OFFERING CIRCULAR

6,000,000 Shares

5.375% Non-Cumulative Preferred Stock, Series I

(stated value $50 per share)

This Offering Circular relates to the offer of 6,000,000 shares of the 5.375% Non-Cumulative Preferred Stock,

Series I (the “Preferred Stock”) of the Federal National Mortgage Association (“Fannie Mae”). The Preferred Stock

has a stated value and liquidation preference of $50 per share. Dividends at the rate of 5.375% per year will accrue

from and including October 28, 2002. We will be required to pay dividends quarterly on March 31, June 30, September

30 and December 31 of each year, commencing December 31, 2002. However, we will be required to pay dividends

only when, as and if declared by our Board of Directors, or a duly authorized committee thereof, in its sole discretion

out of funds legally available for such payment. The amount of dividends we will be required to pay, if our Board

declares them, may be increased if legislation is enacted that changes the Internal Revenue Code of 1986, as

amended, to reduce the dividends-received deduction applicable to dividends on the Preferred Stock as set forth

under “Description of the Preferred Stock—Dividends—Changes in the Dividends-Received Percentage.”

Dividends on the Preferred Stock will not be cumulative. Accordingly, if for any reason our Board of Directors

does not declare a dividend on the Preferred Stock for a dividend period, we will have no obligation to pay a

dividend for that period, whether or not our Board declares dividends on the Preferred Stock for any future

dividend period. If, however, we have not paid or set aside for payment dividends on the Preferred Stock for a

dividend period, we may not pay dividends on our common stock for that period.

On or after October 28, 2007, we may redeem the Preferred Stock, in whole or in part, at any time or from time

to time, at our option at the redemption price of $50 per share plus the dividend (whether or not declared) for the

then-current quarterly dividend period accrued to but excluding the date of redemption.

The Preferred Stock will not have any voting rights, except as set forth under “Description of the Preferred

Stock—Voting Rights; Amendments.”

We will apply to list the Preferred Stock on the New York Stock Exchange under the symbol “FNMprI.” If

approved for listing, we expect trading of the Preferred Stock on the NYSE to commence within a thirty-day period

after the initial delivery of the Preferred Stock.

Our obligations under the terms of the Preferred Stock are only our obligations and are

not those of the United States or of any instrumentality thereof other than Fannie Mae.

Initial Public

Offering Price(1)

Underwriting

Discount

Proceeds to

Fannie Mae(1)(2)

Per Share ................................... $50.00 $0.4375 $49.5625

Total(3) .................................... $300,000,000 $2,625,000 $297,375,000

(1) Plus accrued dividends, if any, from October 28, 2002.

(2) Before deducting estimated expenses of $300,000.

(3) Fannie Mae has granted the Underwriters an option to purchase up to an additional 900,000 shares of Preferred

Stock to cover overallotments, if any. If all such shares are purchased, the total Initial Public Offering Price,

Underwriting Discount and Proceeds to Fannie Mae will be $345,000,000, $3,018,750 and $341,981,250,

respectively. See “Underwriting”.

Bear, Stearns & Co. Inc.

FTN Financial Capital Markets

Lehman Brothers

Blaylock & Partners, L.P.

Deutsche Bank Securities

Vining-Sparks IBG, L.P.

The date of this Offering Circular is October 23, 2002
We are not required to register the Preferred Stock under the U.S. Securities Act of 1933, as amended.

Accordingly, we have not filed a registration statement with the U.S. Securities and Exchange Commission (the

“SEC”). The shares of Preferred Stock are “exempted securities” within the meaning of the U.S. Securities

Exchange Act of 1934, as amended (the “Exchange Act”). Neither the SEC nor any state securities commission

has approved or disapproved the Preferred Stock or determined if this Offering Circular is truthful or complete.

Any representation to the contrary is a criminal offense.

The distribution of this Offering Circular and the offer, sale, and delivery of the Preferred Stock in certain

jurisdictions may be restricted by law. Persons who come into possession of this Offering Circular must inform

themselves about and observe any applicable restrictions.

This Offering Circular is not an offer to sell or a solicitation of an offer to buy any securities other than the

Preferred Stock or an offer to sell or a solicitation of an offer to buy the Preferred Stock in any jurisdiction or in

any other circumstance in which an offer or solicitation is unlawful or not authorized.

Because we are not currently subject to the periodic reporting requirements of the Exchange Act, we do not

file reports or other information with the SEC. See “Recent Developments—Voluntary SEC Disclosure.”

No person has been authorized to give any information or make any representations other than those

contained in this Offering Circular and, if given or made, such information or representations must not be relied

upon as having been authorized. Neither the delivery of this Offering Circular nor any sale made hereunder shall,

under any circumstances, create an implication that there has been no change in the affairs of Fannie Mae since

the date hereof, or in the case of facts set forth in the documents incorporated by reference herein, since the

respective dates thereof or that the information contained herein or therein is correct as to any time subsequent

thereto.

TABLE OF CONTENTS

Description Page

Summary of the Offering ........................................................... 3

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Recent Developments ............................................................. 6

Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Selected Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Government Regulation and Charter Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Description of the Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Legality of Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

United States Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Validity of the Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Additional Information About Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Certificate of Designation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix A

Information Statement dated April 1, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix B

2
SUMMARY OF THE OFFERING

This summary highlights information contained elsewhere in, or incorporated by reference in, this Offering

Circular. It does not contain all of the information you should consider before investing in the Preferred Stock.

You also should read the more detailed information contained elsewhere in this Offering Circular and in the

documents incorporated herein by reference.

Fannie Mae

Fannie Mae is a federally chartered and stockholder-owned corporation organized and existing under the

Federal National Mortgage Association Charter Act. We are the largest investor in home mortgage loans in the

United States. We were established in 1938 as a United States government agency to provide supplemental

liquidity to the mortgage market and were transformed into a stockholder-owned and privately managed

corporation by legislation enacted in 1968.

Description of the Preferred Stock

Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fannie Mae

Securities Offered . . . . . . . . . . . . . . . . . . 6,000,000 shares (assuming the Underwriters do not exercise their

overallotment option) of 5.375% Non-Cumulative Preferred Stock,

Series I, no par value, with a stated value and liquidation preference

of $50 per share.

Dividends:

Dividend Rate . . . . . . . . . . . . . . . . . . . 5.375% per annum. Non-cumulative quarterly cash dividends at the

rate of 5.375% per year will accrue from and including October 28,

2002.

Frequency of Payment . . . . . . . . . . . . . Quarterly, when, as and if declared by the Board of Directors in its

sole discretion, but only out of funds legally available for the payment

of dividends.

Payment Dates ................... March 31, June 30, September 30, and December 31 of each year,

commencing December 31, 2002.

DRD Protection . . . . . . . . . . . . . . . . . . If, prior to April 28, 2004, amendments to the Internal Revenue Code

of 1986, as amended, are enacted that eliminate or reduce the

percentage of the dividends-received deduction below 70%, the

amount of dividends payable in respect of the Preferred Stock will be

adjusted to offset the effect of such reduction. However, no

adjustment will be made to the extent that the percentage of the

dividends-received deduction is reduced below 50%.

Preferences . . . . . . . . . . . . . . . . . . . . . . . The Preferred Stock will be entitled to a preference, both as to

dividends and upon liquidation, over the common stock (and any

other junior stock) of Fannie Mae. The Preferred Stock will rank

equally, both as to dividends and upon liquidation, with all other

currently outstanding series of Fannie Mae preferred stock.

3
Optional Redemption . . . . . . . . . . . . . . . On or after October 28, 2007, we may redeem the Preferred Stock, in

whole or in part, at any time or from time to time, at our option at the

redemption price of $50 per share plus an amount equal to the

dividend for the then-current quarterly dividend period accrued to, but

excluding the date of redemption (whether or not declared, but

without accumulation of any dividends for prior dividend periods).

Holders of Preferred Stock will have no right to require the

redemption of the Preferred Stock.

Liquidation Rights . . . . . . . . . . . . . . . . . . In the event of any dissolution or liquidation of Fannie Mae, holders

of the Preferred Stock will be entitled to receive, out of any assets

available for distribution to stockholders, $50 per share plus the

dividend for the then-current quarterly dividend period accrued

through the liquidation payment date.

Voting Rights . . . . . . . . . . . . . . . . . . . . . None, except with respect to certain changes in the terms of the

Preferred Stock

Preemptive and Conversion Rights . . . . . None

Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . The Preferred Stock has been rated “AA–” by Standard & Poor’s

Ratings Group, a Division of the McGraw-Hill Companies and “aa3”

by Moody’s Investors Service, Inc.

Use of Proceeds . . . . . . . . . . . . . . . . . . . . To be added to the working capital of Fannie Mae and used for

general corporate purposes, including the repurchase of outstanding

shares of our preferred stock.

Transfer Agent, Dividend Disbursing

Agent and Registrar ............... EquiServe Trust Company, N.A.

NYSE Listing . . . . . . . . . . . . . . . . . . . . . We will apply to list the Preferred Stock on the New York Stock

Exchange under the symbol “FNMprI”. If approved for listing, we

expect trading on the NYSE to commence within a thirty-day period

after the initial delivery of the Preferred Stock.

CUSIP Number . . . . . . . . . . . . . . . . . . . . 313586877

4
Summary Selected Financial Data

(Dollars in millions)

June 30, December 31,

2002 2001 2001 2000 1999 1998 1997

Balance Sheet Data:

Mortgage portfolio,

net . . . . . . . . . . . . . . . . $740,590 $662,998 $705,167 $607,399 $522,780 $415,223 $316,316

Total assets ........... 826,677 737,151 799,791 675,072 575,167 485,014 391,673

Total liabilities ........ 808,947 717,720 781,673 654,234 557,538 469,561 377,880

Stockholders’ equity . . . . 17,730 19,431 18,118 20,838 17,629 15,453 13,793

Core capital(1) . . . . . . . . . 26,382 22,978 25,182 20,827 17,876 15,465 13,793

Six Months Ended June 30, Year Ended December 31,

2002 2001 2001 2000 1999 1998 1997

Income Statement Data:

Net interest income . . . . . $4,963 $3,607 $8,090 $5,674 $4,894 $4,110 $3,949

Guaranty fee income . . . . 831 700 1,482 1,351 1,282 1,229 1,274

Fee and other income

(expense) . . . . . . . . . . . 45 52 151 (44) 191 275 125

Administrative

expenses . . . . . . . . . . . (591) (494) (1,017) (905) (800) (708) (636)

Purchased options

expense(2) . . . . . . . . . . (1,286) (202) (37) ————

Net income . . . . . . . . . . . 2,672 2,696 5,894 4,448 3,912 3,418 3,056

Six Months Ended June 30, Year Ended December 31,

2002 2001 2001 2000 1999 1998 1997

Other Data:

Total taxable-equivalent

revenues(3) . . . . . . . . . $5,811 $4,724 $10,187 $7,825 $6,975 $6,272 $5,735

Average net interest

margin . . . . . . . . . . . . . 1.16% 1.06% 1.11% 1.01% 1.01% 1.03% 1.17%

Operating net

income(4) . . . . . . . . . . 3,091 2,553 5,367 4,448 3,912 3,418 3,056

Ratio of earnings to

combined fixed

charges and preferred

stock dividends(5) . . . . 1.17:1 1.17:1 1.20:1 1.16:1 1.17:1 1.18:1 1.19:1

Mortgage purchases .... $147,863 $123,997 $270,584 $154,231 $195,210 $188,448 $70,465

MBS issues acquired by

others . . . . . . . . . . . . . . 209,713 147,289 344,739 105,407 174,850 220,723 108,120

Outstanding MBS(6) .... 945,100 773,836 858,867 706,684 679,169 637,143 579,138

(1) The sum of (a) the stated value of outstanding common stock, (b) the stated value of outstanding noncumulative perpetual preferred stock, (c) paid-in capital, and (d) retained earnings.

(2) Represents the change in the fair value of the time value of purchased options under FAS 133, Accounting

for Derivative Instruments and Hedging Activities.

(3) Includes revenues net of operating losses and amortization expense of purchased option premiums, plus

taxable-equivalent adjustments for tax-exempt income and investment tax credits using the applicable

federal income tax rate.

(4) Operating net income is a non-GAAP (generally accepted accounting principles) measure developed by

management, when we adopted FAS 133, to evaluate and assess the quality of our earnings from our

principal business activities on a consistent basis.

(5) “Earnings” consists of (a) income before federal income taxes and cumulative effect of accounting changes

and (b) fixed charges. “Fixed charges” represent interest expense.

(6) MBS held by investors other than Fannie Mae.

5
FANNIE MAE

Fannie Mae is a federally chartered and stockholder-owned corporation organized and existing under the

Federal National Mortgage Association Charter Act, 12 U.S.C. § 1716 et seq. (the “Charter Act”). See

“Government Regulation and Charter Act” in this Offering Circular and in the Information Statement and

“Additional Information About Fannie Mae” in this Offering Circular. We are the largest investor in home

mortgage loans in the United States. We were established in 1938 as a United States government agency to

provide supplemental liquidity to the mortgage market and were transformed into a stockholder-owned and

privately managed corporation by legislation enacted in 1968.

Fannie Mae provides funds to the mortgage market by purchasing mortgage loans and mortgage-related

securities from lenders, thereby replenishing their funds for additional lending. We acquire funds to purchase

these loans and mortgage-related securities by issuing debt securities to capital market investors, many of whom

ordinarily would not invest in mortgages. In this manner, we are able to expand the total amount of funds

available for housing.

Fannie Mae also issues mortgage-backed securities (“MBS”), receiving guaranty fees for our guarantee of

timely payment of principal and interest on MBS certificates. We issue MBS primarily in exchange for pools of

mortgage loans from lenders. The issuance of MBS enables us to further our statutory purpose of increasing the

liquidity of residential mortgage loans.

In addition, Fannie Mae offers various services to lenders and others for a fee. These services include

issuing certain types of MBS and credit enhancements and providing technology services for originating and

underwriting loans. See “Business” in the Information Statement and “Additional Information About Fannie

Mae” in this Offering Circular.

Fannie Mae’s principal office is located at 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016

(telephone: (202) 752-7000).

RECENT DEVELOPMENTS

Fannie Mae reported operating net income for the third quarter of 2002 of $1.631 billion, an 18.4 percent

increase compared with the third quarter of 2001. Operating earnings per diluted common share (“Operating

EPS”) of $1.62 was 21.8 percent above the same period in 2001. Our operating net income for the first nine

months of 2002 was $4.722 billion, compared with $3.929 billion for the same period in 2001. Operating EPS for

the first nine months of 2002 was $4.65, or 22.4 percent above the first nine months of 2001.

Operating net income and Operating EPS exclude the variability in earnings that results from including

unrealized gains and losses from the change in the time value of purchased options as required under Financial

Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”). Also

excluded is the one-time cumulative change in accounting principle from the adoption of FAS 133 on January 1,

2001. Operating net income and Operating EPS provide consistent accounting treatment for purchased options

and the options embedded in callable debt, and are the performance measures used by management.

Net income on a Generally Accepted Accounting Principles (“GAAP”) basis for the third quarter of 2002

was $994.3 million (including the above FAS 133 items), a decrease of 19.1 percent compared with the third

quarter of 2001. EPS was $0.98 under GAAP, 17.6 percent below the same period last year. The decline in net

income and EPS under GAAP in the third quarter of 2002 was due to a $965.2 million increase in unrealized

losses in the time value of purchased options. This increase was driven by a change in interest rates that caused a

shift in the value under FAS 133 between the time value and the intrinsic value of purchased options that is

unrelated to portfolio rebalancing actions during the quarter. Moreover, because Fannie Mae holds options to

maturity or exercise, mark-to-market losses in time value are never realized. The effects of FAS 133 are

discussed more fully under “—Derivatives and FAS 133” below. Net income and EPS under GAAP were $3.667

billion and $3.59 for the nine months ended September 30, 2002, and $3.925 billion and $3.80 for the nine

months ended September 30, 2001.

6
Business Volume

Fannie Mae’s business volume—mortgages purchased for portfolio plus MBS issues acquired by other

investors—totaled $186.8 billion in the third quarter of 2002, compared with $158.8 billion in the third quarter of

2001 and $159.8 billion in the second quarter of 2002. Business volume for the first nine months of 2002 was

$544.4 billion, a 26.6 percent increase from $430.1 billion for the first nine months of 2001. Business volume in

the third quarter of 2002 consisted of $74.2 billion in portfolio purchases and $112.6 billion in MBS issues

acquired by other investors, compared with $64.2 billion and $94.6 billion, respectively, in the third quarter of

2001. Retained commitments to purchase mortgages were $128.0 billion in the third quarter of 2002, compared

with $54.1 billion in the third quarter of 2001. Outstanding portfolio mandatory delivery commitments totaled

$84.4 billion at September 30, 2002.

Our combined book of business—mortgages held in portfolio and outstanding MBS held by other

investors—grew at a compound annual rate of 13.8 percent during the third quarter of 2002, ending the period at

$1.742 trillion. This growth resulted from a 5.9 percent annualized growth rate in the gross mortgage portfolio

and a 20.4 percent rate of growth in outstanding MBS during the quarter. For the first nine months of 2002, our

combined book of business grew at an annual rate of 15.4 percent.

Portfolio Investment Business Results

Our portfolio investment business manages the interest rate risk of our mortgage portfolio and other

investments. The results of this business are largely reflected in adjusted net interest income, which is net interest

income less the amortization expense of purchased options. Adjusted net interest income for the third quarter of

2002 was $2.192 billion, up 15.9 percent from $1.892 billion in the third quarter of 2001. This increase was

driven by a 9.9 percent rise in the average net investment balance and a 6 basis point increase in the average net

interest margin. Adjusted net interest income for the first nine months of 2002 was $6.514 billion, up 22.1

percent from $5.335 billion during the comparable period in 2001.

Concurrent with the effective date of our risk-based capital requirement on September 13, 2002, we elected

to transfer $135 billion of portfolio and investment securities, classified as held-to-maturity, to the available-forsale category. This change had no effect on our net income. In conjunction with this change, we revised the

calculation of our mortgage portfolio growth statistic to exclude the effect of any unrealized gains or losses. The

calculation now will be based on unpaid principal balance, which also excludes deferred balances and the

allowance for losses.

Our gross mortgage portfolio—before unrealized gains or losses on available for sale securities, deferred

balances, and the allowance for losses—grew at an annual rate of 5.9 percent during the third quarter of 2002,

ending the quarter at $751 billion. Portfolio growth in September 2002 rose to an annual rate of 8.9 percent. Our

net mortgage portfolio—including unrealized gains or losses on available for sale securities, deferred balances,

and the allowance for losses—was $758 billion at the end of the third quarter of 2002, compared with

$741 billion at June 30, 2002.

Our net investment balance—consisting of the net mortgage portfolio and our liquid investments—averaged

$803 billion during the third quarter of 2002, compared with $731 billion during the third quarter of 2001. The

net investment balance was $811 billion at September 30, 2002.

At September 30, 2002, our ratio of liquid assets to total assets was 6.4 percent, compared with 7.8 percent

at June 30, 2002. We have committed to maintain a portfolio of high-quality, liquid, non-mortgage securities

equal to at least 5 percent of total assets.

Our net interest margin averaged 116 basis points in the third quarter of 2002, equal with the second quarter

and up 6 basis points from the third quarter of 2001. Our net interest margin has averaged 116 basis points yearto-date, up from 107 basis points for the first nine months of 2001.

7
We realized losses from debt repurchases and debt calls for the third quarter of 2002 of $138.0 million,

compared with losses of $206.7 million in the third quarter of 2001. During the third quarter of 2002, we realized

$105.1 million of losses on debt repurchases and $32.9 million of losses on debt calls. Debt repurchased and debt

called in the third quarter of 2002 totaled $0.8 billion and $65.4 billion, respectively. We regularly call or

repurchase debt as part of our interest rate risk management program.

Credit Guaranty Business Results

Our credit guaranty business manages our credit risk. The primary indicators of results of this business are

guaranty fee income and credit-related losses. Guaranty fee income was $462.5 million in the third quarter of

2002, a 20.5 percent increase compared with the third quarter of 2001. The increase in guaranty fee income was

driven by a 21.7 percent rise in average outstanding MBS, partially offset by a decline in the average effective

guaranty fee rate compared with the previous year. The effective guaranty fee rate in the third quarter of 2002

was 19.0 basis points, compared with 19.2 basis points in the third quarter of 2001 and 18.3 basis points in the

second quarter of 2002. Guaranty fee income for the first nine months of 2002 was $1.294 billion, compared with

$1.084 billion for the first nine months of 2001.

Credit-related losses—foreclosed property expense plus charge-off recoveries—remained low, driven by a

strong housing market and continued home price gains. Losses totaled $13.9 million in the third quarter of 2002,

compared with $18.7 million in the third quarter of 2001. Foreclosed property expense was $53.2 million in the

third quarter of 2002 compared with $45.1 million in the third quarter of 2001. Charge-off recoveries were $39.3

million in the third quarter of 2002, compared with $26.4 million in the third quarter of 2001. Our credit loss

ratio—credit-related losses as a percentage of the average combined book of business—was 0.3 basis points in

the third quarter of 2002, down from 0.5 basis points during the third quarter of 2001. Our conventional at-risk

single-family serious delinquency rate, an indicator of potential future loss activity, was unchanged for the fourth

consecutive month at .42 percent at August 31, 2002, the latest date available.

Credit-related expense, which includes foreclosed property expense and the provision for losses and is the

amount recorded on our income statement, totaled $13.2 million in the third quarter of 2002, in line with creditrelated losses. Our loss provision was a negative $40.0 million in the third quarter of 2002, compared with a

negative $30.0 million in the third quarter of 2001. Our allowance for loan losses totaled $812 million at

September 30, 2002, compared with $813 million at June 30, 2002 and $807 million at September 30, 2001.

At June 30, 2002, the present value of Fannie Mae’s net sensitivity of future credit losses to an immediate 5

percent decline in home prices was $465 million, taking into account the beneficial effect of third-party credit

enhancements. This compares with $425 million at March 31, 2002. This June 30 figure reflects a gross credit

loss sensitivity of $1,361 million before the effect of credit enhancements, and is net of projected credit risk

sharing proceeds of $896 million.

Fee and Other Income

Fee and other income in the third quarter of 2002 totaled $91.6 million, compared with $49.0 million in the

third quarter of 2001. The increase from the third quarter of 2001 was primarily due to higher technology and

transaction fees. Fee and other income for the first nine months of 2002 was $136.8 million, compared with

$100.8 million for the first nine months of 2001.

Fee and other income includes technology fees, transaction fees, multifamily fees, and other miscellaneous

items, and is net of operating losses from certain tax-advantaged investments—primarily investments in

affordable housing which qualify for the low income housing tax credit. Tax credits associated with housing tax

credit investments are included in federal income tax expense.

8
Federal Income Taxes

Federal income tax expense on operating net income was $649.7 million in the third quarter of 2002,

compared with $454.4 million in the third quarter of 2001. The effective federal income tax rate on operating net

income was 28 percent in the third quarter of 2002, compared with 25 percent for the same period last year. The

increase in the third quarter of 2002 is attributable to lower tax credits from affordable housing investments.

Federal income tax expense for the first nine months of 2002 was $1.7 billion, compared with $1.3 billion for the

first nine months of 2001. The effective federal income tax rate on operating net income was 27 percent for the

first nine months of 2002, compared with 25 percent for the same period last year.

Administrative Expenses

Administrative expenses totaled $314.6 million in the third quarter of 2002, up 15.5 percent from the third

quarter of 2001. The above-average growth in expenses is related to our re-engineering of our core technology

infrastructure to enhance our ability to process and manage the risk on mortgage assets.

Our ratio of administrative expense to the average combined book of business in the third quarter of 2002

was .073 percent, down from .074 percent in the third quarter of 2001. Our efficiency ratio—administrative

expense divided by taxable-equivalent revenue—was 10.5 percent in both the third quarter of 2002 and the third

quarter of 2001.

Capital

Our core capital, which is the basis for our statutory minimum capital requirement, was $26.5 billion at

September 30, 2002, compared with $23.8 billion at September 30, 2001 and $26.4 billion at June 30, 2002. Core

capital was an estimated $729 million above the statutory minimum at September 30, 2002. At June 30, 2002 our

core capital was $1.155 billion above the statutory minimum.

Total capital, which includes core capital and the general allowance for losses and is the basis for the riskbased capital stress test, was $27.3 billion at September 30, 2002, compared with $24.6 billion at September 30,

2001 and $27.2 billion at June 30, 2002. The risk-based capital standard utilizes a stress test to determine the

amount of capital needed to protect against credit and interest rate risks, and requires 30 percent in additional

capital to protect against unspecified management and operations risks. The Office of Federal Housing Enterprise

Oversight (“OFHEO”) will begin to use its risk-based standard for regulatory purposes for the third quarter of

2002 and will release the results in December. The higher of the risk-based or minimum capital standard will be

binding.

We repurchased 4.3 million shares of common stock during the third quarter of 2002 and have repurchased

15.0 million shares year-to-date. Common stock repurchases for 2001 totaled 6.0 million shares. Year-to-date

repurchases include shares used to fund our $300 million commitment to the Fannie Mae Foundation made in the

fourth quarter of 2001. At September 30, 2002 we had 988.7 million shares of common stock outstanding

compared with 992.8 million shares at June 30, 2002. We redeemed all of the outstanding shares of our Series C

preferred stock in the third quarter of 2002.

We issued $1.5 billion of subordinated debentures in the third quarter of 2002 and have issued $2.5 billion

year-to-date. Subordinated debt outstanding totaled $7.5 billion at September 30, 2002. Subordinated debt serves

as an important supplement to our equity capital, although it is not a component of core capital. After providing

for capital to support our off-balance sheet MBS, our capital and outstanding subordinated debt as a percent of

on-balance sheet assets was 3.6 percent at September 30, 2002.

Derivatives and FAS 133

We primarily use derivative instruments as substitutes for noncallable and callable debt issued in the cash

markets to help match the cash flow characteristics of our debt with those of our mortgages and to reduce the

interest rate risk in our portfolio. We account for our derivatives under FAS 133, which was adopted on

January 1, 2001. The implementation of this standard resulted in significant accounting presentation changes to

both our income statement and balance sheet.

9
FAS 133 requires that we mark to market on our income statement the changes in the time value, but not the

total value, of our purchased options—interest rate swaptions and interest rate caps. The mark to market of the

time value of our purchased options during the third quarter of 2002 resulted in a net unrealized loss of $1.378

billion, which is reported on the purchased option expense line of our income statement. See “Selected Financial

Information” in this Offering Circular. Purchased options expense in the third quarter of 2002 includes $399.2

million in amortization expense, which was included in net interest income prior to the adoption of FAS 133 and

currently is included in adjusted net interest income and in operating earnings. This amortization expense

represents the straight-line amortization of the up-front premium paid to purchase the options.

The unrealized loss in the time value component of purchased options in the third quarter was driven by the

significant change in interest rates during that quarter, partially offset by an increase in interest rate volatility.

This unrealized loss in time value was more than offset by an increase in the intrinsic value of the purchased

options, which is not reflected on the income statement. Because Fannie Mae holds options to maturity or

exercise, the mark-to-market losses in time value will never be realized. The total purchased option expense

recorded over the life of the options will be equal to the amortization expense.

FAS 133 also requires that we record any change in the fair values of certain derivatives, primarily interest

rate swaps we use as substitutes for noncallable debt, on the balance sheet in accumulated other comprehensive

income (“AOCI”), which is a separate component of stockholders’ equity. For these types of transactions, FAS

133 does not require or permit noncallable debt to be marked to market. At September 30, 2002, the AOCI

component of stockholders’ equity included a reduction of $16.5 billion, or 2.2 percent of the net mortgage

balance, from the marking to market of these derivatives, compared with a reduction of $9.5 billion at June 30,

2002. Partially offsetting the reduction in AOCI from the mark to market of derivatives was a $5.0 billion

unrealized gain on the available-for-sale securities portfolio. AOCI is not a component of core capital.

Our primary credit exposure on derivatives is that a counterparty might default on payments due, which

could result in our having to replace the derivative with a different counterparty at a higher cost. Our exposure on

derivative contracts (taking into account master settlement agreements that allow for netting of payments and

excluding collateral received) was $2.723 billion at September 30, 2002. All of this exposure was to

counterparties rated A-/A3 or higher. We held $2.322 billion of collateral through custodians for these

instruments. Our exposure, net of collateral, was $401 million at September 30, 2002, versus $278 million at

June 30, 2002. The replacement cost at September 30, 2002 represents about three weeks of annualized pre-tax

operating earnings.

