home prices,

which continued in the first quarter of 2011. We currently expect these loans to perform close to break-even,

but changes in home prices, other economic conditions or borrower behavior could change our expectation

regarding whether these loans will be profitable.

Loans we have acquired since the beginning of 2009 comprised 45% of our single-family guaranty book of

business as of March 31, 2011. Our 2005 to 2008 acquisitions are becoming a smaller percentage of our

guaranty book of business, having decreased from 39% of our guaranty book of business as of December 31,

2010 to 36% as of March 31, 2011.

5
Serious Delinquency Rates by Year of Acquisition

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

become seriously delinquent within a short period of time after acquisition. Loans we acquired in 2009 and

2010 have experienced historically low levels of delinquencies shortly after their acquisition. Table 2 shows,

for single-family loans we acquired in each year from 2001 to 2010, the percentage that were seriously

delinquent (three or more months past due or in the foreclosure process) as of the end of the first quarter

following the acquisition year. Loans we acquired in 2011 are not included in this table because they were

originated so recently that they could not yet have become seriously delinquent. As Table 2 shows, the

percentage of our 2009 acquisitions that were seriously delinquent as of the end of the first quarter following

their acquisition year was more than seven times lower than the average comparable serious delinquency rate

for loans acquired in 2005 through 2008. For loans originated in 2010, this percentage was more than nine

times lower than the average comparable rate for loans acquired in 2005 through 2008. Table 2 also shows

serious delinquency rates for each year’s acquisitions as of March 31, 2011. Except for the most recent

acquisition years, whose serious delinquency rates are likely lower than they will be after the loans have aged,

Table 2 shows that the current serious delinquency rate generally tracks the trend of the serious delinquency

rate as of the end of the first quarter following the year of acquisition. Below the table we provide information

about the economic environment in which the loans were acquired, specifically home price appreciation and

unemployment levels.

6
Table 2: Single-Family Serious Delinquency Rates by Year of Acquisition SDQ Rate

0.0%

0.8%

1.6%

2.4%

3.2%

4.0%

4.8%

5.6%

6.4%

7.2%

8.0%

8.8%

9.6%

10.4%

11.2%

12.0%

12.8%

13.6%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 *

SDQ Rate as of March 31, 2011

SDQ Rate as of end of 1st quarter following

acquisition year

Home Price

Appreciation(1) 6.3% 7.5% 7.6% 10.7% 11.5% 2.7% (4.1)% (10.3)% (3.7)% (3.7)% (1.8)%

Unemployment

rate(2) 4.7% 5.8% 6.0% 5.5% 5.1% 4.6% 4.6% 5.8% 9.3% 9.6% 8.9%

2001 2002 2003 2004 2005 2006 2007 2008 2010 2009 2011 YTD

* For 2010, the serious delinquency rate as of March 31, 2011 is the same as the serious delinquency rate as of the end

of the first quarter following the acquisition year.

(1) Based on Fannie Mae’s Home Price Index (HPI), which measures average price changes based on repeat sales on the

same properties. For 2011, the data show an initial estimate based on purchase transactions in Fannie-Freddie

acquisition and public deed data available through the end of March 2011, supplemented by preliminary data that

became available in April 2011. Previously reported data has been revised to reflect additional available historical data.

Including subsequently available data may lead to materially different results.

(2) Based on the average national unemployment rates for each month reported in the labor force statistics current

population survey (CPS), Bureau of Labor Statistics.

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, on average and as discussed

below, by higher 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

7
payment features. As a result of the sharp declines in home prices, 34% of the loans that we acquired from

2005 through 2008 had mark-to-market LTV ratios that were greater than 100% as of March 31, 2011, which

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

borrower’s home. This percentage is higher when second lien loans secured by the same properties that secure

our 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. We

are taking a number of actions to reduce our credit losses. We discuss these actions and our strategy in our

2010 Form 10-K in “Business—Executive Summary—Our Strategies and Actions to Reduce Credit Losses on

Loans in our Single-Family Guaranty Book of Business” and in “MD&A—Risk Management—Credit Risk

Management—Single-Family Mortgage Credit Risk Management.”

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 we have acquired since January 1, 2009 have had better overall credit risk profiles at the time we

acquired them and their early performance has been strong. Our experience has been that loans with

characteristics such as lower original LTV ratios (that is, more equity held by the borrowers in the underlying

properties), higher FICO credit scores and more stable payments will perform better than loans with risk

characteristics such as higher original LTV ratios, lower FICO credit scores, Alt-A underwriting and payments

that may adjust over the term of the loan. Table 3 shows improvements in the credit risk profile of singlefamily loans we have acquired since January 1, 2009 compared to loans we acquired from 2005 through 2008.

Table 3: Credit Profile of Single-Family Conventional Loans Acquired(1)

Acquisitions from 2009

through the first quarter of 2011

Acquisitions from 2005

through 2008

Weighted average loan-to-value ratio at origination . . . . . 68% 73%

Weighted average FICO credit score at origination . . . . . 762 722

Fully amortizing, fixed-rate loans . . . . . . . . . . . . . . . . . . 95% 86%

Alt-A loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1% 14%

Interest-only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1% 12%

Original loan-to-value ratio H 90% . . . . . . . . . . . . . . . . 5% 11%

FICO credit score G 620 . . . . . . . . . . . . . . . . . . . . . . . . * 5%

* Represent less than 0.5% of the total acquisitions.

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

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

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

prior years reflect changes that we made to our pricing and eligibility standards, as well as changes that

mortgage insurers made to their eligibility standards. We discuss these changes in our 2010 Form 10-K in

“Business—Executive Summary—Our Expectations Regarding Profitability, the Single-Family Loans We

Acquired Beginning in 2009, and Credit Losses—Credit Profile of Our Single-Family Acquisitions.” In

addition, FHA’s role as the lower-cost option for some consumers for loans with higher LTV ratios has also

reduced our acquisitions of these types of loans. The credit risk profile of our acquisitions since the beginning

of 2009 has been influenced further by its significant percentage of refinanced loans. Refinanced loans

generally perform better than purchase money loans, as the borrower has demonstrated a desire to maintain

homeownership. As we discuss in “Outlook” below, we expect fewer refinancings in 2011 than in 2010.

In 2010 and 2011 our acquisitions of refinanced loans included a significant number of loans under our Refi

PlusTM initiative. Under Refi Plus we acquire refinancings of performing Fannie Mae loans that have current

LTV ratios up to 125% and, in some cases, lower FICO credit scores than we generally require. Refi Plus

8
loans reduce the borrowers’ monthly payments or are otherwise more sustainable than the borrowers’ old

loans. Our acquisitions under Refi Plus include our acquisitions under the Home Affordable Refinance

Program (“HARP”), which was established by the Administration to help borrowers who may be unable to

refinance the mortgage loan on their primary residence due to a decline in home values. The LTV ratios at

origination for our 2010 and 2011 acquisitions are higher than for our 2009 acquisitions, primarily due to our

acquisition of Refi Plus loans. The percentage of loans with LTV ratios at origination greater than 90% has

increased from 4% for 2009 acquisitions to 7% for 2010 acquisitions and 8% for acquisitions in the first

quarter of 2011.

Despite the increases in LTV ratios at origination associated with Refi Plus, the overall credit profile of our

2010 and 2011 acquisitions remains significantly stronger than the credit profile of our 2005 through 2008

acquisitions. Whether the loans we acquire in the future exhibit an overall credit profile similar to our

acquisitions since the beginning of 2009 will depend on a number of factors, including our future eligibility

standards and those of mortgage insurers, the percentage of loan originations representing refinancings, our

future objectives, government policy, and market and competitive conditions.

Expected Losses on Our Legacy Book of Business

The single-family credit losses we realized from January 1, 2009 through March 31, 2011, combined with the

amounts we have reserved for single-family credit losses as of March 31, 2011, as described below, total

approximately $120 billion. The vast 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 have not yet

realized, 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, we expect that our credit-related

expenses will be higher in 2011 than in 2010 as weakness in the housing and mortgage markets continues. We

also expect that future defaults on our legacy book of business and the resulting charge-offs will occur over a

period of years. In addition, given the large current 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 13: 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 MBS trusts reflected in our condensed consolidated balance sheets

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

reserves for credit losses, please see “Table 10: Total Loss Reserves.”

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

majority of the fair value losses were recorded prior to our adoption in 2010 of new accounting standards on

the transfers of financial assets and the consolidation of variable interest entities. Prior to our adoption of the

new standards, 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 to the extent that 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 charge-offs or foreclosure), yet these fair value

losses have already reduced the mortgage loan balances reflected in our condensed consolidated balance sheets

and have effectively been recognized in our condensed 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 credit losses on

the acquired loans in the future.

9
Credit Performance

Table 4 presents information for each of the last five quarters about the credit performance of mortgage loans

in our single-family guaranty book of business and actions taken by our servicers with borrowers to resolve

existing or potential delinquent loan payments. We refer to these actions as “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)

Q1

Full

Year Q4 Q3 Q2 Q1

2011 2010

(Dollars in millions)

As of the end of each period:

Serious delinquency rate(2) . . . . . . . . . . . . . 4.27% 4.48% 4.48% 4.56% 4.99% 5.47%

Nonperforming loans(3) . . . . . . . . . . . . . . . $206,098 $ 212,858 $212,858 $212,305 $217,216 $222,892

Foreclosed property inventory:

Number of properties . . . . . . . . . . . . . . . 153,224 162,489 162,489 166,787 129,310 109,989

Carrying value . . . . . . . . . . . . . . . . . . . $ 14,086 $ 14,955 $ 14,955 $ 16,394 $ 13,043 $ 11,423

Combined loss reserves(4) . . . . . . . . . . . . . $ 66,240 $ 60,163 $ 60,163 $ 58,451 $ 59,087 $ 58,900

Total loss reserves(5) . . . . . . . . . . . . . . . . . $ 70,466 $ 64,469 $ 64,469 $ 63,105 $ 64,877 $ 66,479

During the period:

Foreclosed property (number of properties):

Acquisitions(6). . . . . . . . . . . . . . . . . . . . 53,549 262,078 45,962 85,349 68,838 61,929

Dispositions . . . . . . . . . . . . . . . . . . . . . (62,814) (185,744) (50,260) (47,872) (49,517) (38,095)

Credit-related expenses(7). . . . . . . . . . . . . . $ 11,106 $ 26,420 $ 4,064 $ 5,559 $ 4,871 $ 11,926

Credit losses(8) . . . . . . . . . . . . . . . . . . . . . $ 5,604 $ 23,133 $ 3,111 $ 8,037 $ 6,923 $ 5,062

Loan workout activity (number of loans):

Home retention loan workouts(9). . . . . . . . . 60,959 440,276 89,691 113,367 132,192 105,026

Preforeclosure sales and deeds-in-lieu of

foreclosure . . . . . . . . . . . . . . . . . . . . . . 17,120 75,391 15,632 20,918 21,515 17,326

Total loan workouts . . . . . . . . . . . . . . . . . 78,079 515,667 105,323 134,285 153,707 122,352

Loan workouts as a percentage of

delinquent loans in our guaranty book of

business(10) . . . . . . . . . . . . . . . . . . . . . . 25.01% 37.30% 30.47% 37.86% 41.18% 31.59%

(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 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 singlefamily 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 that are on accrual status, 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.

(4) Consists of the allowance for loan losses for loans recognized in our condensed 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 condensed consolidated balance sheets and single-family loans that we have guaranteed under long-term

standby commitments.

10
For additional information on the change in our loss reserves see “Consolidated Results of Operations—CreditRelated 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 firstlien loans. See “Table 38: 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.

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.”

Housing and Mortgage Market and Economic Conditions

During the first quarter of 2011, the United States economic recovery continued at a very slow pace. The

U.S. gross domestic product, or GDP, rose by 1.8% on an annualized basis during the quarter, according to the

Bureau of Economic Analysis advance estimate. The overall economy gained an estimated 478,000 jobs in the

first quarter as a result of employment growth in the private sector. According to the U.S. Bureau of Labor

Statistics, as of March 2011, over the past 12 months there has been an increase of 1.3 million non-farm jobs.

The unemployment rate was 8.8% in March 2011, compared with 9.0% in January 2011, based on data from

the U.S. Bureau of Labor Statistics. Employment will likely need to post sustained improvement for an

extended period to have a positive impact on housing.

Housing activity remained weak during the first quarter of 2011. Although home sales during the quarter

increased modestly from the fourth quarter’s levels, sales of foreclosed homes and short sales (“distressed

sales”) represented an outsized portion of the market. Distressed sales accounted for 40% of existing home

sales in March 2011, up from 35% in March 2010, according to the National Association of REALTORS». In

the face of competition from distressed sales, sales of new homes remained very low.

The overall mortgage market serious delinquency rate has trended down since peaking in the fourth quarter of

2009 but has remained historically high, with an estimated four million loans seriously delinquent (90 days or

more past due or in the foreclosure process) as of December 31, 2010, based on the Mortgage Bankers

Association National Delinquency Survey. In March, the supply of single-family homes as measured by the

inventory/sales ratio remained above long-term average levels. Properties that are vacant and held off the

market, combined with the portion of properties backing seriously delinquent mortgages not currently listed

for sale, represent a significant shadow inventory putting downward pressure on home prices.

We estimate that home prices on a national basis declined by 1.8% in the first quarter of 2011 and have

declined by 22.5% 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. The decline in home prices

has left many homeowners with “negative equity” in their mortgages, which means their principal mortgage

balance exceeds the current market value of their home. According to CoreLogic, approximately 11 million, or

23%, of all residential properties with mortgages were in a negative equity position in the fourth quarter of

2010. This increases the risk that borrowers might walk away from their mortgage obligations, causing the

loans to become delinquent and proceed to foreclosure.

11
During the first quarter of 2011, the multifamily sector continued to improve due to increased rental demand

and improving job growth. Based on preliminary third-party data, we estimate that the national multifamily

vacancy rate on average fell by 25 basis points during the first quarter of 2011 to 7.0%, after having held

steady in the fourth quarter of 2010. In addition, it appears that asking rents increased in the first quarter of

2011 by an estimated 50 basis points on a national basis. As indicated by data from Axiometrics, Inc.,

multifamily concession rates, the rental discount rate as a percentage of asking rents, declined during the first

quarter of the year to 4.64% as of February 2011, after having increased during the fourth quarter of 2010 to

end the year at 5.07%. The increase in rental demand is also reflected in an estimated increase of 44,000 units

in the number of occupied rental units during the first three months of 2011, according to preliminary data

from REIS, Inc. National multifamily fundamentals, which generally include factors such as effective rents,

vacancy rates, supply and demand, job growth, and demographic trends, continued to improve in the first

quarter. However, certain local markets and properties continue to exhibit weak fundamentals.

Outlook

Overall Market Conditions. We expect weakness in the housing and mortgage markets to continue in 2011.

The high level of delinquent mortgage loans will result in the foreclosure of troubled loans, which is likely to

add to the excess housing inventory. Home sales are unlikely to rise before the unemployment rate improves

further. In addition, servicer foreclosure process deficiencies and their consequences have created uncertainty

for potential home buyers, because foreclosed homes account for a substantial part of the existing home

market. Thus, widespread concerns about foreclosure process deficiencies could suppress home sales in the

near term and interfere with the housing recovery.

We expect that single-family default and severity rates, as well as the level of single-family foreclosures, will

remain high in 2011. Despite signs of multifamily sector improvement at the national level, we expect

multifamily charge-offs in 2011 to remain commensurate with 2010 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 the pace of our loan acquisitions for the remainder of 2011 will be significantly lower than in 2010

and the first quarter of 2011, primarily because we expect fewer refinancings as a result of increasing

mortgage rates and, to a lesser extent, the high number of mortgages that have already refinanced to low rates

in recent years. To the extent our acquisitions decline, we will receive fewer risk-based fees, which are

charged at loan acquisition and recognized over time; as a result, our future revenues will be negatively

impacted. We estimate that total originations in the U.S. single-family mortgage market in 2011 will decrease

from 2010 levels by approximately one-third, from an estimated $1.5 trillion to an estimated $1.0 trillion, and

that the amount of originations in the U.S. single-family mortgage market that are refinancings will decline

from approximately $1.1 trillion to approximately $413 billion. Refinancings comprised approximately 82% of

our single-family business volume in the first quarter of 2011, compared with 78% for all of 2010.

Home Price Declines. We expect that home prices on a national basis will decline further, with greater

declines in some geographic areas than others, before stabilizing in late 2011. We now expect that the

peak-to-trough home price decline on a national basis will range between 22% and 29%, as compared with

our expectation at the time we filed our 2010 Form 10-K that the peak-to-trough home price decline on a

national basis would range between 21% and 26%. These estimates 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. These estimates also contain significant inherent uncertainty in

the current market environment regarding a variety of critical assumptions we make when formulating these

estimates, including the effect of actions the federal government has taken and may take with respect to

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.

12
Our 22% to 29% 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 declines on

higher priced homes to have a greater effect on the overall result; and (2) our estimates attempt to exclude

sales of foreclosed homes because we believe that differing maintenance practices and the forced nature of the

sales make foreclosed home prices less representative of market values, whereas the S&P/Case-Shiller index

includes foreclosed homes sales. The S&P/Case-Shiller comparison numbers are calculated using our models

and assumptions, but modified to account for weighting based on property value and the impact of 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/Case-Shiller index provided above are not modified to

account for this data pool difference. We are working on enhancing our home price estimates to identify and

exclude a greater portion of foreclosed home sales. When we begin reporting these enhanced home price

estimates, we expect that some period to period comparisons of home prices may differ from those determined

using our current estimates.

Credit-Related Expenses and Credit Losses. We expect that our credit-related expenses and our credit losses

will be higher in 2011 than in 2010. We describe our credit loss outlook above under “Providing Liquidity,

Our Strong New Book of Business and Expected Losses on Single-Family Loans We Acquired before 2009—

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. 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 we will

continue to be in existence, 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. On February 11, 2011 Treasury and the Department of

Housing and Urban Development (“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 Freddie Mac. The report emphasizes the importance of providing

the necessary financial support to Fannie Mae and Freddie Mac during the transition period. We cannot predict

the prospects for the enactment, timing or content of legislative proposals regarding long-term reform of the

GSEs. Please see “Legislation and GSE Reform” in this report and in our 2010 Form 10-K for a discussion of

recent legislative reform of the financial services industry, and proposals for GSE reform, that could affect our

business and “Risk Factors” for a discussion of the risks to our business relating to the uncertain future of our

company.

LEGISLATIVE AND REGULATORY DEVELOPMENTS

GSE Reform

As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), on

February 11, 2011, Treasury and HUD released their report to Congress on ending the conservatorships of

Fannie Mae and Freddie Mac and reforming the 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.

13
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 Federal Housing Finance Regulatory Reform

Act of 2008 (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

private mortgage guarantors. Each of these options assumes the continued presence of programs operated by

FHA, the Department of Agriculture and the Veterans Administration 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 quarterly report on

Form 10-Q.

We expect that Congress will continue to hold hearings and consider legislation in 2011 on the future status of

Fannie Mae and Freddie Mac. In both the House of Representatives and the Senate, legislation has been

introduced that would require FHFA to make a determination within two years of enactment whether the

GSEs were financially viable and, if the GSEs were determined to be not 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 their existing and ongoing liabilities.

In the House of Representatives, the Subcommittee on Capital Markets and Government Sponsored Enterprises

of the Financial Services Committee has also approved several specific bills relating to GSE operations,

including the following: (1) suspending current compensation packages and applying a government pay scale

for GSE employees; (2) requiring the GSEs to increase guarantee fees; (3) subjecting GSE loans to the risk

retention standards in the Dodd-Frank Act; (4) requiring a quicker reduction of GSE portfolios than required

under the senior preferred stock purchase agreement; (5) requiring Treasury to pre-approve all GSE debt

issuances; (6) repealing the GSEs’ affordable housing goals; and (7) prohibiting FHFA from approving any

new GSE products during conservatorship or receivership, with certain exceptions.

We expect additional legislation relating to the GSEs to be introduced and considered by Congress in 2011.

We cannot predict the prospects for the enactment, timing or content of legislative proposals regarding the

future status of the GSEs.

In sum, there continues to be uncertainty regarding the future of our company, including how long we will

continue to be in existence, 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. Please see “Risk Factors” for a discussion of the risks to our business relating to the uncertain

future of our company.

Proposed Rules Implementing the Dodd-Frank Act

Below we describe some rules that have been proposed by various government agencies to implement

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.

14
Risk Retention. 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 the risk retention requirements established by the Dodd-Frank

Act. 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.

Ability to Repay. On April 19, 2011, the Federal Reserve Board issued a proposed rule pursuant to the DoddFrank 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, 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.

Derivatives. On April 12, 2011, the Federal Reserve Board, the Federal Deposit Insurance Corporation,

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. On April 28, 2011, the Commodity Futures Trading Commission proposed rules under the

Dodd-Frank Act governing 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”).

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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of

judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and

expenses in the condensed consolidated financial statements. Understanding our accounting policies and the

extent to which we use management judgment and estimates in applying these policies is integral to

understanding our financial statements. We describe our most significant accounting policies in “Note 1,

Summary of Significant Accounting Policies” of this report and in our 2010 Form 10-K.

We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and

update them as necessary based on changing conditions. Management has discussed any significant changes in

judgments and assumptions in applying our critical accounting policies with the Audit Committee of our

Board of Directors. 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

15
reasonably different estimates and assumptions could have a material impact on our reported results of

operations or financial condition. These critical accounting policies and estimates are as follows:

• Fair Value Measurement

• Total Loss Reserves

• Other-Than-Temporary Impairment of Investment Securities

See “MD&A—Critical Accounting Policies and Estimates” in our 2010 Form 10-K for a detailed discussion

of these critical accounting policies and estimates. We provide below information about our Level 3 assets and

liabilities as of March 31, 2011 as compared with December 31, 2010.

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 13, Fair Value.”

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- and asset-backed securities and

residual interests, certain mortgage loans, certain acquired property, certain long-term debt arrangements and

certain highly structured, complex derivative instruments.

Table 5 presents a comparison, by balance sheet category, of the amount of financial assets carried in our

condensed consolidated balance sheets at fair value on a recurring basis (“recurring asset”) that were classified

as Level 3 as of March 31, 2011 and December 31, 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

Balance Sheet Category

March 31,

2011

December 31,

2010

As of

(Dollars in millions)

Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,981 $ 4,576

Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,762 31,934

Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,221 2,207

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 247

Level 3 recurring assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,203 $ 38,964

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,227,042 $3,221,972

Total recurring assets measured at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 155,996 $ 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 . . . . . 24% 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

16
assets totaled $42.7 billion during the quarter ended March 31, 2011 and $63.0 billion during the year ended

December 31, 2010.

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 $1.1 billion as of March 31, 2011 and $1.0 billion as of December 31, 2010, and

other liabilities with a fair value of $121 million as of March 31, 2011 and $143 million as of December 31,

2010.

CONSOLIDATED RESULTS OF OPERATIONS

In this section we discuss our condensed consolidated results of operations for the periods indicated. You

should read this section together with our condensed consolidated financial statements, including the

accompanying notes.

Table 6 summarizes our condensed consolidated results of operations for the periods indicated.

Table 6: Summary of Condensed Consolidated Results of Operations

2011 2010 Variance

For the

Three Months Ended

March 31,

(Dollars in millions)

Net interest income .......................................... $ 4,960 $ 2,789 $2,171

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 233 4

Net revenues ............................................... $ 5,197 $ 3,022 $2,175

Investment gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 166 (91)

Net other-than-temporary impairments ............................ (44) (236) 192

Fair value gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 (1,705) 1,994

Administrative expenses ....................................... (605) (605) —

Credit-related expenses(1) ...................................... (11,042) (11,884) 842

Other non-interest expenses(2) ................................... (339) (354) 15

Loss before federal income taxes ................................ (6,469) (11,596) 5,127

Benefit (provision) for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . (2) 67 (69)

Net loss ................................................... (6,471) (11,529) 5,058

Less: Net income attributable to the noncontrolling interest . . . . . . . . . . . . . — (1) 1

Net loss attributable to Fannie Mae ............................. $ (6,471) $(11,530) $5,059

(1) Consists of provision for loan losses, reserve for guaranty losses, and foreclosed property income (expense).

(2) Consists of debt extinguishment losses, net and other expenses.

Net Interest Income

Table 7 presents 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 used a

daily weighted average of amortized cost. When daily average balance information was not available, such as

for mortgage loans, we used monthly averages. Table 8 presents 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 interestearning assets and interest-bearing liabilities or (2) changes in the interest rates of these assets and liabilities.

In the fourth quarter of 2010, we changed the presentation to distinguish the change in net interest income of

Fannie Mae from the change in net interest income of consolidated trusts. We have revised the presentation of

results for prior periods to conform to the current period presentation.

17
Table 7: Analysis of Net Interest Income and Yield

Average

Balance

Interest

Income/

Expense

Average

Rates

Earned/Paid

Average

Balance

Interest

Income/

Expense

Average

Rates

Earned/Paid

2011 2010

For the Three Months Ended March 31,

(Dollars in millions)

Interest-earning assets:

Mortgage loans of Fannie Mae(1) . . . . $ 405,820 $ 3,725 3.67% $ 276,346 $ 3,298 4.77%

Mortgage loans of consolidated

trusts(1) . . . . . . . . . . . . . . . . . . . . . 2,598,508 31,865 4.91 2,713,611 34,321 5.06

Total mortgage loans . . . . . . . . . . . 3,004,328 35,590 4.74 2,989,957 37,619 5.03

Mortgage-related securities. . . . . . . . . 334,057 4,245 5.08 435,754 5,550 5.09

Elimination of Fannie Mae MBS held

in portfolio . . . . . . . . . . . . . . . . . . (214,370) (2,793) 5.21 (286,701) (3,799) 5.30

Total mortgage-related securities,

net . . . . . . . . . . . . . . . . . . . . . . 119,687 1,452 4.85 149,053 1,751 4.70

Non-mortgage securities(2) . . . . . . . . . 79,719 45 0.23 66,860 37 0.22

Federal funds sold and securities

purchased under agreements to

resell or similar arrangements . . . . . 13,743 7 0.20 40,061 21 0.21

Advances to lenders . . . . . . . . . . . . . 4,089 21 2.05 2,512 18 2.87

Total interest-earning assets . . . . . . . . . . $3,221,566 $37,115 4.61% $3,248,443 $39,446 4.86%

Interest-bearing liabilities:

Short-term debt(3) . . . . . . . . . . . . . . . $ 138,848 $ 104 0.30% $ 185,042 $ 116 0.25%

Long-term debt . . . . . . . . . . . . . . . . . 631,917 4,196 2.66 564,875 5,081 3.60

Total short-term and long-term

funding debt . . . . . . . . . . . . . . . 770,765 4,300 2.23 749,917 5,197 2.77

Debt securities of consolidated trusts . . 2,652,024 30,648 4.62 2,758,387 35,259 5.11

Elimination of Fannie Mae MBS held

in portfolio . . . . . . . . . . . . . . . . . . (214,370) (2,793) 5.21 (286,701) (3,799) 5.30

Total debt securities of consolidated

trusts held by third parties . . . . . . 2,437,654 27,855 4.57 2,471,686 31,460 5.09

Total interest-bearing liabilities . . . . . . . $3,208,419 $32,155 4.01% $3,221,603 $36,657 4.55%

Impact of net non-interest bearing

funding . . . . . . . . . . . . . . . . . . . . . . $ 13,147 0.02% $ 26,840 0.03%

Net interest income/net interest yield . . . $ 4,960 0.62% $ 2,789 0.34%

Net interest income/net interest yield of

consolidated trusts(4) . . . . . . . . . . . . . $ 1,217 0.19% $ (938) (0.14)%

Selected benchmark interest rates at

end of period:(5)

3-month LIBOR . . . . . . . . . . . . . . . . 0.30% 0.29%

2-year swap interest rate . . . . . . . . . . 1.00 1.19

5-year swap interest rate . . . . . . . . . . 2.47 2.73

30-year Fannie Mae MBS par coupon

rate . . . . . . . . . . . . . . . . . . . . . . . 4.30 4.51

(1) Interest income includes interest income on acquired credit-impaired loans of $486 million and $587 million for the

three months ended March 31, 2011 and 2010, respectively. These amounts include accretion income of $231 million

and $266 million for the three months ended March 31, 2011 and 2010, 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.

(2) Includes cash equivalents.

(3) Includes federal funds purchased and securities sold under agreements to repurchase.

(4) 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.

(5) Data from British Bankers’ Association, Thomson Reuters Indices and Bloomberg.

18
Table 8: Rate/Volume Analysis of Changes in Net Interest Income

Total

Variance Volume Rate

Variance Due to:(1)

For the Three Months Ended

March 31, 2011 vs. 2010

(Dollars in millions)

Interest income:

Mortgage loans of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 427 $ 1,306 $ (879)

Mortgage loans of consolidated trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,456) (1,430) (1,026)

Total mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,029) (124) (1,905)

Mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,305) (1,292) (13)

Elimination of Fannie Mae MBS held in portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,006 943 63

Total mortgage-related securities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (299) (349) 50

Non-mortgage securities(2) ........................................... 8 7 1

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

arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14) (13) (1)

Advances to lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 9 (6)

Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,331) (470) (1,861)

Interest expense:

Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) (32) 20

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (885) 554 (1,439)

Total short-term and long-term funding debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (897) 522 (1,419)

Debt securities of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,611) (1,322) (3,289)

Elimination of Fannie Mae MBS held in portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,006 943 63

Total debt securities of consolidated trusts held by third parties . . . . . . . . . . . . . . . . (3,605) (379) (3,226)

Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,502) 143 (4,645)

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,171 $ (613) $ 2,784

(1) Combined rate/volume variances are allocated to both rate and volume based on the relative size of each variance.

(2) Includes cash equivalents.

Net interest income increased in the first quarter of 2011, as compared with the first quarter of 2010, due to

lower interest expense on debt, which was partially offset by lower interest income on loans and securities.

The primary drivers of this change were:

• a reduction in the interest expense on debt of consolidated trusts as we purchased the majority of

delinquent loans from our MBS trusts after the first quarter of 2010;

• lower interest expense on funding debt as lower borrowing rates allowed us to replace higher-cost debt

with lower-cost debt;

• a decrease in volume 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 from 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 on our condensed consolidated

balance sheets as we continue to complete a high number of loan modifications and foreclosures.

For the first quarter of 2011, interest income that we did not recognize for nonaccrual mortgage loans, net of

recoveries, was $1.6 billion, which resulted in a 20 basis point reduction in net interest yield, compared with

$2.7 billion for the first quarter of 2010, which resulted in a 33 basis point reduction in net interest yield. Of

19
the $1.6 billion of interest income that we did not recognize for nonaccrual mortgage loans for the first quarter

of 2011, $1.4 billion was related to the unsecuritized mortgage loans that we owned during the period. Of the

$2.7 billion of interest income that we did not recognize for nonaccrual mortgage loans for the first quarter of

2010, $566 million was related to the unsecuritized mortgage loans that we own.

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.”

Fair Value Gains (Losses), Net

Table 9 presents the components of our fair value gains and losses.

Table 9: Fair Value Gains (Losses), Net

2011 2010

For the Three Months

Ended March 31,

(Dollars in millions)

Risk management derivatives fair value gains (losses) attributable to:

Net contractual interest expense accruals on interest rate swaps . . . . . . . . . . . . . . . . . . . . $(635) $ (835)

Net change in fair value during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 751 (1,326)

Total risk management derivatives fair value gains (losses), net . . . . . . . . . . . . . . . . . . 116 (2,161)

Mortgage commitment derivatives fair value gains (losses), net . . . . . . . . . . . . . . . . . . . . . . 23 (601)

Total derivatives fair value gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 (2,762)

Trading securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 1,058

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (75) (1)

Fair value gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 289 $(1,705)

2011 2010

5-year swap interest rate:

As of January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.18% 2.98%

As of March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.47 2.73

Risk Management Derivatives Fair Value Gains (Losses), Net

We supplement our issuance of debt securities with derivative instruments to further reduce duration and

prepayment risks. We recorded risk management derivative fair value gains in the first quarter of 2011

primarily as a result of an increase in the fair value of our pay-fixed derivatives due to an increase in swap

interest rates during the first quarter of 2011, which was partially offset by fair value losses due to time decay

on our purchased options.

We recorded risk management derivative losses in the first quarter of 2010 as a result of: (1) a decrease in

implied interest rate volatility, which reduced the fair value of our purchased options; (2) a decrease in the fair

value of our pay-fixed derivatives due to a decline in swap interest rates; and (3) time decay on our purchased

options.

We present, by derivative instrument type, the fair value gains and losses on our derivatives for the three

months ended March 31, 2011 and 2010 in “Note 9, Derivative Instruments.”

Mortgage Commitment Derivatives Fair Value Gains (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

20
changes in their fair value in our condensed 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 gains on our mortgage commitments in the first quarter of 2011 primarily due to gains on

commitments to sell mortgage-related securities as a result of a decrease in prices as interest rates increased

during the commitment period.