Voluntary SEC Disclosure

On July 12, 2002, we announced that we will voluntarily register our common stock with the SEC in 2003

under Section 12(g) of the Exchange Act. As a result, we will file periodic reports with the SEC, including

annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, together with

any required exhibits. These filings will be available on the SEC’s EDGAR system. Registration of our common

stock with the SEC will not impact the status of our securities (including equity, debt and MBS) as exempt

securities within the meaning of the laws administered by the SEC.

USE OF PROCEEDS

We will add the net proceeds from the sale of the Preferred Stock to our working capital and use them for

general corporate purposes, including the repurchase of shares of our preferred stock. We anticipate the need for

additional financing from time to time, including financing through various types of equity and debt securities.

The amount and nature of such financings will depend upon a number of factors, including the volume of our

maturing debt obligations, the volume of mortgage loan prepayments, the volume and type of mortgage loans we

purchase, and general market conditions.

10
CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2002, and it is adjusted to give effect to the

issuance of the Preferred Stock (before giving effect to the payment of estimated offering expenses and

underwriting discount, and assuming that the Underwriters’ overallotment option is not exercised), without

giving effect to the redemption of our 6.45% Non-Cumulative Preferred Stock, Series C, on July 31, 2002.

Average

Maturity

Average

Cost(1)

Actual

Outstanding at

June 30, 2002 Adjusted

(Dollars in millions)

Debentures, notes, and bonds, net:

Due within one year:

Short-term notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 mos. 2.00% $255,029 $255,029

Universal Benchmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 mos. 5.66 34,382 34,382

Universal Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 mos. 6.31 283 283

Universal Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 mos. 1.77 17,625 17,625

Universal Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 mos. 2.59 49,579 49,579

Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.22 1,916 1,916

Total due within one year ..................... 358,814 358,814

Due after one year:

Universal Benchmark ............................ 6 yrs. 1 mo. 5.71% 266,450 266,450

Universal Retail ................................ 9 yrs. 9 mos. 5.78 9,147 9,147

Universal Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 yrs. 11 mos. 4.83 147,346 147,346

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 yrs. 8 mos. 7.99 7,152 7,152

Total due after one year . . . . . . . . . . . . . . . . . . . . . . 430,095 430,095

Total debentures, notes, and bonds ...................... $788,909 $788,909

Stockholders’ equity:

Preferred stock, $50 stated value;

100,000,000 shares authorized—

38,550,000 shares issued at

June 30, 2002;

44,550,000 shares issued as adjusted

Series C, 5,000,000 shares issued(3) . . . . . . . . . . . . 250 250

Series D, 3,000,000 shares issued . . . . . . . . . . . . . . . 150 150

Series E, 3,000,000 shares issued . . . . . . . . . . . . . . . 150 150

Series F, 13,800,000 shares issued . . . . . . . . . . . . . . 690 690

Series G, 5,750,000 shares issued . . . . . . . . . . . . . . . 288 288

Series H, 8,000,000 shares issued . . . . . . . . . . . . . . . 400 400

Series I, 6,000,000 shares issued . . . . . . . . . . . . . . . — 300

Common stock, $.525 stated value, no

maximum authorization—

1,129,000,000 shares outstanding . . . . . . . . . . . . . . . . . . . . . 593 593

Additional paid-in capital ............................. 1,845 1,845

Retained earnings ................................... 28,133 28,133

Accumulated other comprehensive income ............... (8,652) (8,652)

23,847 24,147

Less treasury stock, at cost—136,000,000 shares(4) .... 6,117 6,117

Total stockholders’ equity ............................ $ 17,730 $ 18,030

(1) Represents weighted-average cost, which includes the amortization of discounts, premiums, issuance costs, hedging results, and the

effects of currency and debt swaps.

(2) Average maturity is indeterminate because the outstanding amount includes investment agreements that have varying maturities.

(3) We redeemed all of the outstanding shares of our 6.45% Series C preferred stock on July 31, 2002 at $50.27771 per share. The

redemption price included dividends of $.27771 per share for the period commencing June 30, 2002, up to, but excluding, July 31, 2002.

(4) Does not reflect any repurchases of our common stock that may be made using proceeds from the sale of the Preferred Stock, Series I.

See “Use of Proceeds.”

We frequently issue debentures, notes, and other debt obligations, and from time to time we redeem such

debt obligations. The amount of debentures, notes, other debt obligations outstanding, and stockholders’ equity

on any date subsequent to June 30, 2002 may differ from that shown in the table above.

11
SELECTED FINANCIAL INFORMATION

The following selected financial data for the years 1997 through 2001 and for the six-month periods ended

June 30, 2002 and 2001 (which data are not covered by the independent auditors’ report) have been summarized

or derived from our audited financial statements for 1997 through 2001 and from our unaudited financial

statements for the six-month periods and other financial information for such periods. The data for the six-month

periods is unaudited and includes, in the opinion of management, all adjustments (consisting of normal recurring

accruals) necessary for a fair presentation. The results for the interim periods are not necessarily indicative of the

results to be expected for an entire year. The data for the year ended periods should be read in conjunction with

the audited financial statements and notes to the financial statements contained in the Information Statement

incorporated herein by reference and included in this Offering Circular as Appendix B.

Six Months Ended

June 30, Year Ended December 31,

2002 2001 2001 2000 1999 1998 1997

(Dollars in millions, except per common share amounts)

Income Statement Data:

Interest income . . . . . . . . . . . . . . . . . . . . . . $ 25,323 $ 24,213 $ 49,170 $ 42,781 $ 35,495 $ 29,995 $ 26,378

Interest expense . . . . . . . . . . . . . . . . . . . . . (20,360) (20,606) (41,080) (37,107) (30,601) (25,885) (22,429)

Net interest income . . . . . . . . . . . . . . . . . . . 4,963 3,607 8,090 5,674 4,894 4,110 3,949

Guaranty fee income . . . . . . . . . . . . . . . . . 831 700 1,482 1,351 1,282 1,229 1,274

Fee and other income (expense) . . . . . . . . . 45 52 151 (44) 191 275 125

Credit-related expenses . . . . . . . . . . . . . . . (46) (47) (78) (94) (127) (261) (375)

Administrative expenses . . . . . . . . . . . . . . . (591) (494) (1,017) (905) (800) (708) (636)

Special contribution .................. — — (300) ————

Purchased options expense(1) . . . . . . . . . . (1,286) (202) (37) ————

Debt extinguishments . . . . . . . . . . . . . . . . . (396) (226) (524) 49 (14) (40) (19)

Income before federal income taxes and

cumulative effect of change in

accounting principle . . . . . . . . . . . . . . . . 3,520 3,390 7,767 6,031 5,426 4,605 4,318

Provision for federal income taxes . . . . . . . (848) (862) (2,041) (1,583) (1,514) (1,187) (1,262)

Income before cumulative effect of change

in accounting principle . . . . . . . . . . . . . . 2,672 2,528 5,726 4,448 3,912 3,418 3,056

Cumulative effect of change in accounting

principle, net of tax effect(2) . . . . . . . . . — 168 168 ————

Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,672 $ 2,696 $ 5,894 $ 4,448 $ 3,912 $ 3,418 $ 3,056

Preferred stock dividends . . . . . . . . . . . . . . (57) (68) (138) (121) (78) (66) (65)

Net income available to common

shareholders . . . . . . . . . . . . . . . . . . . . . . $ 2,615 $ 2,628 $ 5,756 $ 4,327 $ 3,834 $ 3,352 $ 2,991

Basic earnings per common share:

Earnings before cumulative effect of

change in accounting principle . . . . $ 2.63 $ 2.46 $ 5.58 $ 4.31 $ 3.75 $ 3.26 $ 2.85

Cumulative effect of change in

accounting principle . . . . . . . . . . . . — .17 .17 ————

Net earnings . . . . . . . . . . . . . . . . . . . . $ 2.63 $ 2.63 $ 5.75 $ 4.31 $ 3.75 $ 3.26 $ 2.85

Diluted earnings per common share:

Earnings before cumulative effect of

change in accounting principle . . . . $ 2.61 $ 2.44 $ 5.55 $ 4.29 $ 3.72 $ 3.23 $ 2.83

Cumulative effect of change in

accounting principle . . . . . . . . . . . . — .17 .17 ————

Net earnings . . . . . . . . . . . . . . . . . . . . $ 2.61 $ 2.61 $ 5.72 $ 4.29 $ 3.72 $ 3.23 $ 2.83

Cash dividends per common share . . . . . . . $ .66 $ .60 $ 1.20 $ 1.12 $ 1.08 $ .96 $ .84

12
Six Months Ended

June 30, Year Ended December 31,

2002 2001 2001 2000 1999 1998 1997

Balance Sheet Data:

Mortgage portfolio, net .... $740,590 $662,998 $705,167 $607,399 $522,780 $415,223 $316,316

Liquid assets . . . . . . . . . . . . 64,863 59,083 76,072 55,585 41,850 59,258 66,801

Total assets .............. 826,677 737,151 799,791 675,072 575,167 485,014 391,673

Borrowings:

Due within one year . . . 358,814 329,159 343,492 280,322 226,582 205,413 175,400

Due after one year .... 430,095 373,175 419,975 362,360 321,037 254,878 194,374

Total liabilities ........... 808,947 717,720 781,673 654,234 557,538 469,561 377,880

Stockholders’ equity . . . . . . 17,730 19,431 18,118 20,838 17,629 15,453 13,793

Core capital(3) . . . . . . . . . . . 26,382 22,978 25,182 20,827 17,876 15,465 13,793

Operating Data:

Operating net income(4) . . . $ 3,091 $ 2,553 $ 5,367 $ 4,448 $ 3,912 $ 3,418 $ 3,056

Operating earnings per

diluted common share . . . 3.03 2.47 5.20 4.29 3.72 3.23 2.83

Total taxable-equivalent

revenue(5) . . . . . . . . . . . . 5,811 4,724 10,187 7,825 6,975 6,272 5,735

Average net interest

margin . . . . . . . . . . . . . . . 1.16% 1.06% 1.11% 1.01% 1.01% 1.03% 1.17%

Operating return on average

realized common

equity(6) . . . . . . . . . . . . . . 25.8 25.5 25.4 25.2 25.0 25.2 24.6

Other Data:

Dividend payout ratio . . . . . 25.1 22.8 20.9 26.0 28.8 29.5 29.4

Average effective guaranty

fee rate . . . . . . . . . . . . . . . .184 .190 .190 .195 .193 .202 .227

Ratio of administrative

expense to average bookof-business . . . . . . . . . . . . .073 .072 .071 .072 .071 .074 .074

Credit loss ratio . . . . . . . . . . .005 .007 .006 .007 .011 .027 .041

Ratio of earnings to

combined fixed charges

and preferred stock

dividends(7) . . . . . . . . . . . 1.17:1 1.17:1 1.20:1 1.16:1 1.17:1 1.18:1 1.19:1

Mortgage purchases ....... $147,863 $123,997 $270,584 $154,231 $195,210 $188,448 $ 70,465

MBS issues acquired by

others . . . . . . . . . . . . . . . . 209,713 147,289 344,739 105,407 174,850 220,723 108,120

Outstanding MBS(8) ...... 945,100 773,836 858,867 706,684 679,169 637,143 579,138

Weighted-average diluted

common shares

outstanding . . . . . . . . . . . . 1,001 1,007 1,006 1,009 1,031 1,037 1,056

(1) Represents the change in the fair value of the time value of purchased options under FAS 133, Accounting

for Derivative Instruments and Hedging Activities.

(2) Represents the after-tax effect of the adoption of FAS 133 on January 1, 2001.

(3) The sum of (a) the stated value of outstanding common stock, (b) the stated value of non-cumulative

perpetual preferred stock, (c) paid-in capital, and (d) retained earnings.

(4) Operating net income is a non-GAAP (generally accepted accounting principles) measure developed by

management, when we adopted FAS 133, to evaluate and assess the quality of our earnings from our

principal business activities on a consistent basis.

(5) Includes revenues net of operating losses and amortization expense of purchased option premiums, plus

taxable-equivalent adjustments for tax-exempt income and investment tax credits using the applicable

federal income tax rate.

(6) Annualized operating net income less preferred stock dividends divided by average realized common

stockholders’ equity (common stockholders’ equity excluding accumulated other comprehensive income).

(7) “Earnings” consists of (a) income before federal income taxes and cumulative effect of accounting changes

and (b) fixed charges. “Fixed charges” represents interest expense.

(8) MBS held by investors other than Fannie Mae.

13
GOVERNMENT REGULATION AND CHARTER ACT

Fannie Mae is a federally chartered and stockholder-owned corporation organized and existing under the

Charter Act, whose purpose is to (1) provide stability in the secondary market for residential mortgages, (2)

respond appropriately to the private capital market, (3) provide ongoing assistance to the secondary market for

residential mortgages (including activities relating to mortgages on housing for low- and moderate-income

families involving a reasonable economic return that may be less than the return earned on other activities) by

increasing the liquidity of mortgage investments and improving the distribution of investment capital available

for residential mortgage financing, and (4) promote access to mortgage credit throughout the nation (including

central cities, rural areas and underserved areas) by increasing the liquidity of mortgage investments and

improving the distribution of investment capital available for residential mortgage financing.

Fannie Mae originally was incorporated in 1938 pursuant to Title III of the National Housing Act as a

wholly-owned government corporation. In 1954, under a revised Title III called the Federal National Mortgage

Association Charter Act, we became a mixed-ownership corporate instrumentality of the United States. From

1950 to 1968, we operated in the Housing and Home Finance Agency, which was succeeded by the Department

of Housing and Urban Development (“HUD”). Under the Housing and Urban Development Act of 1968 (the

“1968 Act”), the then Federal National Mortgage Association was divided into two separate institutions, the

present Fannie Mae and the Government National Mortgage Association, a wholly-owned corporate

instrumentality of the United States within HUD, which carried on certain special financing assistance and

management and liquidation functions. Fannie Mae was constituted as a federally chartered corporation and the

entire equity interest in Fannie Mae became stockholder-owned.

Although the 1968 Act eliminated all federal ownership interest in Fannie Mae, it did not terminate our

government regulation. Under the Charter Act, approval of the Secretary of the Treasury is required for our

issuance of our debt obligations and MBS. In addition, the Federal Housing Enterprises Financial Safety and

Soundness Act of 1992 (the “1992 Act”) established OFHEO under the management of a Director (the

“Director”) who is responsible for ensuring that we are adequately capitalized and operating safely in accordance

with the 1992 Act. The Director is authorized to levy, pursuant to annual Congressional appropriations, annual

assessments on us and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to cover the reasonable

expenses of OFHEO. The 1992 Act established minimum capital, risk-based capital, and critical capital

requirements for us and required the Director to establish, by regulation, a risk-based capital test to be used to

determine the amount of total capital we must hold to meet the risk-based capital standard. OFHEO issued a final

rule (the “Rule”) in 1996 that sets forth the minimum capital requirements for us and Freddie Mac, which are to

be calculated, reported, and classified on a quarterly basis. We are in compliance with the Rule. See also

“MD&A—Regulatory Environment” in the Information Statement.

OFHEO published regulations in September 2001 to establish the risk-based capital test, followed by

amendments published in February 2002. Under the 1992 Act, we and Freddie Mac are required to hold enough

capital to withstand a stringent 10-year stress period, characterized by unprecedented interest-rate movements

and credit losses occurring simultaneously. The risk-based capital test evaluates combined interest-rate and credit

stress for both rising and declining interest-rate scenarios. The more stringent of these two scenarios determines

the required risk-based capital. The test assumes that (i) interest rates increase or decrease by up to 600 basis

points over the first year, and remain constant at this new level for the remaining 9 years of the test; (ii) severe

credit conditions apply nationwide; and (iii) no new business is acquired by us during this period except to meet

outstanding mortgage commitments. The regulations specify that “benchmark loss experience” will be combined

with other assumptions and applied each quarter to our book of business to establish credit losses under the riskbased capital standard. The regulations also specify the housing price index that OFHEO will use in connection

with the standard and how the test will be used to determine our risk-based capital requirements. The 1992 Act

provides that the final regulations will be enforceable one year after issuance. On September 30, 2002, OFHEO

announced that our risk-based capital as of June 30, 2002 exceeded the risk-based capital that would be required

by the risk-based capital rule.

14
If we fail to meet one or more of the capital standards under the 1992 Act, the Director is required to take

certain remedial measures, and may take others, depending on the standards we fail to meet. The Director’s

enforcement powers include the power to impose temporary and final cease-and-desist orders and civil penalties

on us and on our directors or executive officers. If the Director determines that we are engaging in conduct not

approved by the Director that could result in a rapid depletion of core capital or that the value of the property

subject to mortgages held or securitized by us has decreased significantly, the Director is authorized to treat us as

not meeting one of the capital standards that we otherwise meet. In addition, we are required to submit a capital

restoration plan if we fail to meet any of the capital standards. If the Director does not approve the plan or

determines that we have failed to make reasonable efforts to comply with the plan, then the Director may treat us

as not meeting one of the capital standards that we otherwise meet. Also, if we fail to meet or are treated by the

Director as not meeting one of the capital standards and the Director has reasonable cause to believe that we or

any of our executive officers or directors are engaging in or about to engage in any conduct that threatens to

result in a significant depletion of our core capital, then the Director is authorized to commence proceedings

pursuant to which, after a hearing, the Director could issue a cease and desist order prohibiting such conduct. The

Director could issue such an order without a hearing, which would be effective until completion of the cease-anddesist proceedings, if the Director determined that the conduct in question was likely to cause a significant

depletion of our core capital. Prior approval of the Director is required for us to pay a dividend if the dividend

would decrease our capital below risk-based capital or minimum capital levels established under the 1992 Act.

The 1992 Act gives the Director the authority to conduct on-site examinations of us for purposes of ensuring

our financial safety and soundness. The Charter Act, as amended by the 1992 Act, also authorizes the General

Accounting Office to audit our programs, activities, receipts, expenditures, and financial transactions. We are

required to submit annual and quarterly reports of our financial condition and operations to the Director. We also

are required to submit an annual report to the House and Senate Banking Committees and the Secretary of HUD

regarding our performance in meeting housing goals established by the Secretary of HUD relating to the

purchase of mortgages on housing for low- and moderate-income families, mortgages on rental and owneroccupied housing for low-income families in low-income areas or for very-low-income families, and mortgages

on housing located in rural or other underserved areas.

Under the 1992 Act, the Secretary of HUD retains general regulatory authority to promulgate rules and

regulations to carry out the purposes of the Charter Act, excluding authority over matters granted exclusively to

the Director of OFHEO in the 1992 Act. The Secretary of HUD also must approve any new conventional

mortgage program that is significantly different from those approved or engaged in prior to the 1992 Act. The

Secretary is required to approve any new program unless it is not authorized by the Charter Act or the Secretary

finds that it is not in the public interest. However, until one year after the final regulations establishing the riskbased capital test are in effect, the Secretary must disapprove a new program if the Director determines that the

program would risk significant deterioration of our financial condition. The Secretary has adopted regulations

related to the program approval requirement.

Thirteen members of our eighteen-member Board of Directors are elected by the holders of our common

stock, and the remaining five members are appointed by the President of the United States. The appointed

directors must include one person from the home building industry, one person from the mortgage lending

industry, and one person from the real estate industry. Under the 1992 Act, one appointed director also must be

from an organization that has represented consumer or community interests for not less than two years or a

person who has demonstrated a career commitment to the provision of housing for low-income households. Any

member of the Board of Directors that is appointed by the President of the United States may be removed by the

President for good cause.

In addition to placing us under federal regulation, the Charter Act also grants us certain privileges. For

instance, securities issued by us are deemed to be “exempt securities” under laws administered by the SEC to the

same extent as securities that are obligations of, or guaranteed as to principal and interest by, the United States.

15
Registration statements with respect to our securities are not filed with the SEC. We also are not currently

required to file periodic reports with the SEC. See “Recent Developments—Voluntary SEC Disclosure.”

The Secretary of the Treasury of the United States has discretionary authority to purchase our obligations up

to a maximum of $2.25 billion outstanding at any one time. This facility has not been used since our transition

from government ownership in 1968. Neither the United States nor any agency thereof is obligated to finance our

operations or to assist us in any other manner. The Federal Reserve Banks are authorized to act as depositories,

custodians, and fiscal agents for us, for its own account, or as fiduciary.

We are exempt from all taxation by any state or by any county, municipality, or local taxing authority

except for real property taxes. We are not exempt from payment of federal corporate income taxes. Also, we may

conduct our business without regard to any qualifications or similar statute in any state of the United States or the

District of Columbia.

16
DESCRIPTION OF THE PREFERRED STOCK

We are authorized by the Charter Act to have preferred stock on such terms and conditions as our Board of

Directors may prescribe. On December 27, 1995, our Board of Directors amended our bylaws to authorize us to

issue up to 100,000,000 shares of preferred stock. To date, we have issued the following:

• on March 1, 1996, 7,500,000 shares of 6.41% Non-Cumulative Preferred Stock, Series A (stated value

$50 per share) (the “Series A Preferred Stock”);

• on April 12, 1996, 7,500,000 shares of 6.50% Non-Cumulative Preferred Stock, Series B (stated value

$50 per share) (the “Series B Preferred Stock”);

• on September 20, 1996, 5,000,000 shares of 6.45% Non-Cumulative Preferred Stock, Series C (stated

value $50 per share) (the “Series C Preferred Stock”);

• on September 30, 1998, 3,000,000 shares of 5.25% Non-Cumulative Preferred Stock, Series D (stated

value $50 per share) (the “Series D Preferred Stock”);

• on April 15, 1999, 3,000,000 shares of 5.10% Non-Cumulative Preferred Stock, Series E (stated value

$50 per share) (the “Series E Preferred Stock”);

• on March 20, 2000, 13,800,000 shares of Variable Rate Non-Cumulative Preferred Stock, Series F

(stated value $50 per share) (the “Series F Preferred Stock”);

• on August 8, 2000, 5,750,000 shares of Variable Rate Non-Cumulative Preferred Stock, Series G (stated

value $50 per share) (the “Series G Preferred Stock”); and

• on April 6, 2001, 8,000,000 shares of 5.81% Non-Cumulative Preferred Stock, Series H (stated value

$50 per share) (the “Series H Preferred Stock”).

We redeemed all of our outstanding Series A Preferred Stock on March 1, 2001, all of our outstanding

Series B Preferred Stock on February 28, 2002, and all of our outstanding Series C Preferred Stock on July 31,

2002. In this Offering Circular, we refer to the Series D Preferred Stock through the Series H Preferred Stock as

the “Outstanding Preferred Stock.”

The terms of the Preferred Stock will be established by a Certificate of Designation of Terms of 5.375%

Non-Cumulative Preferred Stock, Series I (the “Certificate of Designation”), adopted by a duly authorized

committee of our Board of Directors, which will be substantially in the form attached as Appendix A to this

Offering Circular. The following is a brief description of the terms of the Preferred Stock; you also should read

the Certificate of Designation for a full description of the Preferred Stock.

General

We have the right to create and issue additional shares of Preferred Stock and additional classes or series of

stock that rank, as to dividends, liquidation or otherwise, prior to, on parity with or junior to the Preferred Stock,

without the consent of holders of the Preferred Stock. As of the date hereof, the shares of Outstanding Preferred

Stock are the only shares of our preferred stock outstanding. The Preferred Stock will rank equally as to the

payment of dividends and the distribution of assets upon our dissolution, liquidation or winding up with the

Outstanding Preferred Stock.

The Preferred Stock has no par value, has a stated value and liquidation preference of $50 per share, and,

upon issuance against full payment of the purchase price therefor, will be fully paid and nonassessable.

The Preferred Stock will not be subject to any mandatory redemption, sinking fund, or other similar

provisions. In addition, holders of Preferred Stock will have no right to require redemption of any shares of

Preferred Stock.

The Preferred Stock will not be convertible into or exchangeable for any of our other stock or obligations

and will have no preemptive rights.

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EquiServe Trust Company, N.A., will be the transfer agent, dividend disbursing agent, and registrar for the

shares of Preferred Stock.

The obligations of Fannie Mae under the terms of the Preferred Stock are obligations of Fannie Mae

only and are not those of the United States or of any instrumentality thereof other than Fannie Mae.

Dividends

Dividends on shares of the Preferred Stock will not be mandatory. Holders of record of Preferred Stock as

they appear on our books and records (the “Holders”) will be entitled to receive, when, as and if declared by our

Board of Directors, or a duly authorized committee thereof, in its sole discretion out of funds legally available for

dividend payments, non-cumulative, quarterly cash dividends that will accrue from and including October 28,

2002 and will be payable on March 31, June 30, September 30, and December 31 of each year (each a “Dividend

Payment Date”), commencing December 31, 2002, at the annual rate of $2.6875 per share (without taking into

account any adjustments as described below under “Changes in the Dividends-Received Percentage”). We will

pay dividends on the Preferred Stock to the Holders on the relevant record date fixed by the Board of Directors,

or a duly authorized committee thereof, which may not be earlier than 45 days or later than 10 days prior to the

applicable Dividend Payment Date. If declared, the initial dividend, which will be for the period from and

including October 28, 2002 to but excluding December 31, 2002, will be $0.4703 per share and, thereafter, if

declared, quarterly dividends will be $0.6719 per share. After the initial dividend, the dividend period relating to

a Dividend Payment Date will be the period from and including the preceding Dividend Payment Date to but

excluding the Dividend Payment Date. If a Dividend Payment Date is not a Business Day, we will pay dividends

(if declared) on the Preferred Stock on the succeeding Business Day, without interest from that Dividend

Payment Date to the date of actual payment. A “Business Day” is any day other than a Saturday, Sunday, or other

day on which banking institutions in New York, New York are authorized or required by law to close. We will

compute dividends payable on the Preferred Stock for any period greater or less than a full dividend period on the

basis of a 360-day year consisting of twelve 30-day months. The amount of dividends per share payable at

redemption will be rounded to the fourth digit after the decimal point. (If the fifth digit to the right of the decimal

point is five or greater, the fourth digit will be rounded up by one.)

The Preferred Stock will rank prior to our common stock with respect to the payment of dividends to the

extent provided in the Certificate of Designation. As a result, unless dividends have been declared and paid or set

apart (or ordered to be set apart) on the Preferred Stock for the then current quarterly dividend period, no

dividend may be declared or paid or set apart for payment on our common stock (or on any of our other stock

ranking, as to the payment of dividends, junior to the Preferred Stock), other than dividends or distributions paid

in shares of, or options, warrants or rights to subscribe for or purchase shares of, our common stock or any of our

other stock ranking junior to the Preferred Stock as to the payment of dividends and the distribution of assets

upon our dissolution, liquidation or winding up. When dividends are not paid in full upon the Preferred Stock and

all of our other classes or series of stock, if any, ranking on a parity as to the payment of dividends with the

Preferred Stock, all dividends declared upon shares of Preferred Stock and all of our other such stock will be

declared pro rata so that the amount of dividends declared per share on the Preferred Stock and all such other

stock will in all cases bear to each other the same ratio that accrued dividends per share on the shares of Preferred

Stock (including any adjustment in the amount of dividends payable due to changes in the Dividends-Received

Percentage (as defined below) but without, in the case of any non-cumulative preferred stock, accumulation of

unpaid dividends for prior dividend periods) and each other stock bear to each other.

Dividends on the Preferred Stock will not be cumulative. If we do not pay a dividend on the Preferred Stock,

the Holders of Preferred Stock will have no claim in respect of such non-payment so long as no dividend (other

than those referred to in the preceding paragraph) is paid on our common stock (or any of our other stock

ranking, as to the payment of dividends, junior to the Preferred Stock) for the then-current quarterly dividend

period.

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The Board of Directors, or a duly authorized committee thereof, may, in its discretion, choose to pay

dividends on the Preferred Stock without the payment of any dividends on our common stock (or any of our other

stock ranking, as to the payment of dividends, junior to the Preferred Stock).

No dividends may be declared or paid or set apart for payment on any shares of the Preferred Stock if at the

same time any arrears exist or default exists in the payment of dividends on any outstanding class or series of our

stock ranking prior to the Preferred Stock with respect to the payment of dividends. At the time of issuance of the

Preferred Stock, there will be no class or series of our stock which ranks prior to the Preferred Stock with respect

to the payment of dividends.

Holders of Preferred Stock will not be entitled to any dividends, whether payable in cash or property, other

than as described above and will not be entitled to interest, or any sum in lieu of interest, in respect of any

dividend payment.

See also “Regulatory Matters” for a description of certain regulatory restrictions on our payment of

dividends.