We recognized losses on our mortgage commitments in the first quarter of 2010 primarily due to losses on

commitments to sell mortgage-related securities as a result of an increase in prices as interest rates decreased

during the commitment period.

Trading Securities Gains (Losses), Net

The gains from our trading securities in the first quarter of 2011 and 2010 were primarily driven by the

narrowing of credit spreads on commercial mortgage-backed securities (“CMBS”); gains in the first quarter of

2010 were also driven by a decrease in interest rates.

Credit-Related Expenses

We refer to our provision for loan losses and the 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 as of

each balance sheet date. We establish our loss reserves through the 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, which results

in an increase to our loss reserves.

Table 10 displays the components of our total loss reserves and our total fair value losses previously

recognized on loans purchased out of MBS trusts reflected in our condensed consolidated balance sheets.

Because these fair value losses lowered our recorded loan balances, we have fewer inherent losses in our

guaranty book of business and consequently require lower total loss reserves. For these reasons, we consider

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

to realize credit losses on the acquired loans in the future. We estimate that approximately two-thirds of this

amount, as of March 31, 2011, represents credit losses we expect to realize in the future and approximately

one-third will eventually be recovered through our condensed consolidated statements of operations and

comprehensive loss, primarily as net interest income if the loan cures or as foreclosed property income if the

sale of the collateral exceeds the recorded investment in the credit-impaired loan. How much of these fair

value losses we expect to realize as credit losses depends primarily on home prices and loss severity. We

exclude these fair value losses from our credit loss calculation as described in “Credit Loss Performance

Metrics.”

21
Table 10: Total Loss Reserves

March 31, 2011 December 31, 2010

As of

(Dollars in millions)

Allowance for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $67,557 $61,556

Reserve for guaranty losses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 323

Combined loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,814 61,879

Allowance for accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,930 3,414

Allowance for preforeclosure property taxes and insurance receivable(2). . . . . . . . . . 1,356 958

Total loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,100 66,251

Fair value losses previously recognized on acquired credit impaired loans(3). . . . . . . 18,457 19,171

Total loss reserves and fair value losses previously recognized on acquired creditimpaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $90,557 $85,422

(1) Amount included in “Other liabilities” in our condensed consolidated balance sheets.

(2) Amount included in “Other assets” in our condensed consolidated balance sheets.

(3) Represents the fair value losses on loans purchased out of MBS trusts reflected in our condensed 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 11.

22
Table 11: Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)

Of

Fannie

Mae

Of

Consolidated

Trusts Total

Of

Fannie

Mae

Of

Consolidated

Trusts Total

2011 2010

For the Three Months Ended March 31,

(Dollars in millions)

Changes in combined loss reserves:

Allowance for loan losses:

Beginning balance . . . . . . . . . . . . . . . . . $48,530 $13,026 $61,556 $ 8,078 $ 1,847 $ 9,925

Adoption of new accounting

standards . . . . . . . . . . . . . . . . . . . . — — — — 43,576 43,576

Provision for loan losses . . . . . . . . . . . 7,159 3,428 10,587 6,271 5,668 11,939

Charge-offs(1) . . . . . . . . . . . . . . . . . . . (5,705) (448) (6,153) (1,705) (3,455) (5,160)

Recoveries . . . . . . . . . . . . . . . . . . . . . 530 952 1,482 97 277 374

Transfers(2) . . . . . . . . . . . . . . . . . . . . 3,207 (3,207) — 13,855 (13,855) —

Net reclassifications(3) . . . . . . . . . . . . . (13) 98 85 (921) 836 (85)

Ending balance(4) . . . . . . . . . . . . . . . . . . $53,708 $13,849 $67,557 $ 25,675 $ 34,894 $ 60,569

Reserve for guaranty losses:

Beginning balance . . . . . . . . . . . . . . . . . $ 323 $ — $ 323 $ 54,430 $ — $ 54,430

Adoption of new accounting

standards . . . . . . . . . . . . . . . . . . . . — — — (54,103) — (54,103)

Benefit for guaranty losses. . . . . . . . . . (33) — (33) (36) — (36)

Charge-offs . . . . . . . . . . . . . . . . . . . . (35) — (35) (61) — (61)

Recoveries . . . . . . . . . . . . . . . . . . . . . 2 — 2 3 — 3

Ending balance . . . . . . . . . . . . . . . . . . . $ 257 $ — $ 257 $ 233 $ — $ 233

Combined loss reserves:

Beginning balance . . . . . . . . . . . . . . . . . $48,853 $13,026 $61,879 $ 62,508 $ 1,847 $ 64,355

Adoption of new accounting

standards . . . . . . . . . . . . . . . . . . . . — — — (54,103) 43,576 (10,527)

Total provision for credit losses . . . . . . 7,126 3,428 10,554 6,235 5,668 11,903

Charge-offs(1) . . . . . . . . . . . . . . . . . . . (5,740) (448) (6,188) (1,766) (3,455) (5,221)

Recoveries . . . . . . . . . . . . . . . . . . . . . 532 952 1,484 100 277 377

Transfers(2) . . . . . . . . . . . . . . . . . . . . 3,207 (3,207) — 13,855 (13,855) —

Net reclassifications(3) . . . . . . . . . . . . . (13) 98 85 (921) 836 (85)

Ending balance(4) . . . . . . . . . . . . . . . . . . $53,965 $13,849 $67,814 $ 25,908 $ 34,894 $ 60,802

March 31,

2011

December 31,

2010

As of

Allocation of combined loss reserves:

Balance at end of each period attributable to:

Single-family. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $66,240 $60,163

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,574 1,716

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $67,814 $61,879

Single-family and multifamily combined loss reserves as a percentage of applicable

guaranty book of business:

Single-family. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.29% 2.10%

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.83 0.91

Combined loss reserves as a percentage of:

Total guaranty book of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.20% 2.03%

Total nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.60 28.81

23
(1) Includes accrued interest of $386 million and $579 million for the three months ended March 31, 2011 and 2010,

respectively.

(2) Includes transfers from trusts for delinquent loan purchases.

(3) Represents reclassification of amounts recorded in provision for loan losses and charge-offs that relate to allowances

for accrued interest receivable and preforeclosure property taxes and insurance receivable from borrowers.

(4) Includes $412 million and $903 million as of March 31, 2011 and 2010, respectively, for acquired credit-impaired

loans.

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 several quarters. Our total loss reserves increased in the first quarter of 2011 due to: (1) a decline

in home prices and increase in initial charge-off severity during the period, (2) the number of loans that

entered a trial modification period during the quarter, (3) a decline in future expected home prices and

(4) loans continuing to remain delinquent for an extended period of time. Our provision for credit losses

decreased in the first quarter of 2011 compared with the first quarter of 2010, primarily because our total loss

reserves increased less in the first quarter of 2011 than in the first quarter of 2010.

Because of the substantial volume of loan modifications we completed and the number of loans that entered a

trial modification period in 2010 and the first quarter of 2011, more than half of our total loss reserves is

attributable to individual impairment rather than the collective reserve for loan losses. Individual impairment

for a troubled debt restructuring (“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 model includes forward-looking assumptions using multiple scenarios of

the future economic environment, including interest rates and home prices. Based on the structure of the

modifications, in particular the size of the concession granted, and the performance of modified loans

combined with the forward-looking 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. Further, 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. The loss reserve for a greater portion of our population of individually impaired loans was

based on the fair value of the underlying collateral as of March 31, 2011 than as of March 31, 2010.

Additionally, while delinquency rates on loans in our single-family guaranty book of business have decreased,

borrowers’ inability or unwillingness to make their mortgage payments, along with delays in foreclosures,

continue to cause loans to remain seriously delinquent for an extended period of time as shown in “Table 35:

Delinquency Status of Single-Family Conventional Loans.”

For additional discussion of our loan workout activities, delinquent loans and concentrations, see “Risk

Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Problem Loan

Management.” For a discussion of our charge-offs, see “Credit Loss Performance Metrics.”

Our balance of nonperforming single-family loans remained high as of March 31, 2011 due to both high levels

of delinquencies and an increase in TDRs. When a TDR is executed, the loan status becomes current, but the

loan will continue to be classified as a nonperforming loan as the loan is not performing in accordance with

the original terms. The composition of our nonperforming loans is shown in Table 12. For information on the

impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 3,

Mortgage Loans.”

24
Table 12: Nonperforming Single-Family and Multifamily Loans

March 31,

2011

December 31,

2010

As of

(Dollars in millions)

On-balance sheet nonperforming loans including loans in consolidated Fannie Mae MBS

trusts:

Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $141,623 $152,756

Troubled debt restructurings on accrual status(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,342 61,907

Total on-balance sheet nonperforming loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207,965 214,663

Off-balance sheet nonperforming loans in unconsolidated Fannie Mae MBS trusts(2) . . . . . . . . 83 89

Total nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $208,048 $214,752

Accruing on-balance sheet loans past due 90 days or more(3) . . . . . . . . . . . . . . . . . . . . . . . . $ 850 $ 896

For the

Three Months Ended

March 31,

2011

For The

Year Ended

December 31,

2010

(Dollars in millions)

Interest related to on-balance sheet nonperforming loans:

Interest income forgone(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,827 $8,185

Interest income recognized for the period(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,388 7,995

(1) Includes HomeSaver Advance first-lien loans on accrual status.

(2) Represents loans that would meet our criteria for nonaccrual status if the loans had been on-balance sheet. Includes

HomeSaver Advance first-lien loans.

(3) Recorded investment in loans as of the end of each period that 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 where

we have recourse against the seller in the event of a default.

(4) Represents the amount of interest income that would have been 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.

(5) Represents interest income recognized during the period based on stated coupon rate for on-balance sheet loans

classified as nonperforming as of the end of each period. Includes primarily amounts accrued while loan was

performing and cash payments received on nonaccrual loans.

Foreclosed Property Expense (Income)

The shift to foreclosed property expense during the first quarter of 2011 from foreclosed property income

during the first quarter of 2010 was primarily due to higher REO inventory as of March 31, 2011 compared

with March 31, 2010 and an increase in valuation adjustments that reduced the value of our REO inventory.

The foreclosed property income in the first quarter of 2010 was primarily due to the recognition of

$562 million in fees from the cancellation and restructuring of some of our mortgage insurance coverage;

there were no such fees recognized in the first quarter of 2011. These fees represented an acceleration of, and

discount on, claims to be paid pursuant to the coverage in order to reduce our future exposure to our mortgage

insurers.

Credit Loss Performance Metrics

Our credit-related expenses should be considered in conjunction with our credit loss performance. 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 the acquisition of credit-impaired loans. We also exclude interest forgone on

nonperforming loans in our mortgage portfolio, other-than-temporary impairment losses resulting from

25
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 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, investors are able to evaluate our

credit performance on a more consistent basis among periods. Table 13 details the components of our credit

loss performance metrics as well as our average single-family and multifamily default rate and initial chargeoff severity rate.

Table 13: Credit Loss Performance Metrics

Amount Ratio(1) Amount Ratio(1)

2011 2010

For the Three Months Ended March 31,

(Dollars in millions)

Charge-offs, net of recoveries(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,704 61.2 bp $4,844 62.9 bp

Foreclosed property (income) expense(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 488 6.4 (19) (0.2)

Credit losses including the effect of fair value losses on acquired creditimpaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,192 67.6 4,825 62.7

Less: Fair value losses resulting from acquired credit-impaired loans . . . . . . . . (31) (0.4) (58) (0.8)

Plus: Impact of acquired credit-impaired loans on charge-offs and foreclosed

property expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 525 6.9 380 4.9

Credit losses and credit loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,686 74.1 bp $5,147 66.8 bp

Credit losses attributable to:

Single-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,604 $5,062

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 85

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,686 $5,147

Average single-family default rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.44% 0.46%

Average single-family initial charge-off severity rate(3) . . . . . . . . . . . . . . . . . . 35.93% 35.40%

Average multifamily default rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.12% 0.09%

Average multifamily initial charge-off severity rate(3) . . . . . . . . . . . . . . . . . . . 36.85% 40.25%

(1) Basis points are based on the annualized amount for each line item presented divided by the average guaranty book of

business during the period.

(2) In the first quarter of 2011, 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 for the first quarter of 2011 was 5.7 basis points.

(3) Single-family and multifamily rates exclude fair value losses on credit-impaired loans acquired from MBS trusts and

any costs, gains or losses associated with REO after initial acquisition through final disposition; single-family rate

excludes charge-offs from preforeclosure sales.

The increase in our credit losses is primarily due to an increase in foreclosed property expense. During the

first quarter of 2010, we recognized $562 million of fees from the cancellation and restructuring of some of

our mortgage insurance as a reduction to foreclosed property expense; no such fees were received in the first

quarter of 2011. In addition, while defaults remain high, defaults in the first quarter of 2011 were lower than

26
they would have been due to delays caused by the servicer foreclosure process deficiencies and the resulting

foreclosure pause.

Our 2009, 2010 and first quarter of 2011 vintages accounted for approximately 1% of our single-family credit

losses for the first quarter of 2011. Typically, credit losses on mortgage loans do not peak until the third

through fifth years following origination. We provide more detailed credit performance information, including

serious delinquency rates by geographic region, statistics on nonperforming loans 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, the Office of Federal Housing Enterprise

Oversight, 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 14 compares 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.

Table 14: Single-Family Credit Loss Sensitivity(1)

March 31,

2011

December 31,

2010

As of

(Dollars in millions)

Gross single-family credit loss sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,774 $ 25,937

Less: Projected credit risk sharing proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,581) (2,771)

Net single-family credit loss sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,193 $ 23,166

Outstanding single-family whole loans and Fannie Mae MBS . . . . . . . . . . . . . . . . . . . . . . . $2,815,575 $2,782,512

Single-family net credit loss sensitivity as a percentage of outstanding single-family whole

loans and Fannie Mae MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.86% 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 both March 31, 2011 and December 31, 2010. 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.

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.

27
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 consist mostly of limited administrative costs.

Home Affordable Modification Program

We incurred impairments related to loans that had entered a trial modification under the Home Affordable

Modification Program (“HAMP”) of $2.7 billion during the first quarter of 2011 compared with $7.6 billion

during the first quarter of 2010. These include impairments on loans that entered into a trial modification

under the program but that have not yet received, or that have been determined to be ineligible for, a

permanent modification under the program. These impairments have been included in the calculation of our

provision for loan losses in our condensed consolidated results of operations and comprehensive loss. The

impairments do not include the reduction in our collective loss reserves which occurred as a result of

beginning to individually assess the loan for impairment upon entering a trial modification. Please see

“MD&A—Consolidated Results of Operations—Financial Impact of the Making Home Affordable Program on

Fannie Mae” in our 2010 Form 10-K for a detailed discussion on these impairments.

We paid or accrued incentive fees for servicers of $80 million during the first quarter of 2011 compared with

$68 million during the first quarter of 2010. 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 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.

BUSINESS SEGMENT RESULTS

Results of our three business segments are intended to reflect each segment as if it were a stand-alone

business. Under our segment reporting structure, the sum of the results for our three business segments does

not equal our condensed 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 condensed 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 condensed consolidated results of operations. We describe the management reporting

and allocation process used to generate our segment results in our 2010 Form 10-K in “Notes to Consolidated

Financial Statements—Note 15, Segment Reporting.” We are working on reorganizing our company by

function rather than by business in order to improve our operational efficiencies and effectiveness. When we

begin operating under a functional structure, we may change some of our management reporting and how we

report our business segment results.

In this section, we summarize our segment results for the first quarters of 2011 and 2010 in the tables below

and provide a comparative discussion of these results. This section should be read together with our

comparative discussion of our condensed consolidated results of operations in “Consolidated Results of

Operations.” See “Note 10, Segment Reporting” of this report for a reconciliation of our segment results to our

condensed consolidated results.

28
Single-Family Business Results

Table 15 summarizes the financial results of our Single-Family business for the periods indicated. The primary

sources of revenue for our Single-Family business are guaranty fee income and fee and other income.

Expenses primarily include credit-related expenses, net interest expense and administrative expenses.

Table 15: Single-Family Business Results

2011 2010 Variance

For the Three Months Ended March 31,

(Dollars in millions)

Statement of operations data:(1)

Net interest expense ....................................... $ (898) $ (1,945) $1,047

Guaranty fee income(2)..................................... 1,871 1,768 103

Credit-related expenses(3) ................................... (11,106) (11,926) 820

Other expenses(4) ......................................... (586) (513) (73)

Loss before federal income taxes ............................. (10,719) (12,616) 1,897

Benefit (provision) for federal income taxes . . . . . . . . . . . . . . . . . . . . . (2) 51 (53)

Net loss attributable to Fannie Mae ........................... $ (10,721) $ (12,565) $1,844

Other key performance data:

Single-family effective guaranty fee rate (in basis points)(5).......... 26.0 24.4

Single-family average charged guaranty fee on new acquisitions (in

basis points)(6) ......................................... 26.1 26.9

Average single-family guaranty book of business(7) ................ $2,881,300 $2,893,988

Single-family Fannie Mae MBS issues(8) ....................... $ 166,673 $ 124,358

(1) Certain prior period amounts have been reclassified to conform to the current period presentation.

(2) Guaranty fee income is included in fee and other income in our condensed consolidated statements of operations and

comprehensive loss.

(3) Consists of the provision for loan losses, provision for guaranty losses and foreclosed property income or expense.

(4) Consists of investment gains and losses, fee and other income, administrative expenses and other expenses.

(5) Calculated based on annualized Single-Family segment guaranty fee income divided by the average single-family

guaranty book of business, expressed in basis points.

(6) 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.

(7) 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.

(8) Reflects unpaid principal balance of Fannie Mae MBS issued and guaranteed by the Single-Family segment during the

period. The three months ended March 31, 2010 includes Housing Finance Agency (HFA) new issue bond program

issuances of $3.1 billion. There were no HFA new issue bond program issuances in 2011.

Net Interest Expense

Net interest expense for the Single-Family business segment includes: (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; (3) cash payments received on loans that have been placed on nonaccrual status; and (4) an

allocated cost of capital charge among our three business segments. Net interest expense decreased in the first

quarter of 2011 compared with the first quarter of 2010 primarily due to a significant decrease in interest

29
income not recognized for loans on nonaccrual status because of a decline in the number of loans on

nonaccrual status.

Guaranty Fee Income

Guaranty fee income increased in the first quarter of 2011 compared with the first quarter of 2010 due to an

increase in the amortization of risk-based pricing adjustments.

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 is based on publicly available data and excludes previously securitized mortgages, remained

high at 48.6% for the first quarter of 2011.

Credit-Related Expenses

Single-family credit-related expenses decreased in the first quarter of 2011 compared with the first quarter of

2010, primarily because our total single-family loss reserves increased less in the first quarter of 2011

compared with the first quarter of 2010.

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.”

Multifamily Business Results

Table 16 summarizes the financial results of our Multifamily business for the periods indicated. 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 net operating losses from our partnership investments.

30
Table 16: Multifamily Business Results

2011 2010 Variance

For the Three Months Ended

March 31,

(Dollars in millions)

Statement of operations data:

Guaranty fee income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 209 $ 194 $ 15

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 35 23

Losses from partnership investments(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) (58) 46

Credit-related income(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 42 22

Other expenses(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (67) (101) 34

Income before federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 112 140

Provision for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) (13) 8

Net income attributable to Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 247 $ 99 $148

Other key performance data:

Multifamily effective guaranty fee rate (in basis points)(5) . . . . . . . . . . . . . . . . . . . . . 44.0 41.8

Credit loss performance ratio (in basis points)(6). . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.3 18.3

Average multifamily guaranty book of business(7). . . . . . . . . . . . . . . . . . . . . . . . . . . $190,012 $185,703

Multifamily new business volumes(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,024 4,162

Multifamily units financed from new business volumes(9) . . . . . . . . . . . . . . . . . . . . . 83,000 61,000

Fannie Mae multifamily MBS issuances(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,581 4,073

Fannie Mae multifamily structured securities issuances (issued by Capital Markets

group)(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400 1,821

Additional net interest income earned on Fannie Mae multifamily mortgage loans and

MBS (included in Capital Markets Group’s results)(12). . . . . . . . . . . . . . . . . . . . . . 230 205

Average Fannie Mae multifamily mortgage loans and MBS in Capital Markets Group’s

portfolio(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,375 117,709

March 31,

2011

December 31,

2010

As of

(Dollars in millions)

Multifamily serious delinquency rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.64% 0.71%

Percentage of guaranty book of business with credit enhancement . . . . . . . . . . . . . . . . . . . . . 90 89

Fannie Mae percentage of total multifamily mortgage debt outstanding(14) . . . . . . . . . . . . . . . 20.5 20.1

Fannie Mae multifamily MBS outstanding(15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $83,145 $77,251

(1) Guaranty fee income is included in fee and other income in our condensed consolidated statements of operations and

comprehensive loss.

(2) Losses from partnership investments is included in other expenses in our condensed consolidated statements of

operations and comprehensive loss.

(3) Consists of the benefit for loan losses, benefit for guaranty losses and foreclosed property expense.

(4) Consists of net interest income or expense, 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.

31
(8) Reflects unpaid principal balance of Fannie Mae MBS issued (excluding portfolio securitizations) and loans purchased

during the period. The three months ended March 31, 2010 includes $1.0 billion of HFA new issue bond program

issuances. There were no HFA new issue bond program issuances for the three months ended March 31, 2011.

(9) Excludes HFA new issue bond program.

(10) Reflects unpaid principal balance of Fannie Mae MBS issued during the period. Includes: (a) issuances of new MBS

volumes, (b) $3.5 billion of Fannie Mae portfolio securitization transactions and (c) $119 million of conversion of

adjustable rate loans to fixed rate loans and DMBS securities to MBS securities for the three months ended March 31,

2011. There were no Fannie Mae portfolio securitizations transactions or conversions of adjustable rate loans to fixed

rate loans and DMBS securities to MBS securities for the three months ended March 31, 2010.

(11) Reflects original unpaid principal balance of out-of-portfolio structured securities issuances by our Capital Markets

Group.

(12) Interest expense estimate based on allocated duration matched funding costs. 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

March 31, 2011 is through December 31, 2010 and is based on the Federal Reserve’s March 2011 mortgage debt

outstanding release, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for

multifamily residences. Information as of December 31, 2010 is through September 30, 2010.

(15) Includes $23.4 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 condensed consolidated balance sheet, as of March 31, 2011

and December 31, 2010, respectively; and $1.4 billion of bonds issued by HFAs as of both March 31, 2011 and

December 31, 2010.

Guaranty Fee Income

Multifamily guaranty fee income increased in the first quarter of 2011 compared with the first quarter of 2010

primarily due to higher fees charged on new acquisitions in recent years. New acquisitions with higher

guaranty fees have become an increasingly large part of our book of business.

Credit-Related Income

Multifamily credit-related income increased in the first quarter of 2011 compared with the first quarter of

2010 primarily due to a modest decrease in the allowance for loan losses as the multifamily sector continued

to show improvement.

Multifamily credit losses were relatively flat period over period at $82 million in the first quarter of 2011

compared with $85 million in the first quarter of 2010. While national multifamily market fundamentals

improved during the first quarter of 2011, certain local markets and properties continue to exhibit weak

fundamentals. As a result, we may continue to experience losses commensurate with 2010 levels for the

remainder of 2011 despite generally improving market fundamentals.

Capital Markets Group Results

Table 17 summarizes the financial results of our Capital Markets group for the periods indicated. Following

the table we discuss the Capital Markets group’s financial results and describe the Capital Markets group’s

mortgage portfolio. For a discussion on the debt issued by the Capital Markets group to fund its investment

activities, see “Liquidity and Capital Management.” For a discussion on the derivative instruments that Capital

Markets uses to manage interest rate risk, see “Consolidated Balance Sheet Analysis—Derivative Instruments”

in this report and “Risk Management—Market Risk Management, Including Interest Rate Risk Management—

Derivative Instruments” and “Notes to Consolidated Financial Statements—Note 10, Derivative Instruments

and Hedging Activities” in our 2010 Form 10-K. 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.

32
Table 17: Capital Markets Group Results

2011 2010 Variance

For the Three Months

Ended March 31,

(Dollars in millions)

Statement of operations data:

Net interest income(1) ........................................... $3,710 $ 3,057 $ 653

Investment gains, net(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 870 792 78

Net other-than-temporary impairments ............................... (44) (236) 192

Fair value gains (losses), net(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 (1,186) 1,404

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 104 (29)

Other expenses(4)............................................... (553) (423) (130)

Income before federal income taxes ................................. 4,276 2,108 2,168

Benefit for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 29 (24)

Net income attributable to Fannie Mae............................... $4,281 $ 2,137 $2,144

(1) Includes $2.0 billion and $795 million of contractual interest, excluding recoveries, on nonaccrual loans received from

the Single-Family segment for the three months ended March 31, 2011 and 2010, respectively. 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.

(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) Fair value gains or losses on trading securities include the 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.

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 SingleFamily, for the contractual interest due. The interest expense recognized on the Capital Markets group’s

statement of operations is limited to our funding debt, which is reported as “Debt of Fannie Mae” in our

condensed 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 increased in the first quarter of 2011 compared with the first

quarter of 2010 primarily due to a decline in funding costs as we replaced higher cost debt with lower cost

debt. This increase of net interest income was partially offset by a decline in interest income from our

mortgage portfolio. Although our mortgage portfolio loan balance increased, the reduction of our mortgage

securities balance and increase in the balance of nonperforming loans, mainly loans modified in a TDR and

our purchases of delinquent loans from MBS trusts, caused the yield on our portfolio and our interest income

to decline. 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 the first quarter of

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.

Additionally, Capital Markets’ net interest income and net interest yield increased in the first quarter of 2011

and 2010 as a result of funds we received from Treasury under the senior preferred stock purchase agreement

33
because the cash received was used to reduce our debt and the cost of these funds is included in dividends

rather than 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 gains (losses), net” and is shown in “Table 9: Fair

Value Gains (Losses), 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 $635 million in the first quarter of 2011 compared with an $835 million

decrease in the first quarter of 2010.

Net Other-Than-Temporary Impairments

The net other-than-temporary impairments recognized by the Capital Markets group is generally consistent

with the amount reported in our condensed 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-than-temporary impairments recorded in the first quarter of 2011.

Fair Value Gains (Losses), Net

The derivative gains and losses that are reported for the Capital Markets group are consistent with the same

gains and losses reported in our condensed consolidated results of operations. We discuss details of these

components of fair value gains and losses in “Consolidated Results of Operations—Fair Value Gains (Losses),

Net.”

The gains on our trading securities for the segment during the first quarter of 2011 were attributable to a

narrowing of spreads on CMBS, partially offset by losses on agency MBS due to an increase in interest rates

during the period.

The gains on our trading securities for the segment during the first quarter of 2010 were attributable to a

narrowing of spreads on CMBS and decreases in interest rates during the period.

The Capital Markets Group’s Mortgage Portfolio

The Capital Markets group’s mortgage portfolio consists of mortgage-related securities and mortgage loans

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.

We are restricted by our senior preferred stock purchase agreement with Treasury in the amount of mortgage

assets that we may own. Beginning on each December 31 and 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. The

maximum allowable amount of mortgage assets we may own was reduced to $810 billion as of December 31,

2010 and will be reduced to $729 billion as of December 31, 2011. As of March 31, 2011, we owned

$757.6 billion in mortgage assets, compared with $788.8 billion as of December 31, 2010.

Table 18 summarizes our Capital Markets group’s mortgage portfolio activity for the periods indicated.

34
Table 18: Capital Markets Group’s Mortgage Portfolio Activity(1)

2011 2010

For the Three Months

Ended March 31,

(Dollars in millions)

Total Capital Markets mortgage portfolio, beginning balance as of January 1 . . . . . . . . . . . . $788,771 $772,728

Mortgage loans:

Beginning balance as of January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427,074 281,162

Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,074 70,561

Securitizations(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,983) (14,254)

Liquidations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,309) (7,192)

Mortgage loans, ending balance as of March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421,856 330,277

Mortgage securities:

Beginning balance as of January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $361,697 $491,566

Purchases(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,090 29,186

Securitizations(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,983 14,254

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35,426) (79,784)

Liquidations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,582) (20,690)

Mortgage securities, ending balance as of March 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335,762 434,532

Total Capital Markets mortgage portfolio, ending balance as of March 31 . . . . . . . . . . . . . . . $757,618 $764,809

(1) Based on unpaid principal balance.

(2) Includes portfolio securitization transactions that do not qualify for sale treatment under the accounting standards on

the transfers of financial assets.

(3) Includes scheduled repayments, prepayments, foreclosures and lender repurchases.

(4) Includes purchases of Fannie Mae MBS issued by consolidated trusts.

Table 19 shows the composition of the Capital Markets group’s mortgage portfolio as of March 31, 2011 and

December 31, 2010.

35
Table 19: Capital Markets Group’s Mortgage Portfolio Composition(1)

March 31,

2011

December 31,

2010

As of

(Dollars in millions)

Capital Markets group’s mortgage loans:

Single-family loans

Government insured or guaranteed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,348 $ 51,783

Conventional:

Long-term, fixed-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239,723 237,096

Intermediate-term, fixed-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,721 11,446

Adjustable-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,496 31,526

Total single-family conventional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279,940 280,068

Total single-family loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331,288 331,851

Multifamily loans

Government insured or guaranteed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413 431

Conventional:

Long-term, fixed-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,180 4,413

Intermediate-term, fixed-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,375 71,010

Adjustable-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,600 19,369

Total multifamily conventional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,155 94,792

Total multifamily loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,568 95,223

Total Capital Markets group’s mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421,856 427,074

Capital Markets group’s mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238,330 260,429

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,659 17,332

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,170 1,425

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,590 22,283

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,653 18,038

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,844 25,052

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,008 12,525

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,508 4,613

Total Capital Markets group’s mortgage-related securities(2) . . . . . . . . . . . . . . . . . . . . . . 335,762 361,697

Total Capital Markets group’s mortgage portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $757,618 $788,771

(1) Based on unpaid principal balance.

(2) The fair value of these mortgage-related securities was $339.8 billion and $365.8 billion as of March 31, 2011 and

December 31, 2010, respectively.

The Capital Markets group’s mortgage portfolio decreased from December 31, 2010 to March 31, 2011

primarily due to sales and liquidations, partially offset by purchases of delinquent loans from MBS trusts. We

expect our mortgage 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.

We purchased approximately 113,000 delinquent loans with an unpaid principal balance of approximately

$20 billion from our single-family MBS trusts in the first quarter of 2011. The total unpaid principal balance

of nonperforming loans in the Capital Markets group’s mortgage portfolio was $231.3 billion as of March 31,

2011. 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 condensed consolidated financial statements.

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

36
including the limit on the mortgage assets that we may own pursuant to the senior preferred stock purchase

agreement. As of March 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 $6.8 billion. In April 2011, we

purchased approximately 32,000 delinquent loans with an unpaid principal balance of $5.7 billion from our

single-family MBS trusts.

CONSOLIDATED BALANCE SHEET ANALYSIS

The section below provides a discussion of our condensed consolidated balance sheets as of the dates

indicated. You should read this section together with our condensed consolidated financial statements,

including the accompanying notes.

Table 20 presents a summary of our condensed consolidated balance sheets as of March 31, 2011 and

December 31, 2010.

Table 20: Summary of Condensed Consolidated Balance Sheets

March 31,

2011

December 31,

2010 Variance

As of

(Dollars in millions)

Assets

Cash and cash equivalents and federal funds sold and securities purchased under

agreements to resell or similar arrangements . . . . . . . . . . . . . . . . . . . . . . . . $ 46,081 $ 29,048 $ 17,033

Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,730 63,678 (26,948)

Investments in securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,648 151,248 (4,600)

Mortgage loans

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402,711 407,482 (4,771)

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,614,903 2,577,794 37,109

Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (67,557) (61,556) (6,001)

Mortgage loans, net of allowance for loan losses . . . . . . . . . . . . . . . . . . . . . 2,950,057 2,923,720 26,337

Other assets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,526 54,278 (6,752)

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,227,042 $3,221,972 $ 5,070

Liabilities and equity (deficit)

Debt

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 761,187 $ 780,044 $(18,857)

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,447,589 2,416,956 30,633

Other liabilities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,684 27,489 (805)

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,235,460 3,224,489 10,971

Senior preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,200 88,600 2,600

Other equity (deficit)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (99,618) (91,117) (8,501)

Total stockholders’ equity (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,418) (2,517) (5,901)

Total liabilities and stockholders’ deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,227,042 $3,221,972 $ 5,070

(1) Includes $33.5 billion as of March 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 31: Cash and Other

Investments Portfolio.”

(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, additional paid-in capital, accumulated deficit, accumulated other

comprehensive loss, treasury stock, and noncontrolling interest.

37
Cash and Other Investments Portfolio

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 cash payments received by the servicer or consolidated trusts due to be

remitted to the MBS certificateholders. Our restricted cash decreased in the first quarter of 2011 primarily due

to a decline in the volume of refinance activity as interest rates increased, resulting in a decrease in

unscheduled payments received.

Investments in Mortgage-Related Securities

Our investments in mortgage-related securities are classified in our condensed consolidated balance sheets as

either trading or available-for-sale and are measured at fair value. Unrealized and realized gains and losses on

trading securities are included as a component of “Fair value gains (losses), net” and unrealized gains and

losses on available-for-sale securities are included in “Other comprehensive income” in our condensed

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 condensed 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 March 31, 2011. Table 21 presents the fair value of our investments in

mortgage-related securities, including trading and available-for-sale securities, as of March 31, 2011 and

December 31, 2010.

Table 21: Summary of Mortgage-Related Securities at Fair Value

March 31, 2011 December 31, 2010

As of

(Dollars in millions)

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,774 $ 30,226

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,557 18,322

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,315 1,629

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,350 15,573

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,207 11,513

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,867 25,608

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,148 11,650

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,947 3,974

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $113,165 $118,495

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

$39.6 billion as of March 31, 2011, of which $32.0 billion was rated below investment grade. Table 22

38
presents the fair value of our investments in Alt-A and subprime private-label securities and an analysis of the

cumulative losses on these investments as of March 31, 2011. As of March 31, 2011, we had realized actual

cumulative principal shortfalls of approximately 3% of the total cumulative credit losses reported in this table

and reflected in our condensed consolidated financial statements.

Table 22: Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities

Unpaid

Principal

Balance

Fair

Value

Total

Cumulative

Losses(1)

Noncredit

Component(2)

Credit

Component(3)

As of March 31, 2011

(Dollars in millions)

Trading securities:(4)

Alt-A private-label securities . . . . . . . . . . . . . . $ 2,991 $ 1,658 $ (1,287) $ (124) $(1,163)

Subprime private-label securities . . . . . . . . . . . 2,724 1,547 (1,176) (268) (908)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,715 $ 3,205 $ (2,463) $ (392) $(2,071)

Available-for-sale securities:

Alt-A private-label securities . . . . . . . . . . . . . . $18,599 $13,692 $ (5,107) $(1,645) $(3,462)

Subprime private-label securities(5) . . . . . . . . . . 15,298 9,660 (5,678) (1,449) (4,229)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33,897 $23,352 $(10,785) $(3,094) $(7,691)

Grand Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,612 $26,557 $(13,248) $(3,486) $(9,762)

(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-than-temporary 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.

(5) Includes a wrap transaction that has been partially consolidated on our balance sheet, which effectively resulted in a

portion of the underlying structure of the transaction being accounted for and reported as available-for-sale securities.

Table 23 presents 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 March 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 Counterparty Credit Risk Management—Financial Guarantors” for additional

information on our financial guarantor exposure and the counterparty risk associated with our financial

guarantors.

39
Table 23: Credit Statistics of Loans Underlying Alt-A and Subprime Private-Label Mortgage-Related Securities

(Including Wraps)

Trading

AvailableforSale Wraps(1) 60 Days

Delinquent(2)(3)

Average

Loss

Severity(3)(4)

Average

Credit

Enhancement(3)(5)

Monoline

Financial

Guaranteed

Amount(6)

Unpaid Principal Balance

As of March 31, 2011

(Dollars in millions)

Private-label mortgage-related securities backed by:(7)

Alt-A mortgage loans:

Option ARM Alt-A

mortgage loans:

2004 and prior . . . . . . . . $ — $ 511 $ — 33.1% 64.5% 18.2% $ —

2005 . . . . . . . . . . . . . . . — 1,375 — 45.0 57.4 43.0 268

2006 . . . . . . . . . . . . . . . — 1,335 — 46.5 65.8 32.3 144

2007 . . . . . . . . . . . . . . . 2,078 — — 45.9 61.7 59.5 752

Other Alt-A mortgage

loans:

2004 and prior . . . . . . . . — 6,704 — 10.2 46.8 12.4 13

2005 . . . . . . . . . . . . . . . 90 4,347 129 24.4 57.0 6.6 —

2006 . . . . . . . . . . . . . . . 67 4,201 — 30.6 59.8 1.8 —

2007 . . . . . . . . . . . . . . . 756 — 194 44.4 67.2 30.2 314

2008(8) . . . . . . . . . . . . . — 126 — — — — —

Total Alt-A mortgage

loans: . . . . . . . . . . . . . . 2,991 18,599 323 1,491

Subprime mortgage loans:

2004 and prior(9) . . . . . . — 2,159 652 24.8 70.4 60.4 674

2005(8) . . . . . . . . . . . . . — 197 1,440 44.6 73.9 58.1 229

2006 . . . . . . . . . . . . . . . — 12,303 — 49.7 78.0 19.6 52

2007 . . . . . . . . . . . . . . . 2,724 639 5,728 50.2 76.1 23.6 182

Total subprime mortgage

loans: . . . . . . . . . . . . . . 2,724 15,298 7,820 1,137

Total Alt-A and subprime

mortgage loans: . . . . . . . $5,715 $33,897 $8,143 $2,628

(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 March 2011

remittances for February 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 March 2011

remittances for February 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

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.

40
(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

$126 million for the 2008 vintage of other Alt-A loans and $20 million for the 2005 vintage of subprime loans. These

securities are excluded from the delinquency, severity and credit enhancement statistics reported in this table.

(9) Includes a wrap transaction that has been partially consolidated on our balance sheet, which effectively resulted in a

portion of the underlying structure of the transaction being accounted for and reported as available-for-sale securities.

Mortgage Loans

The increase in mortgage loans, net of an allowance for loan losses in the first quarter of 2011 was primarily

driven by securitization activity from our lender swap and portfolio securitization programs, partially offset by

scheduled principal paydowns and prepayments. 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 our liability to third-party beneficial interest holders when we have included the assets of a

corresponding trust in our condensed consolidated balance sheets. 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 as of

March 31, 2011 and 2010 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 the first quarter of 2011 was primarily driven by sales of Fannie

Mae MBS, which are accounted for as reissuances of debt of consolidated trusts in our condensed

consolidated balance sheets, since the MBS certificates are transferred from our ownership to a third party.

Derivative Instruments

We supplement our issuance of debt with interest rate related derivatives to manage the prepayment and

duration 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 condensed 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

condensed 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 condensed consolidated balance sheets

and the related outstanding notional amounts as of March 31, 2011 and December 31, 2010 in “Note 9,

Derivative Instruments.” Table 24 provides an analysis of the factors driving the change from December 31,

2010 to March 31, 2011 in the estimated fair value of our net derivative liability related to our risk

management derivatives recorded in our condensed consolidated balance sheets.

41
Table 24: Changes in Risk Management Derivative Assets (Liabilities) at Fair Value, Net

For the Three

Months Ended

March 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(1) . . . . . . . . . . . . . . . . . . . 58

Fair value at date of termination of contracts settled during the period(2) . . . . . . . . . . . . . . . . 308

Net collateral received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (705)

Periodic net cash contractual interest payments(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391

Total cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Statement of operations impact of recognized amounts:

Net contractual interest expense accruals on interest rate swaps . . . . . . . . . . . . . . . . . . . . . . (635)

Net change in fair value during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 751

Risk management derivatives fair value gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Net risk management derivative liability as of March 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . $(621)

(1) Cash receipts from sale of derivative option contracts increase the derivative liability recorded in our condensed

consolidated balance sheets. Cash payments made to purchase derivative option contracts (purchased option premiums)

increase the derivative asset recorded in our condensed consolidated balance sheets.

(2) Cash payments made to terminate derivative contracts reduce the derivative liability recorded in our condensed

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 gains (losses), net in our condensed 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

Gains (Losses), Net,” “Risk Management—Market Risk Management, Including Interest Rate Risk

Management” and “Note 9, Derivative Instruments.”

Stockholders’ Deficit

Our net deficit increased in the first quarter of 2011. See Table 25 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 25 summarizes changes in our stockholders’ deficit reported in our GAAP condensed consolidated

balance sheets and in the fair value of our net assets in our non-GAAP consolidated fair value balance sheets

for the three months ended March 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 13, Fair Value.”

42
Table 25: Comparative Measures—GAAP Change in Stockholders’ Deficit and Non-GAAP Change in Fair Value

of Net Assets (Net of Tax Effect)

For the

Three Months Ended

March 31, 2011

(Dollars in millions)

GAAP consolidated balance sheets:

Fannie Mae stockholders’ deficit as of December 31, 2010(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,599)

Total comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,290)

Capital transactions:(2)

Funds received from Treasury under the senior preferred stock purchase agreement . . . . . . . . . . . 2,600

Senior preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,216)

Capital transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Fannie Mae stockholders’ deficit as of March 31, 2011(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,499)

Non-GAAP consolidated fair value balance sheets:

Estimated fair value of net assets as of December 31, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(120,294)

Capital transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384

Change in estimated fair value of net assets, excluding capital transactions . . . . . . . . . . . . . . . . . . . (11,231)

Decrease in estimated fair value of net assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,847)

Estimated fair value of net assets as of March 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(131,141)

(1) Our net worth, as defined under the senior preferred stock purchase agreement, is equivalent to the “Total deficit”

amount reported in our condensed consolidated balance sheets. Our net worth, or total deficit, consists of “Total

Fannie Mae’s stockholders’ equity (deficit)” and “Noncontrolling interests” reported in our condensed consolidated

balance sheets.

(2) Represents capital transactions, which are reported in our condensed consolidated financial statements.

The $11.2 billion decrease in the fair value of our net assets, excluding capital transactions, during the first

quarter of 2011 was attributable to:

• A net decrease in the fair value due to credit-related items principally related to declining actual and

expected home prices as well as a decrease in the estimated rate of prepayments, which increased the

expected life of the guaranty book of business and increased expected credit losses. This net decrease due

to credit-related items was 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.

43
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

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 intend to have another party

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.

Supplemental Non-GAAP Consolidated Fair Value Balance Sheets

We present our non-GAAP fair value balance sheets in Table 26 below.

44
Table 26: Supplemental Non-GAAP Consolidated Fair Value Balance Sheets

GAAP

Carrying

Value

Fair Value

Adjustment(1) Estimated

Fair Value

GAAP

Carrying

Value

Fair Value

Adjustment(1) EstimatedFair Value

As of March 31, 2011 As of December 31, 2010

(Dollars in millions)

Assets:

Cash and cash equivalents . ................ $ 56,561 $ — $ 56,561 $ 80,975 $ — $ 80,975

Federal funds sold and securities purchased under

agreements to resell or similar arrangements . . . 26,250 — 26,250 11,751 — 11,751

Trading securities . ..................... 57,035 — 57,035 56,856 — 56,856

Available-for-sale securities ................ 89,613 — 89,613 94,392 — 94,392

Mortgage loans:

Mortgage loans held for sale . . ........... 1,414 44 1,458 915 — 915

Mortgage loans held for investment, net of

allowance for loan losses:

Of Fannie Mae ..................... 348,644 (35,472) 313,172 358,698 (39,331) 319,367

Of consolidated trusts ................ 2,599,999 18,737(2) 2,618,736(3) 2,564,107 46,038(2) 2,610,145(3)

Total mortgage loans . . ................ 2,950,057 (16,691) 2,933,366(4) 2,923,720 6,707 2,930,427(4)

Advances to lenders..................... 3,091 (151) 2,940(5)(6) 7,215 (225) 6,990(5)(6)

Derivative assets at fair value. . . . . . . . . . . . . . . 279 — 279(5)(6) 1,137 — 1,137(5)(6)

Guaranty assets and buy-ups, net . . . . . . . . . . . . 459 440 899(5)(6) 458 356 814(5)(6)

Total financial assets. . . ................ 3,183,345 (16,402) 3,166,943(7) 3,176,504 6,838 3,183,342(7)

Credit enhancements . . . . . . . . . . . . . . . . . . . . 471 3,406 3,877(5)(6) 479 3,286 3,765(5)(6)

Other assets .......................... 43,226 (240) 42,986(5)(6) 44,989 (261) 44,728(5)(6)

Total assets......................... $3,227,042 $ (13,236) $3,213,806 $3,221,972 $ 9,863 $3,231,835

Liabilities:

Federal funds purchased and securities sold under

agreements to repurchase . . . . . . . . . . . . . . . . $ 25 $ — $ 25 $ 52 $ (1) $ 51

Short-term debt:

Of Fannie Mae . ..................... 147,092 41 147,133 151,884 90 151,974

Of consolidated trusts . . ................ 5,156 — 5,156 5,359 — 5,359

Long-term debt:

Of Fannie Mae . ..................... 614,095(8) 19,055 633,150 628,160(8) 21,524 649,684

Of consolidated trusts . . ................ 2,442,433(8) 88,041(2) 2,530,474 2,411,597(8) 103,332(2) 2,514,929

Derivative liabilities at fair value . . . . . . . . . . . . 941 — 941(9)(10) 1,715 — 1,715(9)(10)

Guaranty obligations . . . . . . . . . . . . . . . . . . . . 760 2,667 3,427(9)(10) 769 3,085 3,854(9)(10)

Total financial liabilities ................ 3,210,502 109,804 3,320,306(7) 3,199,536 128,030 3,327,566(7)

Other liabilities . . . ..................... 24,958 (398) 24,560(9)(10) 24,953 (472) 24,481(9)(10)

Total liabilities . ..................... 3,235,460 109,406 3,344,866 3,224,489 127,558 3,352,047

Equity (deficit):

Fannie Mae stockholders’ equity (deficit):

Senior preferred(11) ..................... 91,200 — 91,200 88,600 — 88,600

Preferred . . .......................... 20,204 (18,987) 1,217 20,204 (19,829) 375

Common . . .......................... (119,903) (103,655) (223,558) (111,403) (97,866) (209,269)

Total Fannie Mae stockholders’ deficit/nonGAAP fair value of net assets .......... $ (8,499) $(122,642) $ (131,141) $ (2,599) $(117,695) $ (120,294)

Noncontrolling interests. . . . . . . . . . . . . . . . . 81 — 81 82 — 82

Total deficit . . . ..................... (8,418) (122,642) (131,060) (2,517) (117,695) (120,212)

Total liabilities and equity (deficit) . . . ...... $3,227,042 $ (13,236) $3,213,806 $3,221,972 $ 9,863 $3,231,835

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

condensed consolidated balance sheets and our best judgment of the estimated fair value of the listed item.

(2) Fair value exceeds carrying value of consolidated loans and consolidated debt as a significant portion of these were consolidated at

unpaid principal balance as of January 1, 2010, upon adoption of accounting standards on transfers of financial assets and

consolidation of VIEs. Also impacting the difference between fair value and carrying value of the consolidated loans is the credit

component included in consolidated loans, which has no corresponding impact on the consolidated debt.

45
(3) Includes certain mortgage loans that we elected to report at fair value in our GAAP condensed consolidated balance sheet of

$3.0 billion as of both March 31, 2011 and December 31, 2010.

(4) Performing loans had both a fair value and an unpaid principal balance of $2.8 trillion as of March 31, 2011 compared with a fair

value of $2.8 trillion and an unpaid principal balance of $2.7 trillion as of December 31, 2010. Nonperforming loans, which include

loans that are delinquent by one or more payments, had a fair value of $143.4 billion and an unpaid principal balance of

$254.4 billion as of March 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 13, 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 condensed consolidated balance

sheets: (a) Accrued interest receivable, net; (b) Acquired property, net; and (c) Other assets.

(6) “Other assets” include the following GAAP condensed consolidated balance sheets line items: (a) Accrued interest receivable, net

and (b) Acquired property, net. The carrying value of these items in our GAAP condensed consolidated balance sheets totaled

$26.6 billion and $27.5 billion as of March 31, 2011 and December 31, 2010, respectively. “Other assets” in our GAAP condensed

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 $4.3 billion and $9.3 billion as of

March 31, 2011 and December 31, 2010, respectively.

(7) We determined the estimated fair value of these financial instruments in accordance with the fair value accounting standard as

described in “Note 13, Fair Value.”

(8) Includes certain long-term debt instruments that we elected to report at fair value in our GAAP condensed consolidated balance

sheets of $3.1 billion and $3.2 billion as of March 31, 2011 and December 31, 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 condensed consolidated balance sheets: (a) Accrued interest payable and (b) Other

liabilities.

(10) “Other liabilities” include the Accrued interest payable in our GAAP condensed consolidated balance sheets. The carrying value of

this item in our GAAP condensed consolidated balance sheets totaled $13.8 billion as of both March 31, 2011 and December 31,

2010. 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 condensed 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 condensed 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 March 31, 2011 and

December 31, 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 and maintaining sufficient capacity to meet these needs.

Our Treasury group is responsible for implementing our liquidity and contingency planning strategies. 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. 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 planning may be difficult or impossible to execute for

a company of our size in our circumstances. See “Risk Factors” in our 2010 Form 10-K for a description of

the risks associated with our contingency planning.

Our liquidity position could be adversely affected by many causes, both internal and external to our business,

including: actions taken by the conservator, the Federal Reserve, U.S. Treasury or other government agencies;

legislation relating to us or our business; an unexpected 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 downgrade in the credit ratings of our senior unsecured debt or the U.S. government’s debt from the major

46
ratings organizations; 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.

Debt Funding

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 27 summarizes 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 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.

47
Table 27: Activity in Debt of Fannie Mae

2011 2010(2)

For the Three Months

Ended March 31,

(Dollars in millions)

Issued during the period:

Short-term:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,201 $138,480

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.15% 0.23%

Long-term:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,737 $101,964

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.13% 2.28%

Total issued:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $139,938 $240,444

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.88% 1.09%

Paid off during the period:(1)

Short-term:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,031 $130,866

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.26% 0.23%

Long-term:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,857 $ 95,163

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.82% 3.30%

Total paid off:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $159,888 $226,029

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.33% 1.53%

(1) Consists of all payments on debt, including regularly scheduled principal payments, payments at maturity, payments

resulting from calls and payments for any other repurchases.

(2) For the three months ended March 31, 2010, we revised the weighted-average interest rate on short-term issued and

total issued debt primarily to reflect weighting based on transaction level data.

Debt funding activity in the first quarter of 2011 was lower compared with the first quarter of 2010 primarily

because we decreased our redemptions of callable debt and had a lower amount of outstanding debt that

matured in the first quarter of 2011, which reduced the amount of debt we needed to issue. In addition, our

funding needs decreased because of a decrease in purchases of delinquent loans from MBS trusts. During the

first half of 2010, we purchased a significant amount of loans from MBS trusts that were four or more

consecutive monthly payments delinquent.

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. On

February 11, 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, 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” in this report

and in our 2010 Form 10-K for a discussion of the risks we face relating to (1) the uncertain future of our

48
company; (2) our reliance on the issuance of debt securities to obtain funds for our operations; and (3) our

liquidity contingency plans.

Outstanding Debt

Total outstanding debt of Fannie Mae consists of federal funds purchased and securities sold under agreements

to repurchase and short-term and long-term debt, excluding debt of consolidated trusts.

As of March 31, 2011, our outstanding short-term debt, based on its original contractual maturity, as a

percentage of our total outstanding debt remained constant at 19% compared with 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 2.69% as of March 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 120% of the

amount of mortgage assets we are allowed to own on December 31 of the immediately preceding calendar

year. Our debt cap under the senior preferred stock purchase agreement was reduced to $972 billion in 2011.

As of March 31, 2011, our aggregate indebtedness totaled $774.0 billion, which was $198.0 billion below our

debt limit. The calculation of our indebtedness for purposes of complying with our debt cap 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.

Table 28 provides information as of March 31, 2011 and December 31, 2010 on our outstanding short-term

and long-term debt based on its original contractual terms.

49
Table 28: Outstanding Short-Term Borrowings and Long-Term Debt(1)

Maturities Outstanding

WeightedAverage

Interest

Rate Maturities Outstanding

WeightedAverage

Interest

Rate

March 31, 2011 December 31, 2010

As of

(Dollars in millions)

Federal funds purchased and securities sold

under agreements to repurchase . . . . . . . . — $ 25 0.01% — $ 52 2.20%

Short-term debt:

Fixed-rate:

Discount notes .................. — $ 146,751 0.26% — $ 151,500 0.32%

Foreign exchange discount notes . . . . . . — 341 2.51 — 384 2.43

Total short-term debt of Fannie Mae(2) ..... 147,092 0.27 151,884 0.32

Debt of consolidated trusts . . ......... — 5,156 0.22 — 5,359 0.23

Total short-term debt . . . .............. $ 152,248 0.27% $ 157,243 0.32%

Long-term debt:

Senior fixed:

Benchmark notes and bonds ......... 2011 - 2030 $ 291,851 3.14% 2011 - 2030 $ 300,344 3.20%

Medium-term notes . .............. 2011 - 2021 190,950 2.00 2011 - 2020 199,266 2.13

Foreign exchange notes and bonds . .... 2017 - 2028 1,204 6.07 2017 - 2028 1,177 6.21

Other long-term debt(3) ............ 2011 - 2040 47,630 5.64 2011 - 2040 44,893 5.64

Total senior fixed .............. 531,635 2.96 545,680 3.02

Senior floating:

Medium-term notes . .............. 2011 - 2016 74,454 0.30 2011 - 2015 72,039 0.31

Other long-term debt(3) ............ 2020 - 2037 389 5.27 2020 - 2037 386 4.92

Total senior floating ............. 74,843 0.32 72,425 0.34

Subordinated fixed-rate:

Qualifying subordinated(4) .......... 2012 - 2014 4,893 5.08 2011 - 2014 7,392 5.47

Subordinated debentures . . ......... 2019 2,724 9.91 2019 2,663 9.91

Total subordinated fixed-rate . . . .... 7,617 6.80 10,055 6.65

Total long-term debt of Fannie Mae(5) ...... 614,095 2.69 628,160 2.77

Debt of consolidated trusts(3) .......... 2011 - 2051 2,442,433 4.61 2011 - 2051 2,411,597 4.59

Total long-term debt . . . .............. $3,056,528 4.23% $3,039,757 4.22%

Outstanding callable debt of Fannie Mae(6). . . $ 204,664 2.50% $ 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 excludes unamortized discounts, premiums and other cost basis adjustments and debt of consolidated trusts,

totaled $772.6 billion and $792.6 billion as of March 31, 2011 and December 31, 2010, respectively.

(2) 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 $67 million and $128 million as of March 31, 2011 and December 31, 2010, respectively.

(3) Includes a portion of structured debt instruments that is reported at fair value.

(4) Consists of subordinated debt with an interest deferral feature.

(5) 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 $87.5 billion

and $95.4 billion as of March 31, 2011 and December 31, 2010, respectively. Reported amounts also include

unamortized discounts, premiums and other cost basis adjustments of $11.4 billion and $12.4 billion as of March 31,

50
2011 and December 31, 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 $625.5 billion and $640.5 billion as of March 31, 2011 and December 31,

2010, respectively.

(6) Consists of long-term callable debt of Fannie Mae that can be paid off in whole or in part at our option at any time on

or after a specified date. Includes the unpaid principal balance, and excludes unamortized discounts, premiums and

other cost basis adjustments.

Maturity Profile of Outstanding Debt of Fannie Mae

Table 29 presents the maturity profile, as of March 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, decreased 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 31% as of March 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 98 days as of

March 31, 2011, compared with 116 days as of December 31, 2010.

Table 29: Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year(1)

Long-Term

Short-Term

$36.9 $46.6 $21.4 $16.6 $15.9 $6.0 $2.0 $0.4 $0.9 $0.2 $0.2 $0.0 

$15.1

$17.6

$1.1 $5.2

$14.6

$3.0

$3.0

$11.2

$0.1

$9.1

$3.3 $6.1

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

$60

$65

$70

Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12

(Dollars in billions)

(1) Includes unamortized discounts, premiums and other cost basis adjustments of $103 million as of March 31, 2011.

Excludes debt of consolidated trusts maturing within one year of $9.6 billion and federal funds purchased and

securities sold under agreements to repurchase of $25 million as of March 31, 2011.

Table 30 presents the maturity profile, as of March 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 58 months as of both March 31, 2011 and

December 31, 2010.

51
Table 30: Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year(1)

$21.2

$46.7

$58.7

$28.3

$131.1

$49.9

$72.1

$116.7

$0

$50

$100

$150

Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 -

Q1 2014

Q2 2014 -

Q1 2015

Q2 2015 -

Q1 2016

Q2 2016 &

thereafter

(Dollars in billions)

(1) Includes unamortized discounts, premiums and other cost basis adjustments of $11.4 billion as of March 31, 2011.

Excludes debt of consolidated trusts of $2.4 trillion as of March 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.

Cash and Other Investments Portfolio

Table 31 provides information on the composition of our cash and other investments portfolio for the periods

indicated.

Table 31: Cash and Other Investments Portfolio

March 31,

2011

December 31,

2010

As of

(Dollars in millions)

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,831 $17,297

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

arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,250 11,751

Non-mortgage-related securities:

U.S. Treasury securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,383 27,432

Asset-backed securities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,100 5,321

Total non-mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,483 32,753

Total cash and other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $79,564 $61,801

(1) Excludes $3.1 billion and $4.0 billion of U.S. Treasury securities which are a component of cash equivalents as of

March 31, 2011 and December 31, 2010, respectively, as these securities had a maturity at the date of acquisition of

three months or less.

(2) Includes securities primarily backed by credit cards loans, student loans and automobile loans.

Our cash and other investments portfolio increased from December 31, 2010 to March 31, 2011 primarily due

to a decrease in the weighted-average maturity of our outstanding debt in the first quarter of 2011, which

resulted in an increase in the amount of cash and highly liquid non-mortgage securities we were required to

hold pursuant to our liquidity risk management policy.

52
Credit Ratings

Our ability to access the capital markets and other sources of funding, as well as our cost of funds, are highly

dependent on our credit ratings from the major ratings organizations. In addition, our credit ratings are

important when we seek to engage in certain long-term transactions, such as derivative transactions.

While there have been no changes in our credit ratings from December 31, 2010 to May 2, 2011, on April 20,

2011, Standard & Poor’s revised its outlook on the debt issues of Fannie Mae to negative from stable. This

action followed Standard & Poor’s revision to the outlook of the U.S. government’s long-term credit rating to

negative from stable. Standard & Poor’s noted that the ratings on Fannie Mae and other government-related

entities are constrained by the long-term sovereign rating on the U.S. government and noted that it will not raise

the outlooks or ratings on these entities above the U.S. government as long as the ratings and outlook on the

U.S. remain unchanged. Standard & Poor’s also stated that if it were to lower its ratings on the U.S. government,

it would likely lower the ratings on the debt of Fannie Mae and other government-related entities.

Table 32 presents the credit ratings issued by the three major credit rating agencies as of May 2, 2011.

Table 32: Fannie Mae Credit Ratings

Standard & Poor’s Moody’s Fitch

As of May 2, 2011

Long-term senior debt . . . . . . . . . . AAA 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 Stable Stable

(for Long Term Senior Debt (for all ratings) (for AAA rated Long Term

and Qualifying Subordinated Debt) Issuer Default Rating)

Cash Flows

Three Months Ended March 31, 2011. Cash and cash equivalents of $19.8 billion as of March 31, 2011

increased by $2.5 billion from December 31, 2010 driven by net cash inflows provided by operating activities

of $2.6 billion. Net cash generated from investing activities totaled $123.8 billion, resulting primarily from

proceeds received from repayments of loans held for investment. These net cash inflows were offset by net

cash used in financing activities of $123.9 billion primarily attributable to a significant amount of debt

redemptions in excess of proceeds received from the issuances of debt.

Three Months Ended March 31, 2010. Cash and cash equivalents of $30.5 billion as of March 31, 2010

increased by $23.7 billion from December 31, 2009. Net cash generated from investing activities totaled

$108.7 billion, resulting primarily from proceeds received from repayments of loans held for investment.

These net cash inflows were partially offset by net cash outflows used in operating activities of $30.9 billion

resulting primarily from purchases of trading securities. The net cash used in financing activities of

$54.2 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, risk53
based capital or subordinated debt levels during the conservatorship. For information on our minimum capital

requirements see “Note 11, Regulatory Capital Requirements.”

Senior Preferred Stock Purchase Agreement

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.

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 $90.2 billion from

Treasury pursuant to the senior preferred stock purchase agreement as of March 31, 2011. In May 2011, the

Acting Director of FHFA submitted a request for $8.5 billion from Treasury under the senior preferred stock

purchase agreement to eliminate our net worth deficit as of March 31, 2011, and requested receipt of those

funds on or prior to June 30, 2011. 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

$99.7 billion.

We continue to 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. Treasury’s

maximum funding commitment to us prior to a December 2009 amendment of the senior preferred stock

purchase agreement was $200 billion. The amendment to the agreement stipulates that the cap on Treasury’s

funding commitment to us under the senior preferred stock purchase agreement will increase as necessary to

accommodate any net worth deficits for calendar quarters in 2010 through 2012. For any net worth deficits as

of December 31, 2012, Treasury’s remaining funding commitment will be $124.8 billion ($200 billion less

$75.2 billion cumulatively drawn through March 31, 2010) less the smaller of either (a) our positive net worth

as of December 31, 2012 or (b) our cumulative draws from Treasury for the calendar quarters in 2010 through

2012.

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. A quarterly commitment fee was

scheduled to be set by Treasury beginning on March 31, 2011. This commitment fee was waived by Treasury

for the first quarter of 2011. On March 31, 2011, FHFA was notified by Treasury that it was waiving the

commitment fee for the second quarter of 2011 due to the continued fragility of the U.S. mortgage market and

because Treasury believed that imposing the commitment fee would not generate increased compensation for

taxpayers. Treasury further noted that it would reevaluate the situation during the next calendar quarter to

determine whether to set the quarterly commitment fee for the next quarter under the senior preferred stock

purchase agreement.

Dividends

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 first quarter dividend of $2.2 billion was declared by the conservator and paid by us on March 31, 2011.

Upon receipt of additional funds from Treasury in June 2011, which FHFA requested on our behalf in May

2011, the annualized dividend on the senior preferred stock will be $10.0 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

54
conservator requests additional funds on our behalf from Treasury under the senior preferred stock purchase

agreement.

OFF-BALANCE SHEET ARRANGEMENTS

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

$56.7 billion as of March 31, 2011 and $56.9 billion as of December 31, 2010.

Under the temporary credit and liquidity facilities program in which we provide assistance to housing finance

agencies (“HFAs”) and in which Treasury has purchased participation interests, our outstanding commitments

totaled $3.5 billion as of March 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

$17.7 billion as of March 31, 2011 and $17.8 billion as of December 31, 2010. As of both March 31, 2011

and December 31, 2010, there were no liquidity guarantee advances outstanding. For a description of these

programs, see “MD&A—Off-Balance Sheet Arrangements—Treasury Housing Finance Agency Initiative” in

our 2010 Form 10-K.

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 manage these risks and

mitigate our losses 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. In addition to these

financial risks, there is significant uncertainty regarding the future of our company, including how long we

will continue to be in existence, which we discuss in more detail in “Legislative and Regulatory

Developments—GSE Reform” and “Risk Factors.” We are also subject to a number of other risks that could

adversely impact our business, financial condition, earnings and cash flow, including model, legal and

reputational 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.

In this section we provide an update on our management of our major risk categories. For a more complete

discussion of the financial risks we face and how we manage credit risk, market risk and operational risk, see

“MD&A—Risk Management” in our 2010 Form 10-K and “Risk Factors” in our 2010 Form 10-K.

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 macro-economic 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” in our 2010 Form 10-K for a discussion of the risks associated with our use of models.

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

55
mortgage-related assets, both on- and off-balance sheet, our guaranty book of business excludes non-Fannie

Mae mortgage-related securities held in our portfolio for which we do not provide a guaranty.

Mortgage Credit Book of Business

Table 33 displays the composition of our entire mortgage credit book of business as of the periods indicated.

Our total single-family mortgage credit book of business accounted for 93% of our total mortgage credit book

of business as of both March 31, 2011 and December 31, 2010.

The total mortgage credit book of business is not impacted by our repurchase of delinquent loans as this

activity is a reclassification from loans of consolidated trusts to loans of Fannie Mae.