Changes in the Dividends-Received Percentage. If, prior to April 28, 2004, one or more amendments to

the Internal Revenue Code of 1986, as amended (the “Code”), are enacted that eliminate or reduce the percentage

of the dividends-received deduction applicable to the Preferred Stock (currently 70 percent) as specified in

section 243(a)(1) of the Code or any successor provision (the “Dividends-Received Percentage”), certain

adjustments may be made in respect of the dividends payable by us, and Post Declaration Date Dividends and

Retroactive Dividends (as such terms are defined below) may become payable, as described below.

The amount of each dividend payable (if declared) per share of Preferred Stock for dividend payments made

on or after the effective date of such change in the Code will be adjusted by multiplying the amount of the

dividend that would otherwise be payable (before adjustment) by a factor, which will be the number determined

in accordance with the following formula (the “DRD Formula”), and rounding the result to the nearest cent (with

one-half cent rounded up):

1–.35(1–.70)

1–.35(1–DRP)

For purposes of the DRD Formula, “DRP” means the Dividends-Received Percentage (expressed as a decimal)

applicable to the dividend in question; provided, however, that if the Dividends-Received Percentage applicable

to the dividend in question shall be less than 50%, then the DRP shall equal .50. No amendment to the Code,

other than a change in the percentage of the dividends-received deduction applicable to the Preferred Stock as set

forth in section 243(a)(1) of the Code or any successor provision, will give rise to an adjustment.

Notwithstanding the foregoing provisions, if, with respect to any such amendment, we receive either an

unqualified opinion of nationally recognized independent tax counsel selected by us or a private letter ruling or

similar form of assurance from the Internal Revenue Service (the “IRS”) to the effect that such an amendment

does not apply to a dividend payable on the Preferred Stock, then such amendment will not result in the

adjustment provided for pursuant to the DRD Formula with respect to such dividend. The opinion referenced in

the previous sentence shall be based upon the legislation amending or establishing the DRP or upon a published

pronouncement of the IRS addressing such legislation. Unless the context otherwise requires, references to

dividends in this Offering Circular will mean dividends as adjusted by the DRD Formula. Our calculation of the

dividends payable as so adjusted shall be final and not subject to review.

Notwithstanding the foregoing, if any such amendment to the Code is enacted after the dividend payable on

a Dividend Payment Date has been declared but before such dividend is paid, the amount of the dividend payable

on such Dividend Payment Date will not be increased; instead, additional dividends (the “Post Declaration Date

Dividends”), equal to the excess, if any, of (1) the product of the dividend paid by us on such Dividend

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Payment Date and the DRD Formula (where the DRP used in the DRD Formula would be equal to the greater of

the Dividends-Received Percentage applicable to the dividend in question and .50) over (2) the dividend paid by

us on such Dividend Payment Date, will be payable (if declared) to Holders of Preferred Stock on the record date

applicable to the next succeeding Dividend Payment Date.

If any such amendment to the Code is enacted and the reduction in the Dividends-Received Percentage

retroactively applies to a Dividend Payment Date as to which we previously paid dividends on the Preferred

Stock (each, an “Affected Dividend Payment Date”), we will pay (if declared) additional dividends (the

“Retroactive Dividends”) to Holders of Preferred Stock on the record date applicable to the next succeeding

Dividend Payment Date (or, if such amendment is enacted after the dividend payable on such Dividend Payment

Date has been declared, to Holders of Preferred Stock on the record date applicable to the second succeeding

Dividend Payment Date following the date of enactment), in an amount equal to the excess of (1) the product of

the dividend paid by us on each Affected Dividend Payment Date and the DRD Formula (where the DRP used in

the DRD Formula would be equal to the greater of the Dividends-Received Percentage and .50 applied to each

Affected Dividend Payment Date) over (2) the sum of the dividend paid by us on each Affected Dividend

Payment Date. We will only make one payment of Retroactive Dividends for any such amendment.

Notwithstanding the foregoing provisions, if, with respect to any such amendment, we receive either an

unqualified opinion of nationally recognized independent tax counsel selected by us or a private letter ruling or

similar form of assurance from the IRS to the effect that such amendment does not apply to a dividend payable

on an Affected Dividend Payment Date for the Preferred Stock, then such amendment will not result in the

payment of Retroactive Dividends with respect to such Affected Dividend Payment Date. The opinion referenced

in the previous sentence shall be based upon the legislation amending or establishing the DRP or upon a

published pronouncement of the IRS addressing such legislation.

Notwithstanding the foregoing, we will not make any adjustment in our dividends payable, and we will not

be required to pay Post Declaration Date Dividends or Retroactive Dividends, in respect of the enactment on or

after April 28, 2004 of any amendment to the Code that eliminates or reduces the Dividends-Received

Percentage.

In the event that the amount of dividends payable per share of the Preferred Stock is adjusted pursuant to the

DRD Formula and/or Post Declaration Date Dividends or Retroactive Dividends are to be paid, we will give

notice of each such adjustment and, if applicable, any Post Declaration Date Dividends and Retroactive

Dividends to the Holders of Preferred Stock.

Optional Redemption

The Preferred Stock will not be redeemable prior to October 28, 2007. On or after that date, subject to the

notice provisions set forth below and subject to any further limitations which may be imposed by law, we, at our

option, may redeem the Preferred Stock, in whole or in part, at any time or from time to time, out of funds legally

available therefor, at the redemption price of $50 per share plus an amount equal to the dividend (whether or not

declared) for the then-current quarterly dividend period accrued to but excluding the date of redemption,

including any adjustments in dividends payable due to changes in the Dividends-Received Percentage but

without accumulation of unpaid dividends on the Preferred Stock for prior dividend periods. If less than all of the

outstanding shares of the Preferred Stock are to be redeemed, we will select shares to be redeemed from the

outstanding shares not previously called for redemption by lot or pro rata (as nearly as possible) or by any other

method that the Board of Directors, or a duly authorized committee thereof, in its sole discretion deems

equitable.

We will give notice of any such redemption by mail to Holders of Preferred Stock not less than 30 days

prior to the date fixed by the Board of Directors, or duly authorized committee thereof, for such redemption.

Each notice will state the number of shares of Preferred Stock to be redeemed and, if fewer than all of the shares

of Preferred Stock held by the applicable Holder are to be redeemed, the number of shares to be redeemed from

20
such Holder, the redemption price, the redemption date and the place at which such Holder’s certificate(s)

representing shares of the Preferred Stock must be presented upon such redemption.

Under certain circumstances, we may need the approval of the Director prior to exercising our right to

redeem shares of Preferred Stock. See “Regulatory Matters.”

Once proper notice has been given, from and after the redemption date, dividends on the Preferred Stock

called for redemption will cease to accrue and such Preferred Stock called for redemption will no longer be

deemed outstanding, and all rights of the Holders thereof as registered holders of the Preferred Stock will cease.

Liquidation Rights

Upon any voluntary or involuntary dissolution, liquidation or winding up of Fannie Mae, after payment or

provision for our liabilities and the expenses of such dissolution, liquidation or winding up, the Holders of the

outstanding shares of the Preferred Stock will be entitled to receive the amount of $50 per share plus an amount

equal to the dividend (whether or not declared) for the then-current quarterly dividend period accrued to but

excluding the date of such liquidation payment, including any adjustments in dividends payable due to changes in

the Dividends-Received Percentage but without accumulation of unpaid dividends on the Preferred Stock for

prior dividend periods, out of our assets or proceeds thereof available for distribution to stockholders, before any

payment or distribution of assets is made to holders of our common stock (or any of our other stock ranking, as to

the distribution of assets upon our dissolution, liquidation or winding up, junior to the Preferred Stock). If our

assets available for distribution in such event are insufficient to pay in full the aggregate amount payable to

Holders of the Preferred Stock and holders of all other classes or series of our stock, if any, ranking, as to the

distribution of assets upon our dissolution, liquidation or winding up, equally with the Preferred Stock, the assets

will be distributed to the Holders of Preferred Stock and holders of such other stock pro rata, based on the full

respective preferential amounts to which they are entitled (including any adjustments in dividends payable due to

changes in the Dividends-Received Percentage but without, in the case of any noncumulative preferred stock,

accumulation of unpaid dividends for prior dividend periods). After payment of the full amount of the

distribution of assets upon our dissolution, liquidation or winding up to which they are entitled, the Holders of

Preferred Stock will not be entitled to any further participation in any of our distributions of assets.

Notwithstanding the foregoing, Holders of Preferred Stock will not be entitled to be paid any amount in

respect of our dissolution, liquidation or winding up until holders of any class or series of our stock ranking, as to

the distribution of our assets upon dissolution, liquidation or winding up, prior to the Preferred Stock have been

paid all amounts to which such classes or series are entitled. At the time of issuance of the Preferred Stock, there

will be no class or series of our stock ranking prior to the Preferred Stock with respect to the distribution of assets

upon our dissolution, liquidation or winding up.

Neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or

substantially all of our property and assets, nor our merger, consolidation or combination into or with any other

corporation, nor the merger, consolidation or combination of any other corporation or entity into or with us, shall

be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of these

provisions on liquidation rights.

Regulatory Matters

Holders of Preferred Stock are entitled to receive cash dividends if, as and when declared by the Board of

Directors. However, certain provisions of the 1992 Act may operate to restrict the ability of the Board of

Directors to declare dividends in certain circumstances. The 1992 Act established our risk-based capital,

minimum capital and critical capital requirements. OFHEO released risk-based capital regulations for us and

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Freddie Mac on September 13, 2001. Until one year after the final regulations establishing the risk-based capital

test are in effect, a dividend may be paid without the prior approval of the Director of OFHEO if we meet the

minimum capital level and the dividend payment would not decrease our core capital below such level. See

“Government Regulation and Charter Act.”

One year after final regulations establishing the risk-based capital test take effect, a dividend may be paid

without the prior approval of the Director if we meet both the risk-based capital and minimum capital levels and

the dividend payment would not decrease our total capital below the risk-based capital level or our core capital

below the minimum capital level. If we meet either the risk-based capital standard or the minimum capital

standard, we may make a dividend payment without obtaining the approval of the Director only if the dividend

payment would not cause us to fail to meet another capital standard. At any time when we do not meet the riskbased capital standard but meet the minimum capital standard, we are prohibited from making a dividend

payment that would cause us to fail to meet the minimum capital standard. If we meet neither the risk-based

capital standard nor the minimum capital standard but do meet the critical capital standard established under the

1992 Act, we may make a dividend payment only if we would not fail to meet the critical capital standard as a

result of such payment and the Director approves the payment after finding that it satisfies certain statutory

conditions. The Director has the authority to require us to submit a report to the Director regarding any capital

distribution (including any dividend) declared by us before we make the distribution. See “Government

Regulation and Charter Act” and “Management’s Discussion and Analysis of Financial Condition and Results of

Operations—Balance Sheet Analysis—Regulatory Environment” in the Information Statement regarding our

applicable capital standards.

Voting Rights; Amendments

Except as provided below, the Holders of Preferred Stock will not be entitled to any voting rights.

Without the consent of the Holders of Preferred Stock, we may amend, alter, supplement, or repeal any

terms of the Preferred Stock:

• to cure any ambiguity, or to cure, correct or supplement any provision contained in the Certificate of

Designation that may be defective or inconsistent; or

• to make any other provision with respect to matters or questions arising with respect to the Preferred

Stock that is not inconsistent with the provisions of the Certificate of Designation, so long as such action

does not materially and adversely affect the interests of the Holders of Preferred Stock.

The following are deemed not to materially and adversely affect the interests of the Holders of Preferred

Stock:

• any increase in the amount of authorized or issued Preferred Stock; or

• the creation and issuance, or an increase in the authorized or issued amount, of any other class or series

of our stock, whether ranking prior to, on a parity with or junior to the Preferred Stock as to dividends or

liquidation or otherwise.

Otherwise, the terms of the Preferred Stock may be amended, altered, supplemented, or repealed only with

the consent of the Holders of at least two-thirds of the outstanding shares of Preferred Stock. On matters

requiring their consent, Holders of Preferred Stock will be entitled to one vote per share.

New York Stock Exchange Listing

We will apply to list the Preferred Stock on the NYSE under the symbol “FNMprI”. If approved for listing,

we expect trading of the Preferred Stock on the NYSE to commence within a thirty-day period after the initial

delivery of the Preferred Stock.

22
LEGALITY OF INVESTMENT

National banks may purchase, hold, and invest in for their own accounts the shares of Preferred Stock

without regard to limitations generally applicable to investment securities. The Preferred Stock would be subject

to a 100% risk weighting for capital adequacy purposes.

Federal savings associations and federal savings banks may invest in the shares of Preferred Stock without

regard to limitations generally applicable to investments. Preferred Stock held by a federal savings association or

federal savings bank would be subject to a 100% risk weighting for capital adequacy purposes.

Federally insured state-chartered banks, state-chartered savings banks, and state-chartered savings and loan

associations may invest in the shares of Preferred Stock to the extent permitted by the Secondary Mortgage

Market Enhancement Act of 1984 (“SMMEA”) and by applicable state law, after complying with any procedures

imposed by the state. Preferred Stock held by such an institution would be subject to a 100% risk weighting for

federal capital adequacy purposes.

Federal credit unions may purchase the shares of Preferred Stock without regard to limitations generally

applicable to investments.

The shares of Preferred Stock are “stock . . . of a corporation which is an instrumentality of the United

States” within the meaning of § 7701(a)(19)(C)(ii) of the Code for purposes of the 60 percent of assets limitation

applicable to domestic building and loan associations.

In addition to the specific authorizations discussed above, § 106(a)(1) of SMMEA provides that any person,

trust, corporation, partnership, association, business trust or business entity created pursuant to or existing under

the laws of the United States or any state (including the District of Columbia and Puerto Rico) (an “investor”) is

authorized to purchase, hold and invest in securities issued or guaranteed by us (including the shares of Preferred

Stock) to the same extent that such investor is authorized to purchase, hold or invest in obligations issued or

guaranteed as to principal and interest by the United States or any agency or instrumentality thereof. Prior to

October 4, 1991, states were authorized by SMMEA to enact legislation that either prohibited or limited an

investor’s authority to purchase, hold or invest in securities issued or guaranteed by us. To the best of our

knowledge, 18 states currently have legislation limiting to varying extents the ability of certain entities (in most

cases, insurance companies) to invest in securities issued or guaranteed by us, including the shares of Preferred

Stock.

Notwithstanding the above, investors should consult their legal advisors to determine whether and to what

extent the shares of Preferred Stock constitute legal investments for such investors or are eligible to be used as

security for borrowings. The foregoing does not take into consideration the application of statutes, regulations,

orders, guidelines or agreements generally governing investments made by a particular investor, including but

not limited to “prudent investor” provisions, safety and soundness conditions and percentage-of-assets limits.

The regulatory authorities that administer the legal provisions referred to above generally reserve discretion

whether securities, such as the Preferred Stock, that are otherwise acceptable for investment may be purchased or

pledged by the institutions subject to their jurisdiction. An institution under the jurisdiction of the Comptroller of

the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation,

the Office of Thrift Supervision, the National Credit Union Administration, or any other federal or state agency

with similar authority should review any applicable regulations, policy statements and guidelines before

purchasing the Preferred Stock.

23
UNITED STATES TAXATION

The Preferred Stock and payments thereon generally are subject to taxation. Therefore, you should consider

the tax consequences of owning Preferred Stock before acquiring it.

In the opinion of Arnold & Porter, our special tax counsel, the following discussion correctly describes the

principal aspects of the U.S. federal income tax treatment of U.S. Persons (as defined below) that are beneficial

holders of the Preferred Stock (“Shareholders”). This discussion does not address the U.S. federal income tax

treatment of Shareholders that are not U.S. Persons. This discussion is based on the Internal Revenue Code of

1986, as amended (the “Code”), its legislative history, existing and proposed Treasury regulations, revenue

rulings and judicial decisions, changes to any of which subsequent to the date of this Offering Circular may

affect, possibly on a retroactive basis, the tax consequences described herein.

This summary discusses only the Preferred Stock purchased in this offering and held as a capital asset

(within the meaning of federal tax law). This discussion does not purport to address all of the U.S. federal income

tax consequences that may be applicable to particular investors in light of their individual circumstances or to

Shareholders subject to special rules, such as dealers in securities, tax-exempt organizations, life insurance

companies, persons liable for alternative minimum tax, persons that hold the Preferred Stock as part of a straddle

or a hedging or conversion transaction, certain financial institutions and certain securities traders. In addition, this

discussion does not address taxes imposed by any state, local or foreign taxing jurisdiction. In all cases, investors

are advised to consult their own tax advisors regarding the U.S. federal tax consequences to them of holding,

owning and disposing of Preferred Stock, as well as any tax consequences arising under the laws of any state or

other taxing jurisdiction.

For purposes of this discussion, “U.S. Person” generally means (1) a citizen or individual resident of the

United States, (2) a corporation or partnership created or organized in or under the laws of the United States or

any political subdivision thereof, (3) an estate the income of which is includible in its gross income for U.S.

federal income tax purposes without regard to its source, or (4) a trust if a court within the United States is able

to exercise primary supervision over its administration and at least one U.S. Person has the authority to control

all substantial decisions of the trust.

Dividends

Dividends declared and paid on the Preferred Stock will be dividends for U.S. federal income tax purposes

to the extent paid out of our current or accumulated earnings and profits, as determined for federal income tax

purposes, and will be taxable as ordinary income. Although we expect that our current and accumulated earnings

and profits will be such that all dividends paid with respect to the Preferred Stock will qualify as dividends for

federal income tax purposes, we cannot guarantee that result. Our accumulated earnings and profits and our

current earnings and profits in future years will depend in significant part on our future profits or losses, which

we cannot accurately predict. To the extent that the amount of any dividend paid on a share of Preferred Stock

exceeds our current or accumulated earnings and profits for federal income tax purposes attributable to that

share, the dividend will be treated first as a return of capital (rather than as ordinary income) and will be applied

against and reduce the Shareholder’s adjusted tax basis in that share of Preferred Stock. The amount of any such

dividend in excess of the Shareholder’s adjusted tax basis will then be taxed as capital gain. For purposes of the

remainder of this discussion, it is assumed that dividends paid with respect to the Preferred Stock will constitute

dividends for U.S. federal income tax purposes.

Dividends received by Shareholders that are corporations generally will be eligible for the 70-percent

dividends-received deduction under section 243 of the Code. The 70-percent dividends-received deduction will

not be available with respect to a dividend received on Preferred Stock that a Shareholder has held for 45 days or

less (including the day of disposition, but excluding the day of acquisition) during the 90-day period beginning

on the day which is 45 days before the date on which the Preferred Stock becomes ex-dividend. If the dividend is

24
attributable to a period or periods aggregating more than 366 days, the dividends-received deduction will be

available only if the Shareholder has held the Preferred Stock for more than 90 days (including the day of

disposition, but excluding the day of acquisition) during the 180-day period beginning 90 days before the date on

which the Preferred Stock becomes ex-dividend. The length of time that a corporate shareholder is deemed to

have held stock for these purposes is reduced by periods during which the shareholder’s risk of loss with respect

to the stock is diminished by reason of the existence of certain options, contracts to sell, short sales or other

similar transactions. The aggregate dividends-received deduction allowed a corporate shareholder cannot exceed

70 percent of its taxable income (with certain adjustments). Moreover, the dividends-received deduction may be

reduced if the stock is “debt financed.” Stock is “debt financed” if a corporate shareholder incurs indebtedness

“directly attributable” to a “portfolio stock” investment in another company, which would include an investment

in the Preferred Stock.

Dispositions, Including Redemptions

Any sale, exchange, redemption (except as discussed below) or other disposition of the Preferred Stock

generally will result in taxable gain or loss equal to the difference between the amount realized upon the

disposition and the Shareholder’s adjusted tax basis in the Preferred Stock. Such gain or loss will be capital gain

or loss and will be long-term capital gain or loss if the holding period for the Preferred Stock exceeds one year.

Tax rates on capital gain for individual Shareholders vary depending on each Shareholder’s income and holding

period for the Preferred Stock. Shareholders that are individuals should contact their own tax advisors for more

information or for the capital gains tax rate applicable to specific shares of Preferred Stock. The deduction of

capital losses is subject to certain limitations.

A redemption of Preferred Stock may be treated as a dividend, rather than as payment in exchange for the

Preferred Stock, unless the redemption is “not essentially equivalent to a dividend” with respect to the

Shareholder within the meaning of section 302(b)(1) of the Code, “is in complete redemption of all of the stock”

of Fannie Mae held by the Shareholder as described in section 302(b)(3) of the Code or otherwise meets the

requirements of one of the other exceptions from dividend treatment provided in section 302(b) of the Code. In

applying these rules, the Shareholder must take into account not only the Preferred Stock and our other stock that

it owns directly, but also the Preferred Stock and our other stock that it constructively owns within the meaning

of section 318 of the Code. Because of the complex nature of these rules, each Shareholder should consult its tax

advisor to determine whether a redemption of Preferred Stock will be treated as a dividend or as payment in

exchange for the Preferred Stock. If the redemption payment is treated as a dividend, the rules discussed above

under “Dividends” apply.

Information Reporting and Backup Withholding

Payments of dividends on shares of Preferred Stock and payments of proceeds upon the sale or redemption

of Preferred Stock generally are required to be reported to the IRS except in the case of a beneficial holder that is

an “exempt recipient.” Individuals generally are not exempt recipients, whereas corporations and certain other

entities generally are exempt recipients.

Backup withholding of U.S. federal income tax may apply to payments made with respect to shares of

Preferred Stock, as well as to payments of proceeds from the sale of shares of Preferred Stock, to Shareholders

that are not exempt recipients and that fail to provide certain identifying information (such as the taxpayer

identification number of the Shareholder) in the manner required.

The U.S. federal income tax discussion set forth above is included for general information only and

may not be applicable depending upon a Shareholder’s particular situation. Each Shareholder should

consult its own tax advisor with respect to the tax consequences to it of the ownership and disposition of

the Preferred Stock, including the tax consequences under the tax laws of the United States, states,

localities, countries other than the United States and any other taxing jurisdiction and the possible effects

of changes in such tax laws.

25
UNDERWRITING

Subject to the terms and conditions set forth in the underwriting agreement (the “Underwriting

Agreement”), we have agreed to sell to each of the underwriters named below (collectively, the “Underwriters”),

and each of the Underwriters, for whom Bear, Stearns & Co. Inc., First Tennessee Bank National Association

and Lehman Brothers Inc. (the “Representatives”) are acting as representatives, has severally agreed to purchase,

the number of shares of Preferred Stock set forth opposite its name below:

Underwriter Number of Shares

Bear, Stearns & Co. Inc. 2,100,600

First Tennessee Bank National Association 1,200,000

Lehman Brothers Inc. 1,200,000

Blaylock & Partners, L.P. 499,800

Deutsche Bank Securities Inc. 499,800

Vining-Sparks IBG, L.P. 499,800

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000,000

In the Underwriting Agreement, the Underwriters have severally agreed, subject to the terms and conditions

set forth therein, to purchase all the Preferred Stock offered hereby if any is purchased.

The Representatives have advised us that the Underwriters propose initially to offer the Preferred Stock to

the public at the initial public offering price set forth on the cover page of this Offering Circular, and to certain

dealers at such price less a concession not in excess of $0.2625 per share. The Underwriters may allow, and such

dealers may reallow, a discount not in excess of $0.25 per share on sales to certain other dealers. After the initial

public offering, the public offering price, concession and discount may be changed.

We have granted the Underwriters an option exercisable for 30 days after the date of this Offering Circular

to purchase up to an aggregate of 900,000 additional shares of Preferred Stock solely to cover overallotments, if

any. If the Underwriters exercise their overallotment option, the Underwriters have severally agreed, subject to

certain conditions, to purchase approximately the same percentage thereof that the number of shares to be

purchased by each of them, as shown in the foregoing table, bears to the 6,000,000 shares of Preferred Stock

offered.

Prior to this offering, there has been no public market for the Preferred Stock. We will apply to list the

Preferred Stock on the New York Stock Exchange under the symbol “FNMprI.” If accepted for listing, we expect

that trading of the Preferred Stock on the New York Stock Exchange will commence within a thirty-day period

after the initial delivery of the Preferred Stock. The Representatives have advised us that they intend to make a

market in the Preferred Stock prior to the commencement of trading on the New York Stock Exchange, but are

not obligated to do so and may discontinue any such market making at any time without notice.

In the Underwriting Agreement, we and the Underwriters have agreed to indemnify each other against and

contribute toward certain liabilities.

The Underwriters and certain affiliates thereof engage in transactions with and perform services for us in the

ordinary course of business.

The Underwriters may engage in certain transactions that stabilize the price of the Preferred Stock. These

transactions may include entering stabilizing bids, which means the placing of a bid or the effecting of a purchase

for the purpose of pegging, fixing or maintaining the price of the Preferred Stock. Neither we nor the

Underwriters make any representation or prediction as to the direction or magnitude of any effect that the

transactions described above may have on the price of the Preferred Stock. The Underwriters are not required to

engage in any of these transactions. When so doing, the Underwriters act on their own behalf and not as our

representatives. Any such transactions, if commenced, may be discontinued at any time.

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RATING

Standard & Poor’s Ratings Group, a Division of the McGraw-Hill Companies, has assigned the Preferred

Stock a rating of “AA–” and Moody’s Investors Service, Inc. has assigned a rating of “aa3.” A security rating is

not a recommendation to buy, sell or hold securities and may be subject to revision or may be withdrawn at any

time by the assigning rating organization.

ACCOUNTANTS

The audited financial statements of Fannie Mae as of December 31, 2001 and for each of the years in the

three-year period ended December 31, 2001, included in Appendix B and incorporated herein by reference, have

been included in reliance upon the report of KPMG LLP, independent certified public accountants, and upon the

authority of that firm as experts in accounting and auditing. The audit report covering the December 31, 2001

financial statements refers to a change in the accounting for derivative financial instruments.

VALIDITY OF THE PREFERRED STOCK

The validity of the Preferred Stock will be passed upon for us by Sidley Austin Brown & Wood LLP, New

York, New York, and for the Underwriters by Sullivan & Cromwell, Washington, D.C. Certain U.S. federal

income tax matters will be passed upon for us by Arnold & Porter, Washington, D.C.

ADDITIONAL INFORMATION ABOUT FANNIE MAE

We are incorporating by reference in this Offering Circular the documents listed below that we publish from

time to time. This means that we are disclosing information to you by referring you to those documents. The

documents incorporated by reference are considered part of this Offering Circular, so you should read this

Offering Circular, and any applicable supplements or amendments, together with those documents.

You should rely only on the information provided or incorporated by reference in this Offering Circular, and

you should rely only on the most current information.

The following documents are incorporated by reference in this Offering Circular:

• our Information Statement dated April 1, 2002;

• our Supplements dated May 15, 2002 and August 9, 2002 to that Information Statement;

• our Proxy Statement for the May 2002 Annual Meeting of Stockholders; and

• any later supplements to the current Information Statement, any subsequent information statement and

supplements thereto, and any proxy statement published prior to the termination of the offering of the

Preferred Stock.

The Information Statement contains important financial and other information about us. We publish the

Information Statement annually and update it from time to time to reflect quarterly and annual financial results

and as we otherwise determine. The term “Information Statement” as used in this Offering Circular means the

most recent Information Statement published while offers are being made under this Offering Circular, together

with any supplements to that Information Statement.

You can read the Information Statement, proxy statements and other information about us at the offices of

the New York Stock Exchange, the Chicago Stock Exchange and the Pacific Exchange (collectively, the

“Exchanges”). Since we are not, as of the date of this Offering Circular, subject to the periodic reporting

requirements of the Exchange Act, we do not currently file reports or other information with the SEC. See

“Recent Developments—Voluntary SEC Disclosure.”

27
You can obtain copies of the Information Statement and this Offering Circular and all documents

incorporated by reference in this Offering Circular and additional information about us (including any disclosure

documents we file with the SEC) without charge from the Office of Investor Relations, Fannie Mae, 3900

Wisconsin Avenue, NW, Washington, D.C. 20016 (telephone: (202) 752-7115).

The following information is available from us by accessing our World Wide Web site at

www.fanniemae.com or calling us at (800) 701-4791 (for international callers, (202) 752-5499):

• this Offering Circular;

• the Information Statement; and

• our Proxy Statement for the May 2002 Annual Meeting of Stockholders.

Other than the documents specifically incorporated by reference herein, the information on our website is

not part of or incorporated by reference in this Offering Circular.

In the first quarter of 2003, we will begin filing periodic reports with the SEC under the Exchange Act.