Table 33: Composition of Mortgage Credit Book of Business(1)

Conventional(2) Government(3) Conventional(2) Government(3) Conventional(2) Government(3)

Single-Family Multifamily Total

As of March 31, 2011

(Dollars in millions)

Mortgage assets:

Mortgage loans(4) . . . . . . $2,799,337 $52,516 $171,425 $ 453 $2,970,762 $52,969

Fannie Mae MBS(5)(7) . . . 6,177 1,543 — 2 6,177 1,545

Agency mortgage-related

securities(5)(6). . . . . . . . 15,616 1,186 — 32 15,616 1,218

Mortgage revenue

bonds(5) . . . . . . . . . . . 2,140 1,077 7,192 1,599 9,332 2,676

Other mortgage-related

securities(5) . . . . . . . . . 42,475 1,629 24,844 15 67,319 1,644

Total mortgage assets . . . . . 2,865,745 57,951 203,461 2,101 3,069,206 60,052

Unconsolidated Fannie Mae

MBS(5)(7) . . . . . . . . . . . . 1,814 16,985 37 1,791 1,851 18,776

Other credit guarantees(8) . . . 16,191 2,949 16,536 380 32,727 3,329

Mortgage credit book of

business . . . . . . . . . . . $2,883,750 $77,885 $220,034 $4,272 $3,103,784 $82,157

Guaranty book of

business . . . . . . . . . . . $2,823,519 $73,993 $187,998 $2,626 $3,011,517 $76,619

56
Conventional(2) Government(3) Conventional(2) Government(3) Conventional(2) Government(3)

Single-Family Multifamily Total

As of December 31, 2010

(Dollars in millions)

Mortgage assets:

Mortgage loans(4) . . . . . . $2,766,870 $52,577 $170,074 $ 476 $2,936,944 $53,053

Fannie Mae MBS(5)(7) . . . 5,961 1,586 — 2 5,961 1,588

Agency mortgage-related

securities(5)(6). . . . . . . . 17,291 1,506 — 24 17,291 1,530

Mortgage revenue

bonds(5) . . . . . . . . . . . 2,197 1,190 7,449 1,689 9,646 2,879

Other mortgage-related

securities(5) . . . . . . . . . 43,634 1,657 25,052 15 68,686 1,672

Total mortgage assets . . . . . 2,835,953 58,516 202,575 2,206 3,038,528 60,722

Unconsolidated Fannie Mae

MBS(5)(7) . . . . . . . . . . . . 2,230 17,238 37 1,818 2,267 19,056

Other credit guarantees(8) . . . 15,529 3,096 16,601 393 32,130 3,489

Mortgage credit book of

business . . . . . . . . . . . $2,853,712 $78,850 $219,213 $4,417 $3,072,925 $83,267

Guaranty book of

business . . . . . . . . . . . $2,790,590 $74,497 $186,712 $2,689 $2,977,302 $77,186

(1) Based on unpaid principal balance.

(2) Refers to mortgage loans and mortgage-related securities that are not guaranteed or insured by the U.S. government or

any of its agencies.

(3) 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.

(4) Includes unscheduled borrower principal payments.

(5) Excludes unscheduled borrower principal payments.

(6) Consists of mortgage-related securities issued by Freddie Mac and Ginnie Mae.

(7) The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.

(8) Includes single-family and multifamily credit enhancements that we have provided and that are not otherwise reflected

in the table.

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 in detail 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.”

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.

The credit statistics reported below, unless otherwise noted, pertain generally to the portion of our singlefamily guaranty book of business for which we have access to detailed loan-level information, which

57
constituted over 99% of our single-family conventional guaranty book of business as of both March 31, 2011

and December 31, 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. See “Risk

Factors” in our 2010 Form 10-K for a discussion of the risk that we could experience mortgage fraud as a

result of this reliance on lender representations.

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

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.

For additional discussion of our acquisition policy, underwriting standards and use of mortgage insurance as a

form of credit enhancement see “MD&A—Risk Management—Credit Risk Management—Single-Family

Mortgage Credit Risk Management” in our 2010 Form 10-K. For a discussion of our aggregate mortgage

insurance coverage as of March 31, 2011 and December 31, 2010, see “Risk Management—Credit Risk

Management—Institutional Counterparty Credit Risk Management—Mortgage Insurers.”

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

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.

58
Table 34 presents 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.

Table 34: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1)

2011 2010 March 31, 2011 December 31, 2010

Percent of Single-Family

Conventional Business Volume(2)

For the Three Months Ended

March 31,

Percent of Single-Family

Conventional Guaranty

Book of Business(3)(4)

As of

(Dollars in millions)

Original LTV ratio:(5)

G= 60%. . . . . . . . . . . . . . . . . . 30% 30% 24% 24%

60.01% to 70% . . . . . . . . . . . . . 16 16 16 16

70.01% to 80% . . . . . . . . . . . . . 38 37 42 41

80.01% to 90%(6)............ 8 9 9 9

90.01% to 100%(6) ........... 6 6 8 9

Greater than 100%(6) ......... 2 2 1 1

Total . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100%

Weighted average . . . . . . . . . . 69% 69% 71% 71%

Average loan amount . . . . . . . . . . . $213,710 $224,719 $156,557 $155,531

Estimated mark-to-market LTV

ratio:(7)

G= 60%. . . . . . . . . . . . . . . . . . 27% 28%

60.01% to 70% . . . . . . . . . . . . . 12 13

70.01% to 80% . . . . . . . . . . . . . 17 19

80.01% to 90% . . . . . . . . . . . . . 16 15

90.01% to 100% . . . . . . . . . . . . 10 9

Greater than 100% . . . . . . . . . . . 18 16

Total . . . . . . . . . . . . . . . . . . . 100% 100%

Weighted average . . . . . . . . . . 79% 77%

Product type:

Fixed-rate:(8)

Long-term . . . . . . . . . . . . . . . 68% 72% 74% 74%

Intermediate-term . . . . . . . . . . 25 20 14 14

Interest-only . . . . . . . . . . . . . * * 2 2

Total fixed-rate . . . . . . . . . . 93 92 90 90

Adjustable-rate:

Interest-only . . . . . . . . . . . . . 1 2 3 4

Other ARMs . . . . . . . . . . . . . 6 6 7 6

Total adjustable-rate . . . . . . 7 8 10 10

Total . . . . . . . . . . . . . . . . . 100% 100% 100% 100%

Number of property units:

1 unit . . . . . . . . . . . . . . . . . . . . 98% 98% 97% 97%

2-4 units . . . . . . . . . . . . . . . . . . 2 2 3 3

Total . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100%

59
2011 2010 March 31, 2011 December 31, 2010

Percent of Single-Family

Conventional Business Volume(2)

For the Three Months Ended

March 31,

Percent of Single-Family

Conventional Guaranty

Book of Business(3)(4)

As of

(Dollars in millions)

Property type:

Single-family homes . . . . . . . . . 91% 90% 91% 91%

Condo/Co-op. . . . . . . . . . . . . . . 9 10 9 9

Total . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100%

Occupancy type:

Primary residence . . . . . . . . . . . 89% 90% 89% 90%

Second/vacation home . . . . . . . . 5 5 5 4

Investor . . . . . . . . . . . . . . . . . . 6 5 6 6

Total . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100%

FICO credit score:

G 620 . . . . . . . . . . . . . . . . . . . *% 1% 3% 4%

620 to G 660 . . . . . . . . . . . . . . 2 2 7 7

660 to G 700 . . . . . . . . . . . . . . 7 8 14 15

700 to G 740 . . . . . . . . . . . . . . 17 18 21 21

H= 740 . . . . . . . . . . . . . . . . . . 74 71 55 53

Total . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100%

Weighted average . . . . . . . . . . 762 758 736 735

Loan purpose:

Purchase . . . . . . . . . . . . . . . . . . 18% 22% 32% 33%

Cash-out refinance . . . . . . . . . . . 19 20 29 29

Other refinance . . . . . . . . . . . . . 63 58 39 38

Total . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100%

Geographic concentration:(9)

Midwest . . . . . . . . . . . . . . . . . . 15% 15% 15% 15%

Northeast . . . . . . . . . . . . . . . . . 20 21 19 19

Southeast . . . . . . . . . . . . . . . . . 20 18 24 24

Southwest . . . . . . . . . . . . . . . . . 15 14 15 15

West. . . . . . . . . . . . . . . . . . . . . 30 32 27 27

Total . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100%

Origination year:

G= 2001 . . . . . . . . . . . . . . . . . 2% 2%

2002. . . . . . . . . . . . . . . . . . . . . 3 3

2003. . . . . . . . . . . . . . . . . . . . . 10 11

2004. . . . . . . . . . . . . . . . . . . . . 6 7

2005. . . . . . . . . . . . . . . . . . . . . 8 9

2006. . . . . . . . . . . . . . . . . . . . . 8 8

2007. . . . . . . . . . . . . . . . . . . . . 11 12

2008. . . . . . . . . . . . . . . . . . . . . 8 9

2009. . . . . . . . . . . . . . . . . . . . . 20 21

2010. . . . . . . . . . . . . . . . . . . . . 21 18

2011. . . . . . . . . . . . . . . . . . . . . 3 —

Total . . . . . . . . . . . . . . . . . . . 100% 100%

* 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 0.5% of our singlefamily conventional guaranty book of business as of both March 31, 2011 and December 31, 2010. Second lien mortgage loans held

by third parties are not reflected in the original LTV or mark-to-market LTV ratios in this table.

60
(2) Calculated based on unpaid principal balance of single-family loans for each category at time of acquisition. Single-Family business

volume refers to both single-family mortgage loans we purchase for our mortgage portfolio and single-family mortgage loans we

securitize into Fannie Mae MBS.

(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 4.3% of our single-family conventional guaranty book of business as of March 31, 2011 and 3.9% as of December 31,

2010. See “Business—Our Charter and Regulation of Our Activities—Charter Act-Loan Standards” in our 2010 Form 10-K 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 a 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 the first quarter of

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), the LTV ratios at origination for our 2011 acquisitions to date are higher than for our 2009 and 2010

acquisitions.

Whether our acquisitions throughout 2011 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. FHA’s role as the lower-cost option for

some consumers, or in some cases the only option, for loans with higher LTV ratios reduced our acquisition of

these types of loans. We expect the ultimate performance of all our loans will be affected by macroeconomic

trends, including unemployment, the economy, and home prices.

The credit profile of our acquisitions in the first quarter of 2011 was further influenced by a significant

percentage of our acquisitions representing refinanced loans, which generally have a strong credit profile

because refinancing indicates the borrower’s ability to make their mortgage payment and desire to maintain

homeownership. Refinancings represented 82% of our single-family acquisitions in the first quarter of 2011.

While refinanced loans have historically tended to perform better than loans used for initial home purchase,

Refi Plus loans may not ultimately perform as strongly as traditional refinanced loans because these loans,

which relate to non-delinquent Fannie Mae mortgages that were refinanced, may have original LTV ratios as

high as 125% and, in some cases, lower FICO credit scores than we generally require. In the first quarter of

2011, our regulator granted our request for an extension of our ability to acquire loans under Refi Plus with

LTV ratios greater than 80% and up to 125% for loans originated through June 2012. Approximately 17% of

our single-family conventional business volume for the first quarter of 2010 consisted of loans with LTV ratios

higher than 80% at the time of purchase. For the first quarter of 2011, these loans accounted for 16% of our

single-family business volume.

61
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 March 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

March 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.

Our exposure, as discussed in this paragraph, to Alt-A and subprime loans included in our single-family

conventional guaranty book of business 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 mortgagerelated 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 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 $203.7 billion as of March 31, 2011, represented approximately 7.2% 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 $6.3 billion as of March 31, 2011, represented

approximately 0.2% of our single-family conventional guaranty book of business. See “Table 34: Risk

Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” for

information on our single-family book of business.

The outstanding unpaid principal balance of our jumbo-conforming and high-balance loans was $122.4 billion,

or 4.3% of our single-family conventional guaranty book of business, as of March 31, 2011 and $109.7 billion,

or 3.9% of our single-family conventional guaranty book of business, as of December 31, 2010. Jumboconforming and high-balance loans refer to high-balance loans we acquired pursuant to the Economic

Stimulus Act of 2008, the 2008 Reform Act and the American Recovery and Reinvestment Act of 2009,

which increased our conforming loan limits in certain high-cost areas above our standard conforming loan

limit. These increases are currently in effect for mortgages originated through September 30, 2011 and will

expire at that time, unless Congress acts to extend them. The standard conforming loan limit for a one-unit

property was $417,000 in 2011 and 2010. See “Business—Our Charter and Regulation of Our Activities—

Charter Act—Loan Standards” in our 2010 Form 10-K for additional information on our loan limits.

The outstanding unpaid principal balance of reverse mortgage whole loans included in our mortgage portfolio

was $50.9 billion as of March 31, 2011 and $50.8 billion as of December 31, 2010. Our reverse-mortgage

portfolio 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

the 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 December 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.

62
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 reduce the severity of the losses we incur. If a

borrower does not make required 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. We refer to actions taken by servicers

with borrowers to resolve existing or potential delinquent loan payments as “workouts.” Our loan workouts

reflect our various types of home retention strategies and foreclosure alternatives.

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 preforeclosure 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. However, the existence of a second lien may limit our ability to provide

borrowers with loan workout options, including those that are part of our foreclosure prevention efforts. 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.

Our mortgage servicers are the primary point of contact for borrowers and perform a vital role in our efforts to

reduce defaults and pursue foreclosure alternatives. 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. 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.

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.

63
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 periods indicated.

Table 35: Delinquency Status of Single-Family Conventional Loans

March 31,

2011

December 31,

2010

March 31,

2010

As of

As of period end:

Delinquency status:

30 to 59 days delinquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.93% 2.32% 2.09%

60 to 89 days delinquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.70 0.87 0.90

Seriously delinquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.27 4.48 5.47

Percentage of seriously delinquent loans that have been delinquent for more

than 180 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71% 67% 62%

Early Stage Delinquency

The prolonged and severe decline in home prices, coupled with continued high unemployment, caused an

overall increase in the number of early stage delinquencies—loans that are delinquent but less than three

monthly payments past due—over the past several years. However, the number of early stage delinquencies

has decreased as of March 31, 2011 compared with December 31, 2010.

Serious Delinquency

The number of loans at risk of becoming seriously delinquent has diminished in 2011 as early stage

delinquencies have decreased. As of March 31, 2011, the percentage and number of our single-family

conventional loans that were seriously delinquent decreased, as compared with December 31, 2010, and has

decreased every month since February 2010. The decrease in our serious delinquency rate in 2010 and the first

quarter of 2011 was primarily the result of home retention solutions, mainly loan modifications, and

foreclosure alternatives completed, combined with foreclosures when a viable solution was not available. The

volume of loans impacted by these actions continues to exceed the number of loans becoming seriously

delinquent, thereby decreasing our percentage of seriously delinquent loans. The decrease is also attributable

to our acquisition of loans with stronger credit profiles in 2010 and the first quarter of 2011.

We expect serious delinquency rates will continue to be affected in the future by changes in economic factors

such as home prices, unemployment rates and household wealth, and by the extent to which borrowers with

modified loans again become delinquent in their payments.

We continue to work with our servicers to reduce delays in determining and executing the appropriate workout

solution. However, the continued negative conditions in the current economic environment, such as the

sustained weakness in the housing market and high unemployment, have continued to adversely affect the

serious delinquency rates across our single-family conventional guaranty book of business and the serious

delinquency rate remains elevated. Additionally, the period of time that loans are seriously delinquent

continues to remain extended.

Table 36 provides a comparison, by geographic region and by loans with and without credit enhancement, of

the serious delinquency rates as of the periods indicated for single-family conventional loans in our singlefamily guaranty book of business.

64
Table 36: Serious Delinquency Rates

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

March 31, 2011 December 31, 2010 March 31, 2010

Single-family conventional

delinquency rates by geographic

region:(1)

Midwest. . . . . . . . . . . . . . . . . . 15% 3.99% 15% 4.16% 16% 4.96%

Northeast . . . . . . . . . . . . . . . . . 19 4.30 19 4.38 19 4.74

Southeast . . . . . . . . . . . . . . . . . 24 6.08 24 6.15 24 7.22

Southwest . . . . . . . . . . . . . . . . 15 2.73 15 3.05 15 4.17

West . . . . . . . . . . . . . . . . . . . . 27 3.61 27 4.06 26 5.55

Total single-family

conventional loans . . . . . . . 100% 4.27% 100% 4.48% 100% 5.47%

Single-family conventional loans:

Credit enhanced . . . . . . . . . . . . 15% 10.13% 15% 10.60% 17% 13.29%

Non-credit enhanced . . . . . . . . . 85 3.26 85 3.40 83 3.90

Total single-family

conventional loans . . . . . . . 100% 4.27% 100% 4.48% 100% 5.47%

(1) See footnote 9 to “Table 34: 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, subprime 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. States in the

Midwest have experienced prolonged economic weakness and California, Florida, Arizona and Nevada have

experienced the most significant declines in home prices coupled with unemployment rates that remain high.

65
Table 37 presents the conventional serious delinquency rates and other financial information for our singlefamily loans with some of these higher-risk characteristics as of the periods indicated. The reported categories

are not mutually exclusive. See “Consolidated Results of Operations—Credit-Related Expenses—Credit Loss

Performance Metrics” for information on the portion of our credit losses attributable to Alt-A loans and

certain other higher-risk loan categories.

Table 37: Single-Family Conventional Serious Delinquency Rate Concentration Analysis

Unpaid

Principal

Balance

Percentage

of Book

Outstanding

Serious

Delinquency Rate

Estimated

Mark-toMarket

LTV

Ratio(1)

Unpaid

Principal

Balance

Percentage

of Book

Outstanding

Serious

Delinquency Rate

Estimated

Mark-toMarket

LTV

Ratio(1)

Unpaid

Principal

Balance

Percentage

of Book

Outstanding

Serious

Delinquency Rate

Estimated

Mark-toMarket

LTV

Ratio(1)

March 31, 2011 December 31, 2010 March 31, 2010

As of

(Dollars in millions)

States:

Arizona . . . . . .$ 70,055 2% 5.16% 110% $ 71,052 2% 6.23% 105% $ 74,831 3% 8.76% 103%

California ..... 518,569 19 3.35 78 507,598 18 3.89 76 492,294 17 5.72 77

Florida ....... 182,943 7 12.40 110 184,101 7 12.31 107 192,724 7 13.27 103

Nevada . . . . . . . 30,856 1 9.40 133 31,661 1 10.66 128 34,166 1 13.95 130

Select Midwest

states(2) ..... 294,182 10 4.62 82 292,734 11 4.80 80 302,017 11 5.65 80

All other states . . 1,718,421 61 3.34 73 1,695,615 61 3.46 71 1,701,543 61 4.19 70

Product type:

Alt-A ........ 203,709 7 13.45 100 211,770 8 13.87 96 238,325 9 16.22 94

Subprime ..... 6,328 * 27.47 108 6,499 * 28.20 103 7,179 * 31.47 100

Vintages:

2006 ........ 218,938 8 12.12 109 232,009 8 12.19 104 277,752 10 13.42 100

2007 ........ 315,420 11 13.08 109 334,110 12 13.24 104 401,782 14 14.85 99

All other

vintages..... 2,280,667 81 2.50 72 2,216,642 80 2.62 70 2,118,041 76 3.12 68

Estimated

mark-to-market

LTV ratio:

Greater than

100%(1) ..... 499,432 18 15.72 130 435,991 16 17.70 130 439,327 16 21.79 129

Select combined

risk

characteristics:

Original LTV ratio

H 90% and

FICO score

G 620 . . . . . . . 20,656 1 20.20 113 21,205 1 21.41 109 23,395 1 26.94 106

* 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.

Loan Workout Metrics

The efforts of our mortgage servicers are critical in keeping people in their homes, preventing foreclosures and

providing homeowner assistance. 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. Additionally, partnering with our servicers, civic and community leaders and housing industry

partners, we have launched a series of nationwide Mortgage Help Centers to accelerate the response time for

struggling borrowers with loans owned by us. As of March 31, 2011, we have established six Mortgage Help

Centers which completed approximately 800 home retention plans in the first quarter of 2011.

66
Our approach to workouts continues to address the large number of borrowers facing long-term, rather than

short-term, financial hardships due to prolonged economic stress and high levels of unemployment.

Accordingly, the vast majority of loan modifications we completed during the first quarter of 2011 were, as in

recent periods, concentrated on lowering or deferring the borrowers’ monthly mortgage payments for a

predetermined period of time to allow borrowers to work through their hardships.

In addition, we continue to focus on alternatives to foreclosure for borrowers who are unable to retain their

homes. Our servicers work with a borrower to sell their home prior to foreclosure in a preforeclosure 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. Further, in cooperation with several Multiple Listing Services (“MLS”) across the

nation, we developed the Short Sale Assistance Desk (“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. The Assistance Desk leverages the relationship between the

participating MLSs and their members to collect and submit information to us using a dedicated submission

form on the MLS website. Complementing this streamlined service, the participating MLS provides us with

data to help improve valuations and make quicker decisions regarding short sale requests. The Assistance Desk

is meant to serve as a catalyst for progress towards a resolution for the homeowner.

Table 38 provides 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 38: Statistics on Single-Family Loan Workouts

Unpaid

Principal

Balance

Number

of Loans

Unpaid

Principal

Balance

Number

of Loans

Unpaid

Principal

Balance

Number

of Loans

For the

Three Months Ended

March 31, 2011

For The

Year Ended

December 31, 2010

For the

Three Months Ended

March 31, 2010

(Dollars in millions)

Home retention strategies:

Modifications . . . . . . . . . . . . . . . . . . . . . . . . . $10,668 51,043 $ 82,826 403,506 $19,005 93,756

Repayment plans and forbearances completed . . 1,374 9,916 4,385 31,579 1,137 8,682

HomeSaver Advance first-lien loans. . . . . . . . . . — — 688 5,191 178 2,588

$12,042 60,959 $ 87,899 440,276 $20,320 105,026

Foreclosure alternatives:

Preforeclosure sales . . . . . . . . . . . . . . . . . . . . . $ 3,415 15,344 $ 15,899 69,634 $ 3,817 16,457

Deeds-in-lieu of foreclosure . . . . . . . . . . . . . . . 318 1,776 1,053 5,757 158 869

$ 3,733 17,120 $ 16,952 75,391 $ 3,975 17,326

Total loan workouts . . . . . . . . . . . . . . . . . . . . . . . $15,775 78,079 $104,851 515,667 $24,295 122,352

Loan workouts as a percentage of single-family

guaranty book of business(1) . . . . . . . . . . . . . . . 2.18% 1.73% 3.66% 2.87% 3.38% 2.68%

(1) Calculated based on annualized loan workouts during the period as a percentage of our single-family guaranty book of

business as of the end of the period.

The volume of workouts completed in the first quarter of 2011 decreased compared with the first quarter of 2010,

in part because we began to require that certain non-HAMP modifications go through a trial period, which lowered

the number of modifications that became permanent. The number of foreclosure alternatives we agreed to during

the first quarter of 2011 remains high as these are favorable solutions for a growing number of borrowers. We

expect the volume of our foreclosure alternatives to remain high throughout the remainder of 2011.

67
During the first quarter of 2011, approximately two-thirds of our loan modifications were completed under

HAMP. During the first quarter of 2011, we initiated approximately 31,000 trial modifications under HAMP

compared with 92,000 during the first quarter of 2010. We also initiated other types of loan modifications,

repayment plans and forbearances. It is difficult to predict how many of these trial modifications and initiated

plans will be completed.

Table 39 displays the profile of loan modifications (HAMP and non-HAMP) provided to borrowers for the

three months ended March 31, 2011 and the year ended December 31, 2010.

Table 39: Loan Modification Profile

For the

Three Months Ended

March 31, 2011

For The

Year Ended

December 31, 2010

Term extension, interest rate reduction, or combination of both(1) . . . . . . . . . . 96% 93%

Initial reduction in monthly payment(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 91

Estimated mark-to-market LTV ratio H 100% . . . . . . . . . . . . . . . . . . . . . . . 64 53

Troubled debt restructurings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 94

(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.

A significant portion of our modifications pertain to loans with a mark-to-market LTV ratio greater than 100%

because 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 March 31, 2011, the serious delinquency rate for loans with a

mark-to-market LTV ratio greater than 100% was 16%, compared with our overall average single-family

serious delinquency rate of 4.27%.

Approximately 65% of loans modified during the first quarter of 2010 were current or had paid off as of one

year following the loan modification date. In comparison, 39% of loans modified during the first quarter of

2009 were current or had paid off as of one year following the loan modification date. There is significant

uncertainty regarding the ultimate long term success of our current modification efforts because of the

economic and financial pressures on borrowers. 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.

As we have focused our efforts on distressed borrowers who are experiencing current economic hardship, the

short-term performance of our workouts may not be indicative of long-term performance. We believe the

performance of our workouts will be highly dependent on economic factors, such as unemployment rates,

household wealth and home prices.

68
REO Management

Foreclosure and REO activity affect the level of credit losses. Table 40 compares 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.

Table 40: Single-Family Foreclosed Properties

2011 2010

For the Three Months

Ended March 31,

Single-family foreclosed properties (number of properties):

Beginning of period inventory of single-family foreclosed properties (REO)(1) . . . . . . . . . . . . . 162,489 86,155

Acquisitions by geographic area:(2)

Midwest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,285 15,095

Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,004 3,590

Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,976 17,748

Southwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,666 12,882

West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,618 12,614

Total properties acquired through foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,549 61,929

Dispositions of REO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (62,814) (38,095)

End of period inventory of single-family foreclosed properties (REO)(1) . . . . . . . . . . . . . . . . . . 153,224 109,989

Carrying value of single-family foreclosed properties (dollars in millions)(3) . . . . . . . . . . . . . . . $ 14,086 $ 11,423

Single-family foreclosure rate(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.19% 1.36%

(1) Includes acquisitions through deeds-in-lieu of foreclosure.

(2) See footnote 9 to “Table 34: 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 condensed consolidated balance sheets as a

component of “Acquired property, net.”

(4) Estimated based on the annualized total number of properties acquired through foreclosure as a percentage of the total

number of loans in our single-family conventional guaranty book of business as of the end of each respective period.

The continued weak economy, as well as high unemployment rates, continue to result in an increase in the

percentage of our mortgage loans that transition from delinquent to REO status, either through foreclosure or

deed-in-lieu of foreclosure. Additionally, the prolonged decline in home prices on a national basis has

significantly reduced the values of our single-family REO. Our foreclosure rates remain high. However,

foreclosure levels were lower than what they otherwise would have been in the first quarter of 2011 due to the

delays caused by servicer foreclosure process deficiencies and the resulting foreclosure pause. Additionally,

foreclosure levels during 2010 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 percentage of our properties that we are unable to market for sale remains high. The most common

reasons for our inability to market properties for sale are: (1) properties are within the period during which

state law allows the former mortgagor and second lien holders to redeem the property (states which allow this

are known as “redemption states”); (2) properties are still occupied by the person or personal property and the

eviction process is not yet complete (“occupied status”); or (3) properties are being repaired. 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. For example, as of March 31, 2011, approximately 25% compared with 27% as

of December 31, 2010, of our properties that we were unable to market for sale were in redemption status,

which lengthens the time a property is in our REO inventory by an average of three to six months.

69
Additionally, as of March 31, 2011, approximately 39% compared with 40% as of December 31, 2010, of our

properties that we were unable to market for sale were in occupied status, which lengthens the time a property

is in our REO inventory by an average of one to three months.

As shown in Table 41 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 41: Single-Family Acquired Property Concentration Analysis

Percentage of

Book

Outstanding(1)

Percentage of

Book

Outstanding(1)

Percentage of

Properties

Acquired

by Foreclosure(2)

Percentage of

Properties

Acquired

by Foreclosure(2)

March 31, 2011 December 31, 2010

March 31, 2011 March 31, 2010

For the Three Months Ended

As of

States:

Arizona, California, Florida, and Nevada . . 29% 28% 39% 36%

Illinois, Indiana, Michigan, and Ohio. . . . . 10 11 17 19

(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.

We continue to work with our servicers to manage our foreclosure timelines and although we have expanded

our loan workout initiatives to help borrowers stay in their homes, our foreclosure levels for the first quarter of

2011 remain high as a result of the continued adverse impact that the weak economy and high unemployment

have had on the financial condition of borrowers. Although the foreclosure pause has negatively affected our

foreclosure timelines and reduced the number of new REO acquisitions, we cannot yet predict the full impact

of the pause.

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 “Consolidated Results of Operations—Credit-Related

Expenses.”

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

mortgage-related 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.

The credit statistics reported below, unless otherwise noted, pertain only to a specific portion of our

multifamily guaranty book of business for which we have access to detailed loan-level information. 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. The portion of our multifamily guaranty

book of business for which we have detailed loan level-information, excluding loans that have been defeased,

constituted 99% of our total multifamily guaranty book as of both March 31, 2011 and December 31, 2010.

70
See “Risk Factors” in our 2010 Form 10-K for a discussion of the risk due to our reliance on lender

representations regarding the accuracy of the characteristics of loans in our guaranty book of business.

Multifamily Acquisition Policy and Underwriting Standards

Our Multifamily business, in conjunction with 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 Delegated Underwriting and Servicing (“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 84% of our multifamily

guaranty book of business as of March 31, 2011 and December 31, 2010.

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. Other lenders

typically share or absorb credit losses based on a negotiated percentage of the loan or the pool balance.

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 arrangements is an

important factor that influences credit quality and performance and helps reduce our credit risk.

The weighted average original LTV ratio for our multifamily guaranty book of business was 66% as of

March 31, 2011 and 67% as of December 31, 2010. The percentage of our multifamily guaranty book of

business with an original LTV ratio greater than 80% was 5% as of both March 31, 2011 and December 31,

2010. We present the current risk profile of our multifamily guaranty book of business in “Note 6, Financial

Guarantees.”

We monitor the performance and risk concentrations of our multifamily loans and the underlying properties on

an ongoing basis throughout the life of the investment at the loan, property and portfolio level. We closely

track the physical condition of the property, 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. 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 the performance of our third-party service providers for

compliance with our asset management criteria.

Problem Loan Management and Foreclosure Prevention

Unfavorable economic conditions have caused our multifamily serious delinquency rate and the level of

defaults to remain elevated. Since delinquency rates are a lagging indicator, even if the market shows some

improvement, we expect 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.

71
Problem Loan Statistics

Table 42 provides 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 42: Multifamily Serious Delinquency Rates

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

March 31, 2011 December 31, 2010 March 31, 2010

As of

Multifamily loans:

Credit enhanced . . . . . . . . 90% 0.59% 89% 0.67% 89% 0.69%

Non-credit enhanced . . . . . 10 1.05 11 1.01 11 1.56

Total multifamily

loans . . . . . . . . . . . . 100% 0.64% 100% 0.71% 100% 0.79%

The multifamily serious delinquency rate decreased as of March 31, 2011 compared with both December 31,

2010 and March 31, 2010 as national multifamily market fundamentals continue to improve. Table 43

provides a comparison of our multifamily serious delinquency rates for loans acquired through DUS lenders

and loans acquired through non-DUS lenders.

Table 43: Multifamily Concentration Analysis

Percentage

of Book

Outstanding

Serious

Delinquency

Rate

Percentage

of Book

Outstanding

Serious

Delinquency

Rate

Percentage

of Book

Outstanding

Serious

Delinquency

Rate 2011 2010

Percentage

of

Multifamily

Credit

Losses

For the

Three

Months

Ended

March 31,

March 31, 2011 December 31, 2010 March 31, 2010

As of

DUS small balance loans(1) . . . . . . . . . . 8% 0.68% 8% 0.55% 8% 0.47% 8% 12%

DUS non small balance loans(2) . . . . . . . 70 0.48 70 0.56 68 0.56 70 72

Non-DUS small balance loans(1) . . . . . . . 10 1.41 10 1.47 11 1.41 15 11

Non-DUS non small balance loans(2) . . . . 12 0.88 12 0.97 13 1.62 7 5

(1) Loans with original unpaid principal balances less than or equal to $3 million except in high cost markets where they

are loans with original unpaid principal balances less than or equal to $5 million.

(2) Loans with original unpaid principal balances greater than $3 million except in high cost markets where they are loans

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 nonDUS loans in our guaranty book primarily due to the DUS model, which has several features that align our

interest with those of the borrowers and lenders. Smaller balance non-DUS loans continue to represent a

disproportionate share of delinquencies but they are generally covered by loss sharing arrangements, which

limit the credit losses incurred by us.

In addition, Arizona, Florida, Georgia, and Ohio, have a disproportionate 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

10% of the multifamily guaranty book of business.

72
REO Management

Foreclosure and REO activity affect the level of credit losses. Table 44 compares our held for sale multifamily

REO balances for the periods indicated.

Table 44: Multifamily Foreclosed Properties

2011 2010

For the Three

Months Ended

March 31,

Multifamily foreclosed properties (number of properties):

Beginning of period inventory of multifamily foreclosed properties (REO) . . . . . . . . . . . . . . . . 222 73

Total properties acquired through foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 47

Disposition of REO....................................................... (37) (13)

End of period inventory of multifamily foreclosed properties (REO) . . . . . . . . . . . . . . . . . . . . 235 107

Carrying value of multifamily foreclosed properties (dollars in millions) ................. $576 $319

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 improved 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.

See “MD&A—Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk

Management” in our 2010 Form 10-K for additional information about our institutional counterparties,

including counterparty risk we face from mortgage originators and investors, from debt security and mortgage

dealers and from document custodians.