These filings will include our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on

Form 8-K. Our SEC filings will be available at the SEC’s website at www.sec.gov. You may also read and copy

any document we file with the SEC by visiting the SEC’s Public Reference Room at 450 Fifth Street, NW,

Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the operation of

the Public Reference Room. The documents we file with the SEC will also be incorporated by reference in this

Offering Circular. We are providing the address of the SEC’s internet site solely for the information of

prospective investors. We do not intend the Internet address to be an active link.

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APPENDIX A

CERTIFICATE OF DESIGNATION OF TERMS OF

5.375% NON-CUMULATIVE PREFERRED STOCK, SERIES I

1. Designation, Par Value and Number of Shares.

The designation of the series of preferred stock of the Federal National Mortgage Association (“Fannie

Mae”) created by this resolution shall be “5.375% Non-Cumulative Preferred Stock, Series I” (the “Series I

Preferred Stock”), and the number of shares initially constituting the Series I Preferred Stock is 6,000,000*.

Shares of Series I Preferred Stock will have no par value and a stated value and liquidation preference of $50 per

share. The Board of Directors of Fannie Mae, or a duly authorized committee thereof, in its sole discretion, may

reduce the number of shares of Series I Preferred Stock, provided such reduction is not below the number of

shares of Series I Preferred Stock then outstanding.

2. Dividends.

(a) Holders of record of Series I Preferred Stock (each individually a “Holder”, or collectively the

“Holders”) will be entitled to receive, when, as and if declared by the Board of Directors of Fannie Mae, or a

duly authorized committee thereof, in its sole discretion out of funds legally available therefor, non-cumulative

quarterly cash dividends which will accrue from and including October 28, 2002 and will be payable on

March 31, June 30, September 30 and December 31 of each year (each, a “Dividend Payment Date”),

commencing December 31, 2002 at the annual rate of $2.6875 per share or 5.375% of the stated value and

liquidation preference of $50 per share (without taking into account any adjustments referred to in clause (b)

below). If a Dividend Payment Date is not a Business Day, the related dividend (if declared) will be paid on the

next succeeding Business Day with the same force and effect as though paid on the Dividend Payment Date,

without any increase to account for the period from such Dividend Payment Date through the date of actual

payment. A “Business Day” shall mean any day other than a Saturday, Sunday, or a day on which banking

institutions in New York, New York are authorized by law to close. Dividends will be paid to Holders on the

record date fixed by the Board of Directors or a duly authorized committee thereof, which may not be earlier than

45 days or later than 10 days prior to the applicable Dividend Payment Date. If declared, the initial dividend,

which will be for the period from and including October 28, 2002 to but excluding December 31, 2002, will be

$0.4703 per share and will be payable on December 31, 2002 and, thereafter, if declared, quarterly dividends will

be $0.6719 per share. After the initial dividend, the dividend period relating to a Dividend Payment Date will be

the period from and including the preceding Dividend Payment Date to but excluding the related Dividend

Payment Date. If Fannie Mae redeems the Series I Preferred Stock, the dividend that would otherwise be payable

for the then-current quarterly dividend period accrued to but excluding the date of redemption will be included in

the redemption price of the shares redeemed and will not be separately payable. Dividends payable on the Series

I Preferred Stock for any period greater or less than a full dividend period will be computed on the basis of a 360-

day year consisting of twelve 30-day months. The amount of dividends per share payable at redemption will be

rounded to the fourth digit after the decimal point. (If the fifth digit to the right of the decimal point is five or

greater, the fourth digit will be rounded up by one.)

(b) If, prior to April 28, 2004, one or more amendments to the Internal Revenue Code of 1986, as amended

(the “Code”), are enacted that eliminate or reduce the percentage of the dividends-received deduction applicable

to the Series I Preferred Stock as specified in section 243(a)(1) of the Code or any successor provision thereto

(the “Dividends-Received Percentage”), certain adjustments may be made in respect of the dividends payable by

Fannie Mae, and Post Declaration Date Dividends and Retroactive Dividends (as such terms are defined below)

may become payable, as described below.

* Plus up to 900,000 additional shares pursuant to the Underwriters’ overallotment option.

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The amount of each dividend payable (if declared) per share of Series I Preferred Stock for dividend

payments made on or after the effective date of such change in the Code will be adjusted by multiplying the

amount of the dividend payable pursuant to clause (a) of this Section 2 (before adjustment) by a factor, which

will be the number determined in accordance with the following formula (the “DRD Formula”), and rounding the

result to the nearest cent (with one-half cent rounded up):

1–.35(1–.70)

1–.35(1–DRP)

For purposes of the DRD Formula, “DRP” means the Dividends-Received Percentage (expressed as a decimal)

applicable to the dividend in question; provided, however, that if the Dividends-Received Percentage applicable

to the dividend in question shall be less than 50%, then the DRP shall equal .50. No amendment to the Code,

other than a change in the percentage of the dividends-received deduction applicable to the Series I Preferred

Stock as set forth in section 243(a)(1) of the Code or any successor provision thereto, will give rise to an

adjustment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, Fannie Mae

receives either an unqualified opinion of nationally recognized independent tax counsel selected by Fannie Mae

or a private letter ruling or similar form of assurance from the Internal Revenue Service (the “IRS”) to the effect

that such an amendment does not apply to a dividend payable on the Series I Preferred Stock, then such

amendment will not result in the adjustment provided for pursuant to the DRD Formula with respect to such

dividend. The opinion referenced in the previous sentence shall be based upon the legislation amending or

establishing the DRP or upon a published pronouncement of the IRS addressing such legislation. Unless the

context otherwise requires, references to dividends herein will mean dividends as adjusted by the DRD Formula.

Fannie Mae’s calculation of the dividends payable as so adjusted shall be final and not subject to review.

Notwithstanding the foregoing, if any such amendment to the Code is enacted after the dividend payable on

a Dividend Payment Date has been declared but before such dividend is paid, the amount of the dividend payable

on such Dividend Payment Date will not be increased; instead, additional dividends (the “Post Declaration Date

Dividends”), equal to the excess, if any, of (1) the product of the dividend paid by Fannie Mae on such Dividend

Payment Date and the DRD Formula (where the DRP used in the DRD Formula would be equal to the greater of

the Dividends-Received Percentage applicable to the dividend in question and .50) over (2) the dividend paid by

Fannie Mae on such Dividend Payment Date, will be payable (if declared) to Holders on the record date

applicable to the next succeeding Dividend Payment Date.

If any such amendment to the Code is enacted and the reduction in the Dividends-Received Percentage

retroactively applies to a Dividend Payment Date as to which Fannie Mae previously paid dividends on the

Series I Preferred Stock (each, an “Affected Dividend Payment Date”), Fannie Mae will pay (if declared)

additional dividends (the “Retroactive Dividends”) to Holders on the record date applicable to the next

succeeding Dividend Payment Date (or, if such amendment is enacted after the dividend payable on such

Dividend Payment Date has been declared, to Holders on the record date applicable to the second succeeding

Dividend Payment Date following the date of enactment), in an amount equal to the excess of (1) the product of

the dividend paid by Fannie Mae on each Affected Dividend Payment Date and the DRD Formula (where the

DRP used in the DRD Formula would be equal to the greater of the Dividends-Received Percentage and .50

applied to each Affected Dividend Payment Date) over (2) the sum of the dividend paid by Fannie Mae on each

Affected Dividend Payment Date. Fannie Mae will only make one payment of Retroactive Dividends for any

such amendment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, Fannie Mae

receives either an unqualified opinion of nationally recognized independent tax counsel selected by Fannie Mae

or a private letter ruling or similar form of assurance from the IRS to the effect that such amendment does not

apply to a dividend payable on an Affected Dividend Payment Date for the Series I Preferred Stock, then such

amendment will not result in the payment of Retroactive Dividends with respect to such Affected Dividend

Payment Date. The opinion referenced in the previous sentence shall be based upon legislation amending or

establishing the DRP or upon a published pronouncement of the IRS addressing such legislation.

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Notwithstanding the foregoing, no adjustment in the dividends payable by Fannie Mae shall be made, and

no Post Declaration Date Dividends or Retroactive Dividends shall be payable by Fannie Mae, in respect of the

enactment of any amendment to the Code on or after April 28, 2004 that eliminates or reduces the DividendsReceived Percentage.

In the event that the amount of dividends payable per share of Series I Preferred Stock is adjusted pursuant

to the DRD Formula and/or Post Declaration Date Dividends or Retroactive Dividends are to be paid, Fannie

Mae will cause notice of each such adjustment and, if applicable, Post Declaration Date Dividends and

Retroactive Dividends to be given as soon as practicable to the Holders of Series I Preferred Stock.

(c) No dividend (other than dividends or distributions paid in shares of, or options, warrants or rights to

subscribe for or purchase shares of, the common stock of Fannie Mae or any other stock of Fannie Mae ranking,

as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of

Fannie Mae, junior to the Series I Preferred Stock) may be declared or paid or set apart for payment on Fannie

Mae’s common stock (or on any other stock of Fannie Mae ranking, as to the payment of dividends, junior to the

Series I Preferred Stock) unless dividends have been declared and paid or set apart (or ordered to be set apart) on

the Series I Preferred Stock for the then-current quarterly dividend period; provided, however, that the foregoing

dividend preference shall not be cumulative and shall not in any way create any claim or right in favor of the

Holders of Series I Preferred Stock in the event that dividends have not been declared or paid or set apart (or

ordered to be set apart) on the Series I Preferred Stock in respect of any prior dividend period. If the full dividend

on the Series I Preferred Stock is not paid for any quarterly dividend period, the Holders of Series I Preferred

Stock will have no claim in respect of the unpaid amount so long as no dividend (other than those referred to

above) is paid on Fannie Mae’s common stock (or any other stock of Fannie Mae ranking, as to the payment of

dividends, junior to the Series I Preferred Stock) for such dividend period.

(d) The Board of Directors of Fannie Mae, or a duly authorized committee thereof, may, in its discretion,

choose to pay dividends on the Series I Preferred Stock without the payment of any dividends on Fannie Mae’s

common stock (or any other stock of Fannie Mae ranking, as to the payment of dividends, junior to the Series I

Preferred Stock).

(e) No full dividends shall be declared or paid or set apart for payment on any stock of Fannie Mae ranking,

as to the payment of dividends, on a parity with the Series I Preferred Stock for any period unless full dividends

have been declared and paid or set apart for payment on the Series I Preferred Stock for the then-current

quarterly dividend period. When dividends are not paid in full upon the Series I Preferred Stock and all other

classes or series of stock of Fannie Mae, if any, ranking, as to the payment of dividends, on a parity with the

Series I Preferred Stock, all dividends declared upon shares of Series I Preferred Stock and all such other stock of

Fannie Mae will be declared pro rata so that the amount of dividends declared per share of Series I Preferred

Stock and all such other stock will in all cases bear to each other the same ratio that accrued dividends per share

of Series I Preferred Stock (including any adjustments in dividends payable due to changes in the DividendsReceived Percentage but without, in the case of any noncumulative preferred stock, accumulation of unpaid

dividends for prior dividend periods) and such other stock bear to each other.

(f) No dividends may be declared or paid or set apart for payment on any shares of Series I Preferred Stock

if at the same time any arrears exist or default exists in the payment of dividends on any outstanding class or

series of stock of Fannie Mae ranking, as to the payment of dividends, prior to the Series I Preferred Stock.

(g) Holders of Series I Preferred Stock will not be entitled to any dividends, whether payable in cash or

property, other than as herein provided and will not be entitled to interest, or any sum in lieu of interest, in

respect of any dividend payment.

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3. Optional Redemption.

(a) The Series I Preferred Stock shall not be redeemable prior to October 28, 2007. On or after that date,

subject to the notice provisions set forth in Section 3(b) below and subject to any further limitations which may

be imposed by law, Fannie Mae may redeem the Series I Preferred Stock, in whole or in part, at any time or from

time to time, out of funds legally available therefor, at the redemption price of $50 per share plus an amount

equal to the amount of the dividend (whether or not declared) for the then-current quarterly dividend period

accrued to but excluding the date of such redemption, including any adjustments in dividends payable due to

changes in the Dividends-Received Percentage but without accumulation of unpaid dividends on the Series I

Preferred Stock for prior dividend periods. If less than all of the outstanding shares of Series I Preferred Stock are

to be redeemed, Fannie Mae will select the shares to be redeemed from the outstanding shares not previously

called for redemption by lot or pro rata (as nearly as possible) or by any other method that the Board of Directors

of Fannie Mae, or a duly authorized committee thereof, in its sole discretion deems equitable.

(b) In the event Fannie Mae shall redeem any or all of the Series I Preferred Stock as aforesaid, Fannie Mae

will give notice of any such redemption to Holders of Series I Preferred Stock not less than 30 days prior to the

date fixed by the Board of Directors of Fannie Mae, or duly authorized committee thereof, for such redemption.

Each such notice will state: (1) the number of shares of Series I Preferred Stock to be redeemed and, if fewer than

all of the shares of Series I Preferred Stock held by a Holder are to be redeemed, the number of shares to be

redeemed from such Holder; (2) the redemption price; (3) the redemption date; and (4) the place at which a

Holder’s certificate(s) representing shares of Series I Preferred Stock must be presented upon such redemption.

Failure to give notice, or any defect in the notice, to any Holder of Series I Preferred Stock shall not affect the

validity of the proceedings for the redemption of shares of any other Holder of Series I Preferred Stock being

redeemed.

(c) Notice having been given as herein provided, from and after the redemption date, dividends on the Series

I Preferred Stock called for redemption shall cease to accrue and such Series I Preferred Stock called for

redemption will no longer be deemed outstanding, and all rights of the Holders thereof as registered holders of

such shares of Series I Preferred Stock will cease. Upon surrender in accordance with said notice of the

certificate(s) representing shares of Series I Preferred Stock so redeemed (properly endorsed or assigned for

transfer, if the Board of Directors of Fannie Mae, or a duly authorized committee thereof, shall so require and the

notice shall so state), such shares shall be redeemed by Fannie Mae at the redemption price aforesaid. Any shares

of Series I Preferred Stock that shall at any time have been redeemed shall, after such redemption, be cancelled

and not reissued. In case fewer than all the shares represented by any such certificate are redeemed, a new

certificate shall be issued representing the unredeemed shares without cost to the Holder thereof.

(d) The Series I Preferred Stock will not be subject to any mandatory redemption, sinking fund or other

similar provisions. In addition, Holders of Series I Preferred Stock will have no right to require redemption of

any shares of Series I Preferred Stock.

4. Liquidation Rights.

(a) Upon any voluntary or involuntary dissolution, liquidation or winding up of Fannie Mae, after payment

or provision for the liabilities of Fannie Mae and the expenses of such dissolution, liquidation or winding up, the

Holders of outstanding shares of the Series I Preferred Stock will be entitled to receive out of the assets of Fannie

Mae or proceeds thereof available for distribution to stockholders, before any payment or distribution of assets is

made to holders of Fannie Mae’s common stock (or any other stock of Fannie Mae ranking, as to the distribution

of assets upon dissolution, liquidation or winding up of Fannie Mae, junior to the Series I Preferred Stock), the

amount of $50 per share plus an amount equal to the dividend (whether or not declared) for the then-current

quarterly dividend period accrued to but excluding the date of such liquidation payment, including any

adjustments in dividends payable due to changes in the Dividends-Received Percentage but without accumulation

of unpaid dividends on the Series I Preferred Stock for prior dividend periods.

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(b) If the assets of Fannie Mae available for distribution in such event are insufficient to pay in full the

aggregate amount payable to Holders of Series I Preferred Stock and holders of all other classes or series of stock

of Fannie Mae, if any, ranking, as to the distribution of assets upon dissolution, liquidation or winding up of

Fannie Mae, on a parity with the Series I Preferred Stock, the assets will be distributed to the Holders of Series I

Preferred Stock and holders of all such other stock pro rata, based on the full respective preferential amounts to

which they are entitled (including any adjustments in dividends payable due to changes in the DividendsReceived Percentage but without, in the case of any noncumulative preferred stock, accumulation of unpaid

dividends for prior dividend periods).

(c) Notwithstanding the foregoing, Holders of Series I Preferred Stock will not be entitled to be paid any

amount in respect of a dissolution, liquidation or winding up of Fannie Mae until holders of any classes or series

of stock of Fannie Mae ranking, as to the distribution of assets upon dissolution, liquidation or winding up of

Fannie Mae, prior to the Series I Preferred Stock have been paid all amounts to which such classes or series are

entitled.

(d) Neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or

substantially all of the property and assets of Fannie Mae, nor the merger, consolidation or combination of

Fannie Mae into or with any other corporation or the merger, consolidation or combination of any other

corporation or entity into or with Fannie Mae, shall be deemed to be a dissolution, liquidation or winding up,

voluntary or involuntary, for the purposes of this Section 4.

(e) After payment of the full amount of the distribution of assets upon dissolution, liquidation or winding up

of Fannie Mae to which they are entitled pursuant to paragraphs (a), (b) and (c) of this Section 4, the Holders of

Series I Preferred Stock will not be entitled to any further participation in any distribution of assets by Fannie

Mae.

5. No Conversion or Exchange Rights.

The Holders of shares of Series I Preferred Stock will not have any rights to convert such shares into or

exchange such shares for shares of any other class or classes, or of any other series of any class or classes, of

stock or obligations of Fannie Mae.

6. No Pre-Emptive Rights.

No Holder of Series I Preferred Stock shall be entitled as a matter of right to subscribe for or purchase, or

have any pre-emptive right with respect to, any part of any new or additional issue of stock of any class

whatsoever, or of securities convertible into any stock of any class whatsoever, or any other shares, rights,

options or other securities of any class whatsoever, whether now or hereafter authorized and whether issued for

cash or other consideration or by way of dividend.

7. Voting Rights; Amendments.

(a) Except as provided below, the Holders of Series I Preferred Stock will not be entitled to any voting

rights, either general or special.

(b) Without the consent of the Holders of Series I Preferred Stock, Fannie Mae will have the right to amend,

alter, supplement or repeal any terms of this Certificate or the Series I Preferred Stock (1) to cure any ambiguity,

or to cure, correct or supplement any provision contained in this Certificate of Designation that may be defective

or inconsistent with any other provision herein or (2) to make any other provision with respect to matters or

questions arising with respect to the Series I Preferred Stock that is not inconsistent with the provisions of this

Certificate of Designation so long as such action does not materially and adversely affect the interests of the

Holders of Series I Preferred Stock; provided, however, that any increase in the amount of authorized or issued

Series I Preferred Stock or the creation and issuance, or an increase in the authorized or issued amount, of any

other class or series of stock of Fannie Mae, whether ranking prior to, on a parity with or junior to the Series I

Preferred Stock, as to the payment of dividends or the distribution of assets upon dissolution, liquidation or

winding up of Fannie Mae, or otherwise, will not be deemed to materially and adversely affect the interests of the

Holders of Series I Preferred Stock.

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(c) Except as set forth in paragraph (b) of this Section 7, the terms of this Certificate or the Series I Preferred

Stock may be amended, altered, supplemented, or repealed only with the consent of the Holders of at least twothirds of the shares of Series I Preferred Stock then outstanding, given in person or by proxy, either in writing or

at a meeting of stockholders at which the Holders of Series I Preferred Stock shall vote separately as a class. On

matters requiring their consent, Holders of Series I Preferred Stock will be entitled to one vote per share.

(d) The rules and procedures for calling and conducting any meeting of Holders (including, without

limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a

meeting, the obtaining of written consents, and any other aspect or matter with regard to such a meeting or such

consents shall be governed by any rules that the Board of Directors of Fannie Mae, or a duly authorized

committee thereof, in its discretion, may adopt from time to time, which rules and procedures shall conform to

the requirements of any national securities exchange on which the Series I Preferred Stock are listed at the time.

8. Additional Classes or Series of Stock.

The Board of Directors of Fannie Mae, or a duly authorized committee thereof, shall have the right at any

time in the future to authorize, create and issue, by resolution or resolutions, one or more additional classes or

series of stock of Fannie Mae, and to determine and fix the distinguishing characteristics and the relative rights,

preferences, privileges and other terms of the shares thereof. Any such class or series of stock may rank prior to,

on a parity with or junior to the Series I Preferred Stock as to the payment of dividends or the distribution of

assets upon dissolution, liquidation or winding up of Fannie Mae, or otherwise.

9. Priority.

For purposes of this Certificate of Designation, any stock of any class or series of Fannie Mae shall be

deemed to rank:

(a) Prior to the shares of Series I Preferred Stock, either as to the payment of dividends or the distribution of

assets upon dissolution, liquidation or winding up of Fannie Mae, if the holders of such class or series shall be

entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of

Fannie Mae, as the case may be, in preference or priority to the Holders of shares of Series I Preferred Stock.

(b) On a parity with shares of Series I Preferred Stock, either as to the payment of dividends or the

distribution of assets upon dissolution, liquidation or winding up of Fannie Mae, whether or not the dividend

rates or amounts, dividend payment dates or redemption or liquidation prices per share, if any, be different from

those of the Series I Preferred Stock, if the holders of such class or series shall be entitled to the receipt of

dividends or of amounts distributable upon dissolution, liquidation or winding up of Fannie Mae, as the case may

be, in proportion to their respective dividend rates or amounts or liquidation prices, without preference or

priority, one over the other, as between the holders of such class or series and the Holders of shares of Series I

Preferred Stock.

(c) Junior to shares of Series I Preferred Stock, either as to the payment of dividends or the distribution of

assets upon dissolution, liquidation or winding up of Fannie Mae, if such class shall be common stock of Fannie

Mae or if the Holders of shares of Series I Preferred Stock shall be entitled to the receipt of dividends or of

amounts distributable upon dissolution, liquidation or winding up of Fannie Mae, as the case may be, in

preference or priority over the holders of such class or series.

(d) The shares of Preferred Stock of Fannie Mae designated “5.25% Non-Cumulative Preferred Stock,

Series D” (the “Series D Preferred Stock”), “5.10% Non-Cumulative Preferred Stock, Series E” (the “Series E

Preferred Stock”), “Variable Rate Non-Cumulative Preferred Stock, Series F” (the “Series F Preferred Stock”),

“Variable Rate Non-Cumulative Preferred Stock, Series G” (the “Series G Preferred Stock”) and “5.81% NonCumulative Preferred Stock, Series H” (the “Series H Preferred Stock”) shall be deemed to rank on a parity with

A-6
shares of Series I Preferred Stock as to the payment of dividends and the distribution of assets upon dissolution,

liquidation or winding up of Fannie Mae. Accordingly, the holders of record of Series D Preferred Stock, the

holders of record of Series E Preferred Stock, the holders of record of Series F Preferred Stock, the holders of

record of Series G Preferred Stock, the Holders of Series H Preferred Stock and the Holders of Series I Preferred

Stock shall be entitled to the receipt of dividends and of amounts distributable upon dissolution, liquidation or

winding up of Fannie Mae, as the case may be, in proportion to their respective dividend rates or amounts or

liquidation prices, without preference or priority, one over the other.

10. Transfer Agent, Dividend Disbursing Agent and Registrar.

Fannie Mae hereby appoints EquiServe Trust Company, N.A., as its initial transfer agent, dividend

disbursing agent and registrar for the Series I Preferred Stock. Fannie Mae may at any time designate an

additional or substitute transfer agent, dividend disbursing agent and registrar for the Series I Preferred Stock.

11. Notices.

Any notice provided or permitted by this Certificate of Designation to be made upon, or given or furnished

to, the Holders of Series I Preferred Stock by Fannie Mae shall be made by first-class mail, postage prepaid, to

the addresses of such Holders as they appear on the books and records of Fannie Mae. Such notice shall be

deemed to have been sufficiently made upon deposit thereof in the United States mail. Notwithstanding anything

to the contrary contained herein, in the case of the suspension of regular mail service or by reason of any other

cause it shall be impracticable, in Fannie Mae’s judgment, to give notice by mail, then such notification may be

made, in Fannie Mae’s discretion, by publication in a newspaper of general circulation in The City of New York

or by hand delivery to the addresses of Holders as they appear on the books and records of Fannie Mae.

Receipt and acceptance of a share or shares of the Series I Preferred Stock by or on behalf of a Holder

shall constitute the unconditional acceptance by such Holder (and all others having beneficial ownership of

such share or shares) of all of the terms and provisions of this Certificate of Designation. No signature or

other further manifestation of assent to the terms and provisions of this Certificate of Designation shall be

necessary for its operation or effect as between Fannie Mae and the Holder (and all such others).

A-7
[THIS PAGE INTENTIONALLY LEFT BLANK] 
Appendix B

INFORMATION STATEMENT DATED APRIL 1, 2002
[THIS PAGE INTENTIONALLY LEFT BLANK] 
Information Statement

This Information Statement describes the business and operations of the Federal National

Mortgage Association (""Fannie Mae'') as of April 1, 2002 and its Ñnancial condition as of December 31, 2001. It contains Fannie Mae's audited Ñnancial statements for the year ended December 31,

2001.

In connection with oÅerings of securities, Fannie Mae distributes oÅering circulars, prospectuses,

or other oÅering documents that describe securities oÅered, their selling arrangements and other

information. The Information Statement does not oÅer any securities for sale; however, it is typically

incorporated by reference into selling documents. Any incorporation of this Information Statement by

reference includes all supplements hereto. You may obtain copies of the current Information

Statement, any supplements, and other available information from Fannie Mae as provided under

""Available Information'' on page 2. Fannie Mae updates its Information Statement quarterly.

Fannie Mae is a federally chartered corporation. Its principal oÇce is located at 3900 Wisconsin

Avenue, NW, Washington, DC 20016 (202/752-7000). Its Internal Revenue Service employer

identiÑcation number is 52-0883107.

Fannie Mae's securities are not required to be registered under the Securities Act of 1933. At the

close of business on February 28, 2002, approximately 995.8 million shares of Fannie Mae's common

stock (without par value) were outstanding.

The delivery of this Information Statement does not imply, at any time under any

circumstances, that there has been no change in the aÅairs of Fannie Mae since its date or

that the information contained in it is correct as of any time subsequent to its date.

April 1, 2002
TABLE OF CONTENTS

Caption Page

Documents Incorporated by Reference ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2

Available Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2

Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

General ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

Mortgage Loan Portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

Mortgage-Backed SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7

AÅordable Housing InitiativesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8

Housing Goals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8

Delinquencies and REO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8

Fee-Based ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9

Competition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9

Facilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10

Employees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11

Government Regulation and Charter Act ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11

Legal ProceedingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13

Common and Preferred Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14

Forward-Looking InformationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16

Selected Financial Information: 1997-2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17

Management's Discussion and Analysis of Financial Condition and Results of OperationsÏÏÏ 18

Index to Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53

Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95

DOCUMENTS INCORPORATED BY REFERENCE

Fannie Mae's Proxy Statement for the May 2002 Annual Meeting of Shareholders is incorporated

by reference herein under ""ManagementÌAdditional Information.'' Fannie Mae will supplement this

Information Statement to reÖect its quarterly Ñnancial results and other events and information as

Fannie Mae determines. References to the ""Information Statement'' include any documents incorporated by reference and any amendments or supplements. If Fannie Mae modiÑes or updates

information in the Information Statement in a later supplement or in a document incorporated by

reference in this Information Statement, the information as modiÑed or updated replaces the

information initially reported by Fannie Mae in this Information Statement.

AVAILABLE INFORMATION

Fannie Mae periodically makes available statistical information on its mortgage purchase and

mortgage-backed securities volumes as well as other relevant information about Fannie Mae. You may

obtain copies of this Information Statement and any supplements, as well as Fannie Mae's annual

report to stockholders, proxy statement, quarterly Ñnancial releases, the Federal National Mortgage

Association Charter Act and other information regarding Fannie Mae, without charge, from the OÇce

of Investor Relations, Fannie Mae, 3900 Wisconsin Avenue, NW, Washington, DC 20016 (telephone: (202/752-7115)) or by accessing Fannie Mae's Web site at http://www.fanniemae.com. You

may inspect reports and other information concerning Fannie Mae at the oÇces of the New York

Stock Exchange, the Chicago Stock Exchange, and the PaciÑc Exchange. Fannie Mae does not Ñle

reports or other information with the Securities and Exchange Commission.

2
BUSINESS

General

Fannie Mae is a federally chartered, stockholder-owned corporation, and the largest investor in

home mortgage loans in the United States. Fannie Mae was established in 1938 as a United States

government agency to provide supplemental liquidity to the mortgage market. It became a stockholder-owned and privately managed corporation by legislation enacted in 1968.

Fannie Mae provides funds to the mortgage market by purchasing mortgage loans from lenders,

thereby replenishing the lenders' funds for additional mortgage lending. Fannie Mae acquires funds to

purchase these loans by issuing debt securities to capital market investors, many of whom ordinarily

would not invest in mortgages. In this manner, Fannie Mae is able to expand the total amount of

funds available for housing.

Fannie Mae also issues mortgage-backed securities (""MBS''), receiving guaranty fees for its

guarantee of timely payment of principal and interest on the MBS. Fannie Mae issues MBS primarily

in exchange for pools of mortgage loans from lenders. The issuance of MBS enables Fannie Mae to

further its statutory purpose of increasing the liquidity of residential mortgage loans.

In addition, Fannie Mae oÅers various services to lenders and others for a fee. These services

include issuing certain types of MBS and credit enhancements and providing technology services for

originating and underwriting loans. For information regarding Fannie Mae's mortgage loan, MBS,

and other activities in 2001, see ""Management's Discussion and Analysis of Financial Condition and

Results of Operations.''

In this document, both whole loans and participation interests in loans are referred to as ""loans,''

""mortgage loans'' and ""mortgages.'' (Fannie Mae purchases participation interests that range from

50 to 99 percent.) The term ""mortgage'' also is used to refer to the deed of trust or other security

instrument securing a loan rather than the loan itself. Mortgage loans secured by four or fewer

dwelling units are referred to as ""single-family'' mortgage loans and mortgage loans secured by more

than four dwelling units are referred to as ""multifamily'' mortgage loans.

Mortgage Loan Portfolio

Mortgage Loans Purchased

Fannie Mae purchases primarily single-family, conventional (i.e., not federally insured or

guaranteed), Ñxed- or adjustable-rate, Ñrst lien mortgage loans. It also purchases other types of

residential mortgage loans for its portfolio, including mortgage loans insured by the Federal Housing

Administration (""FHA''), mortgage loans guaranteed by the Department of Veterans AÅairs (""VA'')

or the Rural Housing Service, manufactured housing loans, multifamily mortgage loans, and

subordinate mortgage loans (i.e., loans secured by second liens, etc.). Fannie Mae's purchases have a

variety of maturities and are designed to provide a secondary market for a variety of loans. Fannie

Mae's mortgage loan purchases for its portfolio include purchases of mortgage-backed securities.

The composition of Fannie Mae's mortgage portfolio at the end of each of the last Ñve years is

shown in the table under ""Portfolio Composition.'' The composition of its purchases during the last

three years is shown in Table 11 of ""Management's Discussion and Analysis of Financial Condition

and Results of Operations (""MD&A'')ÌBalance Sheet AnalysisÌMortgage Portfolio.''

Principal Balance Limits. Maximum principal balance limits apply to Fannie Mae's mortgage

loan purchases. For 2001, Fannie Mae could not purchase conventional mortgage loans on single-unit

dwellings if the loan's original principal balance exceeded $275,000, except for loans secured by

properties in Alaska, Hawaii, Guam and the Virgin Islands. Higher principal balance limits apply to

loans secured by properties in those areas or secured by two- to four-family dwellings. The maximum

principal balance limits applicable to conventional mortgage loans secured by one- to four-family

3
dwellings can be adjusted by Fannie Mae annually based on the national average price of a single-unit

dwelling as surveyed by the Federal Housing Finance Board. In November 2001, the maximum

principal balance limit for 2002 was increased to $300,700.

Mortgage loans insured by the FHA or guaranteed by the Rural Housing Service are subject to

statutory maximum amount limitations. Fannie Mae will not purchase VA-guaranteed mortgage

loans in excess of principal amounts that Fannie Mae speciÑes from time to time. There are no

statutory limits on the maximum principal balance of multifamily mortgage loans that Fannie Mae

purchases; however, most purchases are within limits established by Fannie Mae based on per unit

dollar amounts set forth in the National Housing Act.

Maturity/Balloon Payments. Fannie Mae currently purchases conventional, single-family Ñxedand adjustable-rate mortgages (""ARMs'') with original maturities of up to 30 years and 40 years,

respectively. Only a small portion of ARMs purchased have maturities of more than 30 years. The

multifamily mortgage loans that Fannie Mae currently purchases for its portfolio generally are

conventional Ñxed-rate loans that have maturities of up to 30 years.

The major portion of Ñxed-rate mortgage loans purchased by Fannie Mae provide for level

monthly installments of principal and interest. Some of these loans have balloon payments due 5, 7 or

10 years after origination, but with monthly payments based on longer (e.g. 30-year) amortization

schedules. Most of the 7-year balloon single-family mortgage loans permit the borrower to reÑnance

the balloon payment at maturity with a 23-year Ñxed-rate mortgage loan if certain requirements are

satisÑed. Many of the multifamily mortgage loans have balloon payments due 5, 7, 10 or 15 years after

origination, but with payments based on 25- or 30-year amortization schedules.

Adjustable Rate. The interest rates on ARMs are determined by formulas providing for

automatic adjustment, up or down, at speciÑed intervals in accordance with changes in speciÑed

indices. Fixed-period ARMs have a Ñxed interest rate for the Ñrst three to ten years, which then is

adjusted at speciÑed intervals thereafter. Substantially all ARMs provide for monthly installments of

interest or principal and interest with the total amount of monthly installments adjusted (up or

down) after the interest rate on the loan is adjusted because of changes in the applicable index. Fannie

Mae currently purchases single-family ARMs only if the ARMs have a cap on the amount the interest

rate may change over the life of the loan. A substantial number of the ARMs purchased provide the

borrower with the option, at speciÑed times or during speciÑed periods of time, to convert the ARM to

a Ñxed-rate mortgage loan with the payment of a small fee.

Fannie Mae also purchases certain ARMs, called reverse mortgages, that provide for monthly

installments of principal to be paid to the borrower. Over the life of the loan, interest and certain

other fees accrue on the balance of the payments made to the borrower. Fannie Mae currently

purchases reverse mortgages only if the reverse mortgages are subject to a cap on the amount the

interest rate may change over the life of the loan. Generally, the loan is due when the borrower no

longer occupies the property.

Prepayments

Substantially all of the single-family mortgage loans in Fannie Mae's portfolio are prepayable by

the borrower without penalty. Therefore, Fannie Mae bears the risk that prepayments may increase

when interest rates decline signiÑcantly or as a result of other factors. Fannie Mae manages this risk

as described in ""MD&AÌRisk ManagementÌInterest Rate Risk Management.'' Most multifamily

loans in Fannie Mae's portfolio provide for defeasance of the loan or require a prepayment premium

that is calculated under a formula intended to protect Fannie Mae from loss of yield on its investment

if the mortgage loan is prepaid.

4
Portfolio Composition

The following table shows the composition of Fannie Mae's mortgage portfolio and the

weighted-average yield (net of servicing) on the mortgage portfolio. The table includes mortgage

loans that back MBS held in Fannie Mae's mortgage portfolio.

Mortgage Portfolio Composition

December 31,

2001 2000 1999 1998 1997

(Dollars in millions)

Single-family:

Government insured or guaranteedÏÏÏÏÏÏÏÏÏÏÏÏ $ 42,181 $ 44,166 $ 41,029$ 21,805 $ 19,478

Conventional:

Long-term, Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 552,463 454,349385,321 297,106 211,541

Intermediate-term, Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,412 67,099 69,195 71,766 61,839

Adjustable-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,765 27,135 14,107 11,873 11,373

MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,655 17,373 14,28911,965 12,447

Total unpaid principal balance ÏÏÏÏÏÏÏÏÏÏÏ $707,476 $610,122 $523,941 $414,515 $316,678

Weighted-average yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.95% 7.24% 7.08% 7.12% 7.60%

Commitments

Fannie Mae issues commitments to purchase a speciÑed dollar amount of mortgage loans during a

speciÑed term. Fannie Mae purchases mortgage loans through standard product commitments with

posted yields and through negotiated commitments.

Most of the mortgage loans Fannie Mae purchases for its portfolio are acquired pursuant to

mandatory delivery commitments. Under such commitments, lenders are obligated to sell loans to

Fannie Mae at the commitment yield. Mandatory delivery commitments are available for standard

product and negotiated transactions. If a lender is not able to deliver the mortgage loans required

under a mandatory delivery commitment during its term, the lender may buy back the commitment at

any time during the commitment term at a market price.

Fannie Mae issues master commitments to lenders to facilitate the delivery of mortgages into

MBS pools or portfolio. In order to deliver under a master commitment, a lender must either deliver

mortgages in exchange for MBS or enter into a mandatory delivery portfolio commitment with the

yield established upon execution of the portfolio commitment.

Fannie Mae also issues to lenders negotiated optional commitments that commit Fannie Mae to

purchase a designated dollar amount of single-family mortgage loans from the lenders if they convert

their standby commitments to mandatory delivery portfolio commitments. Optional commitments do

not obligate the lenders to sell the loans to Fannie Mae; they are obligated to do so only after such

commitments are converted to mandatory delivery portfolio commitments. The yield on the mortgage

loans is established at the time of conversion of the optional commitments. See ""MD&AÌBalance

Sheet AnalysisÌLiquidity and Capital Resources.''

Underwriting Guidelines

Fannie Mae has established certain underwriting guidelines for purchases of conventional

mortgage loans to help reduce the risk of loss from borrower defaults. These guidelines are designed to

assess the creditworthiness of the borrower, as well as the value of the mortgaged property relative to

the amount of the mortgage loan. Fannie Mae, in its discretion, accepts waivers from the guidelines.

Fannie Mae also reviews and changes its guidelines from time to time. As part of its aÅordable

housing initiatives, Fannie Mae continues to introduce new underwriting criteria that could make the

mortgage Ñnance system more accessible to minorities, low-and moderate-income families, underserved and rural residents and people with special housing needs. In addition, Fannie Mae is

5
continuing its underwriting initiatives involving alternative methods of assessing the creditworthiness

of potential borrowers, among other factors. See ""AÅordable Housing Initiatives.''

Fannie Mae generally relies on lender representations to ensure that the mortgage loans it

purchases conform to its applicable underwriting guidelines. Fannie Mae also performs quality control

reviews of selected loans to monitor compliance with the guidelines. In the event that a lender is found

to have breached its representations with respect to a loan's compliance with the guidelines, Fannie

Mae can demand that the lender repurchase the loan or indemnify Fannie Mae against any loss.

Over the last several years, Fannie Mae has enhanced Desktop Underwriter», its automated

underwriting system, to assist lenders in meeting its underwriting standards. Desktop Underwriter is

designed to help lenders process mortgage applications in a more eÇcient and accurate manner and to

apply Fannie Mae's underwriting criteria consistently, objectively, and in a more customized manner

to all prospective borrowers. If Desktop Underwriter provides an ""approve'' recommendation to a loan

application, Fannie Mae waives certain representations as long as the loan is originated in accordance

with the information that was submitted to Desktop Underwriter.

Credit Risk Sharing

Risk sharing through various types of credit enhancement is an integral part of Fannie Mae's

credit risk management strategy. In addition, Fannie Mae's charter requires that conventional singlefamily mortgage loans with an unpaid principal balance ("" UPB'') in excess of 80 percent of the value

of the mortgaged property be subject to one of three credit enhancement structures in order to be

eligible for purchase by Fannie Mae. Fannie Mae uses all three structures. The most commonly used

credit enhancement is primary mortgage insurance in at least the amount of the loan over the 80

percent level, provided by an insurance company acceptable to Fannie Mae. In addition, Fannie Mae

contracts for and manages credit enhancements at, or subsequent to, acquisition of loans to optimize

credit risk management. Fannie Mae also has obtained credit enhancement for a majority of the

mortgage loans in its multifamily loan portfolio. Fannie Mae bears the risk that in some cases parties

assuming credit enhancement obligations may be unable to meet their contractual obligations. Fannie

Mae regularly monitors this risk and follows speciÑc criteria in evaluating and accepting credit

enhancement arrangements in order to minimize its exposure to credit loss. See ""MD&AÌRisk

ManagementÌCredit Risk ManagementÌNon-Derivative Counterparty Risk.''

Servicing

Fannie Mae generally does not service mortgage loans, except for some government-insured

multifamily loans or loans that are serviced under a subservicing arrangement with a major servicing

entity, such as after termination of a servicer. Mortgage loans held in portfolio or backing MBS can be

serviced only by a servicer approved by Fannie Mae, and they must be serviced subject to Fannie

Mae's guidelines. Lenders who sell single-family mortgage loans and conventional multifamily loans to

Fannie Mae typically are approved servicers and typically service the mortgage loans they sell to

Fannie Mae. Servicing includes the collection and remittance of principal and interest payments,

administration of escrow accounts, evaluation of transfers of ownership interests, responding to

requests for partial releases of security, handling proceeds from casualty losses, negotiating problem

loan workouts and, if necessary, processing foreclosures. In the case of multifamily loans, servicing

also may include performing property inspections, evaluating the Ñnancial condition of owners, and

administering various types of agreements (including agreements regarding replacement reserves,

completion or repair, and operations and maintenance). Fannie Mae compensates servicers primarily

by permitting them to retain a speciÑed portion of each interest payment on a serviced mortgage loan.

Fannie Mae reserves the right to remove servicing responsibility from a lender.

6
Mortgage-Backed Securities

MBS are mortgage pass-through trust certiÑcates issued and guaranteed by Fannie Mae that

represent beneÑcial interests in pools of mortgage loans or other MBS. Fannie Mae serves as trustee

for each trust.

MBS are backed by loans from one of three sources: a single lender, multiple lenders, or Fannie

Mae's portfolio. Single-lender MBS generally are issued through lender swap transactions in which a

lender exchanges pools of mortgage loans for MBS. Multiple-lender MBS allow several lenders to pool

mortgage loans together and, in return, receive MBS representing a proportionate share of a larger

pool (called Fannie Majors»). MBS may back other securities, including Fannie Megas» (""Megas''),

stripped MBS (""SMBS''), real estate mortgage investment conduit securities (""REMICs''), and

other mortgage securities utilizing a ""grantor trust'' structure.

MBS are not assets of Fannie Mae, except when acquired for portfolio investment purposes, nor

are MBS recorded as liabilities. Fannie Mae is liable under its guarantee, however, to make timely

payments to investors of principal and interest on the MBS, even if Fannie Mae has not received

payments of principal or interest on the mortgage loans in the underlying pools. MBS enable Fannie

Mae to further its statutory purpose of increasing the liquidity of residential mortgage loans and

create a source of guaranty fee income. Fannie Mae assumes the ultimate credit risk of borrowers'

defaults on mortgage loans underlying MBS as a result of its guarantee of the timely payment of

principal and interest on the MBS. See ""MD&AÌMortgage-Backed Securities.''

Fannie Mae issues MBS backed by single-family or multifamily Ñrst or subordinate mortgage

loans with Ñxed or adjustable rates. Generally, the mortgage loans are either conventional mortgage

loans, or FHA-, VA- or Rural Housing Service-guaranteed mortgage loans. The conventional

mortgage loans are subject to the maximum principal balance limits applicable to Fannie Mae's

purchases as described under ""Mortgage Loan PortfolioÌMortgage Loans PurchasedÌPrincipal

Balance Limits.'' The mortgage loans also are subject to the underwriting guidelines applicable to

Fannie Mae's purchases as described under ""Mortgage Loan PortfolioÌUnderwriting Guidelines.''

The majority of Fannie Mae's MBS outstanding represents beneÑcial interests in conventional

Ñxed-rate Ñrst mortgage loans on single-family dwellings.

Fannie Mae issues and guarantees several forms of MBS that involve only a single class of

certiÑcates (principally its standard MBS and Fannie Majors), with each investor receiving a portion

of the payments of principal and interest on the underlying mortgage loans equal to its undivided

interest in the pool. With these standard MBS, an investor has an undivided interest in a pool of

underlying mortgage loans that generally are provided either by one lender or by Fannie Mae out of its

mortgage loan portfolio. Megas represent undivided interests in a pool of MBS, REMIC tranches, or

Government National Mortgage Association (""Ginnie Mae'') guaranteed pass-through certiÑcates

(""Ginnie Mae certiÑcates'') of the same type. In addition, Fannie Mae issues and guarantees MBS in

the form of single-class ""grantor trust'' securities representing an undivided interest in a pool of MBS,

Ginnie Mae certiÑcates, other mortgage-backed securities, or mortgage loans.

Fannie Mae also issues and guarantees other mortgage-backed securities that involve more than

one class of certiÑcates and, therefore, require special allocations of cash Öows. SMBS are issued in

series with one or more classes, each of which is entitled to diÅerent cash Öows and may represent

(1) an undivided interest solely in the principal payments, (2) an undivided interest solely in the

interest payments, or (3) diÅerent percentage interests in principal and interest payments to be made

on a pool of mortgage loans, MBS, REMICs, other SMBS and/or Ginnie Mae certiÑcates. REMICs

represent beneÑcial interests in a trust having multiple classes of certiÑcates entitled to diÅerent cash

Öows from the underlying mortgage loans, MBS, SMBS, Megas, Ginnie Mae certiÑcates and/or other

REMICs. Pursuant to the guaranty provided to REMICs and SMBS certiÑcate holders, Fannie Mae

is obligated to make timely distribution of required installments of principal and/or interest and, in

the case of REMICs, to distribute the principal balance in full by a speciÑed date, whether or not

7
suÇcient funds are available in the related REMIC trust. Fannie Mae has issued a limited amount of

subordinated REMIC classes that are not guaranteed by Fannie Mae.

Fannie Mae receives guaranty fees for its standard MBS and Fannie Majors. Such fees generally

are paid monthly until the underlying mortgage loans have been repaid or otherwise liquidated from

the pool (usually as a result of prepayment or serious delinquency). The aggregate amount of

guaranty fees Fannie Mae receives depends upon the amount of MBS outstanding and on the guaranty

fee rate. The amount of MBS outstanding is inÖuenced by the rates at which the underlying mortgage

loans are repaid or liquidated from the pool and by the rate at which Fannie Mae issues new MBS. In

general, when the prevailing interest rates decline signiÑcantly below the interest rates on loans

underlying MBS, the rate of single-family prepayments is likely to increase, as is the issuance of new

MBS; conversely, when interest rates rise above the interest rates on loans underlying MBS, the rate

of single-family prepayments and new MBS issuance is likely to slow down. In addition, the rate of

principal prepayments is inÖuenced by a variety of economic, demographic, and other factors. Fannie

Mae also generally receives one-time fees for swapping SMBS, REMICs, Megas, grantor trust

securities for MBS, mortgage loans, Ginnie Mae certiÑcates, SMBS, REMIC certiÑcates, or other

mortgage-backed securities.

Fannie Mae typically does not service the loans in an MBS pool. Fannie Mae, however, reserves

the right to remove the servicing responsibility from a lender at any time if it considers such removal

to be in the best interest of MBS certiÑcate holders. In such event, Fannie Mae Ñnds a replacement

lender or subservicer to service the loans. Fannie Mae is responsible to MBS holders for the

administration and servicing of mortgage loans underlying MBS, including the collection and receipt

of payments from lenders and the remittance of distributions and certain reports to holders of MBS

certiÑcates.

AÅordable Housing Initiatives

In March 2000, Fannie Mae announced its ""American Dream CommitmentSM''Ìa pledge to

invest $2 trillion during the following ten years to help Ñnance housing for 18 million home buyers and

renters and join with housing partners to reverse decay in inner cities and older suburbs and expand

the availability of livable, aÅordable rental housing. The new plan will focus on: (1) promoting

mortgage consumer rights, including broader, more equal access to low-cost mortgage credit; (2) Ñghting mortgage discrimination and leading the housing market in serving minority families, including a

pledge to provide $420 billion in Ñnancing for 3 million minority households; (3) addressing the

unique housing needs of women-headed households, young families, new immigrants, seniors, and

urban and rural dwellers; (4) strengthening inner city and older suburban areas through new capital

investments and expanded Partnership OÇces; (5) providing new technologies to mortgage lenders

and consumers in order to lower the costs of mortgage Ñnancing; and (6) increasing the supply of

aÅordable rental housing. In 2000, Fannie Mae met its ""Trillion Dollar Commitment'' to help Ñnance

over 10 million homes for families and communities most in need during the seven years from 1994

through 2000.

Housing Goals

Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the ""1992

Act''), Fannie Mae has certain goals to promote aÅordable housing for moderate-, low- and very

low-income families and to serve the housing needs of those in underserved areas. In 2001, Fannie

Mae exceeded the applicable goals. See ""MD&AÌHousing Goals.''

Delinquencies and REO

When a mortgage loan for which Fannie Mae bears the default risk is liquidated through

foreclosure or transferred by deed in lieu of foreclosure, Fannie Mae generally acquires the underlying

property (such real estate owned is called ""REO'') and holds it for sale. The level of delinquencies

8
and number of REO are aÅected by economic conditions, loss mitigation eÅorts (which include

contacting delinquent borrowers to oÅer a repayment plan, loan modiÑcation, preforeclosure sale, or

other options), contractual provisions in credit enhancements, and a variety of other factors. Fannie

Mae manages the risk of delinquencies and REO as described in ""MD&AÌRisk ManagementÌCredit

Risk Management.''

Fee-Based Services

Fannie Mae oÅers certain services to lenders and other customers in return for a fee. These

include issuing REMICs, SMBS, Fannie Megas and grantor trust securities, providing technology

services for originating and underwriting loans, and the facilitation of securities transactions. Fannie

Mae receives fee income from dealers in exchange for creating and issuing REMICs, SMBS, grantor

trust securities, and Megas. In addition to issuing these securities, Fannie Mae is responsible for all

tax reporting and administration costs associated with these securities.

Fannie Mae also receives fee income in return for providing technology related services, such as

Desktop Underwriter, Desktop Originator», Desktop Trader», and other on-line services. These

services provide lenders the ability to underwrite mortgage loans electronically, communicate with

third-party originators, access Fannie Mae loan pricing schedules, and enter into sale commitments

with Fannie Mae on a real-time basis.

Fannie Mae also simultaneously purchases and sells MBS and certain other mortgage-related

securities, such as Ginnie Mae certiÑcates, with the intention of earning a spread on such trades or as

a fee-based service to customers. In addition, Fannie Mae receives fee income through other activities,

such as repurchase transactions, and by providing credit enhancements and other investment

alternatives for customers.

Competition

Fannie Mae competes, within the limits prescribed by its Charter Act, for the purchase of

mortgage loans for portfolio and the issuance of mortgage-backed securities in the secondary mortgage

market. For single-family products, Fannie Mae competes primarily with the Federal Home Loan

Mortgage Corporation (""Freddie Mac''), another government-sponsored enterprise with a mission,

authority, and regulatory oversight that are virtually identical to those of Fannie Mae, and with the

Federal Home Loan Banks, which also Ñnance and service single-family mortgage loans through the

Mortgage Partnership Finance Programs that were initiated in 1997. Fannie Mae competes to a lesser

extent with savings and loan associations, savings banks, commercial banks and other companies that

purchase single-family mortgage loans for their own portfolio or pool single-family mortgage loans for

sale to investors as whole loans or mortgage-backed securities.

Fannie Mae competes with the FHA insurance program, a program of the U.S. Department of

Housing and Urban Development (""HUD''), for the business of guaranteeing the credit performance

of mortgage loans and, due to the eligibility of such FHA-insured loans for securitization by Ginnie

Mae, with Ginnie Mae as well. The base maximum principal balance for loans eligible for the FHA

insurance program is 48 percent of Fannie Mae's loan limits. The loan limit for FHA-insured loans in

high cost areas is as much as 87 percent of Fannie Mae's limits. The higher FHA limits may result in

increased competition for Fannie Mae's guaranty business. For additional information on the

maximum principal balances for loans purchased by Fannie Mae, see ""Mortgage Loan PortfolioÌ

Mortgage Loans PurchasedÌPrincipal Balance Limits.''

In the case of multifamily products, Fannie Mae generally competes with government housing

programs, Freddie Mac, insurance companies, and the same kinds of entities it competes with in the

single-family market. In addition, there is competition for multifamily mortgage loans from certain

entities typically sponsored by investment banks and commercial banks that purchase such loans and

pool them for sale to investors in the commercial mortgage-backed securities market. Such entities

9
are referred to as ""conduits,'' and their role in the multifamily mortgage market has increased

signiÑcantly over the last Ñve years. Conduits continue to be a strong source of competition.

Competition is particularly intense for multifamily mortgage loans eligible for government

subsidies, which have low-income rent and occupancy restrictions. As a prerequisite to expansion or

merger plans, commercial banks must fund such loans to meet certain obligations under the

Community Reinvestment Act, and they often are willing to do so at or below their own cost of funds.

Fannie Mae competes for these same investment opportunities to meet its housing goals.

Fannie Mae competes primarily on the basis of price, products, structures, and services oÅered.

Competition based on advances in technology-related and other fee-based services continues to

increase, as do the types and nature of the products oÅered by Fannie Mae, Freddie Mac, and other

market participants. Fannie Mae's market share of loans purchased for cash or swapped for MBS is

aÅected by the volume of mortgage loans oÅered for sale in the secondary market by loan originators

and other market participants and the amount purchased by other market participants that compete

with Fannie Mae.

Under the 1992 Act, the Secretary of HUD must approve any new Fannie Mae or Freddie Mac

conventional mortgage program that is signiÑcantly diÅerent from those approved or engaged in prior

to that Act's enactment. The ability of Fannie Mae and Freddie Mac to compete with other

competitors possibly could be aÅected by this requirement. See ""Government Regulation and Charter

Act.''

Competition also is a consideration in connection with the issuance of Fannie Mae's debt

securities. Fannie Mae competes with Freddie Mac, the FHLB system and other governmentsponsored entities for funds raised through the issuance of unsecured debt in the ""agency'' debt

market. Increases in the issuance of unsecured debt by other government-sponsored entities generally,

and in the issuance of callable debt in particular, may have an adverse eÅect on the issuance of Fannie

Mae's unsecured debt or result in the issuance of such debt at higher interest rates than would

otherwise be the case. In addition, the availability and cost of funds raised through the issuance of

certain types of unsecured debt may be adversely aÅected by regulatory initiatives that tend to reduce

investments by certain depository institutions in unsecured debt with greater than normal volatility or

interest-rate sensitivity.

Facilities

Fannie Mae owns its principal oÇce, which is located at 3900 Wisconsin Avenue, NW, Washington, DC, oÇces at 3939 Wisconsin Avenue, NW and 4250 Connecticut Avenue, NW, in Washington, DC, and two facilities in Herndon, Virginia. These owned facilities total 776,000 square feet of

oÇce space. In addition, Fannie Mae leases 386,000 square feet of oÇce space at 4000 Wisconsin

Avenue, NW, which is adjacent to Fannie Mae's principal oÇce, 62,000 square feet of oÇce space at

2115 Wisconsin Avenue, NW, in Washington, DC, 230,000 square feet of oÇce space at 12900 Worldgate Drive in Herndon, Virginia and 80,000 square feet of oÇce space at 11600 Sallie Mae Drive, in

Reston, Virginia. The present lease for 4000 Wisconsin Avenue expires in 2003, and Fannie Mae has

options to extend the lease for up to 15 additional years, in 5-year increments. The lease for

2115 Wisconsin Avenue expires in 2002 and Fannie Mae is currently in negotiations to extend the

lease. The lease for 12900 Worldgate Drive expires in 2012 with a 5 year renewal option, and the lease

for 11600 Sallie Mae Drive expires in 2008 with two 3-year renewal options. Fannie Mae also

maintains oÇces in leased premises in Pasadena, California; Atlanta, Georgia; Chicago, Illinois;

Philadelphia, Pennsylvania; and Dallas, Texas. These regional oÇces negotiate mortgage loan and

MBS business with lenders, assist in supervising the servicing of Fannie Mae's mortgage loan portfolio

by lenders, assist in supervising or managing the handling and disposition of REO, and provide

training to the staÅs of lenders. In addition to the regional oÇces, Fannie Mae has 50 ""Fannie Mae

Partnership OÇces'' in leased premises around the country which work with cities, rural areas and

other underserved communities. Fannie Mae also plans to establish four additional Partnership

10
OÇces in 2002. There currently are Fannie Mae Partnership OÇces in Birmingham, Alabama;

Phoenix, Arizona; Los Angeles, California; San Francisco, California; Denver, Colorado; Hartford,

Connecticut; Washington, D.C.; Miami, Florida; Orlando, Florida; Atlanta, Georgia; Chicago, Illinois;

Indianapolis, Indiana; Des Moines, Iowa; Lexington, Kentucky; New Orleans, Louisiana; Baltimore,

Maryland; Boston, Massachusetts; Detroit, Michigan; St. Paul, Minnesota; Jackson, Mississippi;

Kansas City, Missouri; St. Louis, Missouri; Helena, Montana; Lincoln, Nebraska; Las Vegas, Nevada;

Manchester, New Hampshire; Newark, New Jersey; Albuquerque, New Mexico; BuÅalo, New York;

New York, New York; Charlotte, North Carolina; Bismarck, North Dakota; Oklahoma City,

Oklahoma; Cleveland, Ohio; Columbus, Ohio; Portland, Oregon; Pittsburgh, Pennsylvania; WilkesBarre, Pennsylvania; Providence, Rhode Island; Columbia, South Carolina; Sioux Falls, South

Dakota; Nashville, Tennessee; Houston, Texas; San Antonio, Texas (two oÇces, one of which is

responsible for border region issues); Salt Lake City, Utah; Arlington, Virginia; Seattle, Washington;

Milwaukee, Wisconsin; and Cheyenne, Wyoming.