Mortgage Seller/Servicers

Our business with our mortgage seller/servicers is concentrated. Our ten largest single-family mortgage

servicers, including their affiliates, serviced 76% of our single-family guaranty book of business as of

March 31, 2011, compared to 77% as of December 31, 2010. Our largest mortgage servicer is Bank of

America which, together with its affiliates, serviced approximately 25% of our single-family guaranty book of

business as of March 31, 2011, compared with 26% as of December 31, 2010. In addition, we had two other

mortgage servicers, JPMorgan Chase & Co. and Wells Fargo Bank, N.A., that, with their affiliates, each

serviced over 10% of our single-family guaranty book of business as of March 31, 2011. In addition, Wells

Fargo Bank serviced over 10% of our multifamily guaranty book of business as of both March 31, 2011 and

December 31, 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.

During the first quarter of 2011, our primary mortgage servicer counterparties have generally continued to

meet their obligations to us. The large number of delinquent loans on their books of business may negatively

affect the ability of these counterparties to continue to meet their obligations to us in the future.

73
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.” During the first quarter of 2011, the number of our

repurchase requests remained high. The aggregate unpaid principal balance of loans repurchased by our seller/

servicers pursuant to their contractual obligations was approximately $1.6 billion, compared to $1.8 billion

during the first quarter of 2010. In addition, as of March 31, 2011, we had $8.6 billion in outstanding

repurchase requests related to loans that had been reviewed for potential breaches of contractual obligations,

compared to $5.0 billion as of December 31, 2010. As of March 31, 2011, approximately 58% of our total

outstanding repurchase requests had been made to one of our seller/servicers, compared to 41% as of

December 31, 2010. As of March 31, 2011, 20% of our outstanding repurchase requests had been outstanding

for more than 120 days from either the original loan repurchase request date or, for lenders remitting after the

REO is disposed, the date of our final loss determination, compared to 30% as of December 31, 2010.

The amount of our outstanding repurchase requests provided above is 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 this amount. In addition, 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.

We continue to work with our mortgage seller/servicers to fulfill outstanding repurchase requests; however, 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. If a significant

seller/servicer counterparty, or a number of seller/servicer counterparties, fails to fulfill its repurchase

obligations to us, it could result in a significant increase in our credit losses and have a material adverse effect

on our results of operations and financial condition. We expect that the amount of our outstanding repurchase

requests could remain high in 2011.

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” in our 2010 Form 10-K for additional discussion on

risks of mortgage fraud to which we are exposed.

Mortgage Insurers

We use several types of credit enhancement to manage our single-family mortgage credit risk, including

primary and pool mortgage insurance coverage. 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 $94.8 billion on the single-family mortgage loans in our guaranty book of business as

of March 31, 2011, which represented approximately 3% of our single-family guaranty book of business as of

March 31, 2011. Primary mortgage insurance represented $90.2 billion of this total, and pool mortgage

insurance was $4.6 billion. We had total mortgage insurance coverage risk in force of $95.9 billion on the

single-family mortgage loans in our guaranty book of business as of December 31, 2010, which represented

approximately 3% of our single-family guaranty book of business as of December 31, 2010. Primary mortgage

insurance represented $91.2 billion of this total, and pool mortgage insurance was $4.7 billion of this total.

74
Table 45 presents our maximum potential loss recovery for the primary and pool mortgage insurance coverage

on single-family loans in our guaranty book of business by mortgage insurer for our top eight mortgage

insurer counterparties as of March 31, 2011. These mortgage insurers provided over 99% of our total

mortgage insurance coverage on single-family loans in our guaranty book of business as of March 31, 2011.

Table 45: Mortgage Insurance Coverage

Counterparty:(1) Primary Pool Total

Maximum Coverage(2)

As of March 31, 2011

(Dollars in millions)

Mortgage Guaranty Insurance Corporation ........................... $21,073 $1,781 $22,854

Radian Guaranty, Inc. . . . ....................................... 14,956 339 15,295

Genworth Mortgage Insurance Corporation ........................... 14,080 76 14,156

United Guaranty Residential Insurance Company ...................... 13,779 172 13,951

PMI Mortgage Insurance Co. ..................................... 11,901 289 12,190

Republic Mortgage Insurance Company ............................. 9,317 1,206 10,523

Triad Guaranty Insurance Corporation .............................. 2,877 779 3,656

CMG Mortgage Insurance Company(3) .............................. 1,940 — 1,940

(1) Insurance coverage amounts provided for each counterparty may include coverage provided by consolidated affiliates

and subsidiaries of the counterparty.

(2) Maximum coverage refers to the aggregate dollar amount of insurance coverage (i.e., “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.

(3) CMG Mortgage Insurance Company is a joint venture owned by PMI Mortgage Insurance Co. and CUNA Mutual

Insurance Society.

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. A

number of our mortgage insurers have received waivers from their regulators regarding state-imposed

risk-to-capital limits. Without these waivers, these mortgage insurers would not be able to continue to write

new business in accordance with state regulatory requirements, should they fall below their regulatory capital

requirements. In anticipation that a waiver may not be granted or continued by their regulator, at least one of

our mortgage insurers arranged for another mortgage insurer subsidiary or affiliate to write new business on its

behalf. The parent companies of several of our largest mortgage insurer counterparties raised capital, which

may improve their ability to meet state-imposed risk-to-capital limits and their ability to continue paying our

claims in full as they come due, to the extent that the capital raised by the parent companies is contributed to

their respective mortgage insurance entities. Though we are unable to determine how long certain of our

mortgage insurer counterparties will remain below their state-imposed risk-to-capital limits, at this time we

continue to receive payments on our claims as they come due, except where deferred payment terms have

been established.

Our mortgage insurer counterparties have increased the number of mortgage loans for which they have

rescinded coverage. In those cases where mortgage insurance was obtained and the mortgage insurer has

rescinded coverage, we generally require the seller/servicer to repurchase the loan or indemnify us against

loss.

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. Although these agreements do not affect our rights to demand repurchase in the

event of violations of lender representations and warranties, these agreements are likely to result in fewer

mortgage insurance rescissions for certain groups of loans. Fewer rescissions may result in Fannie Mae

devoting more resources to an independent review process to determine whether loans subject to these

agreements have underlying origination defects.

75
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 hope 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.

Besides evaluating their condition to assess whether we have incurred probable losses in connection with our

coverage, we also evaluate these counterparties individually to determine whether or under what conditions

they will remain eligible to insure new mortgages sold to us. Except for Triad Guaranty Insurance

Corporation, as of May 6, 2011, our private mortgage insurer counterparties remain qualified to conduct

business with us.

As of March 31, 2011, our allowance for loan losses of $67.6 billion, allowance for accrued interest receivable

of $2.9 billion and reserve for guaranty losses of $257 million incorporated an estimated recovery amount of

approximately $16.5 billion from mortgage insurance related both to loans that are individually measured for

impairment and those that are collectively reserved. This amount is comprised of the contractual recovery of

approximately $17.4 billion as of March 31, 2011 and an adjustment of approximately $975 million which

reduces the contractual recovery for our assessment of our mortgage insurer counterparties’ inability to fully

pay those claims. As of December 31, 2010, our allowance for loan losses of $61.6 billion, allowance for

accrued interest receivable of $3.4 billion and reserve for guaranty losses of $323 million incorporated an

estimated recovery amount of approximately $16.4 billion from mortgage insurance related both to loans that

are individually measured for impairment and those that are collectively reserved. This amount is comprised of

the contractual recovery of approximately $17.5 billion as of December 31, 2010 and an adjustment of

approximately $1.2 billion, which reduces the contractual recovery for our assessment of our mortgage insurer

counterparties’ inability to fully pay those claims.

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 $4.1 billion as of March 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 $650 million as of March 31,

2011 and $648 million as of December 31, 2010 was due from our mortgage seller/servicers. We assessed the

receivables for collectibility, and they were recorded net of a valuation allowance of $271 million as of

March 31, 2011 and $317 million as of December 31, 2010 in “Other assets.” These mortgage insurance

receivables are short-term in nature, having a duration of approximately three to 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 $1.6 billion for

the first quarter of 2011 and $6.4 billion for the year ended December 31, 2010.

Financial Guarantors

We were the beneficiary of financial guarantees totaling $8.6 billion as of March 31, 2011 and $8.8 billion as

of December 31, 2010 on securities held in our investment portfolio or on securities that have been

resecuritized to include a Fannie Mae guaranty and sold to third parties. The securities covered by these

guarantees consist primarily of private-label mortgage-related securities and mortgage revenue bonds. We are

also the beneficiary of financial guarantees included in securities issued by Freddie Mac, the federal

government and its agencies that totaled $23.9 billion as of March 31, 2011 and $25.7 billion as of

December 31, 2010.

76
With the exception of Ambac Assurance Corporation, none of our financial guarantor counterparties has failed

to repay us for claims under guaranty contracts. However, based on the stressed financial condition of our

financial guarantor counterparties, we believe that one or more of our financial guarantor counterparties may

not be able to fully meet their obligations to us in the future. We model our securities assuming the benefit of

those external financial guarantees from guarantors that we determine are creditworthy. For additional

discussions of our model methodology and key inputs used to estimate other-than-temporary impairment see

“Note 5, Investments in Securities.”

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 $14.8 billion as of March 31, 2011 and $15.6 billion

as of December 31, 2010. As of March 31, 2011, 55% of our maximum potential loss recovery on singlefamily loans was from three lenders. As of December 31, 2010, 56% of our maximum potential loss recovery

on single-family loans was from three lenders. Our maximum potential loss recovery from lenders under these

risk sharing agreements on multifamily loans was $30.7 billion as of March 31, 2011 and $30.3 billion as of

December 31, 2010. As of both March 31, 2011 and December 31, 2010, 41% of our maximum potential loss

recovery on multifamily loans was from three 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 Standard & Poor’s, Moody’s and Fitch

ratings) was 46% as of both March 31, 2011 and December 31, 2010. The percentage of these recourse

obligations to lender counterparties rated below investment grade was 23% as of both March 31, 2011 and

December 31, 2010. The remaining percentage of these recourse obligations were to lender counterparties that

were not rated by rating agencies, which was 31% as of both March 31, 2011 and 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 March 31, 2011, approximately 54% of the unpaid principal balance of

loans in our guaranty book of business was serviced by our DUS lenders, which are 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. To ensure the level of risk associated with

these lenders remains within our standards, we actively monitor their financial condition.

Custodial Depository Institutions

A total of $47.9 billion in deposits for single-family payments were received and held by 287 institutions in

the month of March 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, 93% as of March 31, 2011

and 92% as of December 31, 2010 were held by institutions rated as investment grade by Standard & Poor’s,

Moody’s and Fitch. Our ten largest custodial depository institutions held 93% of these deposits as of both

March 31, 2011 and December 31, 2010.

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

77
asset-backed securities. See “Liquidity and Capital Management—Liquidity Management—Cash and Other

Investments Portfolio” for more detailed information on our cash and other investments portfolio. Our

counterparty risk is primarily with financial institutions and Treasury.

Our cash and other investments portfolio, which totaled $79.6 billion as of March 31, 2011, included

$32.5 billion of U.S. Treasury securities and $10.8 billion of unsecured positions. All of our unsecured

positions were short-term deposits with financial institutions that had short-term credit ratings of A-1, P-1, F1

(or its equivalent) or higher from Standard & Poor’s, Moody’s and Fitch ratings, respectively. 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 our unsecured positions were shortterm deposits with financial institutions which had short-term credit ratings of A-1, P-1, F1 (or equivalent) or

higher from Standard & Poor’s, Moody’s and Fitch ratings, respectively.

Derivatives Counterparties

Our derivative 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 by

counterparty where the right of legal offset exists, such as master netting agreements, and by transaction where

the right of legal offset does not exist. Derivatives in a gain position are included in our condensed

consolidated balance sheets in “Other assets.” We manage our exposure to derivatives counterparties by

requiring collateral in specified instances.

Our net credit exposure on derivatives contracts decreased to $104 million as of March 31, 2011, from

$152 million as of December 31, 2010. We had outstanding interest rate and foreign currency derivative

transactions with 15 counterparties as of March 31, 2011 and December 31, 2010. Derivatives transactions

with nine of our counterparties accounted for approximately 91% of our total outstanding notional amount as

of March 31, 2011, with each of these counterparties accounting for between approximately 5% and 16% of

the total outstanding notional amount. In addition to the 15 counterparties with whom we had outstanding

notional amounts as of March 31, 2011, we had a master netting agreement with one more counterparty with

whom we may enter into interest rate derivative or foreign currency derivative transactions 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 March 31, 2011 and December 31, 2010. See

“Risk Factors” in our 2010 Form 10-K for a discussion of the risks to our business posed by interest rate risk

and a discussion of the risks to our business as a result of the increasing concentration of our derivatives

counterparties.

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. We describe our sources of

interest rate risk exposure and our strategy for managing interest rate risk and spread risk in “MD&A—Risk

Management—Market Risk Management, Including Interest Rate Risk Management” in our 2010 Form 10-K.

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

78
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.

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

Summaries, which are available on our website and announced in a press release.

The sensitivity measures presented in Table 46, 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.

In addition, Table 46 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 March 31, 2011.

79
Table 46: Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve(1)

March 31, 2011 December 31, 2010

As of

(Dollars in billions)

Rate level shock:

-100 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(0.2) $(0.8)

-50 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (0.2)

+50 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.1) (0.2)

+100 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.3) (0.5)

Rate slope shock:

-25 basis points (flattening) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (0.1)

+25 basis points (steepening) . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 0.1

Duration

Gap

Rate Slope Shock

25 Bps

Rate Level Shock

50 Bps

For the Three Months Ended March 31, 2011

(In months)

Exposure

(Dollars in billions)

Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 $0.1 $0.2

Minimum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.4) — 0.1

Maximum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 0.2 0.4

Standard deviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 — 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 47 shows an example

of how derivatives impacted the net market value exposure for a 50 basis point parallel interest rate shock.

Table 47: Derivative Impact on Interest Rate Risk (50 Basis Points)

Before

Derivatives

After

Derivatives

Effect of

Derivatives

(Dollars in billions)

As of March 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.

In “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management—

Measurement of Interest Rate Risk—Other Interest Rate Risk Information” in our 2010 Form 10-K, we

provided additional interest rate sensitivities including separate disclosure of the potential impact on the fair

value of our trading assets and other financial instruments. As of March 31, 2011, these sensitivities were

relatively unchanged as compared with December 31, 2010. The fair value of our trading financial instruments

and our other financial instruments as of March 31, 2011 and December 31, 2010 can be found in “Note 13,

Fair Value.”

80
Liquidity Risk Management

See “Liquidity and Capital Management—Liquidity Management” for a discussion on how we manage

liquidity risk.

IMPACT OF FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

We identify and discuss the expected impact on our condensed consolidated financial statements of recently

issued accounting pronouncements in “Note 1, Summary of Significant Accounting Policies.”

FORWARD-LOOKING STATEMENTS

This report includes statements that constitute forward-looking statements within the meaning of Section 21E

of the Securities Exchange Act of 1934 (“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. Forwardlooking statements often include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,”

“estimate,” “forecast,” “project,” “would,” “should,” “could,” “likely,” “may,” or similar words.

Among the forward-looking statements in this report are statements relating to:

• Our expectation that loans in our new single-family book of business will be profitable over their lifetime;

• Our estimate that, while single-family loans that we acquired from 2005 through 2008 will give rise to

additional credit losses that we have not yet realized, we have reserved for the substantial majority of the

remaining losses;

• Our expectation that, if FHA continues to be the lower-cost option for some consumers, and in some

cases the only option, for loans with higher LTV ratios, our market share could be adversely impacted if

the market shifts away from refinance activity, which is likely to occur when interest rates rise;

• Our belief that loans we have acquired since 2009 would become unprofitable if home prices declined by

more than 15% from their March 2011 levels over the next five years based on our home price index;

• Our expectations regarding whether loans we acquired in specific years will be profitable or unprofitable,

or perform close to break-even;

• The possibility that changes in home prices, other economic conditions or borrower behavior could

change our expectations regarding whether loans we acquired in 2004 will be profitable;

• Our expectation that defaults on loans we acquired from 2005 through 2008 and the resulting charge-offs

will occur over a period of years;

• Our expectation that it will take years before our REO inventory is reduced to pre-2008 levels;

• Our expectation that we will realize as credit losses an estimated two-thirds of the fair value losses on

loans purchased out of MBS trusts that are reflected in our condensed consolidated balance sheets, and

recover the remaining one-third through our condensed consolidated results of operations, depending

primarily on changes in home prices and loss severity;

• Our expectation that employment will likely need to post sustained improvement for an extended period

to have a positive impact on housing;

• Our expectation that weakness in the housing and mortgage markets will continue in 2011;

• Our expectation that home sales are unlikely to increase until the unemployment rate improves further;

81
• Our expectation that single-family default and severity rates, as well as the level of single-family

foreclosures, will remain high in 2011;

• Our expectation that multifamily charge-offs in 2011 will remain commensurate with 2010 levels as

certain local markets and properties continue to exhibit weak fundamentals;

• Our expectation that the pace of our loan acquisitions for the remainder of 2011 will be significantly

lower than in 2010 and the first quarter of 2011 because we expect increasing mortgage rates and, to a

lesser extent, the high number of mortgages that have already refinanced to low rates in recent years will

lead to fewer refinancings;

• Our expectation that our future revenues will be negatively impacted to the extent our acquisitions decline

and we receive fewer risk-based fees;

• Our estimation that total originations in the U.S. single-family mortgage market in 2011 will decrease

from 2010 levels by approximately one-third, from an estimated $1.5 trillion to an estimated $1.0 trillion,

and that the amount of originations in the U.S. single-family mortgage market that are refinancings will

decline from approximately $1.1 trillion to approximately $413 billion;

• Our expectation that home prices on a national basis will decline further, with greater declines in some

geographic areas than others, before stabilizing in late 2011;

• Our expectation that the peak-to-trough home price decline on a national basis will range between 22%

and 29%, as compared with our expectation at the time we filed our 2010 Form 10-K that the

peak-to-trough home price decline on a national basis would range between 21% and 26%;

• Our expectation that our credit-related expenses and our credit losses will be higher in 2011 than in 2010;

• Our expectation that we will not earn profits in excess of our annual dividend obligation to Treasury for

the indefinite future;

• Our expectation that Congress will continue to hold hearings and consider legislation in 2011 on the

future status of Fannie Mae and Freddie Mac;

• Our expectation that, as drafted, bills introduced in Congress that would require FHFA to make a

determination within two years of enactment 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 their existing and ongoing liabilities;

• 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, servicer capacity, and other

constraints, including the limit on mortgage assets that we may own pursuant to the senior preferred stock

purchase agreement;

• 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 fair value will not

impact future Treasury draws, which is based on our intention not to have another party assume the credit

risk inherent in our book of business;

• Our expectation that our debt funding needs will decline in future periods as we reduce the size of our

mortgage portfolio in compliance with the requirements of the senior preferred stock purchase agreement;

• Our expectation that our acquisitions of Alt-A mortgage 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;

82
• Our expectation that serious delinquency rates will continue to be affected in the future by changes in

economic factors such as home prices, unemployment rates and household wealth, and by the extent to

which borrowers with modified loans again become delinquent in their payments;

• Our expectation that the volume of our foreclosure alternatives will remain high throughout the remainder

of 2011;

• Our belief that the performance of our workouts will be highly dependent on economic factors, such as

unemployment rates, household wealth and home prices;

• Our expectation that the amount of our outstanding repurchase requests to seller/servicers could remain

high in 2011;

• The possibility that, in light of agreements by mortgage insurers with lenders to waive certain rights to

investigate claims, fewer rescissions of mortgage insurance may result in our devoting more resources to

an independent review process to determine whether there are underlying origination defects in loans

subject to these agreements;

• Our belief that one or more of our financial guarantor counterparties may not be able to fully meet their

obligations to us in the future;

• Our expectation that we will continue to need funding from Treasury to avoid triggering FHFA’s

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;

• 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; and

• Our expectation that the pause in foreclosures as a result of servicer foreclosure process deficiencies will

likely continue to result in longer foreclosure timelines and higher credit-related expenses.

Forward-looking statements reflect our management’s expectations, forecasts or predictions of future conditions,

events or results based on various assumptions and management’s estimates of trends and economic factors in

the markets in which we are active, 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 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 “Risk Factors” in this report and in

our 2010 Form 10-K, as well as the factors described in “Executive Summary—Providing Liquidity, Our Strong

New Book of Business and Our Expected Losses on our Legacy Book of Loans Acquired before 2009—Factors

that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations” in this report.

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” in our 2010 Form 10-K

and in this report. Our forward-looking statements speak only as of the date they are made, and we undertake

no obligation to update any forward-looking statement because of new information, future events or otherwise,

except as required under the federal securities laws.

83
Item 1. Financial Statements

FANNIE MAE

(In conservatorship)

Condensed Consolidated Balance Sheets—(Unaudited)

(Dollars in millions, except share amounts)

March 31,

2011

December 31,

2010

As of

ASSETS

Cash and cash equivalents (includes $717 and $348, respectively, related to consolidated trusts) ........ $ 19,831 $ 17,297

Restricted cash (includes $33,405 and $59,619, respectively, related to consolidated trusts) . . . ........ 36,730 63,678

Federal funds sold and securities purchased under agreements to resell or similar arrangements ........ 26,250 11,751

Investments in securities:

Trading, at fair value (includes $21 as of both periods related to consolidated trusts) ............ 57,035 56,856

Available-for-sale, at fair value (includes $1,678 and $1,055, respectively, related to consolidated

trusts) .............................................................. 89,613 94,392

Total investments in securities . ........................................... 146,648 151,248

Mortgage loans:

Loans held for sale, at lower of cost or fair value (includes $1,055 and $661, respectively, related

to consolidated trusts) . . . ................................................ 1,414 915

Loans held for investment, at amortized cost:

Of Fannie Mae . . . ..................................................... 402,352 407,228

Of consolidated trusts (includes $2,969 and $2,962, respectively, at fair value and loans pledged as

collateral that may be sold or repledged of $2,241 and $2,522, respectively) . ............. 2,613,848 2,577,133

Total loans held for investment . . ........................................... 3,016,200 2,984,361

Allowance for loan losses . ................................................ (67,557) (61,556)

Total loans held for investment, net of allowance ................................ 2,948,643 2,922,805

Total mortgage loans . . ................................................ 2,950,057 2,923,720

Accrued interest receivable, net (includes $8,918 and $8,910, respectively, related to consolidated trusts) . . 11,303 11,279

Acquired property, net . . . ..................................................... 15,264 16,173

Other assets (includes $242 and $593, respectively, related to consolidated trusts) ................. 20,959 26,826

Total assets . . . .......................................................... $3,227,042 $3,221,972

LIABILITIES AND EQUITY (DEFICIT)

Liabilities:

Accrued interest payable (includes $9,673 and $9,712, respectively, related to consolidated trusts) . . . . . $ 13,828 $ 13,764

Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . 25 52

Debt:

Of Fannie Mae (includes $884 and $893, respectively, at fair value) ....................... 761,187 780,044

Of consolidated trusts (includes $2,193 and $2,271, respectively, at fair value) . . . ............. 2,447,589 2,416,956

Other liabilities (includes $713 and $893, respectively, related to consolidated trusts) ............. 12,831 13,673

Total liabilities.......................................................... 3,235,460 3,224,489

Commitments and contingencies (Note 14) .......................................... — — Fannie Mae stockholders’ equity (deficit):

Senior preferred stock, 1,000,000 shares issued and outstanding . . . ....................... 91,200 88,600

Preferred stock, 700,000,000 shares are authorized—576,868,039 and 576,868,139 shares issued

and outstanding, respectively ............................................... 20,204 20,204

Common stock, no par value, no maximum authorization—1,270,092,862 and 1,270,092,708 shares

issued, respectively; 1,119,073,956 and 1,118,504,194 shares outstanding, respectively . . . . . . . . . 667 667

Accumulated deficit . ..................................................... (111,669) (102,986)

Accumulated other comprehensive loss .......................................... (1,501) (1,682)

Treasury stock, at cost, 151,018,906 and 151,588,514 shares, respectively . .................. (7,400) (7,402)

Total Fannie Mae stockholders’ deficit .......................................... (8,499) (2,599)

Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 82

Total deficit . .......................................................... (8,418) (2,517)

Total liabilities and equity (deficit) ................................................ $3,227,042 $3,221,972

See Notes to Condensed Consolidated Financial Statements

84
FANNIE MAE

(In conservatorship)

Condensed Consolidated Statements of Operations and Comprehensive Loss—(Unaudited)

(Dollars and shares in millions, except per share amounts)

2011 2010

For the Three

Months Ended

March 31,

Interest income:

Trading securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 284 $ 315

Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,213 1,473

Mortgage loans (includes $31,865 and $34,321, respectively, related to consolidated trusts). . . . . . . . . . . . 35,590 37,619

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 39

Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,115 39,446

Interest expense:

Short-term debt (includes $3 and $2, respectively, related to consolidated trusts) . . . . . . . . . . . . . . . . . . . 107 118

Long-term debt (includes $27,852 and $31,458, respectively, related to consolidated trusts). . . . . . . . . . . . 32,048 36,539

Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,155 36,657

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,960 2,789

Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,587) (11,939)

Net interest loss after provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,627) (9,150)

Investment gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 166

Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (57) (186)

Noncredit portion of other-than-temporary impairments recognized in other comprehensive income . . . . . . . . 13 (50)

Net other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) (236)

Fair value gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 (1,705)

Debt extinguishment gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (124)

Fee and other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 233

Non-interest income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570 (1,666)

Administrative expenses:

Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 324

Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 194

Occupancy expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 41

Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 46

Total administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605 605

Benefit for guaranty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33) (36)

Foreclosed property expense (income). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 488 (19)

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 230

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,412 780

Loss before federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,469) (11,596)

Provision (benefit) for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (67)

Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,471) (11,529)

Other comprehensive income:

Changes in unrealized losses on available-for-sale securities, net of reclassification adjustments and taxes . . 179 1,370

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2

Total other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 1,372

Total comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,290) (10,157)

Less: Comprehensive income attributable to the noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . — (1)

Total comprehensive loss attributable to Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,290) $(10,158)

Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,471) $(11,529)

Less: Net income attributable to the noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (1)

Net loss attributable to Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,471) (11,530)

Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,216) (1,527)

Net loss attributable to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,687) $(13,057)

Loss per share—Basic and Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.52) $ (2.29)

Weighted-average common shares outstanding—Basic and Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,698 5,692

See Notes to Condensed Consolidated Financial Statements

85
FANNIE MAE

(In conservatorship)

Condensed Consolidated Statements of Cash Flows—(Unaudited)

(Dollars in millions)

2011 2010

For the Three

Months Ended

March 31,

Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,566 $ (30,885)

Cash flows provided by investing activities:

Purchases of trading securities held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (185) (6,695)

Proceeds from maturities of trading securities held for investment . . . . . . . . . . . . . . . . . . . . . 522 805

Proceeds from sales of trading securities held for investment . . . . . . . . . . . . . . . . . . . . . . . . 409 15,068

Purchases of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) (107)

Proceeds from maturities of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,851 4,120

Proceeds from sales of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498 4,428

Purchases of loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,745) (12,725)

Proceeds from repayments of loans held for investment of Fannie Mae . . . . . . . . . . . . . . . . . 5,381 3,920

Proceeds from repayments of loans held for investment of consolidated trusts. . . . . . . . . . . . . 121,533 108,903

Net change in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,948 3,174

Advances to lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,646) (10,338)

Proceeds from disposition of acquired property and preforeclosure sales . . . . . . . . . . . . . . . . 10,979 7,678

Net change in federal funds sold and securities purchased under agreements to resell or similar

agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,499) (9,135)

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (163) (382)

Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,839 108,714

Cash flows used in financing activities:

Proceeds from issuance of debt of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,776 293,013

Payments to redeem debt of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (183,073) (277,495)

Proceeds from issuance of debt of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,567 88,750

Payments to redeem debt of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (177,551) (172,385)

Payments of cash dividends on senior preferred stock to Treasury . . . . . . . . . . . . . . . . . . . . . (2,216) (1,527)

Proceeds from senior preferred stock purchase agreement with Treasury . . . . . . . . . . . . . . . . 2,600 15,300

Net change in federal funds purchased and securities sold under agreements to repurchase . . . . 26 180

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (123,871) (54,164)

Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,534 23,665

Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,297 6,812

Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,831 $ 30,477

Cash paid during the period for interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,689 $ 36,788

See Notes to Condensed Consolidated Financial Statements

86
FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 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.

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; (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;

and (3) Treasury’s agreement to establish a temporary secured lending credit facility that was available to us

and the other GSEs regulated by FHFA under identical terms until December 31, 2009.

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.

As of May 6, 2011, the conservator has advised us that it has not disaffirmed or repudiated any contracts we

entered into prior to its appointment as conservator. The GSE Act requires FHFA to exercise its right to

disaffirm or repudiate most contracts within a reasonable period of time after its appointment as conservator.

FHFA’s proposed rule on conservatorship and receivership operations, published on July 9, 2010, defines

“reasonable period” as a period of 18 months following the appointment of a conservator or receiver. This

proposed rule has not been finalized.

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 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 May 6, 2011, 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.

The conservatorship has no specified termination date and there continues to be uncertainty regarding the

future of our company, including how long we will continue to be in existence, the extent of our role in the

87
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 (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 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.

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.

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. We have received a total of $90.2 billion as of March 31, 2011 under Treasury’s

funding commitment and the Acting Director of FHFA has submitted a request for an additional $8.5 billion

from Treasury to eliminate our net worth deficit as of March 31, 2011. The aggregate liquidation preference of

the senior preferred stock was $91.2 billion as of March 31, 2011 and will increase to $99.7 billion as a result

of FHFA’s request on our behalf for funds to eliminate our net worth deficit as of March 31, 2011.

Treasury’s maximum funding commitment to us prior to a December 2009 amendment of the senior preferred

stock purchase agreement was $200 billion. The amendment to the agreement stipulates that the cap on

Treasury’s funding commitment to us under the senior preferred stock purchase agreement will increase as

necessary to accommodate any net worth deficits for calendar quarters in 2010 through 2012. For any net

worth deficits as of December 31, 2012, Treasury’s remaining funding commitment will be $124.8 billion

($200 billion less $75.2 billion cumulatively drawn through March 31, 2010) less the smaller of either (a) our

positive net worth as of December 31, 2012 or (b) our cumulative draws from Treasury for the calendar

quarters in 2010 through 2012.

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. A quarterly commitment fee was

scheduled to be set by Treasury beginning on March 31, 2011. This commitment fee was waived by Treasury

for the first quarter of 2011. On March 31, 2011, FHFA was notified by Treasury that it was waiving the

commitment fee for the second quarter of 2011 due to the continued fragility of the U.S. mortgage market and

because Treasury believed that imposing the commitment fee would not generate increased compensation for

taxpayers. Treasury further noted that it would reevaluate the situation during the next calendar quarter to

determine whether to set the quarterly commitment fee for the next quarter under the senior preferred stock

purchase agreement.

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. 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.

88

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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, 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.

On February 11, 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. We expect that

Congress will continue to hold hearings and consider legislation in 2011 on the future status of Fannie Mae

and Freddie Mac, including proposals that would result in a substantial change to our business structure, or

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.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in

accordance with accounting principles generally accepted in the United States of America (“GAAP”) for

interim financial information and with the SEC’s instructions to Form 10-Q and Article 10 of Regulation S-X.

Accordingly, they do not include all of the information and note disclosures required by GAAP for complete

consolidated financial statements. In the opinion of management, all adjustments of a normal recurring nature

considered necessary for a fair presentation have been included. Results for the three months ended March 31,

2011 may not necessarily be indicative of the results for the year ending December 31, 2011. The unaudited

interim condensed consolidated financial statements as of March 31, 2011 should be read in conjunction with

our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K

for the year ended December 31, 2010 (“2010 Form 10-K”), filed with the SEC on February 24, 2011.

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 the Treasury are deemed related

parties. As of March 31, 2011, Treasury held an investment in our senior preferred stock with a liquidation

preference of $91.2 billion. Our administrative expenses were reduced by $35 million in the first quarter of

2011 due to accrual and receipt of reimbursements from Treasury and Freddie Mac for expenses incurred as

program administrator for the Home Affordable Modification Program (“HAMP”) and other initiatives under

the Making Home Affordable Program.

During the three months ended March 31, 2011, we received a refund of $1.1 billion from the IRS, a bureau

of Treasury, related to the carryback of our 2009 operating loss to the 2008 and 2007 tax years.

Under a temporary credit and liquidity facilities (“TCLF”) program, we had $3.5 billion and $3.7 billion

outstanding, which includes principal and interest, of three-year standby credit and liquidity support as of

March 31, 2011 and December 31, 2010, respectively. Treasury has purchased participating interests in these

temporary credit and liquidity facilities. Under a new issue bond (“NIB”) program, we had $7.6 billion

outstanding of pass-through securities backed by single-family and multifamily housing bonds issued by

housing finance agencies (“HFAs”) as of March 31, 2011 and December 31, 2010. Treasury bears the initial

89

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
loss of principal under the TCLF program and the NIB program up to 35% of the total principal on a

combined program-wide basis.

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 March 31,

2011 and December 31, 2010, we held Freddie Mac mortgage-related securities with a fair value of

$16.6 billion and $18.3 billion, respectively, and accrued interest receivable of $83 million and $93 million,

respectively. We recognized interest income on Freddie Mac mortgage-related securities held by us of

$188 million and $335 million for the three months ended March 31, 2011 and 2010, 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.

Use of Estimates

Preparing condensed 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 condensed 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.

Principles of Consolidation

Our condensed consolidated financial statements include our accounts as well as the accounts of 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”).

Cash and Cash Equivalents and Statements of Cash Flows

During 2010, we identified certain servicer and consolidation related transactions that were not appropriately

reflected in our condensed consolidated statements of cash flows for the three months ended March 31, 2010.

As a result, our condensed consolidated statement of cash flows for the three months ended March 31, 2010

includes a $2.0 billion adjustment to decrease net cash used in operating activities, a $3.5 billion adjustment to

decrease net cash provided by investing activities, primarily related to “Proceeds from sales of

available-for-sale securities,” “Purchases of loans held for investment,” “Proceeds from repayments of loans

held for investment of consolidated trusts” and “Other, net” and a $1.5 billion adjustment to decrease net cash

used in financing activities, primarily related to “Proceeds from issuance of long-term debt of consolidated

trusts.” We have evaluated the effects of these misstatements, both quantitatively and qualitatively, on our

previously reported condensed consolidated statements of cash flows for the three months ended March 31,

2010 and concluded that this prior period was not materially misstated.

90

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Collateral

Cash Collateral

The following table displays cash collateral accepted and pledged as of March 31, 2011 and December 31,

2010.

March 31, 2011 December 31, 2010

As of

(Dollars in millions)

Cash collateral accepted(1).............................. $3,056 $3,101

Cash collateral pledged ................................ $6,049 $5,884

Cash collateral pledged related to derivatives activities......... 2,849 3,453

Total cash collateral pledged .......................... $8,898 $9,337

(1) Includes restricted cash of $2.4 billion and $2.5 billion as of March 31, 2011 and December 31, 2010, respectively.

Non-Cash Collateral

The following table displays non-cash collateral pledged and accepted as of March 31, 2011 and

December 31, 2010.

March 31, 2011 December 31, 2010

As of

(Dollars in millions)

Non-cash collateral pledged where the secured party has the right

to sell or repledge:

Held-for-investment loans of consolidated trusts............ $ 2,241 $2,522

Non-cash collateral accepted with the right to sell or repledge(1). . $20,000 $7,500

Non-cash collateral accepted without the right to sell or

repledge ......................................... 11,249 6,744

(1) None of this collateral was sold or repledged as of March 31, 2011 and December 31, 2010.

Additionally, we provide early funding to lenders on a collateralized basis and account for the advances as

secured lending arrangements in “Other assets” in our condensed consolidated balance sheets. These amounts

totaled $3.1 billion at March 31, 2011 and $7.2 billion at December 31, 2010.

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.

When securities sold under agreements to repurchase meet all of the conditions of a secured financing, we

report the collateral of the transferred securities at fair value, excluding accrued interest. The fair value of

these securities is classified in “Investments in securities” in our condensed consolidated balance sheets. We

had no repurchase agreements outstanding as of March 31, 2011 and $49 million in repurchase agreements

outstanding as of December 31, 2010.

91

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Fair Value Gains (Losses), Net

The following table displays the composition of “Fair value gains (losses), net” for the three months ended

March 31, 2011 and 2010.

2011 2010

For the Three

Months Ended

March 31,

(Dollars in millions)

Derivatives fair value gains (losses), net ............................... $139 $(2,762)

Trading securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 1,058

Other, net...................................................... (75) (1)

Fair value gains (losses), net ...................................... $289 $(1,705)

Reclassifications

To conform to our current period presentation, we have reclassified and condensed certain amounts reported in

our condensed consolidated financial statements. The following table displays the line items that were

reclassified and condensed in our condensed consolidated balance sheet as of December 31, 2010.

Before

Reclassification

After

Reclassification

As of December 31, 2010

(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

Service and MBS trust payable ......................... 2,950

Other liabilities . . . ................................. 10,400 13,673

92

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
The following table represents the line items that we reclassified and condensed in our condensed consolidated

statements of operations and comprehensive loss for the three months ended March 31, 2010.

Before

Reclassification

After

Reclassification

For the Three Months Ended

March 31, 2010

(Dollars in millions)

Reclassified lines to:

Interest expense:

Short-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116 $

Of consolidated trusts .............................. 2

Long-term debt:

Of Fannie Mae . . ................................. 5,081

Of consolidated trusts .............................. 31,458

Short-term debt (includes $2 related to consolidated trusts) . . . . 118

Long-term debt (includes $31,458 related to consolidated

trusts).......................................... 36,539

Guaranty fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 233

Losses from partnership investments . . . . . . . . . . . . . . . . . . . . . . . 58

Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 230

In our condensed consolidated statements of cash flows for the three months ended March 31, 2010, we

reclassified the following amounts within “Cash flows used in financing activities” to conform to our current

period presentation: $192.4 billion from “Proceeds from issuance of short-term debt of Fannie Mae” and

$100.6 billion from “Proceeds from issuance of long-term debt of Fannie Mae” to “Proceeds from issuance of

debt of Fannie Mae,” $185.2 billion from “Payments to redeem short-term debt of Fannie Mae” and

$92.4 billion from “Payments to redeem long-term debt of Fannie Mae” to “Payments to redeem debt of

Fannie Mae,” $3.3 billion from “Proceeds from issuance of short-term debt of consolidated trusts” and

$83.7 billion from “Proceeds from issuance of long-term debt of consolidated trusts” to “Proceeds from

issuance of debt of consolidated trusts” and $9.5 billion from “Payments to redeem short-term debt of

consolidated trusts” and $162.6 billion from “Payments to redeem long-term debt of consolidated trusts” to

“Payments to redeem debt of consolidated trusts.”

New Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (“FASB”) issued a new standard that clarifies when

a loan restructuring is considered a troubled debt restructuring (“TDR”). Specifically, the new standard amends

existing guidance to clarify 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 new standard is effective for the first interim or annual period beginning on or after June 15, 2011 and

should be applied retrospectively to the beginning of the annual period of adoption. We will adopt this new

guidance effective for the period ending September 30, 2011 and are currently assessing the impact that the

new standard may have on our condensed consolidated financial statements.

93

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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.

As of March 31, 2011, we consolidated certain Fannie Mae multi-class resecuritization trusts that were not

consolidated as of December 31, 2010 because we now hold in our portfolio a substantial portion of the

certificates. As a result of consolidating these multi-class resecuritization trusts, which had combined total

assets of $1.3 billion in unpaid principal balance as of March 31, 2011, we derecognized our investment in

these trusts and recognized the assets and liabilities of the consolidated trusts at their fair value.

We deconsolidate Fannie Mae multi-class resecuritization trusts when we no longer hold in our portfolio a

substantial portion of the certificates, derecognizing the assets and liabilities of the trusts and recognizing at

fair value our retained interests as securities in our condensed consolidated balance sheet. As of March 31,

2011, there was no change in the consolidation status of Fannie Mae multi-class resecuritization trusts that

were consolidated as of December 31, 2010.

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 March 31, 2011 and December 31, 2010, as well as our

maximum exposure to loss and the total assets of those unconsolidated VIEs.

Mortgage-Backed

Trusts

Asset-Backed

Trusts

Limited

Partnership

Investments

As of March 31, 2011

(Dollars in millions)

Assets and liabilities recorded in our condensed

consolidated balance sheets:

Assets:

Available-for-sale securities(1) . . . . . . . . . . . . . . . . . . . . $ 80,570 $ — $ —

Trading securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,472 4,100 —

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 — 95

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 719 — 152

Net carrying amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . $103,580 $ 4,100 $ (57)

Maximum exposure to loss(1) . . . . . . . . . . . . . . . . . . . . . . . $107,416 $ 4,100 $ 336

Total assets of unconsolidated VIEs(1) . . . . . . . . . . . . . . . . . $666,298 $343,868 $13,001

94

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Mortgage-Backed

Trusts

Asset-Backed

Trusts

Limited

Partnership

Investments

As of December 31, 2010(2)

(Dollars in millions)

Assets and liabilities recorded in our condensed

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 exposed through consolidation which may also represent an interest in other unconsolidated VIEs.

(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

three months ended March 31, 2011 and 2010, the unpaid principal balance of portfolio securitizations was

$29.3 billion and $17.8 billion, respectively.

The majority of our portfolio securitization transactions do not qualify for sale treatment. As a result, our

continuing involvement in the form of guaranty assets and guaranty liabilities with assets that were transferred

into unconsolidated trusts is not material. We report the assets and liabilities of consolidated trusts created via

portfolio securitization transactions that do not qualify as sales in our condensed consolidated balance sheets.

The following table displays some key characteristics of the REMIC and Stripped Mortgage-Backed Securities

retained in unconsolidated portfolio securitization trusts.

March 31, 2011 December 31, 2010

As of

(Dollars in millions)

Unpaid principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,448 $ 15,771

Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,238 16,745

Weighted-average coupon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.18% 6.28%

Weighted-average loan age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 years 4.4 years

Weighted-average maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.0 years 22.0 years

95

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
For the three months ended March 31, 2011 and 2010, the principal and interest received on retained interests

was $750 million and $836 million, 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 March 31, 2011 and

December 31, 2010.

Unpaid Principal

Balance

Principal Amount of

Delinquent Loans(1)

(Dollars in millions)

As of March 31, 2011

Loans held for investment

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 418,770 $136,489

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,603,491 27,972

Loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,470 116

Securitized loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,108 24

Total loans managed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,025,839 $164,601

As of December 31, 2010

Loans held for investment

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 423,686 $141,342

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,565,347 34,080

Loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 964 127

Securitized loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,147 78

Total loans managed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,992,144 $175,627

(1) Represents the unpaid principal balance of loans held for investment and loans held for sale for which we are no

longer accruing interest and loans 90 days or more delinquent which are continuing to accrue interest.

Qualifying Sales of Portfolio Securitizations

We recognize assets obtained and liabilities incurred in a portfolio securitization at fair value. Proceeds from

the initial sale of securities from portfolio securitizations were $108 million and $249 million for the three

months ended March 31, 2011 and 2010, respectively. For the three months ended March 31, 2010, proceeds

from the initial sale of securities were reduced by $1.3 billion from the amount previously disclosed, primarily

related to deconsolidated REMICs that should have been presented as proceeds from issuance of long-term

debt of consolidated trusts.

96

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
3. Mortgage Loans

The following table displays our mortgage loans as of March 31, 2011 and December 31, 2010.

Of

Fannie

Mae

Of

Consolidated

Trusts Total

Of

Fannie

Mae

Of

Consolidated

Trusts Total

March 31, 2011 December 31, 2010

As of

(Dollars in millions)

Single-family . . . . . . . . . . . . . . . . . . . $328,656 $2,523,197 $2,851,853 $328,824 $2,490,623 $2,819,447

Multifamily . . . . . . . . . . . . . . . . . . . . 90,517 81,361 171,878 95,157 75,393 170,550

Total unpaid principal balance of

mortgage loans . . . . . . . . . . . . . . 419,173 2,604,558 3,023,731 423,981 2,566,016 2,989,997

Cost basis and fair value adjustments,

net . . . . . . . . . . . . . . . . . . . . . . . . . (16,462) 10,345 (6,117) (16,498) 11,777 (4,721)

Allowance for loan losses for loans held

for investment . . . . . . . . . . . . . . . . . (53,708) (13,849) (67,557) (48,530) (13,026) (61,556)

Total mortgage loans . . . . . . . . . . $349,003 $2,601,054 $2,950,057 $358,953 $2,564,767 $2,923,720

During the three months ended March 31, 2011, we redesignated loans with a carrying value of $561 million

from held for investment (“HFI”) to held for sale (“HFS”).

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

March 31, 2011 and December 31, 2010. For purposes of this table, each loan in our portfolio is included in

only one segment and class category.

30 - 59 Days

Delinquent

60 - 89 Days

Delinquent

Seriously

Delinquent(2) TotalDelinquent Current Total

Recorded

Investment in

Loans Over

90 Days

Delinquent

and

Accruing

Interest

Recorded

Investment

in

Nonaccrual

Loans

As of March 31, 2011(1)

(Dollars in millions)

Single-family:

Primary(3) ..... $39,980 $14,949 $ 89,650 $144,579 $2,356,321 $2,500,900 $128 $104,375

Government(4) . . . 96 48 320 464 51,486 51,950 320 —

Alt-A . . . ..... 7,670 3,598 34,761 46,029 153,035 199,064 16 38,335

Other(5) ....... 3,514 1,624 14,241 19,379 81,837 101,216 105 15,670

Total singlefamily ..... 51,260 20,219 138,972 210,451 2,642,679 2,853,130 569 158,380

Multifamily(6) . . . . 322 NA 1,094 1,416 172,385 173,801 — 1,047

Total. ..... $51,582 $20,219 $140,066 $211,867 $2,815,064 $3,026,931 $569 $159,427

97

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
30 - 59 Days

Delinquent

60 - 89 Days

Delinquent

Seriously

Delinquent(2) TotalDelinquent Current Total

Recorded

Investment in

Loans Over

90 Days

Delinquent

and Accruing

Interest

Recorded

Investment

in

Nonaccrual

Loans

As of December 31, 2010(1)

(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 singlefamily ..... 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 (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost

basis adjustments; and (c) 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 included in the

current column.

(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 HFI loans, excluding loans for which we

have elected the fair value option, by portfolio segment, class and credit quality indicators as of March 31,

2011 and December 31, 2010. The single-family credit quality indicator is updated quarterly and the

multifamily credit quality indicators are as of the origination date of each loan.

Primary(3) Alt-A Other(4) Primary(3) Alt-A Other(4)

March 31, 2011(1)(2) December 31, 2010(1)(2)

As of

(Dollars in millions)

Single-family

Estimated mark-to-market LTV ratio:(5)

Less than or equal to 80% . . . . . . . . . $1,491,411 $ 70,592 $ 26,614 $1,561,202 $ 79,305 $ 29,854

80.01% to 90% . . . . . . . . . . . . . . . . . 426,344 25,620 11,794 376,414 27,472 13,394

90.01% to 100% . . . . . . . . . . . . . . . . 237,697 23,487 11,817 217,193 24,392 12,935

100.01% to 110% . . . . . . . . . . . . . . . 129,197 18,260 10,893 112,376 18,022 11,400

110.01% to 120% . . . . . . . . . . . . . . . 71,237 13,471 9,043 62,283 12,718 8,967

120.01% to 125% . . . . . . . . . . . . . . . 24,542 5,295 3,817 21,729 5,083 3,733

Greater than 125% . . . . . . . . . . . . . . 120,472 42,339 27,238 106,288 40,160 25,096

Total . . . . . . . . . . . . . . . . . . . . . . $2,500,900 $199,064 $101,216 $2,457,485 $207,152 $105,379

98

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
March 31, 2011(1) December 31, 2010(1)

As of

(Dollars in millions)

Multifamily

Original LTV ratio:

Less than or equal to 70% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,355 $ 96,844

70.01% to 80% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,087 71,560

Greater than 80% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,359 4,110

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $173,801 $172,514

Original debt service coverage ratio:

Less than or equal to 1.10% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,287 $ 15,034

1.11% to 1.25% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,765 50,745

Greater than 1.25% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,749 106,735

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $173,801 $172,514

(1) Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and

other cost basis adjustments; and (c) accrued interest receivable.

(2) Excludes $52.0 billion and $52.5 billion as of March 31, 2011 and December 31, 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.

99

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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, related allowance and average recorded investment as of March 31, 2011

and December 31, 2010 and interest income recognized for the three months ended March 31, 2011 and 2010

for individually impaired loans.

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

As of March 31, 2011

For the Three Months Ended

March 31, 2011

(Dollars in millions)

Individually impaired loans:

With related allowance recorded:

Single-family:

Primary(3) .............. $104,608 $ 97,149 $26,095 $ 737 $ 95,087 $ 904 $ 41

Government(4) . . . . . . . . . . . 218 217 45 7 232 3 —

Alt-A ................. 31,987 28,881 10,352 334 28,567 242 2

Other(5) ................ 14,956 14,089 4,872 125 13,889 106 6

Total single-family ....... 151,769 140,336 41,364 1,203 137,775 1,255 49

Multifamily . . . ............ 2,035 2,033 494 20 2,202 25 1

Total individually impaired loans

with related allowance

recorded . . . ............ 153,804 142.369 41,858 1,223 139,977 1,280 50

With no related allowance

recorded:(6)

Single-family:

Primary(3) .............. 11,255 7,041 — — 7,139 108 57

Government(4) . . . . . . . . . . . 19 11 — — 12 1 —

Alt-A ................. 4,062 1,841 — — 1,863 33 19

Other(5) ................ 1,013 515 — — 513 8 4

Total single-family ....... 16,349 9,408 — — 9,527 150 80

Multifamily . . . . . . . . . . . . . . . 710 696 — — 754 15 3

Total individually impaired loans

with no related allowance

recorded . . . ............ 17,059 10,104 — — 10,281 165 83

Total individually impaired

loans(7) .................. $170,863 $152,473 $41,858 $1,223 $150,258 $1,445 $133

100

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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

As of December 31, 2010

For the Three Months Ended

March 31, 2010

(Dollars in millions)

Individually impaired loans:

With related allowance recorded:

Single-family:

Primary(3) .............. $ 99,838 $ 93,024 $23,565 $ 772 $ 81,258 $1,198 $210

Government(4) . . . . . . . . . . . 240 248 38 7 141 1 —

Alt-A ................. 30,932 28,253 9,592 368 25,361 408 58

Other(5) ................ 14,429 13,689 4,479 137 12,094 173 35

Total single-family ....... 145,439 135,214 37,674 1,284 118,854 1,780 303

Multifamily . . . ............ 2,372 2,371 556 23 1,496 56 1

Total individually impaired loans

with related allowance

recorded . . . ............ 147,811 137,585 38,230 1,307 120,350 1,836 304

With no related allowance

recorded:(6)

Single-family:

Primary(3) .............. 10,586 7,237 — — 7,860 209 18

Government(4) . . . . . . . . . . . 19 13 — — 11 2 —

Alt-A ................. 3,600 1,884 — — 2,091 88 9

Other(5) . . . . . . . . . . . . . . . . 879 512 — — 589 24 2

Total single-family ....... 15,084 9,646 — — 10,551 323 29

Multifamily . . . . . . . . . . . . . . . 789 811 — — 642 18 —

Total individually impaired loans

with no related allowance

recorded . . . ............ 15,873 10,457 — — 11,193 341 29

Total individually impaired

loans(7) .................. $163,684 $148,042 $38,230 $1,307 $131,543 $2,177 $333

(1) Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and

other cost basis adjustments; and (c) accrued interest receivable.

(2) Total single-family interest income recognized of $1.4 billion consists of $1.1 billion of contractual interest and

$352 million of effective yield adjustments for the three months ended March 31, 2011. Total single-family interest

income recognized of $2.1 billion consists of $1.8 billion of contractual interest and $275 million of effective yield

adjustments for the three months ended March 31, 2010.

(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.

(7) Includes single-family loans restructured in a TDR with a recorded investment of $145.4 billion and $140.1 billion as

of March 31, 2011 and December 31, 2010, respectively. Includes multifamily loans restructured in a TDR with a

recorded investment of $916 million and $939 million as of March 31, 2011 and December 31, 2010, respectively.

101

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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 $48 million and $85 million for the three months ended March 31,

2011 and 2010, respectively. The following table displays the outstanding balance, carrying amount and

accretable yield of acquired credit-impaired loans as of March 31, 2011 and December 31, 2010, excluding

loans that were modified as TDRs subsequent to their acquisition from MBS trusts.

March 31,

2011

December 31,

2010

As of

(Dollars in millions)

Outstanding contractual balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,231 $8,519

Carrying amount:

Loans on accrual status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,960 $2,029

Loans on nonaccrual status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,020 2,449

Total carrying amount of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,980 $4,478

Accretable yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,125 $2,412

The following table displays interest income recognized and the impact to the “Provision for credit 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 three months ended March 31, 2011 and 2010.

2011 2010

For the Three

Months Ended

March 31,

(Dollars in millions)

Accretion of fair value discount(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $231 $266

Interest income on loans returned to accrual status or subsequently modified as

TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 321

Total interest income recognized on acquired credit-impaired loans . . . . . . . $486 $587

Increase in “Provision for loan losses” subsequent to the acquisition of creditimpaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $238 $564

(1) Represents accretion of the fair value discount that was recorded on acquired credit-impaired loans.

4. Allowance for Loan 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. 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. The allowance for loan losses is calculated based on our estimate of

incurred losses as of the balance sheet date. Determining the adequacy of our allowance for loan losses is

complex and requires judgment about the effect of matters that are inherently uncertain.

102

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Allowance for Loan Losses

The following table displays changes in both single-family and multifamily allowance for loan losses for the

three months ended March 31, 2011 and total allowance for loan losses for the three months ended March 31,

2011 and 2010.

Of

Fannie

Mae

Of

Consolidated

Trusts Total

Of

Fannie

Mae

Of

Consolidated

Trusts Total

2011 2010

For the Three Months Ended March 31,

(Dollars in millions)

Single-family allowance for loan

losses:

Beginning balance . . . . . . . . . . . $47,377 $12,603 $59,980

Provision for loan losses . . . . . . . 7,243 3,369 10,612

Charge-offs(1) . . . . . . . . . . . . . . . (5,623) (448) (6,071)

Recoveries . . . . . . . . . . . . . . . . . 530 952 1,482

Transfers(2) . . . . . . . . . . . . . . . . 3,162 (3,162) —

Net reclassifications(3) . . . . . . . . . (18) 99 81

Ending balance. . . . . . . . . . . . . . $52,671 $13,413 $66,084

Multifamily allowance for loan

losses:

Beginning balance . . . . . . . . . . . $ 1,153 $ 423 $ 1,576

Provision (benefit) for loan

losses. . . . . . . . . . . . . . . . . . . (84) 59 (25)

Charge-offs(1) . . . . . . . . . . . . . . . (82) — (82)

Transfers(2) . . . . . . . . . . . . . . . . 45 (45) —

Net reclassifications(3) . . . . . . . . . 5 (1) 4

Ending balance. . . . . . . . . . . . . . $ 1,037 $ 436 $ 1,473

Total allowance for loan losses:

Beginning balance . . . . . . . . . . . $48,530 $13,026 $61,556 $ 8,078 $ 1,847 $ 9,925

Adoption of new accounting

standards . . . . . . . . . . . . . . . . — — — — 43,576 43,576

Total provision for loan losses . . . 7,159 3,428 10,587 6,271 5,668 11,939

Charge-offs(1) . . . . . . . . . . . . . . . (5,705) (448) (6,153) (1,705) (3,455) (5,160)

Recoveries . . . . . . . . . . . . . . . . . 530 952 1,482 97 277 374

Transfers(2) . . . . . . . . . . . . . . . . 3,207 (3,207) — 13,855 (13,855) —

Net reclassifications(3) . . . . . . . . . (13) 98 85 (921) 836 (85)

Ending balance(4)(5). . . . . . . . . . . $53,708 $13,849 $67,557 $25,675 $ 34,894 $60,569

(1) Total charge-offs include accrued interest of $386 million and $579 million for the three months ended March 31,

2011 and 2010, respectively. Single-family charge-offs include accrued interest of $377 million for the three months

ended March 31, 2011. Multifamily charge-offs include accrued interest of $9 million for the three months ended

March 31, 2011.

(2) Includes transfers from trusts for delinquent loan purchases.

103

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
(3) Represents reclassification of amounts recorded in provision for loan losses and charge-offs that relate to allowance for

accrued interest receivable and preforeclosure property taxes and insurance receivable from borrowers.

(4) Total allowance for loan losses includes $412 million and $903 million as of March 31, 2011 and 2010, respectively,

for acquired credit-impaired loans.

(5) Total single-family allowance for loan losses was $58.8 billion as of March 31, 2010. Total multifamily allowance for

loan losses was $1.8 billion as of March 31, 2010.

As of March 31, 2011, the allowance for accrued interest receivable for loans of Fannie Mae was $2.6 billion

and for loans of consolidated trusts was $340 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 March 31, 2011 and December 31, 2010.

SingleFamily Multifamily TotalSingleFamily Multifamily Total

March 31, 2011 December 31, 2010

As of

(Dollars in millions)

Allowance for loan losses

by segment:

Individually impaired

loans . . . . . . . . . . . . $ 40,957 $ 489 $ 41,446 $ 37,296 $ 549 $ 37,845

Collectively reserved

loans . . . . . . . . . . . . 24,720 979 25,699 22,306 1,020 23,326

Acquired creditimpaired loans . . . . . 407 5 412 378 7 385

Total allowance for

loan losses . . . . . . $ 66,084 $ 1,473 $ 67,557 $ 59,980 $ 1,576 $ 61,556

Recorded investment in

loans by segment:(1)

Individually impaired

loans . . . . . . . . . . . . $ 145,376 $ 2,721 $ 148,097 $ 140,062 $ 3,074 $ 143,136

Collectively reserved

loans . . . . . . . . . . . . 2,703,386 171,003 2,874,389 2,677,640 169,332 2,846,972

Acquired creditimpaired loans . . . . . 4,368 77 4,445 4,798 108 4,906

Total recorded

investment in

loans . . . . . . . . . . $2,853,130 $173,801 $3,026,931 $2,822,500 $172,514 $2,995,014

(1) Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and

other cost basis adjustments; and (c) accrued interest receivable.

104

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
5. Investments in Securities

Trading Securities

Trading securities are recorded at fair value with subsequent changes in fair value recorded as “Fair value

gains (losses), net” in our condensed 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 March 31, 2011 and December 31, 2010.

March 31,

2011

December 31,

2010

As of

(Dollars in millions)

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,131 $ 7,398

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,201 1,326

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 590

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,658 1,683

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,547 1,581

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,943 10,764

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 606 609

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 152

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,552 24,103

Non-mortgage-related securities:

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,383 27,432

Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,100 5,321

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,483 32,753

Total trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $57,035 $56,856

Losses in trading securities held in our portfolio, net . . . . . . . . . . . . . . . . . . . . . . . $ 1,912 $ 2,149

The following table displays information about our net trading gains and losses for the three months ended

March 31, 2011 and 2010.

2011 2010

For the Three

Months Ended

March 31,

(Dollars in

millions)

Net trading gains (losses):

Mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $229 $1,006

Non-mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) 52

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $225 $1,058

Net trading gains (losses) recorded in the period related to securities still held at period end:

Mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $222 $ 900

Non-mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) 48

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $217 $ 948

105

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Available-for-Sale Securities

We measure AFS securities at fair value with unrealized gains and losses recorded as a component of “Other

comprehensive income,” net of tax, and we record realized gains and losses from the sale of AFS securities in

“Investment gains, net” in our condensed 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

three months ended March 31, 2011 and 2010.

2011 2010

For the Three

Months Ended

March 31,

(Dollars in millions)

Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60 $ 265

Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 120

Total proceeds(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390 4,179

(1) Excludes proceeds from the initial sale of securities from new portfolio securitizations included in “Note 2,

Consolidations and Transfers of Financial Assets.” For the three months ended March 31, 2010, proceeds were reduced

by $419 million from what was previously disclosed, primarily related to deconsolidated REMICs that should have

been presented as proceeds from issuance of long-term debt of consolidated trusts.

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 March 31, 2011 and December 31, 2010.

Total

Amortized

Cost(1)

Gross

Unrealized

Gains

Gross

Unrealized

Losses -

OTTI(2)

Gross

Unrealized

Losses -

Other(3)

Total

Fair

Value

As of March 31, 2011

(Dollars in millions)

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . $19,426 $1,267 $ (7) $ (43) $20,643

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . 14,435 921 — — 15,356

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . 873 131 — — 1,004

Alt-A private-label securities . . . . . . . . . . . . . . 15,337 187 (1,634) (198) 13,692

Subprime private-label securities . . . . . . . . . . . 11,109 42 (1,102) (389) 9,660

CMBS(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,097 66 — (239) 14,924

Mortgage revenue bonds . . . . . . . . . . . . . . . . . 11,273 49 (78) (702) 10,542

Other mortgage-related securities . . . . . . . . . . . 3,997 122 (31) (296) 3,792

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $91,547 $2,785 $(2,852) $(1,867) $89,613

106

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Total

Amortized

Cost(1)

Gross

Unrealized

Gains

Gross

Unrealized

Losses -

OTTI(2)

Gross

Unrealized

Losses -

Other(3)

Total

Fair

Value

As of December 31, 2010

(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 recognized in our condensed 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 $807 million and $848 million as of March 31, 2011 and December 31, 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 March 31, 2011 and

December 31, 2010.

Gross

Unrealized

Losses

Fair

Value

Gross

Unrealized

Losses

Fair

Value

Less Than 12

Consecutive Months

12 Consecutive

Months or Longer

As of March 31, 2011

(Dollars in millions)

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (34) $ 1,160 $ (16) $ 199

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . (97) 1,946 (1,735) 8,256

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . (46) 704 (1,445) 8,237

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31) 4,124 (208) 6,286

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . (195) 4,174 (585) 3,019

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . (8) 345 (319) 1,871

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(411) $12,453 $(4,308) $27,868

107

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Gross

Unrealized

Losses

Fair

Value

Gross

Unrealized

Losses

Fair

Value

Less Than 12

Consecutive Months

12 Consecutive

Months or Longer

As of December 31, 2010

(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 our

condensed consolidated statements of operations and comprehensive loss and the noncredit component in

“Other comprehensive income” 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. $4.3 billion of the $4.7 billion of gross unrealized losses on AFS securities as of March 31, 2011 have

existed for a period of 12 consecutive months or longer. Gross unrealized losses on AFS securities as of

March 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 March 31, 2011 that was 87%

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 a

portion or the majority of these unrealized losses over the lives of the securities.

The following table displays our net other-than-temporary impairments by major security type recognized in

our condensed consolidated statements of operations and comprehensive loss for the three months ended

March 31, 2011 and 2010.

2011 2010

For the Three

Months Ended

March 31,

(Dollars in millions)

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37 $ 37

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 184

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 15

Net other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $44 $236

108

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
For the three months ended March 31, 2011, we recorded net other-than-temporary impairment of $44 million.

The net other-than-temporary impairment charges recorded in the three month period ended March 31, 2011

were primarily driven by an increase in collateral delinquencies 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.

The following table displays activity related to the unrealized credit component on debt securities held by us

recognized in earnings for the three months ended March 31, 2011 and 2010. A related unrealized non-credit

component has been recognized in “Accumulated other comprehensive loss.”

2011 2010

For the Three

Months Ended

March 31,

(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6

Additions for credit losses on debt securities for which OTTI was previously

recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 230

Reductions for securities no longer in portfolio at period end . . . . . . . . . . . . . . . . . . . — (51)

Reductions for amortization resulting from increases in cash flows expected to be

collected over the remaining life of the securities . . . . . . . . . . . . . . . . . . . . . . . . . . (219) (167)

Balance March 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,040 $8,209

As of March 31, 2011, those debt securities with other-than-temporary impairment for which we recognized in

our condensed 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 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 model

securities assuming the benefit of those external financial guarantees that we determined are creditworthy. We

have recorded other-than-temporary impairments for the three months ended March 31, 2011 based on this

analysis, with amounts related to credit loss recognized in our condensed 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.

109

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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.