Employees

At December 31, 2001, Fannie Mae employed approximately 4,500 full-time personnel.

GOVERNMENT REGULATION AND CHARTER ACT

Fannie Mae is a federally chartered and stockholder-owned corporation organized and existing

under the Federal National Mortgage Association Charter Act, 12 U.S.C. Û 1716 et seq. (the ""Charter

Act'') whose purpose is to (1) provide stability in the secondary market for residential mortgages,

(2) respond appropriately to the private capital market, (3) provide ongoing assistance to the

secondary market for residential mortgages (including activities relating to mortgages on housing for

low- and moderate-income families involving a reasonable economic return that may be less than the

return earned on other activities) by increasing the liquidity of mortgage investments and improving

the distribution of investment capital available for residential mortgage Ñnancing, and (4) promote

access to mortgage credit throughout the nation (including central cities, rural areas and underserved

areas) by increasing the liquidity of mortgage investments and improving the distribution of

investment capital available for residential mortgage Ñnancing.

Fannie Mae originally was incorporated in 1938 pursuant to Title III of the National Housing Act

as a wholly owned government corporation. In 1954, under a revised Title III called the Federal

National Mortgage Association Charter Act, it became a mixed-ownership corporate instrumentality

of the United States. From 1950 to 1968, it operated in the Housing and Home Finance Agency,

which was succeeded by HUD. Under the Housing and Urban Development Act of 1968 (the ""1968

Act''), the then Federal National Mortgage Association was divided into two separate institutions, the

present Fannie Mae and the Government National Mortgage Association, a wholly owned corporate

instrumentality of the United States within HUD, which carried on certain special Ñnancing

assistance and management and liquidation functions. Fannie Mae was constituted as a federally

chartered corporation and the entire equity interest in Fannie Mae became stockholder-owned.

Although the 1968 Act eliminated all federal ownership interest in Fannie Mae, it did not

terminate government regulation of Fannie Mae. Under the Charter Act, approval of the Secretary of

the Treasury is required for Fannie Mae's issuance of its debt obligations and MBS. In addition, the

1992 Act established the OÇce of Federal Housing Enterprise Oversight (""OFHEO''), an independent

oÇce within HUD under the management of a Director (the ""Director'') who is responsible for

ensuring that Fannie Mae is adequately capitalized and operating safely in accordance with the 1992

Act. The Director is authorized to levy, pursuant to annual Congressional appropriations, annual

assessments on Fannie Mae and Freddie Mac to cover reasonable expenses of OFHEO. The 1992 Act

established minimum capital, risk-based capital, and critical capital requirements for Fannie Mae and

required the Director to establish, by regulation, a risk-based capital test to be used to determine the

amount of total capital Fannie Mae must hold to meet the risk-based capital standard. OFHEO issued

11
a Ñnal rule (the ""Rule'') in 1996 that sets forth the minimum capital requirements for Fannie Mae

and Freddie Mac, which are to be calculated, reported, and classiÑed on a quarterly basis. Fannie Mae

is in compliance with the Rule. See also ""MD&AÌRegulatory Environment.''

OFHEO published regulations in September 2001 to establish the risk-based capital test, followed

by amendments published in February 2002. Under the 1992 Act, Fannie Mae and Freddie Mac are

required to hold enough capital to withstand a stringent 10-year stress period, characterized by

unprecedented interest-rate movements and credit losses occurring simultaneously. The risk-based

capital test evaluates combined interest-rate and credit stress for both rising and declining interestrate scenarios. The more stringent of these two scenarios determines the required risk-based capital.

The test assumes that (i) interest rates increase or decrease by up to 600 basis points over the Ñrst

year, and remain constant at this new level for the remaining 9 years of the test; (ii) severe credit

conditions apply nationwide; and (iii) no new business is acquired by Fannie Mae during this period

except to meet outstanding mortgage commitments. The regulations specify that ""benchmark loss

experience'' will be combined with other assumptions and applied each quarter to Fannie Mae's book

of business to establish credit losses under the risk-based capital standard. The regulations also specify

the housing price index that OFHEO will use in connection with the standard and how the test will be

used to determine Fannie Mae's risk-based capital requirements. The 1992 Act provides that the Ñnal

regulations will be enforceable one year after issuance.

If Fannie Mae fails to meet one or more of the capital standards under the 1992 Act, the Director

is required to take certain remedial measures, and may take others, depending on the standards

Fannie Mae fails to meet. The Director's enforcement powers include the power to impose temporary

and Ñnal cease-and-desist orders and civil penalties on Fannie Mae and on directors or executive

oÇcers of Fannie Mae. If the Director determines that Fannie Mae is engaging in conduct not

approved by the Director that could result in a rapid depletion of core capital or that the value of the

property subject to mortgages held or securitized by Fannie Mae has decreased signiÑcantly, the

Director is authorized to treat Fannie Mae as not meeting one of the capital standards that it

otherwise meets. In addition, Fannie Mae is required to submit a capital restoration plan if it fails to

meet any of the capital standards. If the Director does not approve the plan or determines that Fannie

Mae has failed to make reasonable eÅorts to comply with the plan, then the Director may treat Fannie

Mae as not meeting one of the capital standards that it otherwise meets. Also, if Fannie Mae fails to

meet or is treated by the Director as not meeting one of the capital standards and the Director has

reasonable cause to believe that Fannie Mae or any executive oÇcer or director of Fannie Mae is

engaging in or about to engage in any conduct that threatens to result in a signiÑcant depletion of

Fannie Mae's core capital, then the Director is authorized to commence proceedings pursuant to

which, after a hearing, the Director could issue a cease and desist order prohibiting such conduct. The

Director could issue such an order without a hearing, which would be eÅective until completion of the

cease-and-desist proceedings, if the Director determined that the conduct in question was likely to

cause a signiÑcant depletion of core capital. Prior approval of the Director is required for Fannie Mae

to pay a dividend if the dividend would decrease Fannie Mae's capital below risk-based capital or

minimum capital levels established under the 1992 Act. See ""Common and Preferred Stock.''

The 1992 Act gives the Director the authority to conduct on-site examinations of Fannie Mae for

purposes of ensuring Fannie Mae's Ñnancial safety and soundness. The Charter Act, as amended by

the 1992 Act, also authorizes the General Accounting OÇce to audit the programs, activities, receipts,

expenditures, and Ñnancial transactions of Fannie Mae. Fannie Mae is required to submit annual and

quarterly reports of the Ñnancial condition and operations of Fannie Mae to the Director. Fannie Mae

also is required to submit an annual report to the House and Senate Banking Committees and the

Secretary of HUD regarding Fannie Mae's performance in meeting housing goals established by the

Secretary of HUD relating to the purchase of mortgages on housing for low- and moderate-income

families, mortgages on rental and owner-occupied housing for low-income families in low-income areas

or for very-low-income families, and mortgages on housing located in rural or other underserved areas.

See ""MD&AÌHousing Goals.''

12
Under the 1992 Act, the Secretary of HUD retains general regulatory authority to promulgate

rules and regulations to carry out the purposes of the Charter Act, excluding authority over matters

granted exclusively to the Director of OFHEO in the 1992 Act. The Secretary of HUD also must

approve any new conventional mortgage program that is signiÑcantly diÅerent from those approved or

engaged in prior to the 1992 Act. The Secretary is required to approve any new program unless it is

not authorized by the Charter Act of Fannie Mae or the Secretary Ñnds that it is not in the public

interest. However, until one year after the Ñnal regulations establishing the risk-based capital test are

in eÅect, the Secretary must disapprove a new program if the Director determines that the program

would risk signiÑcant deterioration of the Ñnancial condition of Fannie Mae. The Secretary has

adopted regulations related to the program approval requirement.

Thirteen members of Fannie Mae's eighteen-member Board of Directors are elected by the

holders of Fannie Mae's common stock, and the remaining Ñve members are appointed by the

President of the United States. The appointed directors must include one person from the home

building industry, one person from the mortgage lending industry, and one person from the real estate

industry. Under the 1992 Act, one appointed director also must be from an organization that has

represented consumer or community interests for not less than two years or a person who has

demonstrated a career commitment to the provision of housing for low-income households. Any

member of the Board of Directors that is appointed by the President of the United States may be

removed by the President for good cause.

In addition to placing Fannie Mae under federal regulation, the Charter Act also grants to Fannie

Mae certain privileges. For instance, securities issued by Fannie Mae are deemed to be ""exempt

securities'' under laws administered by the Securities and Exchange Commission (""SEC'') to the

same extent as securities that are obligations of, or guaranteed as to principal and interest by, the

United States. Registration statements with respect to Fannie Mae's securities are not Ñled with the

SEC. Fannie Mae also is not required to Ñle periodic reports with the SEC.

The Secretary of the Treasury of the United States has discretionary authority to purchase

obligations of Fannie Mae up to a maximum of $2.25 billion outstanding at any one time. This facility

has not been used since Fannie Mae's transition from government ownership in 1968. Neither the

United States nor any agency thereof is obligated to Ñnance Fannie Mae's operations or to assist

Fannie Mae in any other manner. The Federal Reserve Banks are authorized to act as depositories,

custodians, and Ñscal agents for Fannie Mae, for its own account, or as Ñduciary.

Fannie Mae is exempt from all taxation by any state or by any county, municipality, or local

taxing authority except for real property taxes. Fannie Mae is not exempt from payment of federal

corporate income taxes. Also, Fannie Mae may conduct its business without regard to any

qualiÑcations or similar statute in any state of the United States or the District of Columbia.

LEGAL PROCEEDINGS

In the ordinary course of business, Fannie Mae is involved in legal proceedings that arise in

connection with properties acquired either through foreclosure on properties securing delinquent

mortgage loans owned by Fannie Mae or by receiving deeds to such properties in lieu of foreclosure.

For example, claims related to possible tort liability and compliance with applicable environmental

requirements arise from time to time, primarily in the case of single-family REO.

Fannie Mae is a party to legal proceedings from time to time arising from its relationships with its

seller/servicers. Disputes with lenders concerning their loan origination or servicing obligations to

Fannie Mae, or disputes concerning termination by Fannie Mae (for any of a variety of reasons) of a

lender's authority to do business with Fannie Mae as a seller and/or servicer, can result in litigation.

Also, loan servicing issues have resulted from time to time in claims against Fannie Mae brought as

putative class actions for borrowers.

13
Fannie Mae also is a party to legal proceedings from time to time arising from other aspects of its

business and administrative policies. Claims and proceedings of all types are subject to many

uncertain factors that generally cannot be predicted with assurance. However, in the case of the legal

proceedings and claims that are currently pending against Fannie Mae, management believes that

their outcome will not have a material adverse eÅect on Fannie Mae's Ñnancial condition or results of

operations.

COMMON AND PREFERRED STOCK

Section 303(a) of the Charter Act provides that Fannie Mae shall have common stock, without

par value. Each share of common stock is entitled to one vote at all elections of directors and on all

other matters presented for common shareholder vote. The common stock has no conversion or preemptive rights or redemption or sinking fund provisions. The outstanding shares of common stock

are fully paid and nonassessable. There is no prohibition against the purchase by Fannie Mae of its

own common stock, holding such common stock in its treasury, and reselling such stock. In the event

of liquidation of Fannie Mae, holders of common stock are entitled to share ratably, in accordance

with their holdings, in the remaining assets of Fannie Mae after payment of all liabilities and amounts

payable to the holders of preferred stock. The holders of the common stock elect thirteen directors,

and the President of the United States appoints the remaining Ñve directors. The Charter Act, Fannie

Mae's governing instrument, cannot be amended by the stockholders, but only by an Act of Congress.

Fannie Mae also is authorized by the Charter Act to have preferred stock on such terms and

conditions as the Board of Directors of Fannie Mae may prescribe. No common stockholder approval

is required to issue preferred stock. As of February 28, 2002, Fannie Mae had outstanding $250 million

of non-cumulative preferred stock issued in 1996, $150 million in 1998, $150 million in 1999,

$978 million in 2000, and $400 million in 2001 that is redeemable at Fannie Mae's option beginning in

2001, 1999, 2004, 2002 and 2006, respectively. Holders of these preferred stock issues are entitled to

receive noncumulative, quarterly dividends when, and if, declared by Fannie Mae's Board of Directors.

Payment of dividends on preferred stock is not mandatory, but has priority over payment of dividends

on common stock. See ""Notes to Financial StatementsÌNote 12'' for additional information on

preferred stock.

The Charter Act contains no limitation on the amount of stock that may be issued except that, if

Fannie Mae fails to meet certain minimum capital standards, the Director of OFHEO could require

the right to approve Fannie Mae's issuance of stock or securities convertible into stock. At

February 28, 2002, there were outstanding approximately 995.8 million shares of common stock. As of

December 31, 2001, there were approximately 26,000 stockholders of record. Based on the number of

requests for proxies and quarterly reports, Fannie Mae estimates that there are approximately

380,000 additional stockholders who held shares through banks, brokers and nominees.

Holders of common and preferred stock are entitled to receive cash dividends if, as, and when

declared by the Board of Directors. However, certain provisions of the 1992 Act may operate to

restrict the ability of the Board of Directors to declare dividends in certain circumstances. The 1992

Act established risk-based capital, minimum capital and critical capital requirements for Fannie Mae.

OFHEO has released proposed risk-based capital regulations for public review and comment. Until

one year after the Ñnal regulations establishing the risk-based capital test are in eÅect, a dividend may

be paid without the prior approval of the Director of OFHEO if Fannie Mae meets the minimum

capital level and the dividend payment would not decrease Fannie Mae's base capital below such level.

See ""Government Regulation and Charter Act.'' One year after Ñnal regulations establishing the riskbased capital test take eÅect, a dividend may be paid without the prior approval of the Director if

Fannie Mae meets both the risk-based capital and minimum capital levels and the dividend payment

would not decrease Fannie Mae's total capital below the risk-based capital level or its core capital

below the minimum capital level. If Fannie Mae meets either the risk-based capital standard or the

minimum capital standard, it may make a dividend payment without obtaining the approval of the

14
Director only if the dividend payment would not cause Fannie Mae to fail to meet another capital

standard. At any time when Fannie Mae does not meet the risk-based capital standard but meets the

minimum capital standard, Fannie Mae is prohibited from making a dividend payment that would

cause Fannie Mae to fail to meet the minimum capital standard. If Fannie Mae meets neither the

risk-based capital standard nor the minimum capital standard but does meet the critical capital

standard established under the 1992 Act, it may make a dividend payment only if Fannie Mae would

not fail to meet the critical capital standard as a result of such payment and the Director approves the

payment after Ñnding that it satisÑes certain statutory conditions. The Director has the authority to

require Fannie Mae to submit a report to the Director regarding any capital distribution (including

any dividend) declared by Fannie Mae before Fannie Mae makes the distribution. See ""Government

Regulation and Charter Act'' and ""MD&AÌBalance Sheet AnalysisÌRegulatory Environment''

regarding the capital standards applicable to Fannie Mae.

The payment of dividends on common stock also is subject to the payment of dividends on any

preferred stock outstanding. No cash dividend may be declared or paid or set apart for payment on

common stock unless cash dividends have been declared and paid or set apart (or ordered to be set

apart) on preferred stock outstanding for the current dividend period.

Dividends on common stock have been declared and paid for each quarter during Fannie Mae's

two most recent Ñscal years. See ""Quarterly Results of Operations'' for quarterly dividends paid on

common stock during 2001 and 2000.

This description is summarized from the Charter Act, the 1992 Act, the bylaws and certain

resolutions of the Board of Directors and stockholders of Fannie Mae. This description does not

purport to be complete, and is qualiÑed in its entirety by reference to the Charter Act, the 1992 Act,

the bylaws of Fannie Mae, and the resolutions.

Fannie Mae's common stock is publicly traded on the New York, PaciÑc, and Chicago stock

exchanges and is identiÑed by the ticker symbol ""FNM.'' The transfer agent and registrar for the

common stock is First Chicago Trust Company of New York, a division of EquiServe, P.O. Box 2598,

Jersey City, New Jersey 07303. The following table shows, for the periods indicated, the high and low

prices per share of Fannie Mae's common stock on the New York Stock Exchange Composite

Transactions as reported in the Bloomberg Financial Markets service.

Quarterly Common Stock Data

2001 2000

Quarter High Low High Low

1st ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $87.94 $72.08 $64.88 $47.88

2nd ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 87.87 74.00 65.63 51.25

3rdÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 87.10 73.71 72.88 48.13

4thÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85.14 75.1989.38 66.13

The closing price of Fannie Mae's common stock on March 26, 2002, as so reported, was $79.73.

15
FORWARD-LOOKING INFORMATION

From time to time, Fannie Mae may make forward-looking statements relating to matters such as

Fannie Mae's anticipated Ñnancial performance, business prospects, future business plans, Ñnancial

condition, or other matters. For example, ""MD&A'' includes forward-looking statements that are not

historical facts or explanations of historical data. The words ""believes,'' ""anticipates,'' ""expects,''

""should'' and similar expressions generally identify forward-looking statements.

Forward-looking statements reÖect management's expectations based on various assumptions

and management's estimates of trends and economic factors in the markets in which Fannie Mae is

active, as well as Fannie Mae's business plans. As such, forward-looking statements are subject to

risks and uncertainties, and Fannie Mae's actual results may diÅer (possibly signiÑcantly) from those

indicated in such statements. Among the factors that may aÅect the performance, development, or

results of Fannie Mae's business, and thereby cause actual results to diÅer from management's

expressed expectations, are the following:

‚ signiÑcant changes in borrower preferences for Ñxed- or adjustable-rate mortgages, originator preferences for selling mortgages in the secondary market, investor preferences for

Fannie Mae's securities versus other investments, the availability of funding at attractive

spreads in the Ñnancial markets (in particular from callable debt), and other factors

aÅecting the overall mix of mortgage loans available for purchase, Fannie Mae's funding

opportunities, or Fannie Mae's net interest margins;

‚ signiÑcant changes in employment rates, housing price appreciation, or other factors

aÅecting delinquency or foreclosure levels and credit losses;

‚ signiÑcant changes in Fannie Mae's policies or strategies, such as its underwriting

requirements or its interest rate risk management, credit loss mitigation, or investment

strategies;

‚ regulatory or legislative changes aÅecting Fannie Mae, its competitors, or the markets in

which Fannie Mae is active, including changes in taxes or capital requirements applicable

to Fannie Mae or its activities (see ""Government Regulation and Charter Act,'' and

""MD&AÌBalance Sheet AnalysisÌRegulatory Environment'' regarding certain matters

currently being considered by regulators, legislators, or the Administration);

‚ competitive developments in the markets for mortgage purchases and for the sale of

mortgage-backed and debt securities, or signiÑcant changes in the rate of growth in

conforming residential mortgage debt;

‚ signiÑcant changes in the amount and rate of growth of Fannie Mae's expenses, and the

costs (and eÅects) of legal or administrative proceedings (see ""Legal Proceedings'') or

changes in accounting policies or practices;

‚ signiÑcant changes in general economic conditions or the monetary or Ñscal policy of the

United States; and

‚ unanticipated, substantial changes in interest rates. It is possible that sudden, severe

swings in interest rates could have at least a short-term signiÑcant eÅect on Fannie Mae's

results.

Fannie Mae does not undertake to update any forward-looking statement herein or that may be

made from time to time on behalf of Fannie Mae.

16
SELECTED FINANCIAL INFORMATION: 1997-2001 (Unaudited)

The following selected Ñnancial information for the years 1997 through 2001 has been summarized or derived from the audited

Ñnancial statements and other Ñnancial information. This information should be read in conjunction with the audited Ñnancial

statements and notes to the Ñnancial statements.

Income Statement Data for the years ended: 2001 2000 1999 1998 1997

(Dollars in millions, except per common share

amounts)

Operating net income(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,367 $ 4,448 $ 3,912 $ 3,418 $ 3,056

Operating earnings per diluted common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.20 4.293.72 3.23 2.83

Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 49,170 $ 42,781 $ 35,495 $ 29,995 $ 26,378

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (41,080) (37,107) (30,601) (25,885) (22,429)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,090 5,674 4,894 4,110 3,949

Guaranty fee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,482 1,351 1,282 1,2291,274

Fee and other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 151 (44) 191 275 125

Credit-related expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (78) (94) (127) (261) (375)

Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,017) (905) (800) (708) (636)

Special contributionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (300) ÌÌÌÌ Purchased options expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (37) ÌÌÌÌ

Income before federal income taxes, extraordinary item and cumulative eÅect of change in

accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,291 5,982 5,440 4,645 4,337

Provision for federal income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,224) (1,566) (1,519) (1,201) (1,269)

Income before extraordinary item and cumulative eÅect of change in accounting principle ÏÏÏÏ 6,067 4,416 3,921 3,444 3,068

Extraordinary itemÌ(loss) gain on early extinguishment of debt, net of tax eÅect ÏÏÏÏÏÏÏÏÏÏÏ (341) 32 (9) (26) (12)

Cumulative eÅect of change in accounting principle, net of tax eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 168 ÌÌÌÌ

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,894 $ 4,448 $ 3,912 $ 3,418 $ 3,056

Preferred stock dividendsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (138) (121) (78) (66) (65)

Net income available to common shareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,756 $ 4,327 $ 3,834 $ 3,352 $ 2,991

Basic earnings per common share:

Earnings before extraordinary item and cumulative eÅect of change in accounting principle $ 5.92 $ 4.28 $ 3.75 $ 3.28 $ 2.87

Extraordinary (loss) gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.34) .03 Ì (.02) (.02)

Cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .17 ÌÌÌÌ

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.75 $ 4.31 $ 3.75 $ 3.26 $ 2.85

Diluted earnings per common share:

Earnings before extraordinary item and cumulative eÅect of change in accounting principle $ 5.89$ 4.26 $ 3.73 $ 3.26 $ 2.84

Extraordinary (loss) gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.34) .03 (.01) (.03) (.01)

Cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .17 Ì Ì Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.72 $ 4.29$ 3.72 $ 3.23 $ 2.83

Cash dividends per common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.20 $ 1.12 $ 1.08 $ .96 $ .84

Balance Sheet Data at December 31:

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $705,167 $607,399 $522,780 $415,223 $316,316

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74,554 54,968 39,751 58,515 64,596

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 799,791 675,072 575,167 485,014 391,673

Borrowings:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 343,492 280,322 226,582 205,413 175,400

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 419,975 362,360 321,037 254,878 194,374

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 781,673 654,234 557,538 469,561 377,880

Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,118 20,838 17,62915,453 13,793

Core capital(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,182 20,827 17,876 15,465 13,793

Other Data for the year ended December 31:

Total taxable-equivalent revenues(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 10,187 $ 7,825 $ 6,975 $ 6,272 $ 5,735

Average net interest margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.11% 1.01% 1.01% 1.03% 1.17%

Operating return on average realized common equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25.4 25.2 25.0 25.2 24.6

Dividend payout ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20.9 26.0 28.8 29.5 29.4

Average eÅective guaranty fee rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .190 .195 .193 .202 .227

Credit loss ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .006 .007 .011 .027 .041

Ratio of earnings to combined Ñxed charges and preferred stock dividends(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.20:1 1.16:1 1.17:1 1.18:1 1.19:1

Mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $270,584 $154,231 $195,210 $188,448 $ 70,465

MBS issues acquired by othersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 344,739105,407 174,850 220,723 108,120

Outstanding MBS(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 858,867 706,684 679,169 637,143 579,138

Weighted-average diluted common shares outstanding, in millions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,006 1,0091,031 1,037 1,056

(1) Excludes the cumulative after-tax gain of $168 million from the change in accounting principle upon adoption of FAS 133 on January 1, 2001 and the after-tax

loss of $24 million recognized during the year 2001 for the change in fair value of time value of purchased options under FAS 133. Includes after-tax charges of

$383 million for the amortization expense of purchased options premiums during the year ended December 31, 2001.

(2) The sum of (a) the stated value of outstanding common stock, (b) the stated value of outstanding noncumulative perpetual preferred stock, (c) paid-in capital,

and (d) retained earnings.

(3) Includes revenues net of operating losses and amortization expense of purchased options premiums, plus taxable-equivalent adjustments for tax-exempt income

and investment tax credits using the applicable federal income tax rate.

(4) ""Earnings'' consists of (a) income before federal income taxes, extraordinary items and cumulative eÅect of accounting changes and (b) Ñxed charges. Fixed

charges represent interest expense.

(5) MBS held by investors other than Fannie Mae.

17
MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2001 Overview

Fannie Mae achieved exceptional operational and Ñnancial results in 2001, surpassing its earnings

targets and posting its 15th consecutive year of record operating earnings while taking a number of

actions to strengthen the company's future Ñnancial performance. Despite a weaker economic

environment, operating earnings and operating earnings per diluted common share (EPS) increased

21 percent over 2000 to $5.367 billion and $5.20, respectively. The increase in earnings was driven

primarily by strong portfolio and net interest margin growth.

2001 performance highlights include:

‚ 30 percent increase in total taxable-equivalent revenues

‚ 19 percent growth in the average net mortgage portfolio

‚ 19 percent increase in the total book of business

‚ 10 basis point increase in the average net interest margin

‚ 9 percent decline in credit losses to the lowest level since 1983

Fannie Mae's portfolio investment business generated operating net income of $3.489 billion in

2001, an increase of 27 percent over 2000. The portfolio investment business manages the interest rate

risk within the company's mortgage portfolio and other investments. It includes the management of

asset purchases and funding activities for Fannie Mae's mortgage and investment portfolios. Income is

derived primarily from the diÅerence, or spread, between the yield on mortgage loans and investments

and the borrowing costs related to those loans and investments. The portfolio investment business

capitalized on opportunities presented by the decline in interest rates during 2001 to grow the average

net mortgage portfolio by 19 percent and raise the average adjusted net interest margin by 10 basis

points to 1.11 percent. A sharp decline in short-term interest rates relative to long-term interest rates

enabled Fannie Mae to reprice maturing debt more quickly than assets, temporarily reducing Fannie

Mae's debt cost relative to its asset yield. In addition, lower rates boosted originations of Ñxed-rate

mortgages in the primary market and increased the supply of Ñxed-rate mortgages in the secondary

market, producing wide spreads between mortgage yields and Fannie Mae's debt costs. Results of this

business segment are largely reÖected in adjusted net interest income, which is discussed further in

Management's Discussion and Analysis (MD&A) under ""Results of Operations for 2001.''

Fannie Mae's credit guaranty business produced a 10 percent increase in operating net income to

$1.878 billion in 2001. The credit guaranty business manages the company's credit risk and derives

income from guaranteeing the timely payment of principal and interest on the book of business to

investors. Guaranty fee income increased 10 percent while credit losses on Fannie Mae's total book of

business fell 9 percent to the lowest level since 1983, when the book of business was less than a tenth

of its current size. Results of this business segment are captured primarily in guaranty fee income and

credit-related expenses, which are discussed further in MD&A under ""Results of Operations for

2001.''

Additional information on Fannie Mae's business segments can be found in the Notes to

Financial Statements under Note 10, ""Line of Business Reporting.''

Fannie Mae's Ñnancial statements are based on the application of generally accepted accounting

principles, which are described in the Notes to Financial Statements under Note 1, ""Summary of

SigniÑcant Accounting Policies.'' The application of certain accounting policies involves uncertainties

and requires signiÑcant management judgment, including the use of assumptions and estimates.

Changes in these assumptions and estimates could have a material impact on Fannie Mae's Ñnancial

position and results of operations. Fannie Mae identiÑes in its MD&A the accounting policies it

believes are the most subjective, involve signiÑcant uncertainty, and require complex management

judgment. Management believes Fannie Mae's critical accounting policies include determining the

18
adequacy of the allowance for losses, the amortization of purchase discounts or premiums on

mortgages and mortgage-backed securities (MBS), and the amortization of upfront guaranty fee

adjustments. Further discussion of these critical accounting policies, including the uncertainties

involved and management's analysis process, is provided in MD&A under ""Credit Risk ManagementAllowance for Losses,'' ""Balance Sheet AnalysisÌMortgage Portfolio,'' and ""Mortgage-Backed

Securities.''