Subprime Option ARM Fixed Rate Variable Rate Hybrid Rate

Alt-A

As of March 31, 2011

(Dollars in millions)

Vintage Year

2004 & Prior:

Unpaid principal balance . . . . . . . . . . . . . . . . $ 2,159 $ 511 $3,726 $ 532 $2,446

Weighted average collateral default(1) . . . . . . . 40.9% 36.7% 12.0% 34.7% 17.3%

Weighted average collateral severities(2). . . . . . 60.7% 45.8% 42.9% 44.7% 35.8%

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1% 6.0% 8.6% 8.2% 11.1%

Average credit enhancement(4) . . . . . . . . . . . . 51.3% 18.2% 12.0% 21.8% 10.7%

2005

Unpaid principal balance . . . . . . . . . . . . . . . . $ 197 $1,375 $1,261 $ 570 $2,516

Weighted average collateral default(1) . . . . . . . 76.1% 57.3% 42.7% 58.5% 41.8%

Weighted average collateral severities(2). . . . . . 73.0% 54.3% 58.6% 59.5% 50.5%

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7% 3.9% 6.6% 6.9% 7.8%

Average credit enhancement(4) . . . . . . . . . . . . 64.3% 29.2% 2.0% 19.3% 6.5%

2006

Unpaid principal balance . . . . . . . . . . . . . . . . $12,303 $1,335 $ 602 $1,733 $1,866

Weighted average collateral default(1) . . . . . . . 78.7% 72.6% 44.3% 61.5% 37.0%

Weighted average collateral severities(2). . . . . . 73.3% 60.8% 62.8% 62.6% 48.1%

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7% 3.2% 6.1% 6.9% 9.3%

Average credit enhancement(4) . . . . . . . . . . . . 19.7% 21.5% 2.4% 1.6% 1.8%

2007 & After:

Unpaid principal balance . . . . . . . . . . . . . . . . $ 639 $ — $ — $ — $ 126

Weighted average collateral default(1) . . . . . . . 74.4% N/A N/A N/A 44.8%

Weighted average collateral severities(2). . . . . . 69.9% N/A N/A N/A 54.3%

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6% N/A N/A N/A 6.7%

Average credit enhancement(4) . . . . . . . . . . . . 34.4% N/A N/A N/A 25.7%

Total

Unpaid principal balance . . . . . . . . . . . . . . . . $15,298 $3,221 $5,589 $2,835 $6,954

Weighted average collateral default(1) . . . . . . . 73.1% 60.4% 22.4% 55.8% 31.9%

Weighted average collateral severities(2). . . . . . 71.4% 55.7% 48.6% 58.6% 44.7%

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1% 3.9% 7.9% 7.1% 9.4%

Average credit enhancement(4) . . . . . . . . . . . . 25.3% 24.3% 8.7% 9.0% 7.0%

(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.

110

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
(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.

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 March 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.

Total

Amortized

Cost

Total

Fair

Value

Amortized

Cost

Fair

Value

Amortized

Cost

Fair

Value

Amortized

Cost

Fair

Value

Amortized

Cost

Fair

Value

One Year or Less

After One Year

Through Five Years

After Five Years

Through Ten Years After Ten Years

As of March 31, 2011

(Dollars in millions)

Fannie Mae................... $19,426 $20,643 $— $— $ 1 $ 1 $ 3,576 $ 3,774 $15,849 $16,868

Freddie Mac . . . ............... 14,435 15,356 4 4 32 33 1,492 1,595 12,907 13,724

Ginnie Mae. . . . . . . . . . . . . . . . . . . 873 1,004 — — — — 5 6 868 998

Alt-A private-label securities . . ..... 15,337 13,692 — — 1 1 279 281 15,057 13,410

Subprime private-label securities ..... 11,109 9,660 — — — — — — 11,109 9,660

CMBS . . .................... 15,097 14,924 — — 1,990 1,989 12,472 12,328 635 607

Mortgage revenue bonds .......... 11,273 10,542 55 55 370 380 771 772 10,077 9,335

Other mortgage-related securities..... 3,997 3,792 — — — — — 16 3,997 3,776

Total . . . .................... $91,547 $89,613 $59 $59 $2,394 $2,404 $18,595 $18,772 $70,499 $68,378

Accumulated Other Comprehensive Loss

The following table displays our accumulated other comprehensive loss by major categories as of March 31,

2011 and December 31, 2010.

March 31,

2011

December 31,

2010

As of

(Dollars in millions)

Net unrealized gains on available-for-sale securities for which we have not recorded

other-than-temporary impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 446 $ 304

Net unrealized gains (losses) on available-for-sale securities for which we have

recorded other-than-temporary impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,703) (1,736)

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (244) (250)

Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,501) $(1,682)

111

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
The following table displays the activity in other comprehensive income, net of tax, by major categories for

the three months ended March 31, 2011 and 2010.

2011 2010

For the Three

Months Ended

March 31,

(Dollars in millions)

Comprehensive loss:

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(6,471) $(11,529)

Other comprehensive income (loss), net of tax:

Changes in net unrealized losses on available-for-sale securities (net of tax of $87 and

$710, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 1,318

Reclassification adjustment for other-than-temporary impairments recognized in net

loss (net of tax of $13 and $81, respectively). . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 155

Reclassification adjustment for gains included in net loss (net of tax of $8 and $56,

respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14) (103)

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2

Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 1,372

Total comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(6,290) $(10,157)

6. Financial Guarantees

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. For those guarantees recognized in

our condensed 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

$52.5 billion and $52.4 billion as of March 31, 2011 and December 31, 2010, respectively. The maximum

amount we could recover through available credit enhancements and recourse with third parties on guarantees

recognized in our condensed consolidated balance sheets was $12.4 billion and $12.6 billion as of March 31,

2011 and December 31, 2010, respectively. In addition, we had exposure of $10.1 billion and $10.3 billion for

other guarantees not recognized in our condensed consolidated balance sheets as of March 31, 2011 and

December 31, 2010, respectively. The maximum amount we could recover through available credit

enhancements and recourse with third parties on guarantees not recognized in our condensed consolidated

balance sheets was $3.8 billion and $3.9 billion as of March 31, 2011 and December 31, 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.

The fair value of our guaranty obligations associated with the Fannie Mae MBS included in “Investments in

securities” was $1.9 billion and $2.0 billion as of March 31, 2011 and December 31, 2010, respectively.

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. Management also monitors the serious delinquency rate, which is the percentage of single-family

loans three or more months past due or in the foreclosure process, and the percentage of multifamily loans

60 days or more past due, of loans that also have higher risk characteristics, such as high mark-to-market

loan-to-value ratios and low original debt service coverage ratios. We use this information, in conjunction with

112

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
housing market and economic conditions, to structure our pricing and our eligibility and underwriting criteria

to accurately 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.

The following tables display the current delinquency status and certain higher risk characteristics of our

single-family conventional and total multifamily guaranty book of business as of March 31, 2011 and

December 31, 2010.

30 Days

Delinquent

60 Days

Delinquent

Seriously

Delinquent(2) 30 DaysDelinquent

60 Days

Delinquent

Seriously

Delinquent(2)

As of March 31, 2011(1) As of December 31, 2010(1)

Percentage of single-family

conventional guaranty book of

business(3) . . . . . . . . . . . . . . . . . 1.83% 0.73% 5.05% 2.19% 0.89% 5.37%

Percentage of single-family

conventional loans(4) . . . . . . . . . . 1.93 0.70 4.27 2.32 0.87 4.48

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)

As of March 31, 2011(1) As of December 31, 2010(1)

Estimated mark-to-market loan-to-value

ratio:

Less than 100% . . . . . . . . . . . . . . . . . 82% 2.36% 84% 2.62%

100.01% to 110% . . . . . . . . . . . . . . . . 6 9.79 5 11.60

110.01% to 120% . . . . . . . . . . . . . . . . 3 13.08 3 14.74

120.01% to 125% . . . . . . . . . . . . . . . . 1 14.69 1 16.86

Greater than 125% . . . . . . . . . . . . . . . 8 22.45 7 24.71

Geographical distribution:

Arizona . . . . . . . . . . . . . . . . . . . . . . . 2 5.16 2 6.23

California . . . . . . . . . . . . . . . . . . . . . . 19 3.35 18 3.89

Florida . . . . . . . . . . . . . . . . . . . . . . . . 7 12.40 7 12.31

Nevada . . . . . . . . . . . . . . . . . . . . . . . 1 9.40 1 10.66

Select Midwest states(5) . . . . . . . . . . . . 10 4.62 11 4.80

All other states . . . . . . . . . . . . . . . . . . 61 3.34 61 3.46

Product distribution (not mutually

exclusive):(6)

Alt-A . . . . . . . . . . . . . . . . . . . . . . . . . 7 13.45 8 13.87

Subprime . . . . . . . . . . . . . . . . . . . . . . * 27.47 * 28.20

Negatively amortizing adjustable rate. . . * 8.57 * 9.02

Interest only . . . . . . . . . . . . . . . . . . . . 5 17.10 6 17.85

Investor property . . . . . . . . . . . . . . . . . 6 4.67 6 4.79

Condo/Coop . . . . . . . . . . . . . . . . . . . . 9 5.15 9 5.37

Original loan-to-value ratio H90%(7) . . . 9 9.40 10 10.04

FICO credit score G620(7) . . . . . . . . . . 3 14.05 4 14.63

Original loan-to-value ratio H90% and

FICO credit score G620(7) . . . . . . . . 1 20.20 1 21.41

113

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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)

As of March 31, 2011(1) As of December 31, 2010(1)

Vintages:

2005 . . . . . . . . . . . . . . . . . . . . . . . . . 8 7.17 9 7.20

2006 . . . . . . . . . . . . . . . . . . . . . . . . . 8 12.12 8 12.19

2007 . . . . . . . . . . . . . . . . . . . . . . . . . 11 13.08 12 13.24

2008 . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.10 9 4.88

All other vintages . . . . . . . . . . . . . . . . 65 1.64 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 over 99% of our total single-family conventional guaranty book of business as of

both March 31, 2011 and December 31, 2010.

(2) Consists of single-family conventional loans that were three months or more past due or in foreclosure, 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».

114

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
30 Days

Delinquent

Seriously

Delinquent(3) 30 DaysDelinquent

Seriously

Delinquent(3)

As of March 31, 2011(1)(2) As of December 31, 2010(1)(2)

Percentage of multifamily guaranty book of business......... 0.16% 0.64% 0.21% 0.71%

Percentage of

Multifamily

Guaranty

Book of Business

Percentage

Seriously

Delinquent(3)

Percentage of

Multifamily

Guaranty

Book of Business

Percentage

Seriously

Delinquent(3)

As of March 31, 2011(1)(2) As of December 31, 2010(1)(2)

Original loan-to-value ratio:

Greater than 80% . . . . . . . . . . . . . . . . . 5% 0.60% 5% 0.59%

Less than or equal to 80% . . . . . . . . . . . 95 0.64 95 0.71

Original debt service coverage ratio:

Less than or equal to 1.10 . . . . . . . . . . . 9 0.20 9 0.27

Greater than 1.10 . . . . . . . . . . . . . . . . . 91 0.68 91 0.75

Acquisition loan size distribution:

Less than or equal to $750,000 . . . . . . . . 2 1.59 2 1.61

Greater than $750,000 and less than or

equal to $3 million . . . . . . . . . . . . . . 12 1.22 12 1.17

Greater than $3 million and less than

or equal to $5 million . . . . . . . . . . . . 9 0.84 9 0.88

Greater than $5 million and less than

or equal to $25 million . . . . . . . . . . . 42 0.76 42 0.88

Greater than $25 million . . . . . . . . . . . . 35 0.18 35 0.24

Maturing dates:

Maturing in 2011 . . . . . . . . . . . . . . . . . 3 1.10 3 0.68

Maturing in 2012 . . . . . . . . . . . . . . . . . 7 0.43 7 0.42

Maturing in 2013 . . . . . . . . . . . . . . . . . 10 0.46 11 0.54

Maturing in 2014 . . . . . . . . . . . . . . . . . 8 0.52 8 0.67

Maturing in 2015 . . . . . . . . . . . . . . . . . 9 0.70 9 0.57

(1) 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 both March 31, 2011 and

December 31, 2010, respectively, excluding loans that have been defeased. Defeasance is a pre-payment of a loan

through substitution of collateral.

(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.

115

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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 three months ended

March 31, 2011 and 2010.

Acquired

Property

Valuation

Allowance(1) AcquiredProperty, Net

Acquired

Property

Valuation

Allowance(1) AcquiredProperty, Net

For the Three Months Ended

March 31, 2011

For the Three Months Ended

March 31, 2010

(Dollars in millions)

Beginning balance, January 1 . . . . . $18,054 $(1,881) $16,173 $ 9,716 $(574) $ 9,142

Additions . . . . . . . . . . . . . . . . . . . 4,889 (129) 4,760 6,762 (52) 6,710

Disposals . . . . . . . . . . . . . . . . . . . (6,015) 730 (5,285) (3,425) 206 (3,219)

Write-downs, net of recoveries . . . . — (384) (384) — (264) (264)

Ending balance, March 31. . . . . . . . $16,928 $(1,664) $15,264 $13,053 $(684) $12,369

(1) Reflects activities in the valuation allowance for acquired properties held primarily by our single-family segment.

8. Short-Term Borrowings and Long-Term Debt

Short-Term Borrowings

The following table displays our outstanding short-term borrowings (borrowing with an original contractual

maturity of one year or less) and weighted-average interest rates of these borrowings as of March 31, 2011

and December 31, 2010.

Outstanding

WeightedAverage

Interest

Rate(1) Outstanding

WeightedAverage

Interest

Rate(1)

March 31, 2011 December 31, 2010

As of

(Dollars in millions)

Federal funds purchased and securities sold under

agreements to repurchase. . . . . . . . . . . . . . . . . . . . . . $ 25 0.01% $ 52 2.20%

Fixed-rate short-term debt:

Discount notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $146,751 0.26% $151,500 0.32%

Foreign exchange discount notes . . . . . . . . . . . . . . . . 341 2.51 384 2.43

Total short-term debt of Fannie Mae . . . . . . . . . . . . 147,092 0.27 151,884 0.32

Debt of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . 5,156 0.22 5,359 0.23

Total short-term debt . . . . . . . . . . . . . . . . . . . . . . . . $152,248 0.27% $157,243 0.32%

(1) Includes the effects of discounts, premiums, and other cost basis adjustments.

116

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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 March 31, 2011 and December 31, 2010.

Maturities Outstanding

WeightedAverage

Interest

Rate(1) Maturities Outstanding

WeightedAverage

Interest

Rate(1)

March 31, 2011 December 31, 2010

As of

(Dollars in millions)

Senior fixed:

Benchmark notes and bonds. . . . . . . 2011 - 2030 $ 291,851 3.14% 2011 - 2030 $ 300,344 3.20%

Medium-term notes . . . . . . . . . . . . . 2011 - 2021 190,950 2.00 2011 - 2020 199,266 2.13

Foreign exchange notes and bonds . . 2017 - 2028 1,204 6.07 2017 - 2028 1,177 6.21

Other long-term debt(2) . . . . . . . . . . 2011 - 2040 47,630 5.64 2011 - 2040 44,893 5.64

Total senior fixed . . . . . . . . . . . . 531,635 2.96 545,680 3.02

Senior floating:

Medium-term notes . . . . . . . . . . . . . 2011 - 2016 74,454 0.30 2011 - 2015 72,039 0.31

Other long-term debt(2) . . . . . . . . . . 2020 - 2037 389 5.27 2020 - 2037 386 4.92

Total senior floating . . . . . . . . . . 74,843 0.32 72,425 0.34

Subordinated fixed:

Qualifying subordinated(3) . . . . . . . . 2012 - 2014 4,893 5.08 2011 - 2014 7,392 5.47

Subordinated debentures . . . . . . . . . 2019 2,724 9.91 2019 2,663 9.91

Total subordinated fixed . . . . . . . . 7,617 6.80 10,055 6.65

Total long-term debt of Fannie

Mae(4) . . . . . . . . . . . . . . . . . . . . 614,095 2.69 628,160 2.77

Debt of consolidated trusts(2) . . . . . . . . 2011 - 2051 2,442,433 4.61 2011 - 2051 2,411,597 4.59

Total long-term debt . . . . . . . . . . $3,056,528 4.23% $3,039,757 4.22%

(1) Includes the effects of discounts, premiums and other cost basis adjustments.

(2) Includes a portion of structured debt instruments that is reported at fair value.

(3) Consists of subordinated debt issued with an interest deferral feature.

(4) Reported amounts include a net discount and other cost basis adjustments of $11.4 billion and $12.4 billion as of

March 31, 2011 and December 31, 2010, respectively.

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 both March 31, 2011 and December 31, 2010. We had no

borrowings outstanding from these lines of credit as of March 31, 2011.

117

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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. 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 interest rate swaps,

interest rate options, foreign currency swaps and futures.

We enter into forward purchase and sale commitments that lock in the future delivery of mortgage loans and

mortgage-related securities at a fixed price or yield. Certain commitments to purchase mortgage loans and

purchase or sell mortgage-related securities meet the criteria of a derivative. We typically settle the notional

amount of our mortgage commitments that are accounted for as derivatives.

We recognize all derivatives as either assets or liabilities in our condensed consolidated balance sheets at their

fair value on a trade date basis. Fair value amounts, which are netted to the extent a legal right of offset exists

and is enforceable by law at the counterparty level and are inclusive of cash collateral posted or received, are

recorded in “Other assets” or “Other liabilities” in our condensed consolidated balance sheets. We record all

derivative gains and losses, including accrued interest, in “Fair value gains (losses), net” in our condensed

consolidated statements of operations and comprehensive loss.

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 March 31, 2011 and December 31, 2010.

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives

As of March 31, 2011 As of December 31, 2010

(Dollars in millions)

Risk management derivatives:

Swaps:

Pay-fixed . . . . . . . . . . . . . . . . . . . $ 72,172 $ 2,074 $198,078 $(10,764) $ 49,085 $ 1,812 $228,142 $(14,115)

Receive-fixed . . . . . . . . . . . . . . . . 150,481 5,180 64,296 (868) 172,174 6,493 52,003 (578)

Basis . . . . . . . . . . . . . . . . . . . . . . 415 43 1,150 (3) 435 29 50 —

Foreign currency . . . . . . . . . . . . . . 1,223 161 372 (45) 1,274 164 286 (51)

Swaptions:

Pay-fixed . . . . . . . . . . . . . . . . . . . 73,750 737 58,300 (1,844) 66,200 482 30,950 (1,773)

Receive-fixed . . . . . . . . . . . . . . . . 54,440 4,074 58,300 (849) 48,340 4,992 30,275 (673)

Interest rate caps . . . . . . . . . . . . . . . . . 7,000 20 — — 7,000 24 — —

Other(1) . . . . . . . . . . . . . . . . . . . . . . . . 1,047 80 100 (1) 909 75 25 (1)

Total gross risk management

derivatives . . . . . . . . . . . . . . . . . . 360,528 12,369 380,596 (14,374) 345,417 14,071 341,731 (17,191)

Accrued interest receivable (payable) . . — 1,221 — (1,981) — 1,288 — (1,805)

Netting adjustment(2) . . . . . . . . . . . . . — (13,478) — 15,622 — (15,175) — 18,023

Total net risk management

derivatives . . . . . . . . . . . . . . . . . $360,528 $ 112 $380,596 $ (733) $345,417 $ 184 $341,731 $ (973)

118

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives

As of March 31, 2011 As of December 31, 2010

(Dollars in millions)

Mortgage commitment derivatives:

Mortgage commitments to purchase

whole loans. . . . . . . . . . . . . . . . . . $ 2,017 $ 9 $ 1,075 $ (4) $ 2,880 $ 19 $ 4,435 $ (105)

Forward contracts to purchase

mortgage-related securities . . . . . . . 20,310 111 12,828 (60) 19,535 123 27,697 (468)

Forward contracts to sell mortgagerelated securities . . . . . . . . . . . . . . 13,149 47 25,959 (144) 40,761 811 24,562 (169)

Total mortgage commitment

derivatives . . . . . . . . . . . . . . . . . $ 35,476 $ 167 $ 39,862 $ (208) $ 63,176 $ 953 $ 56,694 $ (742)

Derivatives at fair value . . . . . . . . . $396,004 $ 279 $420,458 $ (941) $408,593 $ 1,137 $398,425 $ (1,715)

(1) Includes 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 receivable and payable. Cash

collateral receivable was $2.8 billion and $3.5 billion as of March 31, 2011 and December 31, 2010, respectively. Cash

collateral payable was $704 million and $604 million as of March 31, 2011 and December 31, 2010, respectively.

A majority of our derivative instruments contain provisions that require our senior unsecured debt to maintain

a minimum credit rating from each of the major credit rating agencies. If our senior unsecured debt were to

fall below established thresholds in our governing agreements, which range from A- to BBB+, we would be in

violation of these provisions, and the counterparties to the derivative instruments could request immediate

payment or demand immediate collateralization on derivative instruments in net liability positions. The

aggregate fair value of all derivatives with credit-risk-related contingent features that were in a net liability

position as of March 31, 2011 was $3.6 billion for which we posted collateral of $2.8 billion in the normal

course of business. If the credit-risk-related contingency features underlying these agreements were triggered

as of March 31, 2011, we would be required to post an additional $734 million of collateral to our

counterparties.

119

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
The following table displays, by type of derivative instrument, the fair value gains and losses, net on our

derivatives for the three months ended March 31, 2011 and 2010.

2011 2010

For the

Three Months

Ended March 31,

(Dollars in millions)

Risk management derivatives:

Swaps:

Pay-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 602 $(5,879)

Receive-fixed ................................................ (256) 4,669

Basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 9

Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 (3)

Swaptions:

Pay-fixed ................................................... (55) (934)

Receive-fixed ................................................ (233) 27

Interest rate caps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) (56)

Other(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6

Total risk management derivatives fair value gains (losses), net. . . . . . . . . . . . 116 (2,161)

Mortgage commitment derivatives fair value gains (losses), net . . . . . . . . . . . . . 23 (601)

Total derivatives fair value gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . $ 139 $(2,762)

(1) Includes 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. Typically, we seek to manage credit exposure

by contracting with experienced counterparties that are rated A- (or its equivalent) or better. We also manage

our exposure by requiring counterparties to post collateral. The collateral includes cash, U.S. Treasury

securities, agency debt and agency mortgage-related securities.

120

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
The table below displays our 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 March 31, 2011 and December 31, 2010.

AA+/AA/AA- A+/A Subtotal(2) Other(3) Total

Credit Rating(1)

As of March 31, 2011

(Dollars in millions)

Credit loss exposure(4). . . . . . . . . . . . . . . . . . . . . $ 77 $ 651 $ 728 $ 77 $ 805

Less: Collateral held(5) . . . . . . . . . . . . . . . . . . . . 55 646 701 — 701

Exposure net of collateral . . . . . . . . . . . . . . . . . . $ 22 $ 5 $ 27 $ 77 $ 104

Additional information:

Notional amount . . . . . . . . . . . . . . . . . . . . . . . $209,395 $529,732 $739,127 $1,997 $741,124

Number of counterparties . . . . . . . . . . . . . . . . . 7 8 15

AA+/AA/AA- A+/A Subtotal(2) Other(3) Total

Credit Rating(1)

As of December 31, 2010

(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 Standard & Poor’s

and Moody’s. The credit rating reflects the equivalent Standard & Poor’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

March 31, 2011 and December 31, 2010, respectively. Those interest rate and foreign currency derivatives had notional

balances of $125.1 billion and $106.5 billion as of March 31, 2011 and December 31, 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. We posted cash collateral of $2.8 billion and

$3.4 billion related to our counterparties’ credit exposure to us as of March 31, 2011 and December 31, 2010,

respectively.

121

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
10. 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. When we begin operating under a functional

structure, we may change some of our management reporting and how we report our business segment results.

Under our segment reporting, the sum of the results for our three business segments does not equal our

condensed 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. 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 under-capitalization; (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. We also include

an eliminations/adjustments category to reconcile our business segment results and the activity related to our

consolidated trusts to our condensed consolidated statements of operations.

The following tables display our segment results for the three months ended March 31, 2011 and 2010.

SingleFamily MultifamilyCapital

Markets

Consolidated

Trusts(1)

Eliminations/

Adjustments(2)

Total

Results

Business Segments Other Activity/Reconciling Items

For the Three Months Ended March 31, 2011

(Dollars in millions)

Net interest income (expense) ....... $ (898) $ (9) $3,710 $ 1,574 $ 583(3) $ 4,960

Benefit (provision) for loan losses . . . . (10,612) 25 — — — (10,587)

Net interest income (expense) after

provision for loan losses . . ....... (11,510) 16 3,710 1,574 583 (5,627)

Guaranty fee income (expense) ...... 1,871 209 (399) (1,110)(4) (521)(4) 50(4)

Investment gains (losses), net . . . . . . . 1 4 870 (26) (774)(5) 75

Net other-than-temporary impairments . . — — (44) — — (44)

Fair value gains (losses), net . . . . . . . . — — 218 (33) 104(6) 289

Debt extinguishment gains (losses),

net . . . . . . . . . . . . . . . . . . . . . . . — — (24) 37 — 13

Losses from partnership investments . . . — (12) — — — (12)(7)

Fee and other income (expense) . . . . . . 147 58 75 (92) (1) 187

Administrative expenses ........... (416) (68) (121) — — (605)

Benefit (provision) for guaranty losses. . (6) 39 — — — 33

Foreclosed property expense . ....... (488) — — — — (488)

Other income (expenses) . . . ....... (318) 6 (9) — (19) (340)

Income (loss) before federal income

taxes ...................... (10,719) 252 4,276 350 (628) (6,469)

Benefit (provision) for federal income

taxes . . . . . . . . . . . . . . . . . . . . . . (2) (5) 5 — — (2)

Net income (loss) attributable to

Fannie Mae ................ $(10,721) $247 $4,281 $ 350 $(628) $ (6,471)

122

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
SingleFamily Multifamily

Capital

Markets

Consolidated

Trusts(1)

Eliminations/

Adjustments(2)

Total

Results

Business Segments Other Activity/Reconciling Items

For the Three Months Ended March 31, 2010

(Dollars in millions)

Net interest income (expense) ....... $ (1,945) $ 4 $ 3,057 $ 1,239 $ 434(3) $ 2,789

Benefit (provision) for loan losses . . . . (11,945) 6 — — — (11,939)

Net interest income (expense) after

provision for loan losses . . ....... (13,890) 10 3,057 1,239 434 (9,150)

Guaranty fee income (expense) ...... 1,768 194 (279) (1,197)(4) (432)(4) 54(4)

Investment gains (losses), net . . . . . . . 2 — 792 (155) (473)(5) 166

Net other-than-temporary impairments . . — — (236) — — (236)

Fair value losses, net . ............ — — (1,186) (35) (484)(6) (1,705)

Debt extinguishment losses, net ...... — — (55) (69) — (124)

Losses from partnership investments . . . — (58) — — — (58)(7)

Fee and other income (expense) . . . . . . 47 35 104 (7) — 179

Administrative expenses ........... (390) (99) (116) — — (605)

Benefit (provision) for guaranty losses. . (11) 47 — — — 36

Foreclosed property income (expense) . . 30 (11) — — — 19

Other income (expenses) . . . ....... (172) (6) 27 — (21) (172)

Income (loss) before federal income

taxes ...................... (12,616) 112 2,108 (224) (976) (11,596)

Benefit (provision) for federal income

taxes . . . . . . . . . . . . . . . . . . . . . . 51 (13) 29 — — 67

Net income (loss) . ............ (12,565) 99 2,137 (224) (976) (11,529)

Less: Net income attributable to

noncontrolling interests . . . . . . . . — — — — (1)(8) (1)

Net income (loss) attributable to

Fannie Mae ................ $(12,565) $ 99 $ 2,137 $ (224) $(977) $(11,530)

(1) Represents activity related to the assets and liabilities of consolidated trusts in our condensed 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 condensed 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 condensed 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) Losses from partnership investments are included in other expenses in our condensed consolidated statements of

operations and comprehensive loss.

(8) Represents the adjustment from equity method accounting to consolidation accounting for partnership investments that

are consolidated in our condensed consolidated balance sheets.

123

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
11. 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.

The following table displays our regulatory capital classification measures as of March 31, 2011 and

December 31, 2010.

March 31,

2011(1) December 31,2010(1)

As of

(Dollars in millions)

Core capital(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (98,199) $ (89,516)

Statutory minimum capital requirement(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,530 33,676

Deficit of core capital over statutory minimum capital requirement . . . . . . . . . . . . . . . . $(130,729) $(123,192)

Deficit of core capital percentage over statutory minimum capital requirement . . . . . . . . (402)% (366)%

(1) Amounts as of March 31, 2011 and December 31, 2010 represent estimates that have been 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).

12. Concentration of Credit Risk

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 76% of our single-family guaranty book of business as

of March 31, 2011, compared with 77% as of December 31, 2010. Our ten largest multifamily mortgage

servicers, including their affiliates, serviced 69% of our multifamily guaranty book of business as of

March 31, 2011, compared with 70% as of December 31, 2010.

If one of our principal mortgage seller/servicers fails to meet its obligations to us, it could increase our creditrelated expenses and credit losses, result in financial losses to us and have a material adverse effect on our

earnings, liquidity, financial condition and net worth.

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

$94.8 billion on the single-family mortgage loans in our guaranty book of business as of March 31, 2011,

which represented approximately 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 $90.2 billion and $4.6 billion, respectively, as of March 31, 2011, compared with $91.2 billion and

124

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
$4.7 billion, respectively, as of December 31, 2010. Eight mortgage insurance companies provided over 99%

of our mortgage insurance as of both March 31, 2011 and December 31, 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. 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.

As of March 31, 2011, our allowance for loan losses of $67.6 billion, allowance for accrued interest receivable

of $2.9 billion and reserve for guaranty losses of $257 million incorporated an estimated recovery amount of

approximately $16.5 billion from mortgage insurance related both to loans that are individually measured for

impairment and those that are collectively reserved. This amount is comprised of the contractual recovery of

approximately $17.4 billion as of March 31, 2011 and an adjustment of approximately $975 million which

reduces the contractual recovery for our assessment of our mortgage insurer counterparties’ inability to fully

pay those claims.

We had outstanding receivables of $4.1 billion in “Other assets” in our condensed consolidated balance sheet

as of March 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 $650 million as of March 31, 2011 and $648 million

as of December 31, 2010 was due from our mortgage seller/servicers. We assessed the receivables for

collectibility, and they are recorded net of a valuation allowance of $271 million as of March 31, 2011 and

$317 million as of December 31, 2010 in “Other assets.” These mortgage insurance receivables are short-term

in nature, having a duration of approximately three to six months, and the valuation allowance reduces our

claim receivable to the amount which is considered probable of collection as of March 31, 2011 and

December 31, 2010. We received proceeds under our primary and pool mortgage insurance policies for singlefamily loans of $1.6 billion for the three months ended March 31, 2011 and $6.4 billion for the year ended

December 31, 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 for the year ended December 31, 2010

are included in our total insurance proceeds amount; there were no such cash fees received in the three months

ended March 31, 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 (income).”

Financial Guarantors. We were the beneficiary of financial guarantees totaling $8.6 billion and $8.8 billion

as of March 31, 2011 and December 31, 2010, respectively, on securities held in our investment portfolio or

on securities that have been resecuritized to include a Fannie Mae guaranty and sold to third parties. The

securities covered by these guarantees consist primarily of private-label mortgage-related securities and

mortgage revenue bonds. In addition, we are the beneficiary of financial guarantees totaling $23.9 billion and

$25.7 billion as of March 31, 2011 and December 31, 2010, respectively, obtained from Freddie Mac, the

federal government, and its agencies. These financial guaranty contracts assure the collectibility of timely

interest and ultimate principal payments on the guaranteed securities if the cash flows generated by the

underlying collateral are not sufficient to fully support these payments.

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

125

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
and net worth. We model the fair value of our securities assuming the benefit of those external financial

guarantees that we determine are creditworthy.

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 $14.8 billion as of

March 31, 2011 and $15.6 billion as of December 31, 2010. As of March 31, 2011, 55% 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 three lenders. Our maximum potential loss

recovery from lenders under these risk sharing agreements on multifamily loans was $30.7 billion as of

March 31, 2011 and $30.3 billion as of December 31, 2010. As of both March 31, 2011 and December 31,

2010, 41% of our maximum potential loss recovery on multifamily loans was from three lenders.

13. 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

standards require or permit assets or liabilities to be measured at fair value. The guidance establishes a threelevel 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.

126

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Recurring Changes in Fair Value

The following tables display our assets and liabilities measured in our condensed 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 March 31, 2011 and December 31, 2010. Specifically, total assets measured

at fair value on a recurring basis and classified as Level 3 were $38.2 billion, or 1% of “Total assets,” and

$39.0 billion, or 1% of “Total assets,” in our condensed consolidated balance sheets as of March 31, 2011 and

December 31, 2010, respectively.

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

Fair Value Measurements as of March 31, 2011

(Dollars in millions)

Assets:

Cash equivalents(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,150 $ 2,950 $ — $ — $ 6,100

Trading securities:

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 5,480 1,651 — 7,131

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,201 — — 1,201

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 311 — — 311

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . — 1,638 20 — 1,658

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . — — 1,547 — 1,547

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 10,943 — — 10,943

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . — — 606 — 606

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 155 — 155

Non-mortgage-related securities:

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . 29,383 — — — 29,383

Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . — 4,098 2 — 4,100

Total trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,383 23,671 3,981 — 57,035

Available-for-sale securities:

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 20,097 546 — 20,643

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 15,344 12 — 15,356

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,004 — — 1,004

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . — 6,456 7,236 — 13,692

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . — — 9,660 — 9,660

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 14,924 — — 14,924

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . — 10 10,532 — 10,542

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 16 3,776 — 3,792

Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . — 57,851 31,762 — 89,613

Mortgage loans of consolidated trusts . . . . . . . . . . . . . . . . . . . . — 748 2,221 — 2,969

Other assets:

Risk management derivatives:

Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 8,523 156 — 8,679

Swaptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 4,811 — — 4,811

Interest rate caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 20 — — 20

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 — 77 — 80

Netting adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (13,478) (13,478)

Mortgage commitment derivatives . . . . . . . . . . . . . . . . . . . . — 161 6 — 167

Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 13,515 239 (13,478) 279

Total assets at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . $32,536 $98,735 $38,203 $(13,478) $155,996

127

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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

Fair Value Measurements as of March 31, 2011

(Dollars in millions)

Liabilities:

Long-term debt:

Of Fannie Mae:

Senior fixed. . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ 461 $ — $ — $ 461

Senior floating . . . . . . . . . . . . . . . . . . . . . . . . . . — — 423 — 423

Total of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . — 461 423 — 884

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . — 1,526 667 — 2,193

Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . — 1,987 1,090 — 3,077

Other liabilities:

Risk management derivatives:

Swaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 13,560 101 — 13,661

Swaptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,693 — — 2,693

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 — — — 1

Netting adjustment . . . . . . . . . . . . . . . . . . . . . . . — — — (15,622) (15,622)

Mortgage commitment derivatives . . . . . . . . . . . . . . — 188 20 — 208

Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 1 16,441 121 (15,622) 941

Total liabilities at fair value. . . . . . . . . . . . . . . . . $ 1 $18,428 $1,211 $(15,622) $ 4,018

128

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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

Fair Value Measurements as of December 31, 2010

(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

Interest rate caps . . . . . . . . . . . . . . . . . . . . . . . . . . . — 24 — — 24

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 — 72 — 75

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

129

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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

Fair Value Measurements as of December 31, 2010

(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 and money market funds that are

classified as Level 2.

130

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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 three months ended March 31, 2011 and 2010.

The tables also display gains and losses due to changes in fair value, including both realized and unrealized

gains and losses, recognized in our condensed consolidated statements of operations and comprehensive loss

for Level 3 assets and liabilities for the three months ended March 31, 2011 and 2010. When assets and

liabilities are transferred between levels, we recognize the transfer as of the end of the period.

Balance,

December 31,

2010

Included

in Net

Loss

Included

in Other

Comprehensive

Income Purchases(3) Sales(3) Settlements(4)

Transfers

Out of

Level 3(1)

Transfers

into

Level 3(1)

Balance,

March 31,

2011

Net Unrealized

Gains (Losses)

Included

in Net Loss

Related to

Assets and

Liabilities Still

Held as of

March 31,

2011(2)

Total Gains or (Losses)

(Realized/Unrealized)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

For the Three Months Ended March 31, 2011

(Dollars in millions)

Trading securities:

Mortgage-related:

Fannie Mae . . . ...... $ 2,202 $ (13) $ — $ — $(15) $ (132) $(391) $ — $ 1,651 $(10)

Alt-A private-label

securities . . . . . . . . . 20 — — — — — — — 20 —

Subprime private-label

securities . . . ...... 1,581 11 — — — (45) — — 1,547 11

Mortgage revenue

bonds . . . . . . . . . . . 609 — — — — (3) — — 606 3

Other . . . . . . . . . . . . 152 4 — — — (1) — — 155 4

Non-mortgage-related:

Asset-backed securities . . 12 — — — — (3) (9) 2 2 —

Total trading securities . . . . . 4,576 2 — — (15) (184) (400) 2 3,981 8

Available-for-sale securities:

Mortgage-related:

Fannie Mae . . . . . . . . . 114 — 4 416 (15) (2) (101) 130 546 —

Freddie Mac . . . . . . . . 3 — — — — — — 9 12 —

Alt-A private-label

securities . . . ...... 7,049 (2) 104 — — (258) (317) 660 7,236 —

Subprime private-label

securities . . . ...... 9,932 130 (58) — — (344) — — 9,660 —

Mortgage revenue

bonds ........... 11,030 (2) 21 — (42) (475) — — 10,532 —

Other . ........... 3,806 1 71 — — (102) — — 3,776 —

Total available-for-sale

securities . ........... 31,934 127 142 416 (57) (1,181) (418) 799 31,762 —

Mortgage loans of

consolidated trusts ...... 2,207 11 — 15 — (79) (6) 73 2,221 11

Net derivatives . . . . . . . . . . 104 14 — — — — — — 118 5

Long-term debt:

Of Fannie Mae:

Senior floating . ...... (421) (22) — — — 20 — — (423) (22)

Of consolidated trusts . . . . (627) (35) — — — 22 22 (49) (667) (35)

Total long-term debt ...... $ (1,048) $ (57) $ — $ — $ — $ 42 $ 22 $ (49) $ (1,090) $(57)

131

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Balance,

December 31,

2009

Impact of

New

Accounting

Standards

Included

in Net

Loss

Included

in Other

Comprehensive

Income

Purchases,

Sales,

Issuances,

and

Settlements,

Net

Transfers

Out of

Level 3(1)

Transfers

into

Level 3(1)

Balance,

March 31,

2010

Net Unrealized

Gains (Losses)

Included in Net

Loss Related to

Assets and

Liabilities Still

Held as of

March 31,

2010(2)

Total Gains or (Losses)

(Realized/Unrealized)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

For the Three Months Ended March 31, 2010

(Dollars in millions)

Trading securities:

Mortgage-related:

Fannie Mae ............. $ 5,656 $ (2) $ 38 $ — $ (131) $(1,490) $ 5 $ 4,076 $ 43

Alt-A private-label securities . . 564 62 23 — (36) (490) 30 153 —

Subprime private-label

securities ............. 1,780 — (26) — (71) — — 1,683 (26)

Mortgage revenue bonds . . . . . 600 — 50 — (39) — — 611 47

Other . . . . . . . . . . . . . . . . . 154 — 5 — (1) — — 158 5

Non-mortgage-related:

Asset-backed securities. . . . . . 107 — (1) — (36) (40) 13 43 1

Total trading securities ......... 8,861 60 89 — (314) (2,020) 48 6,724 70

Available-for-sale securities:

Mortgage-related:

Fannie Mae . . . . . . . . . . . . . 596 (203) (2) 1 167 (344) 2 217 —

Freddie Mac . . . . . . . . . . . . 27 — — — (3) — 6 30 —

Ginnie Mae . . . . . . . . . . . . . 123 — — — — — — 123 —

Alt-A private-label securities . . 8,312 471 (4) 267 (312) (1,011) 794 8,517 —

Subprime private-label

securities ............. 10,746 (118) (88) 463 (492) — — 10,511 —

Mortgage revenue bonds ..... 12,820 21 (1) 233 (514) — — 12,559 —

Other ................. 3,530 366 (5) 110 (128) — — 3,873 —

Total available-for-sale securities . . . 36,154 537 (100) 1,074 (1,282) (1,355) 802 35,830 —

Guaranty assets and buy-ups ..... 2,577 (2,568) — — 2 — — 11 1

Net derivatives . . . . . . . . . . . . . . 123 — 35 — (18) — — 140 (2)

Long-term debt:

Of Fannie Mae:

Senior floating ........... (601) — 14 — 5 — — (582) 15

Of consolidated trusts ........ — (77) (1) — — 9 (2) (71) —

Total long-term debt .......... $ (601) $ (77) $ 13 $ — $ 5 $ 9 $ (2) $ (653) $ 15

(1) 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. The transfers into Level 3 consisted primarily of private-label

mortgage-related securities backed by Alt-A loans as well as Fannie Mae guaranteed mortgage-related securities.

Prices for these securities are based on inputs from a single source or inputs that were not readily observable.

(2) 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.

(3) Purchases and sales include activity related to the consolidation and deconsolidation of assets of securitized trusts.

(4) Issuances and settlements include activity related to the consolidation and deconsolidation of liabilities of securitized

trusts.

132

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
The following tables display realized and unrealized gains and losses included in our condensed consolidated

statements of operations and comprehensive loss for the three months ended March 31, 2011 and 2010, for our

Level 3 assets and liabilities measured in our condensed consolidated balance sheets at fair value on a

recurring basis.

Interest

Income

Fair Value

Gains

(Losses), net

Net

Other-thanTemporary

Impairments Other Total

For the Three Months Ended March 31, 2011

(Dollars in millions)

Total realized and unrealized gains (losses) included in

net loss ................................... $135 $(24) $(17) $ 3 $ 97

Net unrealized losses related to Level 3 assets and

liabilities still held as of March 31, 2011 . . . ....... $ — $(33) $ — $— $(33)

Interest

Income

Fair Value

Gains

(Losses), net

Net

Other-thanTemporary

Impairments Other Total

For the Three Months Ended March 31, 2010

(Dollars in millions)

Total realized and unrealized gains (losses) included in

net loss ................................... $111 $133 $(212) $5 $37

Net unrealized gains related to Level 3 assets and

liabilities still held as of March 31, 2010 . . . . . . . . . . $ — $ 83 $ — $1 $84

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

condensed 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

four 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.

Mortgage Loans Held for Investment “HFI”—The majority of HFI performing loans and nonperforming loans

that are not individually impaired are reported in our condensed 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 senior-subordinate trust structures, which are recorded in our condensed consolidated

balance sheets at fair value on a recurring basis.

133

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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 thirdparty 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 assumptions about key factors, including loan performance, collateral value, foreclosure related

expenses, disposition timeline, and mortgage insurance repayment. Using these assumptions, along with

indicative bids for a representative sample of nonperforming loans, we compute a market calibrated fair value.

The bids on 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, is estimated directly from a model calibrated to these indicative 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.

Fair value of a portion of our single-family 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. A portion of the nonperforming loans that are

impaired is measured at fair value in our condensed consolidated balance sheets on a nonrecurring basis.

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 condensed

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 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. Exchange-traded 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

134

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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

condensed 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 condensed

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 include 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

condensed consolidated balance sheets. While the fair value of the guaranty assets reflect all guaranty

arrangements, the carrying value primarily reflects only those arrangements entered into subsequent to our

adoption of the accounting standard on guarantor’s accounting and disclosure requirements for guarantees.

Debt—The majority of debt of Fannie Mae is recorded in our condensed 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 condensed 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.

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

135

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
with embedded derivatives is recorded in our condensed 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 condensed 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 three months ended

March 31, 2011 and 2010 as a result of fair value measurements.

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

Fair Value Measurements

For the Three Months Ended March 31, 2011

For the Three

Months Ended

March 31, 2011

(Dollars in millions)

Assets:

Mortgage loans held for sale, at lower of cost or fair

value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $89 $ 131 $ 220 $ (5)

Single-family mortgage loans held for investment, at

amortized cost:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . — — 27,265 27,265(3) (1,014)

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . — — 633 633(3) (80)

Multifamily mortgage loans held for investment, at

amortized cost:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,028 1,028(3) (80)

Acquired property, net:

Single-family. . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 12,114 12,114(4) (811)

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 93 93(4) (16)

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,402 1,402 (30)

Total assets at fair value . . . . . . . . . . . . . . . . . . . . $— $89 $42,666 $42,755 $(2,036)

136

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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)

Fair Value Measurements

For the Three Months Ended March 31, 2010

For the Three

Months Ended

March 31, 2010

(Dollars in millions)

Assets:

Mortgage loans held for sale, at lower of cost or fair

value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $6,690 $ 473 $ 7,163(1)(2) $ (69)(2)

Single-family mortgage loans held for investment, at

amortized cost:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . — — 3,621 3,621(3) 109

Multifamily mortgage loans held for investment, at

amortized cost:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,089 1,089(3) (91)

Acquired property, net:

Single-family. . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 5,827 5,827(4) (332)

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 73 73(4) (15)

Other Assets:

Guaranty assets . . . . . . . . . . . . . . . . . . . . . . . . . . — — 18 18 (3)

Partnership investments. . . . . . . . . . . . . . . . . . . . . — — 69 69 (63)

Total assets at fair value . . . . . . . . . . . . . . . . . . . . $— $6,690 $11,170 $17,860 $(464)

(1) Includes $7.1 billion of mortgage loans held for sale that were sold, retained as a mortgage-related security or

redesignated to mortgage loans held for investment as of March 31, 2010.

(2) Includes $7.1 billion of estimated fair value and $68 million in losses due to the adoption of the new accounting

standards.

(3) Includes $1.3 billion and $161 million of mortgage loans held for investment that were liquidated or transferred to

foreclosed properties as of March 31, 2011 and 2010, respectively.

(4) Includes $4.1 billion and $1.6 billion of acquired properties that were sold or transferred as of March 31, 2011 and

2010, respectively.

The following is a description of the fair valuation techniques we use for assets and liabilities measured at fair

value on a nonrecurring basis under the accounting standard 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.

Mortgage Loans Held for Sale “HFS”—HFS loans are reported at the lower of cost or fair value in our

condensed 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

137

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
our condensed 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

fair value estimate is based on the best information available at the time of valuation. The hierarchy includes

offers accepted, third-party interior appraisals, independent broker opinions, proprietary home price model

values and exterior broker price opinions. Estimated cost to sell is based upon historical sales cost at a

geographic level.

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, are depreciated and are impaired when circumstances indicate that the carrying

amount of the property is no longer recoverable. Acquired property held for use is included in other assets in

our condensed consolidated balance sheets. The fair value of our single-family foreclosed properties on an

ongoing basis is determined using the same information hierarchy used at the point of initial fair value. The

fair value of our multifamily properties is derived using third-party valuations. When third-party valuations are

not available, we estimate the fair value using current net operating income of the property and capitalization

rates.

Acquired property is classified as 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

March 31, 2011 and December 31, 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 condensed 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

138

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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.

Carrying

Value

Estimated

Fair Value

Carrying

Value

Estimated

Fair Value

March 31, 2011 December 31, 2010

As of

(Dollars in millions)

Financial assets:

Cash and cash equivalents(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,561 $ 56,561 $ 80,975 $ 80,975

Federal funds sold and securities purchased under agreements to

resell or similar arrangements . . . . . . . . . . . . . . . . . . . . . . . . 26,250 26,250 11,751 11,751

Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,035 57,035 56,856 56,856

Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,613 89,613 94,392 94,392

Mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . 1,414 1,458 915 915

Mortgage loans held for investment, net of allowance for loan

losses:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348,644 313,172 358,698 319,367

Of consolidated trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,599,999 2,618,736 2,564,107 2,610,145

Mortgage loans held for investment . . . . . . . . . . . . . . . . . . . . . . 2,948,643 2,931,908 2,922,805 2,929,512

Advances to lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,091 2,940 7,215 6,990

Derivative assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . 279 279 1,137 1,137

Guaranty assets and buy-ups. . . . . . . . . . . . . . . . . . . . . . . . . . . 459 899 458 814

Total financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,183,345 $3,166,943 $3,176,504 $3,183,342

Financial liabilities:

Federal funds purchased and securities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25 $ 25 $ 52 $ 51

Short-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,092 147,133 151,884 151,974

Of consolidated trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,156 5,156 5,359 5,359

Long-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 614,095 633,150 628,160 649,684

Of consolidated trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,442,433 2,530,474 2,411,597 2,514,929

Derivative liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . 941 941 1,715 1,715

Guaranty obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 760 3,427 769 3,854

Total financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,210,502 $3,320,306 $3,199,536 $3,327,566

(1) Includes restricted cash of $36.7 billion and $63.7 billion as of March 31, 2011 and December 31, 2010, respectively.

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

139

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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 standard 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 condensed

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 condensed consolidated

statements of operations and comprehensive loss.

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 March 31, 2011 and December 31, 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)

March 31, 2011 December 31, 2010

As of

(Dollars in millions)

Fair value ................ $2,969 $884 $2,193 $2,962 $893 $2,271

Unpaid principal balance ...... 3,472 809 2,506 3,456 829 2,572

140

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
(1) Includes nonaccrual loans with a fair value of $242 million and $219 million as of March 31, 2011 and December 31,

2010, respectively. The difference between unpaid principal balance and the fair value of these nonaccrual loans as of

March 31, 2011 is $216 million. Includes loans that are 90 days past due with a fair value of $365 million and

$369 million as of March 31, 2011 and December 31, 2010, respectively. The difference between unpaid principal

balance and the fair value of these 90 or more days past due loans as of March 31, 2011 is $253 million.

(2) Includes interest-only debt instruments with no unpaid principal balance and a fair value of $140 million and

$151 million as of March 31, 2011 and December 31, 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 instrumentspecific credit risk, for loans and debt for which the fair value election was made. Amounts are recorded as a

component of “Fair value gains (losses), net” in our condensed consolidated statements of operations and

comprehensive loss for the periods ended March 31, 2011 and 2010.

Loans

LongTerm

Debt

Total

Gains

(Losses)

LongTerm

Debt

2011 2010

For the Three Months Ended March 31,

(Dollars in millions)

Changes in instrument-specific credit risk ............................... $(217) $ (4) $(221) $ 3

Other changes in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 33 98 (27)

Fair value gains (losses), net . ..................................... $(152) $29 $(123) $(24)

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.

14. 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. Litigation claims and proceedings of all types are subject to many uncertain

factors that generally cannot be predicted with assurance. The following describes our material legal

proceedings, investigations and other matters.

For certain legal actions and proceedings we have established a reserve for probable losses where we can

reasonably estimate such losses or ranges of losses. Based on our current knowledge and after consultation

with counsel, we do not believe that such losses or ranges of losses will have a material adverse effect on our

financial condition. 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 certain other legal actions or proceedings, we cannot reasonably

estimate such losses or ranges of losses, particularly for proceedings that are in their early stages of

141

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
development, where plaintiffs seek substantial or indeterminate damages, or where there may be novel or

unsettled legal questions relevant to the proceedings. For these matters, we have not established a reserve.

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 lawsuits described

below, we believe we have valid defenses to the claims in these lawsuits and intend to defend these lawsuits

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 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 the 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.

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. On October 13, 2009, the Court entered an

order allowing FHFA to intervene in In re Fannie Mae 2008 Securities Litigation.

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, 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 purport to represent

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. Lead plaintiffs seek various

forms of relief, including rescission, damages, interest, costs, attorneys’ and experts’ fees, and other equitable

and injunctive relief.

142

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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.

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.

Comprehensive Investment Services v. Mudd, et al.

On May 13, 2009, Comprehensive Investment Services, Inc. filed an individual securities action against certain

of our former officers and directors, and certain of our underwriters in the Southern District of Texas. Plaintiff

alleges violations of Section 12(a)(2) of the Securities Act of 1933; violation of § 10(b) of the Securities

Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; violation of § 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% noncumulative preferred Series T stock. The complaint seeks various forms of relief, including rescission,

damages, interest, costs, attorneys’ and experts’ fees, and other equitable and injunctive relief. 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.

Smith v. Fannie Mae, et al.

This 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 and is pending in the Southern District of New

York where it is coordinated 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, 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, violations of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated

thereunder; violations of § 20(a) of the Securities Exchange Act of 1934; common law fraud and negligence

claims; and California state law claims for misrepresentation. Plaintiff seeks relief in the form of rescission,

actual damages (including interest), and exemplary and punitive damages.

143

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
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. We are cooperating with this investigation.

Investigation by the Department of Justice

On September 26, 2008, we received notice of an ongoing federal investigation by the U.S. Attorney for the

Southern District of New York into certain accounting, disclosure and corporate governance matters. In

connection with that investigation, Fannie Mae received a Grand Jury subpoena for documents. That subpoena

was subsequently withdrawn. However, we were informed that the Department of Justice was continuing an

investigation and on March 15, 2010, we received another Grand Jury subpoena for documents. We are

cooperating with this investigation.

144

FANNIE MAE

(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)
Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information about market risk is set forth in “MD&A—Risk Management—Market Risk Management,

Including Interest Rate Risk Management.”

Item 4. 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

Securities and Exchange Commission (“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 Deputy 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 Deputy Chief Financial Officer, the effectiveness of our disclosure controls and

procedures as in effect as of March 31, 2011, the end of the period covered by this report. As a result of

management’s evaluation, our Chief Executive Officer and Deputy Chief Financial Officer concluded that our

disclosure controls and procedures were not effective at a reasonable assurance level as of March 31, 2011 or

as of the date of filing this report.

Our disclosure controls and procedures were not effective as of March 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

March 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 this material weakness while we are

under conservatorship.

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.

145
Management has determined that we continued to have the following material weakness as of March 31, 2011

and as of the date of filing this report:

• Disclosure Controls and Procedures. We have been under the conservatorship of FHFA since

September 6, 2008. Under the 2008 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 2008 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 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 2008 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 condensed 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 March 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

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

quarterly report on Form 10-Q for the quarter ended March 31, 2011 (“First Quarter 2011 Form 10-Q”),

and engaged in discussions regarding issues associated with the information contained in those filings.

Prior to filing our First Quarter 2011 Form 10-Q, FHFA provided Fannie Mae management with a written

acknowledgement that it had reviewed the First Quarter 2011 Form 10-Q, and it was not aware of any

material misstatements or omissions in the First Quarter 2011 Form 10-Q and had no objection to our

filing the First Quarter 2011 Form 10-Q.

• The Acting Director of FHFA and our Chief Executive Officer have been in frequent communication,

typically meeting on at least a bi-weekly basis.

146
• 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.

Changes in Internal Control over Financial Reporting

Management is required to evaluate, with the participation of our Chief Executive Officer and Deputy 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. There have been no changes in our internal control over financial reporting since

December 31, 2010 that management believes have materially affected, or are reasonably likely to materially

affect, our internal control over financial reporting.

147
PART II—OTHER INFORMATION

Item 1. Legal Proceedings

The information in this item supplements information regarding certain legal proceedings set forth in “Legal

Proceedings” in our 2010 Form 10-K. We also provide information regarding material legal proceedings in

“Note 14, 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 reasonably be 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 have not recognized in our condensed consolidated financial

statements the potential liability that may result from these matters. We presently cannot determine the

ultimate resolution of the matters described or incorporated by reference in this item or in our 2010

Form 10-K. We have recorded a reserve for legal claims related to those matters for which 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.

Item 1A. Risk Factors

In addition to the information in this report, you should carefully consider the risks relating to our business

that we identify in “Risk Factors” in our 2010 Form 10-K. This section supplements and updates that

discussion and, for a complete understanding of the subject, you should read both together. Please also refer to

“MD&A—Risk Management” in this report and in our 2010 Form 10-K for more detailed descriptions 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. However, these are not the only

risks we face. In addition to the risks we discuss below, we face risks and uncertainties not currently known to

us or that we currently believe are immaterial. 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 the forward-looking statements

contained in this report.

The future of our company is uncertain.

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

be in existence, 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.

On February 11, 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

148
importance of proceeding with a careful transition plan and providing the necessary financial support to

Fannie Mae and Freddie Mac during the transition period.

In April 2011, in the House of Representatives, the Subcommittee on Capital Markets and Government

Sponsored Enterprises of the Financial Services Committee approved several bills relating to GSE operations.

We expect that Congress will continue to hold hearings and consider legislation in 2011 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.

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 may be insufficient to

cover our obligations or aggregate liquidation preference on our preferred stock, or 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 be able to make funds available to

us within the required 60 days if providing the funds would cause the government to exceed its authorized

debt ceiling. 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.

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 Federal

Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the 2008 Reform Act

(together, 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 secured and unsecured claims against the

company (including repaying all outstanding debt obligations), the administrative expenses of the receiver 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.

149
A decrease in the credit ratings on our senior unsecured debt would likely have an adverse effect on our

ability to issue debt on reasonable terms and trigger additional collateral requirements.

Our borrowing costs and our access to the debt capital markets depend in large part on the high credit ratings

on our senior unsecured debt. 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. While there have been no changes in our

credit ratings from December 31, 2010 to May 2, 2011, on April 20, 2011, Standard & Poor’s revised its

outlook on the debt issues of Fannie Mae to negative from stable. This action followed Standard & Poor’s

revision to the outlook of the U.S. government’s long-term credit rating to negative from stable. Standard &

Poor’s noted that the ratings on Fannie Mae and other government-related entities are constrained by the longterm sovereign rating on the U.S. government and noted that it will not raise the outlooks or ratings on these

entities above the U.S. government as long as the ratings and outlook on the U.S. remain unchanged.

Standard & Poor’s also stated that if it were to lower its ratings on the U.S. government, it would likely lower

the ratings on the debt of Fannie Mae and other government-related entities. A reduction in our credit ratings

would likely increase our borrowing costs, limit our access to the capital markets and trigger additional

collateral requirements under our derivatives contracts and other borrowing arrangements. It may also reduce

our earnings and materially adversely affect our liquidity, our ability to conduct our normal business

operations, our financial condition and results of operations. Our credit ratings and ratings outlook are

included in “MD&A—Liquidity and Capital Management—Liquidity Management—Credit Ratings.”

Deficiencies in servicer and law firm foreclosure processes and the resulting foreclosure pause may cause

higher credit losses and credit-related expenses.

A number of our single-family mortgage servicers temporarily halted foreclosures in the fall of 2010 in some

or all states after discovering deficiencies in their processes and the processes of their lawyers and other

service providers relating to the execution of affidavits in connection with the foreclosure process. This

foreclosure pause could expand to additional servicers and states, and possibly to all or substantially all of our

loans in the foreclosure process. Some servicers have lifted the foreclosure pause in some jurisdictions, while

continuing the pause in others.

Although we cannot predict the ultimate impact of this foreclosure pause on our business at this time, we

believe the pause has resulted in longer foreclosure timelines and higher credit-related expenses and will likely

continue to do so. The foreclosure pause could negatively affect housing market conditions and delay the

recovery of the housing market. This foreclosure pause may also negatively affect the value of the privatelabel securities we hold and result in additional impairments on these securities.

The foreclosure process deficiencies have generated significant concern and are currently being reviewed by

various government agencies and the attorneys general of all fifty states. Foreclosure process deficiencies

could lead to expensive or time-consuming new regulation, such as new rules applicable to the foreclosure

process recently issued by courts in some states. On April 13, 2011, federal banking regulators announced

enforcement actions against fourteen mortgage servicers and their parent bank holding companies to address

deficiencies and weaknesses identified in the regulators’ review of the servicers’ foreclosure processing. The

enforcement actions require the servicers to correct deficiencies and make improvements in their servicing and

foreclosure practices. The actions also require each servicer to hire an independent firm to conduct a

comprehensive review of foreclosure actions pending during 2009 and 2010 to identify and provide

remediation to borrowers who suffered financial injury as a result of wrongful foreclosures or other

foreclosure process deficiencies.

The failure of our servicers or a law firm 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.

Depending on the duration and extent of the foreclosure pause and the foreclosure process deficiencies, and

the responses to them, these matters could have a material adverse effect on our business.

150
Challenges to the MERS» System could pose counterparty, operational, reputational and legal risks for us.

MERSCORP, Inc. 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 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, Inc.

Several legal challenges have been made disputing MERS’s legal standing to initiate foreclosures and/or act as

nominee in local land records. 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. 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. On April 13, 2011, federal banking regulators and

FHFA announced that they were taking enforcement action against MERS to address significant weaknesses

in, among other things, oversight, management supervision and corporate governance at MERS that were

uncovered as part of the regulators’ review of mortgage servicers’ foreclosure processing. Failures by MERS

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 MERS or the impact on our business, results of operations and

financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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

“Plans”). During the quarter ended March 31, 2011, 73,094 restricted stock units vested, as a result of which

48,419 shares of common stock were issued, and 24,675 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.

During the quarter ended March 31, 2011, 154 shares of common stock were issued upon conversion of

100 shares of 8.75% Non-Cumulative Mandatory Convertible Preferred Stock, Series 2008-1, at the option of

151
the holders pursuant to the terms of the preferred stock. All series of preferred stock, other than the senior

preferred stock, were issued prior to September 7, 2008.

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 of 1933 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.

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, 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 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 report.

Our Purchases of Equity Securities

The following table shows shares of our common stock we repurchased during the first quarter of 2011.

Period

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

January 1-31 . . . . . . . . . . . . . . . . . . . . . . 294 $0.52 — —

February 1-28 . . . . . . . . . . . . . . . . . . . . . 23 0.59 — —

March 1-31 ....................... 1 0.55 — —

Total . . . . . . . . . . . . . . . . . . . . . . . . . . 318

152
(1) Consists of shares of common stock reacquired from employees to pay an aggregate of $167,443 in withholding taxes

due upon the vesting of previously issued restricted stock. Does not include 100 shares of 8.75% Non-Cumulative

Mandatory Convertible Series 2008-1 Preferred Stock received from holders upon conversion of those shares into

154 shares of common stock.

(2) We no longer have any publicly announced share repurchase programs under which we could purchase our common

stock.

Dividend Restrictions

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 Qualifying 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.

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.

Item 3. Defaults Upon Senior Securities

None.

Item 4. [Removed and reserved]

Item 5. Other Information

None.

Item 6. Exhibits

An index to exhibits has been filed as part of this report beginning on page E-1 and is incorporated herein by

reference.

153
SIGNATURES

Pursuant to the requirements 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

By: /s/ Michael J. Williams

Michael J. Williams

President and Chief Executive Officer

Date: May 6, 2011

By: /s/ David C. Hisey

David C. Hisey

Executive Vice President and

Deputy Chief Financial Officer

Date: May 6, 2011

154
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, 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 Non-Cumulative Mandatory Convertible

Preferred Stock, Series 2008-1 (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current

Report on Form 8-K, filed May 14, 2008.)

4.17 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

4.18 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.)

4.19 Warrant to Purchase Common Stock, dated September 7, 2008 (Incorporated by reference to

Exhibit 4.3 to Fannie Mae’s Current Report on Form 8-K, filed September 11, 2008.)

4.20 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.)

4.21 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.)

4.22 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.)

31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)

31.2 Certification of Deputy 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 Deputy Chief Financial Officer pursuant to 18 U.S.C. Section 1350

101. INS XBRL Instance Document*

101. SCH XBRL Taxonomy Extension Schema*

101. CAL XBRL Taxonomy Extension Calculation*

101. LAB XBRL Taxonomy Extension Labels*

101. PRE XBRL Taxonomy Extension Presentation*

101. DEF XBRL Taxonomy Extension Definition*

* 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.

E-2
Exhibit 31.1

CERTIFICATION

PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)

I, Michael J. Williams, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 of Fannie Mae

(formally, the Federal National Mortgage Association);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to

state a material fact necessary to make the statements made, in light of the circumstances under which such

statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the

registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure

controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control

over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and

have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be designed under our supervision, to ensure that material information relating to the

registrant, including its consolidated subsidiaries, is made known to us by others within those entities,

particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over

financial reporting to be designed under our supervision, 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;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in

this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end

of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that

occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case

of an annual report) that has materially affected, or is reasonably likely to materially affect, the

registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of

internal control over financial reporting, to the registrant’s auditors and the audit committee of the

registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control

over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,

process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

/s/ Michael J. Williams

Michael J. Williams

President and Chief Executive Officer

Date: May 6, 2011
Exhibit 31.2

CERTIFICATION

PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)

I, David C. Hisey, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 of Fannie Mae

(formally, the Federal National Mortgage Association);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to

state a material fact necessary to make the statements made, in light of the circumstances under which such

statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the

registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure

controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control

over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and

have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be designed under our supervision, to ensure that material information relating to the

registrant, including its consolidated subsidiaries, is made known to us by others within those entities,

particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over

financial reporting to be designed under our supervision, 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;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in

this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end

of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that

occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case

of an annual report) that has materially affected, or is reasonably likely to materially affect, the

registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of

internal control over financial reporting, to the registrant’s auditors and the audit committee of the

registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control

over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,

process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

/s/ David C. Hisey

David C. Hisey

Executive Vice President and

Deputy Chief Financial Officer

Date: May 6, 2011
Exhibit 32.1

CERTIFICATION

In connection with the Quarterly Report on Form 10-Q of Fannie Mae (formally, the Federal National

Mortgage Association) for the quarter ended March 31, 2011, as filed with the Securities and Exchange

Commission on the date hereof (the “Report”), I, Michael J. Williams, President and Chief Executive Officer

of Fannie Mae, certify, pursuant to 18 U.S.C. Section 1350 that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities

Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and

results of operations of Fannie Mae.

/s/ Michael J. Williams

Michael J. Williams

President and Chief Executive Officer

Dated: May 6, 2011

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed

as part of the Report or as a separate disclosure document.
Exhibit 32.2

CERTIFICATION

In connection with the Quarterly Report on Form 10-Q of Fannie Mae (formally, the Federal National

Mortgage Association) for the quarter ended March 31, 2011, as filed with the Securities and Exchange

Commission on the date hereof (the “Report”), I, David C. Hisey, Executive Vice President and Deputy Chief

Financial Officer of Fannie Mae, certify, pursuant to 18 U.S.C. Section 1350, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities

Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and

results of operations of Fannie Mae.

/s/ David C. Hisey

David C. Hisey

Executive Vice President and

Deputy Chief Financial Officer

Dated: May 6, 2011

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed

as part of the Report or as a separate disclosure document.
FR006