Fannie Mae also tracks performance based on operating net income and operating EPS, which are

adjusted for certain items related to the January 1, 2001 adoption of Financial Accounting Standard

No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities. Management

believes operating net income is a more meaningful measure of Fannie Mae's performance because it

adjusts for elements of earnings volatility related to FAS 133 and is comparable with income reported

in prior periods. FAS 133 may result in earnings volatility because it requires that Fannie Mae record

the change in the fair value of the time value of purchased options in the income statement, but not

the options in callable debt or mortgages. Prior to the adoption of FAS 133, Fannie Mae amortized

premiums on purchased options into interest expense on a straight-line basis over the life of the

option. Without these adjustments, net income and diluted EPS grew 33 percent to $5.894 billion and

$5.72, respectively. Table 1 reconciles 2001 net income to operating net income.

Table 1: Reconciliation of Net Income to Operating Net Income

Year Ended

December 31,

2001

(Dollars in

millions)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,894

Cumulative after-tax gain upon adoption of FAS 133 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (168)

After-tax expense from the change in the fair value of the time value of

purchased options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24

After-tax amortization expense of purchased options premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (383)

Operating net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,367

Fannie Mae had several other key accomplishments during 2001:

‚ implementing voluntary safety and soundness initiatives to enhance market discipline, liquidity, and capital;

‚ surpassing all statutory housing goals and signiÑcantly exceeding all annual corporate purchasing goals for Fannie Mae's ten-year, $2 trillion American Dream CommitmentSM;

‚ providing record liquidity to the housing market in conjunction with lending partners to help

ensure the housing Ñnance system operated smoothly following the events of September 11; the

September 11 terrorist attacks did not signiÑcantly disrupt Fannie Mae's business operations

or impact its Ñnancial results;

‚ contributing $10 million to relief funds for the victims and the families of victims aÅected by

the events of September 11 and $300 million in Fannie Mae common stock to the Fannie Mae

Foundation;

‚ working with lending partners to launch several new products, processes, and partnerships that

deliver mortgage credit to people previously underserved through products such as Expanded

Approval/Timely Payment RewardsSM; and

‚ launching of a major initiative to re-engineer Fannie Mae's core technology infrastructure that

will increase its ability to meet the needs of its customers by signiÑcantly enhancing transaction

processing, product development, and risk management.

19
Results of Operations for 2001

Taxable-Equivalent Revenues

Taxable-equivalent revenues represent total revenues adjusted to reÖect the beneÑts of tax-exempt

income and investment tax credits based on applicable federal income tax rates.

In 2001, Fannie Mae generated taxable-equivalent revenue of $10.187 billion, a 30 percent

increase over 2000. The increase in taxable-equivalent revenues was largely attributable to strong

growth in the mortgage portfolio and net interest margin, which boosted net interest income. Table 2

compares 2001 and 2000 taxable-equivalent revenues and its components.

Table 2: Taxable-Equivalent Revenues

Year Ended December

31,

2001 2000

(Dollars in millions)

Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,090 $5,674

Purchased options premium amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (590) Ì

Adjusted net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,500 5,674

Guaranty fee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,482 1,351

Fee and other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 151 (44)

Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,133 6,981

Taxable-equivalent adjustments:

Investment tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 584 430

Tax-exempt investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 470 414

Total taxable-equivalent revenues (1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,187 $7,825

(1) Taxable-equivalent revenues include: (a) revenues net of amortization expense of purchased

option premiums that would have been recorded prior to the adoption of FAS 133,

(b) operating losses on certain tax-advantaged investments, and (c) taxable-equivalent

adjustments for tax-exempt income and investment tax credits using the applicable federal

income tax rate of 35 percent.

Net Interest Income

Net interest income is the diÅerence between interest income and interest expense. Adjusted net

interest income includes reported net interest income less amortization expense related to purchased

options premiums. Prior to the adoption of FAS 133, reported net interest income included the

amortization expense of purchased options premiums on a straight line basis over the life of the option.

With the adoption of FAS 133, this expense is now included in the change in the fair value of the time

value of purchased options that is reported in the income statement in the category ""purchased options

expense.'' Management believes adjusted net interest income is a more meaningful measure of

performance and is comparable with reported net interest income in prior periods.

Adjusted net interest income increased 32 percent to $7.500 billion in 2001, as Fannie Mae grew

the average net mortgage portfolio 19 percent and the average net interest margin by 10 basis points.

Mortgage portfolio and net interest margin growth was driven primarily by the sharp decline in

intermediate-term and short-term interest rates during the year. Lower interest rates and a steepened

yield curve allowed Fannie Mae to:

‚ Reduce debt costs: The sharp decline in short-term interest rates relative to long-term

interest rates provided an opportunity for Fannie Mae to call or retire debt at a pace that

exceeded the increase in mortgage liquidations, which temporarily reduced Fannie Mae's debt

costs relative to its asset yield.

20
‚ Purchase mortgages at attractive spreads: The decline in intermediate-term rates reduced mortgage rates to the lowest levels in 30 years, creating a surge in mortgage reÑnancings

and originations to record levels and increasing the supply of mortgages for sale in the

secondary market. This supply surge boosted mortgage-to-debt spreads on mortgage acquisitions. Mortgage-to-debt spread is the diÅerence between the yield on a mortgage and the cost of

debt that funds mortgage purchases.

Additional information on mortgage portfolio volumes and yields, the cost of debt, and derivative

instruments is presented in MD&A under ""Balance Sheet Analysis.''

Guaranty Fee Income

Guaranty fees compensate Fannie Mae for the assumption of credit risk associated with its

guarantee of the timely payment of principal and interest to MBS investors. Guaranty fee income

excludes fees received on MBS that Fannie Mae holds in its portfolio and the costs of managing the

administration of outstanding MBS.

Guaranty fee income increased 10 percent to $1.482 billion in 2001, driven primarily by

12 percent growth in average outstanding MBS (or MBS held by investors other than Fannie Mae).

Record mortgage originations more than doubled the growth in average outstanding MBS over the

4 percent growth rate in 2000. The increase in average outstanding MBS more than oÅset a .5 basis

point decline in the average guaranty fee rate to 19.0 basis points that resulted from the increased

liquidation of older, higher fee-rate business as mortgage reÑnances increased. Table 3 presents the

average eÅective guaranty fee rate for the past three years.

Table 3: Guaranty Fee Data

Year Ended December 31,

2001 2000 1999

(Dollars in millions)

Guaranty fee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,482 $ 1,351 $ 1,282

Average balance of outstanding MBSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 779,647 694,165 664,672

Average eÅective guaranty fee rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .190% .195% .193%

Additional information on Fannie Mae's MBS, guaranty fees, and guaranty obligation is

presented in MD&A under ""Mortgage-Backed Securities.''

Fee and Other Income (Expense)

Fee and other income (expense) consists of technology fees, transaction fees, multifamily fees, and

other miscellaneous items and is net of operating losses from certain tax-advantaged investments in

aÅordable housing projects. These tax-advantaged investments represent equity interests in limited

partnerships that own rental housing and generate tax credits, which reduce Fannie Mae's eÅective

federal income tax rate and are accounted for under the equity method. Fannie Mae does not guarantee

any obligations of these partnerships, and exposure is limited to the amount of Fannie Mae's

investment. Fannie Mae records the tax beneÑt related to these investments as a reduction in the

provision for federal income taxes and as an increase in taxable-equivalent revenues.

Fannie Mae recorded $151 million of fee and other income in 2001, up from $44 million of

expense in 2000. The $195 million increase in fee and other income (expense) was due primarily to

the following:

‚ a $146 million increase in technology and transaction fees resulting largely from greater usage

of Fannie Mae's Desktop Underwriter» and Desktop Originator» systems due to record

business volumes and

‚ absence of a hedging loss on an anticipated Benchmark Notes» issuance that occurred in April

2000.

21
Credit-Related Expenses

Credit-related expenses include foreclosed property expenses and the provision for losses.

Credit-related expenses declined $16 million to $78 million in 2001 despite signiÑcant growth in

Fannie Mae's total book of business and weaker economic conditions. As a percentage of Fannie Mae's

average book of business, credit-related losses, which include foreclosed property expenses and chargeoÅs (net of recoveries), decreased slightly to .6 basis points in 2001 from .7 basis points in 2000.

While the 2001 economic slowdown may increase delinquency rates, defaults, and losses in

subsequent years, Fannie Mae's credit performance and future credit outlook remain favorable. The

combination of high-quality underwriting, low loan-to-value ratios, signiÑcant third-party credit

enhancements, and highly eÅective credit loss management processes eÅectively positions Fannie Mae

to manage the credit impact of an economic downturn. SpeciÑc strategies that have strengthened the

credit risk proÑle of the current book of business and proven successful in limiting losses include:

‚ expanded use of Desktop Underwriter, Fannie Mae's automated loan underwriting system,

‚ substantial use of both primary mortgage insurance and other credit enhancements to cover

loans with higher risk of default and loss,

‚ use of Risk ProÑlerSM technology over the life of the loan to identify loans most at risk of

default and loss and to enable early servicing intervention,

‚ comprehensive and well-executed loss mitigation strategies to prevent defaults and minimize

losses on loans that default, and

‚ centralized foreclosure management operations at Fannie Mae's National Property Disposition

Center in Dallas to achieve higher net proceeds from the sale of real estate owned and reduce

property disposition costs.

The reduction in credit-related expenses was largely due to a 10 percent decrease in foreclosed

property expense to $193 million despite a slight increase in the number of foreclosed single-family

property acquisitions to 14,486 in 2001 from 14,351 in 2000. Fannie Mae's current policy is to record a

negative provision for losses because of the recent experience of net recoveries on charged-oÅ

properties stemming from credit enhancements and recent home price appreciation. Fannie Mae

recorded a negative provision of $115 million in 2001, compared with a negative provision of

$120 million in 2000.

Additional information on Fannie Mae's credit proÑle is presented in MD&A under ""Risk

ManagementÌCredit Risk Management.''

Administrative Expenses

Administrative expenses include those costs incurred to run the daily operations of Fannie Mae,

such as personnel costs and technology expenses.

Administrative expenses increased 12 percent to $1.017 billion in 2001, primarily due to the

following:

‚ 11 percent increase in compensation expense to $602 million in 2001, resulting primarily from

an 8 percent increase in the number of employees as well as annual salary increases,

‚ increased costs related to a multi-year project to re-engineer the company's core infrastructure

systems, and

‚ $10 million contribution in 2001 to support victims and families of victims aÅected by the

September 11 tragedy.

Despite the increase in administrative expenses, Fannie Mae's eÇciency ratioÌthe ratio of

administrative expenses to taxable-equivalent revenuesÌimproved to 10.0 percent in 2001 from

11.6 percent in 2000. The ratio of administrative expenses to the average book of business was

.071 percent in 2001, compared with .072 percent in 2000.

22
Special Contribution

Special contribution expense reÖects a contribution by Fannie Mae to the Fannie Mae

Foundation.

Fannie Mae made a commitment during the fourth quarter of 2001 to contribute $300 million of

Fannie Mae common stock to the Fannie Mae Foundation. The Fannie Mae Foundation creates

aÅordable homeownership and housing opportunities through innovative partnerships and initiatives

that build healthy, vibrant communities across the United States. It is a separate, private nonproÑt

organization that is not consolidated by Fannie Mae, but is supported solely by Fannie Mae. The 2001

contribution to the Fannie Mae Foundation is expected to reduce the Foundation's need for

contributions over the next several years. Fannie Mae acquired the shares through open market

purchases and contributed the shares to the Foundation in the Ñrst quarter of 2002.

Purchased Options Expense

Purchased options expense includes the change in the fair value of the time value of purchased

options in accordance with FAS 133. The change in the fair value of the time value of purchased

options will vary from period to period with changes in interest rates and market views on interest rate

volatility. However, the total expense included in earnings from the purchase date until the exercise or

expiration date of an option will equal the initial option premium paid because Fannie Mae generally

holds such options to maturity.

In 2001, Fannie Mae recorded $37 million in purchased options expense related to the change in

the fair value of purchased options. This amount reÖects Öuctuations in the market value of purchased

options from period to period that result primarily from changes in expected interest rate volatility.

Prior to the adoption of FAS 133 on January 1, 2001, Fannie Mae amortized premiums on purchased

options into interest expense on a straight-line basis over the life of the option. The purchased options

premium amortization for 2001 that would have been included in interest expense pre-FAS 133

totaled $590 million.

Income Taxes

The provision for federal income taxes, net of the tax impact from debt extinguishments and the

cumulative eÅect of change in accounting principle, increased to $2.131 billion in 2001 from

$1.583 billion in 2000. The eÅective 2001 federal income tax rate on operating net income remained at

the 2000 level of 26 percent. Fannie Mae's eÅective tax rate on net income was 27 percent in 2001,

compared with 26 percent in 2000.

Extraordinary Item

Fannie Mae strategically repurchases or calls debt and related interest rate swaps as part of its

interest rate risk management eÅorts to reduce future debt costs. The sharp decline in short-term

interest rates during 2001 created an opportunity for Fannie Mae to call over $173 billion of highcoupon debt and notional principal of interest rate swaps. In addition, Fannie Mae repurchased

$9 billion of debt. The weighted-average cost of redeemed debt and interest rate swaps was

6.23 percent. Fannie Mae recognized an extraordinary loss of $524 million ($341 million after tax) in

2001 on the call and repurchase of debt. During 2000, Fannie Mae called or repurchased $18 billion in

debt and notional principal of interest rate swaps carrying a weighted-average cost of 7.10 percent and

recognized an extraordinary gain of $49 million ($32 million after tax).

Cumulative EÅect of Change in Accounting Principle

EÅective January 1, 2001, Fannie Mae adopted FAS 133 as amended by Financial Accounting

Standard No. 138, Accounting for Derivative Instruments and Certain Hedging ActivitiesÌan

amendment of FASB Statement No. 133. The adoption of FAS 133 on January 1, 2001 resulted in a

cumulative after-tax increase to income of $168 million ($258 million pre-tax). The cumulative eÅect

on earnings from the change in accounting principle is primarily attributable to recording the fair

23
value of the time value of purchased options, which are used as a substitute for callable debt, at

adoption of FAS 133 on January 1, 2001.

Risk Management

Fannie Mae is subject to three major areas of risk: interest rate risk, credit risk, and operations

risk. Active management of these risks is an essential part of Fannie Mae's operations and a key

determinant of its ability to maintain steady earnings growth. The following discussion highlights

Fannie Mae's strategies to manage these three risks.

Interest Rate Risk Management

Fannie Mae is exposed to interest rate risk because changes in interest rates may aÅect mortgage

portfolio cash Öows in a way that will adversely aÅect earnings or long-term value. Fannie Mae's

interest rate risk is concentrated primarily in its mortgage portfolio, where exposure to changes in

interest rates is managed to achieve stable earnings growth and a competitive return on equity over

time.

Fannie Mae's overall objective in managing interest rate risk is to deliver consistent earnings

growth and target returns on capital in a wide range of interest rate environments. Central elements of

Fannie Mae's approach to managing interest rate risk include: (1) investing in assets and issuing

liabilities that perform similarly in diÅerent interest rate environments, (2) assessing the sensitivity of

portfolio proÑtability and risk to changes in interest rates, and (3) taking rebalancing actions in the

context of a well-deÑned risk management process.

(1) Funding of mortgage assets with liabilities that have similar cash Öow patterns

through time and across diÅerent interest rate paths.

To achieve the desired liability durations, Fannie Mae issues debt across a broad spectrum of Ñnal

maturities. Because the durations of mortgage assets change as interest rates change, callable debt and

interest rate derivatives are frequently used to alter the durations of liabilities. The duration of

callable debt, like that of a mortgage, shortens when interest rates decrease and lengthens when

interest rates increase. Fannie Mae also uses derivative Ñnancial instruments, including interest rate

swaps and other derivatives with embedded interest rate options, to achieve its desired liability

structure and to better match the prepayment risk of the mortgage portfolio. These instruments are

close substitutes for callable and noncallable debt.

(2) Regularly assessing the portfolio's exposure to changes in interest rates using a

diverse set of analyses and measures.

Because the assets in Fannie Mae's mortgage portfolio are not perfectly matched with the

liabilities funding those assets, the portfolio's projected performance changes with movements in

interest rates. Fannie Mae uses various analyses and measuresÌincluding net interest income at risk,

duration and convexity analysis, portfolio value analyses, and stress testingÌto project the portfolio's

future performance. Risk measures and assumptions are regularly evaluated and modeling tools are

enhanced as management deems appropriate. Net interest income at risk, duration, convexity, and

portfolio value analyses all provide key information about risk across a wide range of interest rates.

Because future events may not be consistent with recent experience, Fannie Mae has constructed a

further series of tests using highly stressful assumptions of changes in interest rates.

Using stochastic interest rate simulations based on historical interest rate volatility, Fannie Mae

projects portfolio net interest income over a wide range of interest rate environments, including

speciÑc rising and falling interest rate paths. Stochastic simulations generate probability distributions

of future interest rates based on historic behavior. These analyses generally include assumptions about

new business activity to provide a more realistic assessment of possible portfolio performance. Fannie

Mae also regularly conducts narrower assessments of interest rate risk by analyzing the interest rate

sensitivity of only the existing mortgage portfolio (assuming no new business).

24
The duration and convexity of the portfolio, along with net interest income and portfolio value-atrisk analyses, are the primary risk assessment tools used to analyze the existing portfolio. The

portfolio duration gapÌthe diÅerence between the durations of portfolio assets and liabilitiesÌ

summarizes for management the extent to which estimated cash Öows for assets and liabilities are

matched, on average, through time and across interest rate scenarios. A positive duration gap

indicates more of an exposure to rising interest rates, and a negative duration gap indicates more of an

exposure to declining interest rates. The portfolio's convexityÌor the diÅerence between the duration

sensitivities of the portfolio's assets and liabilitiesÌprovides management with information on how

quickly and by how much the portfolio's duration gap will change in diÅerent interest rate environments. Management regularly monitors the portfolio's duration and convexity under current market

conditions and for a series of hypothetical interest rate shocks. In addition, management tracks the

portfolio's long-term value and the amount of value that is at risk over a broad range of potential

interest rate scenarios.

Many of the projections of mortgage cash Öows depend on prepayment models. While Fannie Mae

is highly conÑdent in the quality of these models, management recognizes that the models are based on

historical patterns that may not continue in the future. The models contain many assumptions,

including some regarding the reÑnanceability of mortgages and relocation rates. Other assumptions

are implicit in the projections of interest rates and include projections of the shape of the yield curve

and volatility. Fannie Mae constructs ""worst-case'' assumptions of dramatic changes in interest rates,

combined with substantial adverse changes in prepayments, volatility, and the shape of the yield

curve. The stress tests provide extreme measures of potential risk in highly improbable environments

and contribute to the evaluation of risk strategies.

(3) Setting the parameters for rebalancing actions to help attain corporate objectives.

The Board of Directors oversees interest rate risk management through the adoption of corporate

goals and objectives and the review of regular reports on performance against them. Senior management is responsible for ensuring that appropriate long-term strategies are in place to achieve the goals

and objectives. Management establishes reference points for the key performance measures that are

used to signal material changes in risk and to assist in determining whether adjustments in portfolio

strategy are required to achieve long-term objectives. Management regularly reports these measures

and reference points to the Board of Directors.

One of the primary reference points for interest rate risk management is the target range

established for the duration gap of plus or minus six months. This range for the duration gap is

generally consistent with a level of interest rate risk that does not require portfolio rebalancing

actions. As the duration gap begins to move outside of this target range, management considers

actions to bring the duration gap back within the range in a manner that is consistent with achieving

the company's earnings objectives. As the duration gap moves further outside the target range,

signiÑcantly greater emphasis is placed on reducing the risk exposure and signiÑcantly less emphasis is

placed on meeting earnings objectives. While no time horizon has been established over which

rebalancing actions must take place, management closely monitors the repricing diÅerences between

assets and liabilities that are driving any duration gap mismatch. This analysis provides management

with information on the time horizon over which rebalancing actions may be taken.

The Portfolio Investment Committee, which includes the company's senior mortgage portfolio

managers and the Chief Financial OÇcer, meets weekly and reviews current Ñnancial market

conditions, portfolio risk measures, and performance targets. The Committee develops and monitors

near-term strategies and the portfolio's standing relative to its long-term objectives. The results of

Portfolio Investment Committee meetings are reported to the weekly Asset and Liability Management

Committee, which is comprised of senior management and includes the company's Chief Executive

OÇcer.

25
Fannie Mae was successful in meeting its interest rate risk management objectives in 2001

despite signiÑcant interest rate moves and unprecedented levels of interest rate volatility.

2001 was a year of signiÑcant interest rate movements coupled with unprecedented levels of

interest rate volatility. Fannie Mae's three-month cost of debt declined over 450 basis points during

2001. Fannie Mae's ten-year cost of debt reached a low in November that was 120 basis points below

year-end 2000 levels before rising 100 basis points to end the year 20 basis points lower than the prior

year end. In addition, the pattern of interest rates during 2001 resulted in two mortgage reÑnancing

waves, one in the Ñrst quarter and the second in the third and fourth quarters. Fannie Mae's

disciplined risk management process was the cornerstone to management's success in meeting the

company's interest rate risk objectives throughout this challenging environment.

Duration Gap

Fannie Mae's duration gap was a positive Ñve months at December 31, 2001, versus negative

three months at December 31, 2000. The signiÑcant changes in both the level of interest rates and the

shape of the yield curve in 2001 combined with extreme levels of interest rate volatility resulted in the

monthly duration gap being outside of the plus or minus six month target range three times in

2001Ìslightly better than the historical average of approximately one-third of the time. After

thorough analysis, Fannie Mae periodically took rebalancing actions during the year when deemed

appropriate in a manner that eÅectively reduced the portfolio's risk exposure while minimizing the

costs associated with rebalancing.

Convexity

Fannie Mae also eÅectively managed convexity to optimize the earnings potential of its portfolio

while remaining within corporate risk guidelines. Fannie Mae took advantage of the opportunity to

lower its debt costs by redeeming signiÑcant amounts of callable debt, particularly during the Ñrst

quarter of 2001, in response to the sharp decline in short-term interest rates. These redemptions

initially reduced the total amount of option-embedded debt and increased the portfolio's convexity

exposure. After thorough analysis, Fannie Mae reduced this exposure by aggressively increasing the

amount of option protection purchased during the remainder of the year through the issuance of

callable debt and the purchase of option-embedded interest rate derivatives. By the end of the year,

option-embedded debt as a percentage of the retained mortgage portfolio was 54 percent, versus

46 percent at year-end 2000.

Net Interest Income at Risk

Net interest income at risk is a measure that Fannie Mae uses to estimate the impact of changes

in interest rates on projected net interest income relative to a base case scenario. Presented below in

Table 4 is Fannie Mae's net interest income at risk based on instantaneous plus and minus 100 basis

point changes in interest rates followed by a stochastic interest rate distribution. This risk measurement is an extension of Fannie Mae's monthly net interest income at risk disclosure and is based on

the same data, assumptions, and methodology.

Table 4: Net Interest Income at Risk

December 31, 2001 December 31, 2000

1-Year Portfolio 4-Year Portfolio 1-Year Portfolio 4-Year Portfolio

Net Interest Net Interest Net Interest Net Interest

Income at Risk Income at Risk Income at Risk Income at Risk

Assuming a 100 basis point

increase in interest rates ÏÏÏÏÏÏÏ 10% 10% 2% 5%

Assuming a 100 basis point

decrease in interest rates ÏÏÏÏÏÏÏ (1) 3 2 9

Fannie Mae had moderate exposure to an instantaneous 100 basis point increase in interest rates

at December 31, 2001. At year-end 2001, Fannie Mae's net interest income at risk for both the oneyear and four-year horizons is estimated not to exceed ten percent. Conversely, Fannie Mae's risk

26
exposure at year-end 2001 to a 100 basis point instantaneous decline in rates was low as net interest

income is estimated to beneÑt over the one-year horizon while the net interest income exposure is

estimated not to exceed three percent over the four-year horizon. The changes in the proÑle of net

interest income at risk from December 31, 2000 to December 31, 2001 are driven by the changes in the

shape and level of interest rates, changes in the composition of the portfolio, and changes in forecast

assumptions. Actual portfolio net interest income may diÅer from these estimates because of speciÑc

interest rate movements, changing business conditions, changing prepayments, and management

actions.

Interest Rate Sensitivity of Net Asset Value

Another indicator of the interest rate exposure of Fannie Mae's existing business is the sensitivity

of the fair value of net assets (net asset value) to changes in interest rates. Table 5 presents Fannie

Mae's estimated net asset value as of December 31, 2001, and two estimates of net asset value that are

based on hypothetical plus and minus 100 basis point instantaneous shocks in interest rates.

Table 5: Interest Rate Sensitivity of Net Asset Value

December 31, 2001 December 31, 2000

Percentage of Percentage of

Net Asset Net Asset Net Asset Net Asset

Dollars in millions Value Value Value Value

December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $23,044 Ì $20,677 Ì

Assuming a 100 basis point increase in

interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,876 91% 20,204 98%

Assuming a 100 basis point decrease in

interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,756 77% 14,822 72%

Changes in net asset value take into account several factors, including:

‚ changes in the values of all mortgage assets and the debt funding these assets,

‚ changes in the value of net guaranty fee income from oÅ-balance-sheet obligations, and

‚ changes in the value of interest rate derivatives.

As indicated in Table 5, the net asset value of Fannie Mae's December 31, 2001 book of business

would decline an estimated 9 percent from an instantaneous 100 basis point increase in interest rates

and decline an estimated 23 percent from an instantaneous 100 basis point decrease in interest rates.

These sensitivities at December 31, 2001 diÅer from Fannie Mae's duration gap and net interest

income at risk exposures primarily due to inclusion of the guaranty fee business on a run-oÅ basis in

the net asset value sensitivity analysis but not the other interest rate risk measures.

The net asset value of Fannie Mae on December 31, 2001, as presented in Table 5, is the same as

that disclosed in the Notes to Financial Statements under Note 16, ""Disclosures of Fair Value of

Financial Instruments.'' The net asset values for the hypothetical interest rate scenarios were derived

in a manner consistent with the estimation procedures described in that note. The net asset value

sensitivities do not necessarily represent the changes in Fannie Mae's net asset value that would

actually occur for the given interest rate scenarios because the sensitivities neither reÖect the eÅects of

new business nor consider prospective asset/liability rebalancing or other hedging actions Fannie Mae

might take in the future. Consequently, net interest income at risk more closely reÖects the near-term

interest rate risk exposure that Fannie Mae faces as a going concern.

Additional information on interest rate risk management is presented in MD&A under ""Balance

Sheet AnalysisÌDerivative Instruments.''

Credit Risk Management

Fannie Mae actively manages credit risk because credit losses could have a signiÑcant impact on

Ñnancial performance. Fannie Mae's primary credit risk is the possibility of failing to recover amounts

due from borrowers on mortgages in its portfolio or mortgages underlying guaranteed MBS. Fannie

27
Mae's secondary credit risk is that counterparties in transactions, such as derivatives, mortgage

insurance, recourse, liquidity investments, or mortgage servicing, may be unable to meet their

contractual obligations.

Fannie Mae's overall objective in managing credit risk is to deliver consistent earnings growth and

target returns on capital for the risks it retains and manages.

Fannie Mae regularly measures its exposure to credit losses under alternative economic scenarios,

implements a broad range of risk mitigation strategies, monitors credit risk trends, and routinely

explores risk management opportunities. Analytical tools are used extensively to measure credit risk

exposures and evaluate risk management alternatives. Fannie Mae continually reÑnes its methods of

measuring credit risk, setting risk and return targets, and transferring risk to third parties. Fannie

Mae's Credit Risk Policy Committee has primary oversight and approval of credit risk management

strategy. The committee ensures that Fannie Mae's credit risks are appropriately identiÑed, measured,

and managed in a consistent manner. Fannie Mae's Chief Credit OÇcer chairs the committee. Each

Fannie Mae business unit has a credit policy function and a dedicated business unit credit oÇcer.

Those business unit credit oÇcers and the leaders of Fannie Mae's Credit Policy team serve on the

Credit Risk Policy Committee.

Three main credit risk management teams support the Chief Credit OÇcer and the committee:

‚ Policy and StandardsÌEstablishes and monitors credit policies, standards, and delegation of

credit authority throughout the organization.

‚ Credit Research and Portfolio ManagementÌResponsible for understanding and managing the

aggregate risk exposure, risk sensitivity, and usage of risk capital. Has primary accountability

for the strategy and execution of credit risk sharing transactions. Also responsible for

translating key elements of loan performance and credit pricing methodologies into Ñnancial

models and applications.

‚ Counterparty Risk ManagementÌResponsible for company-wide identiÑcation and measurement of exposures to contractual counterparties. Has responsibility to aggregate Fannie Mae's

overall counterparty risk position and develop counterparty risk management policies and

acceptable exposure limits.

These credit risk management teams work in concert with designated credit oÇcers in the

following business units: Mortgage Portfolio, eBusiness, Single Family, and Multifamily, as well as

other units of Housing and Community Development. The business unit credit oÇcers help ensure

that the management of credit risk and return is eÅectively integrated into Fannie Mae's business

activities. The business unit credit oÇcers have credit approval authority up to certain thresholds for

speciÑc transactions in their respective lines of business. The business unit credit oÇcers report to

both the business unit leaders and the Chief Credit OÇcer.

The credit risk management teams also work closely with Fannie Mae's regional oÇces. The

regional oÇces are responsible for managing Fannie Mae's customer relationships. The regional

oÇces, together with headquarters staÅ, ensure that Fannie Mae's transactions with lender partners

meet established policies and standards, are appropriately priced, and are eÅectively managed. The

Regional Senior Vice Presidents have credit authority up to certain thresholds to develop customized

mortgage product solutions for lenders while maintaining Fannie Mae's track record for prudent credit

risk management.

The Credit Risk Policy Committee works in concert with the other primary decision committees

of Fannie MaeÌthe Portfolios and Capital Committee and the Operations, Transactions and

Investments (OTI) Committee. In some instances, certain credit transactions may be referred to the

OTI Committee for further review and consideration.

28
Single-Family Credit Risk Management

Fannie Mae actively manages single-family mortgage credit risk, beginning with mortgage

underwriting and through liquidation, to reduce the risk that it will not recover amounts due from

borrowers.

Fannie Mae establishes sound underwriting policies to ensure that purchased and securitized

mortgages perform in accordance with the level of compensation received for the credit risk of the

loans. Fannie Mae also deploys portfolio management and loss mitigation strategies to control credit

risk throughout the life of mortgages owned or guaranteed by Fannie Mae.

Fannie Mae has developed an automated underwriting tool, Desktop Underwriter, to help lenders

consistently and objectively apply Fannie Mae's underwriting standards to prospective borrowers.

Desktop Underwriter provides a comprehensive analysis of the unique characteristics of a borrower

and mortgage, including such factors as a borrower's credit history and property value. Over

59 percent of newly originated mortgages sold to Fannie Mae in 2001 were evaluated through Desktop

Underwriter, up from 56 percent in 2000. Management expects the use of Desktop Underwriter by

lenders to continue to increase in 2002.

Fannie Mae continues to explore new ways of using its enhanced credit analytics such as Desktop

Underwriter to grow its total book of business while carefully balancing the risk and return of mortgage

purchases and securitizations.

As the precision of Fannie Mae's risk assessment capabilities has increased, loans to borrowers

formerly obtaining Ñnancing in higher-cost markets (for example, Alternative A loans or A minus

loans) have become eligible for purchase by Fannie Mae. In many instances, sale of these loans to

Fannie Mae requires payment of risk-based guaranty fees or price adjustments by lenders as

additional credit risk compensation. Management plans to continue investing in research and

technology to produce tools that help Fannie Mae and lenders assess and manage credit risk, thereby

expanding homeownership opportunities.

Fannie Mae works closely with its lender partners to minimize credit losses.

Many loan servicers employ Risk ProÑlerSM, a default prediction model created by Fannie Mae, to

enhance their loss mitigation eÅorts on loans serviced for Fannie Mae. Risk ProÑler uses credit risk

indicators such as updated borrower credit data, current property values, and mortgage product

characteristics to predict the likelihood that a loan will default. Currently, servicers are using Risk

ProÑler to evaluate close to 82 percent of the loans Fannie Mae owns or guarantees. In addition,

Fannie Mae employs Risk ProÑler to monitor default probability trends in its total book of business.

In the event mortgages become at risk to default, Fannie Mae employs strategies to reduce loss

exposure through resolutions other than foreclosure. Fannie Mae pursues early intervention in a

delinquency by its mortgage servicers to cure delinquencies and keep borrowers in their homes. Highrisk borrowers who cannot cure a default may be oÅered a workout alternativeÌsuch as a repayment

plan, temporary forbearance, or modiÑcation of termsÌif the alternative is expected to reduce the

likelihood of foreclosure and loss. If these workout options prove inappropriate, the servicer may

arrange a preforeclosure sale to minimize credit-related costs. The beneÑts of a preforeclosure sale

include avoidance of the costs of foreclosure and a tendency for the property to sell at a higher price

because the home is usually occupied. In 2001, loan workouts outpaced foreclosed property acquisitions for the third year in a row. If a loan modiÑcation or preforeclosure sale is not possible, Fannie

Mae's goal is to handle the foreclosure process expeditiously and cost-eÅectively to maximize the

proceeds from the sale of the property and to minimize the time it retains a nonearning asset.

Fannie Mae makes frequent updates of critical data on every mortgage to ascertain the current

level of credit risk in its total book of business and to manage that risk eÅectively through credit

enhancements.

Fannie Mae reviews such elements as the current estimated market value of the property, the

property value in relation to Fannie Mae's outstanding loan, the credit strength of the borrower, and

29
the potential volatility of those measures to ascertain the current level of credit risk in the total book

of business. Fannie Mae uses updated data to analyze the sensitivity of mortgages it owns or

guarantees to a wide range of projected changes in interest rates and home prices. Based on the

sensitivity analysis and loan performance analytics, Fannie Mae employs various credit enhancement

contracts to protect itself against losses on higher risk loans, including loans with high loan-to-value

ratios. Fannie Mae reassesses the eÇciency and eÅectiveness of its credit enhancement contracts and

rebalances credit risk to optimize risk management and Ñnancial performance.

Credit enhancements include primary loan-level mortgage insurance, pool mortgage insurance,

recourse arrangements with lenders, and other customized contracts, which together provided

protection against credit losses on 33 percent of the number of single-family mortgages at the end of

2001, compared with 38 percent at the end of 2000. The percentage of loans with credit enhancement

declined in 2001, primarily reÖecting a decrease in the proportion of the outstanding portfolio with

primary mortgage insurance, pool insurance, and recourse. The decline in the proportion of loans with

primary mortgage insurance is attributable to an increase in loans with loan-to-value ratios below

80 percent. In 2001, Fannie Mae had more reÑnance loan acquisitions, which traditionally have a

greater proportion of loans with loan-to-value ratios below 80 percent. Fannie Mae does not require

primary mortgage insurance on loans with loan-to-value ratios below 80 percent. In addition, rising

property values enabled some borrowers with Fannie Mae loans to cancel their outstanding mortgage

insurance subject to Fannie Mae's mortgage insurance cancellation requirements. The proportion of

loans with pool insurance and recourse credit enhancements declined in 2001 because these transactions were less prevalent in the market in 2001 than in prior periods. Credit enhancements, however,

absorbed a higher percentage of single-family credit losses in 2001 than in 2000. During 2001, credit

enhancements absorbed $435 million, or 85 percent, of $512 million in gross single-family credit

losses. In comparison, credit enhancements absorbed $349 million, or 80 percent, of $435 million in

gross single-family credit losses during 2000.

The application of various credit risk management strategies throughout a loan's life

helped reduce credit-related losses in 2001 despite deteriorating economic conditions.

As shown in Table 6, single-family credit-related losses decreased $9 million, and Fannie Mae's

credit loss ratio (the ratio of credit-related losses to the average amount of mortgages owned or

guaranteed) on its single-family book of business decreased by .1 basis point in 2001 to .6 basis points

despite weaker economic conditions.

Table 6: Single-Family Credit-Related Losses

Year Ended December 31,

Dollars in millions 2001 2000 1999

Recoveries, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(112) $(127) $(126)

Foreclosed property expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 189213 244

Credit-related losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 77 $ 86 $ 118

Credit loss ratioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .006% .007% .011%

The reduction in single-family credit-related losses in 2001 was mainly due to an 11 percent or

$24 million decline in foreclosed property expenses. Although the number of acquired properties

increased slightly to 14,486 from 14,351 in 2000, average credit-related losses per foreclosed singlefamily property acquisition fell to $3,500 from $3,800 in 2000.

As part of its voluntary safety and soundness initiatives, Fannie Mae discloses on a quarterly

basis the sensitivity of its future credit losses to an immediate 5 percent decline in home prices. At

September 30, 2001, the present value of Fannie Mae's sensitivity of net future credit losses to an

immediate 5 percent decline in home prices was $467 million, taking into account the beneÑcial eÅect

of third-party credit enhancements. This amount reÖects a gross credit loss sensitivity of $1.349 billion before the eÅect of credit enhancements, and is net of projected credit risk-sharing proceeds of

30
$882 million. The sensitivity of future credit losses is calculated based on the present value of the

diÅerence between credit losses in a baseline scenario and credit losses assuming an immediate

5 percent decline in home prices, followed by an increase in home prices at the rate projected by

Fannie Mae's credit pricing models.

The risk proÑle for conventional single-family mortgages in Fannie Mae's portfolio and

underlying MBS at the end of 2001 suggests Fannie Mae is well-positioned to manage

through an economic slowdown.

Fannie Mae tracks various trends in its total book of business to monitor credit risk, including

delinquencies, geographical concentrations, loan-to-value ratios, mortgage product mix, and loan age.

Fannie Mae's conventional single-family serious delinquency rate increased to .49 percent at December 31, 2001 from .45 percent at December 31, 2000. The serious delinquency rate is based on the

number of single-family mortgages in Fannie Mae's net portfolio or mortgages underlying MBS for

which it retains the primary risk of loss and that are 90 or more days delinquent or in foreclosure. The

comparable serious delinquency rate for all commercial banks was .79 percent and for Federal Housing

Administration loans was 2.83 percent. Table 7 summarizes the single-family serious delinquency

rates by region on loans where Fannie Mae bears the primary risk.

Table 7: Single-Family Serious Delinquency Rates(1)

December 31,

2001 2000 1999

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .58% .57% .67%

Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .54 .49.50

Midwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .49.39.37

Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .47 .40 .41

West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .38 .38 .46

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .49% .45% .48%

(1) Single-family loans where Fannie Mae bears the primary risk.

The average current loan-to-value ratio on loans owned or guaranteed by Fannie Mae was

estimated at 59 percent at year-end 2001, compared with 58 percent at year-end 2000. Fannie Mae

derived this estimate by using the current outstanding loan balance on 11.7 million loans and

estimating the value of the underlying homes based on Fannie Mae's proprietary home price indices.

The greater the excess of property values over Fannie Mae's outstanding loan balance in homes

underlying mortgages, the lower the incidence and severity of default. Fannie Mae's conventional

single-family book of business is predominantly composed of long-term and intermediate-term Ñxedrate loans, which have a lower incidence of default than adjustable-rate mortgages. At year-end 2001,

94 percent of Fannie Mae's conventional single-family book of business was long-term or intermediate-term Ñxed-rate loans, compared with 93 percent at year-end 2000. Table 8 provides a detailed

overview of the distribution of Fannie Mae's conventional single-family mortgages by product type

and loan-to-value ratios.

31
Table 8: Distribution of Conventional Single-Family Loans

Outstanding at

December 31, Business Volumes

2001 2000 2001 2000 1999

Product:

Long-term, Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75% 74% 76% 73% 76%

Intermediate-term, Ñxed-rate(1)ÏÏÏÏ 1919 19 11 19

Adjustable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 7 5 16 5

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100% 100% 100%

Original loan-to-value ratio:

Greater than 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13% 14% 13% 17% 15%

81% to 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 15 13 15 14

71% to 80% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42 41 44 44 42

61% to 70% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 14 13 11 14

Less than 61% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 16 17 13 15

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100% 100% 100%

Average original loan-to-value ratio 74% 75% 74% 77% 75%

Current loan-to-value ratio:(2)

Greater than 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4% 3%

81% to 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 6

71% to 80% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 17

61% to 70% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 23

Less than 61% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4951

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100%

Average current loan-to-value ratio 59% 58%

Average loan amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $100,813 $92,800 $134,718 $118,100 $115,700

(The maximum loan amount was $275,000 in 2001.)

(1) Contractual maturities of 20 years or less at purchase for portfolio loans and 15 years or less

at issue date for MBS issuances.

(2) Includes only Fannie Mae primary risk loans.

Multifamily Credit Risk Management

Fannie Mae has dedicated multifamily underwriting and due diligence teams that evaluate loans

prior to acquisition and portfolio monitoring and loss mitigation teams that manage credit risk

throughout the life of multifamily loans.

There are two primary sources of risk from a mortgage on a multifamily property. First, the

underlying property cash Öows may be insuÇcient to service the loan. Second, the proceeds from the

sale or reÑnancing of a property may be insuÇcient to repay the loan at maturity.

To manage these risks, Fannie Mae centralizes responsibility for managing credit risk in the

multifamily portfolio within the multifamily business unit. The business unit ensures that the

aggregate risk is properly identiÑed and managed and promotes consistent application of risk

management policies and procedures. SpeciÑc areas of responsibility, which are subject to review and

oversight by the Chief Credit OÇcer and Credit Risk Policy Committee, include portfolio credit risk

management, lender assessment, counterparty risk evaluation, regular asset management of earning

assets, special asset management of problem transactions, and contract compliance monitoring for

structured transactions.

32
Fannie Mae maintains rigorous loan underwriting guidelines and extensive real estate due

diligence examinations for the loans it acquires or guarantees. The loan underwriting guidelines

include speciÑc occupancy rate, loan-to-value, and debt service coverage criteria. The due diligence

examinations typically include property condition and property valuation reviews as well as investigations into the quality of property management. Because of the size of multifamily loans, management

generally requires servicers to submit periodic operating information and property condition reviews

to monitor the performance of individual loans. Fannie Mae uses this information to evaluate the

credit quality of the portfolio, identify potential problem loans, and initiate appropriate loss mitigation activities.

Fannie Mae manages credit risk throughout the life of a multifamily loan through dedicated due

diligence, portfolio monitoring, and loss mitigation teams. The due diligence team specializes in

assessing transactions prior to purchase or securitization, particularly with large loans or structured

transactions, and performs post-purchase reviews when the underwriting has been delegated to

lenders. Under the Delegated Underwriting and Servicing (DUS) product line, Fannie Mae purchases

or securitizes mortgages under $20 million from approved risk sharing lenders without prior review of

the mortgages by Fannie Mae. The portfolio monitoring team performs detailed portfolio loss reviews,

addresses borrower and geographic concentration risks, assesses lender qualiÑcations, evaluates

counterparty risk, and tracks property performance and contract compliance. Fannie Mae is enhancing its quantitative tools to provide earlier indications of any deterioration in the credit quality of the

multifamily portfolio. The loss mitigation team manages troubled assets from default through

foreclosure and property disposition, if necessary.

Fannie Mae's multifamily credit risk management eÅorts include substantial use of various forms

of credit enhancement on the majority of loans purchased or guaranteed. Fannie Mae has shared risk

arrangements where lenders in its DUS product line bear losses on the Ñrst 5 percent of unpaid

principal balance (UPB) and share in remaining losses up to a prescribed limit. On structured

transactions, Fannie Mae generally has full or partial recourse to lenders or third parties for loan

losses. Letters of credit, investment agreements, or pledged collateral may secure the recourse. Thirdparty recourse providers for structured and other transactions include government and private

mortgage insurers. Table 9 presents the credit risk-sharing proÑle, by UPB, of multifamily loans in

portfolio and underlying MBS at December 31, 2001, 2000, and 1999.

Table 9: Multifamily Risk ProÑle

December 31,

2001 2000 1999

Fannie Mae risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17% 13% 12%

Shared risk(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64 5956

Recourse(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1928 32

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

(1) Includes loans in which the lender initially bears losses of up to 5 percent of UPB and shares

any remaining losses with Fannie Mae up to a prescribed limit.

(2) Includes loans not included in ""shared risk'' that have government mortgage insurance, or

full or partial recourse to lenders or third parties.

The economic slowdown during 2001 had only a modest impact on multifamily credit performance as occupancy rates and multifamily property values remained strong. Multifamily credit-related

losses increased to $4 million from $3 million in 2000. However, there were no primary risk (including

those with shared risk) multifamily properties in Fannie Mae's inventory of foreclosed properties at

December 31, 2001, compared with four properties at the end of 2000. Management anticipates an

increase in multifamily credit losses in 2002 because of the growth of the portfolio in recent years and

weakened economic conditions. Table 10 provides a detailed breakdown of credit-related losses and

33
the ratio of credit-related losses to average UPB outstanding for multifamily loans in portfolio and

underlying MBS.

Table 10: Multifamily Credit-Related Losses

Year Ended December 31,

Dollars in millions 2001 2000 1999

Charge-oÅs, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ 2 $ 4

Foreclosed property expense, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 1 3

Credit-related losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4 $ 3 $ 7

Credit loss ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .008% .007% .015%

Multifamily serious delinquencies were .32 percent at year-end 2001. Two loans under forbearance agreements at December 31, 2001 totaling $118 million on properties in New York City that were

aÅected by the World Trade Center disaster are included in the multifamily serious delinquency rate

at year-end 2001. The multifamily serious delinquency rate excluding these two properties was

.10 percent at December 31, 2001, up from a record low of .05 percent at year-end 2000. Multifamily

serious delinquencies represent loans for which Fannie Mae has primary risk of loss and that are

60 days or more delinquent. The multifamily serious delinquency percentage is based on the UPB of

delinquent loans compared with the total amount of multifamily loans in portfolio and underlying

MBS for which Fannie Mae is at risk.

Allowance for Losses

Fannie Mae establishes an allowance for losses on mortgages in its portfolio and mortgages

underlying MBS outstanding. The allowance for losses is a critical accounting policy that requires

management judgment and assumptions. Fannie Mae considers delinquency levels, loss experience,

economic conditions in areas of geographic concentration, and mortgage characteristics in establishing

the allowance for losses. Management sets the allowance for losses at a level it believes is adequate to

cover estimated losses inherent in the total book of business. The allowance for losses is established by

recording an expense for the provision for losses and may be reduced by recording a negative

provision. The allowance for losses is subsequently reduced through charge-oÅs and increased through

recoveries, including those due to credit enhancements and the resale of properties. Senior management reviews the adequacy of the allowance for losses on a quarterly basis.

The allowance for losses was $806 million at December 31, 2001, compared with $809 million at

December 31, 2000. The allowance for losses declined as a percentage of Fannie Mae's total book of

business to .052 percent in 2001 from .062 percent in 2000. The decrease in the allowance as a

percentage of the total book of business reÖects Fannie Mae's excellent credit performance resulting

from the combination of a strong housing market and Fannie Mae's strategy and expertise in credit

loss management. Over the last three years, Fannie Mae has experienced a decrease in its credit loss

ratio in each yearÌfrom .011 percent in 1999 to .006 percent in 2001. Although the economic

downturn increased Fannie Mae's serious delinquency rates in 2001, management believes that the

allowance for losses is adequate to cover losses inherent in Fannie Mae's book of business at December

31, 2001 because:

‚ Fannie Mae had approximately 40 percent equity in its single-family book of business based

upon the average outstanding loan amounts relative to the average market value of homes. The

average loan-to-value ratio on conventional single-family loans, where Fannie Mae bears the

primary risk, was 59 percent at the end of 2001, compared with 58 percent at the end of 2000.

‚ Approximately 33 percent of the single-family mortgages Fannie Mae owns or guarantees

beneÑt from some form of third-party enhancement, helping to ensure that a substantial

portion of credit losses are absorbed by others. Absorption of single-family credit losses by

others increased to 85 percent in 2001 from 80 percent in 2000.

34
Changes in the allowance for losses for the years 1997 Ó 2001 are summarized below.

Allowance for Losses

Total

(Dollars in millions)

Balance, December 31, 1996 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 780

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100

Net chargeoÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (77)

Balance, December 31, 1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 803

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (50)

Net recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49

Balance, December 31, 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 802

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (120)

Net recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 122

Balance, December 31, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 804

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (120)

Net recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 125

Balance, December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 809

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (115)

Net recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 112

Balance, December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 806

Non-Derivative Counterparty Risk

Fannie Mae actively manages the counterparty credit risk that arises from several sources,

including mortgage insurance, lender recourse, the Liquid Investment Portfolio, and mortgage servicing transactions.

Fannie Mae bears the risk that counterparties in these transactions will not fulÑll their

contractual obligations to make payments due to Fannie Mae or to perform other contractual

obligations. Fannie Mae has a dedicated Counterparty Risk Management team that is responsible for

quantifying aggregate counterparty risk exposures across business activities, maintaining a corporate

credit policy framework for managing counterparty risk, and directly managing the counterparty risk

associated with mortgage insurance companies. Fannie Mae generally requires that its counterparties

have an investment grade credit rating (a rating of BBB¿/Baa¿ or higher by Standard & Poor's and

Moody's Investor Service, respectively) with the exception of its recourse and mortgage servicing

counterparties. Fannie Mae does not require an investment grade credit rating for its recourse and

mortgage servicing counterparties because the risk is much lower. Fannie Mae has ongoing, extensive

mortgage purchase and mortgage servicing relationships with these counterparties and, in some

instances, holds collateral. Individual business units are responsible for managing the counterparty

exposures routinely associated with their business activities. The Counterparty Risk Management

team reviews business unit policies, procedures, and approval authorities, and the Credit Risk Policy

Committee approves these internal controls.

The primary credit risk presented by Fannie Mae's mortgage insurance counterparties is that

they will be unable to meet their contractual obligations to pay claims to Fannie Mae on insured

mortgages. Before approving a mortgage insurance company, Fannie Mae conducts a comprehensive

counterparty analysis, which generally includes a review of the mortgage insurer's business plan,

insurance portfolio characteristics, master insurance policies, reinsurance treaties, and ratings on

ability to pay claims. Fannie Mae monitors approved insurers through a reporting and analysis process

performed quarterly. If an insurer cannot provide mortgage insurance in accordance with Fannie

Mae's requirements, most Fannie Mae mortgages provide that if the borrower pays separate sums for

premiums (which is typical), then those sums may be used to pay for other substantially equivalent

mortgage insurance. If this insurance is unavailable, such sums may be retained by Fannie Mae and, in

35
its discretion, used for other credit enhancement. These payments therefore serve as collateral backing

Fannie Mae's exposure to mortgage insurance counterparties. At year-end 2001, Fannie Mae was the

beneÑciary of primary mortgage insurance coverage on $314 billion of single-family loans in portfolio

or underlying MBS. Seven mortgage insurance companies, all rated AA or higher by Standard &

Poor's, provided 96 percent of the total coverage.

The primary credit risk associated with recourse transactions is that lenders will be unable to

fulÑll their obligations to absorb losses on mortgage loans that default. At December 31, 2001, the

unpaid balance of single-family loans where Fannie Mae has recourse to lenders for losses totaled an

estimated $42 billion. The quality of these counterparties is high. Fifty-nine percent of the $42 billion

is covered by recourse agreements with investment grade counterparties. Fannie Mae also mitigates

the risk associated with recourse transactions through various means, including requiring some

lenders to pledge collateral to secure their obligations. Fannie Mae held $247 million in collateral

directly or through custodians on single-family lender recourse transactions at December 31, 2001. In

addition, Fannie Mae can protect itself against losses from a lender's nonperformance by terminating

a lender's contractual status as a Fannie Mae seller/servicer, selling these rights to service Fannie Mae

loans, and retaining sale proceeds. Lenders with recourse obligations had servicing rights on $1.288

trillion of mortgages.

The primary credit risk associated with the Liquid Investment Portfolio is that issuers will not

repay Fannie Mae in accordance with contractual terms. The level of credit risk in the portfolio is low

because these investments are primarily high-quality, short-term investments, such as asset-backed

securities, commercial paper, and federal funds. The majority of asset-backed securities in the Liquid

Investment Portfolio are rated AAA by Standard & Poor's. Unsecured investments in the portfolio are

generally rated A or higher by Standard & Poor's. At December 31, 2001, 96 percent of the Liquid

Investment Portfolio had a credit rating of A or higher.

The primary credit risk associated with mortgage servicers is that they will not fulÑll their

contractual servicing obligations. On behalf of Fannie Mae, 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. A servicing contract breach could result in

credit losses for Fannie Mae, or Fannie Mae could incur the cost of Ñnding a replacement servicer.

Fannie Mae mitigates this risk by requiring mortgage servicers to maintain a minimum servicing fee

rate that Fannie Mae can retain or transfer to compensate a replacement servicer in the event of a

servicing contract breach. Fannie Mae also manages this risk by requiring servicers to follow speciÑc

servicing guidelines and by monitoring each servicer's performance using loan-level data. Fannie Mae

conducts on-site reviews of compliance with servicing guidelines and mortgage servicing performance.

Fannie Mae also works on-site with nearly all of its major servicers to facilitate loan loss mitigation

eÅorts and improve the default management process. In addition, Fannie Mae reviews quarterly

Ñnancial information on servicers. At year-end 2001, Fannie Mae's ten largest mortgage servicers

serviced 71 percent of its single-family book of business.

Information on derivative counterparty credit risk is included in MD&A under ""Balance SheetÌ

Derivative Instruments.'' Additional information on non-derivative counterparty credit risk is

presented in the Notes to Financial Statements under Note 14, ""Financial Instruments with OÅBalance-Sheet Risk,'' and Note 15, ""Concentrations of Credit Risk.''

Operations Risk Management

Fannie Mae actively manages its operations risk through various measures, such as key performance indicators, to monitor and identify trends.

Operations risk is the risk of potential loss resulting from a breakdown in established controls and

procedures, examples of which include circumvention of internal controls, fraud, human error, and

systems malfunction or failure. Fannie Mae has established extensive policies and procedures to

decrease the likelihood of such occurrences. Fannie Mae's OÇce of Auditing tests the adequacy of and

adherence to internal controls and established policies and procedures. Financial system data are

36
regularly reconciled to source documents to ensure the accuracy of Ñnancial system outputs. In

addition, Fannie Mae has a comprehensive disaster recovery plan that is designed to restore critical

operations with minimal interruption in the event of a disaster. Although the attacks of September 11,

2001 temporarily reduced mortgage commitments and slowed portfolio growth, Fannie Mae was able

to remain open for business during every day of the week of the tragedy with only minimal disruption

to operations.

The use of Ñnancial forecast models is another potential operations risk. To mitigate the risk

associated with the use of Ñnancial models, Fannie Mae regularly reconciles forecasted results to

actual results and recalibrates models for the diÅerences.

Fannie Mae evaluates key performance indicators for elements of operations risk to monitor

trends and identify early warning signals. Each key performance indicator is based on clearly deÑned

and quantiÑable performance thresholds. Senior managers are responsible for monitoring key performance indicators, addressing the monthly results, and taking corrective actions as necessary. The

OTI Committee also reviews the results and actions taken.

Balance Sheet Analysis

Fannie Mae's primary balance sheet activities are purchasing mortgages and other investments

with proceeds from debt issuances and repayments of mortgages and other investments. Fannie Mae's

liquidity and capital resources are critical to its activities and its regulatory capital requirements. The

following analysis describes trends in these aspects of Fannie Mae's business activities.

Mortgage Portfolio

Fannie Mae's net mortgage portfolio grew 16 percent to $705 billion at December 31, 2001 from

$607 billion at December 31, 2000. The volume of mortgage originations reached record levels in 2001

as mortgage interest rates fell to historic lows during the year. The drop in interest rates, combined

with a historically high Ñxed-rate share of total mortgage originations, caused the supply of mortgages

in the secondary market to be unusually high, resulting in attractive mortgage-to-debt spreads and

increased purchase commitments by the portfolio business.

During the second half of 2001, an unusually large number of portfolio commitments were made

for settlement a number of months forward. Fannie Mae ended 2001 with $55 billion in outstanding

mortgage purchase commitments, compared with $16 billion at December 31, 2000. Delayed settlement of these commitments in 2002 is expected to add over 5 percentage points to portfolio growth in

2002.

Additional information on mortgage portfolio composition is presented in the Notes to Financial

Statements under Note 2, ""Mortgage Portfolio, Net.''

The average yield on Fannie Mae's net mortgage portfolio decreased to 7.11 percent during 2001

from 7.16 percent during 2000. The decrease in yield resulted largely from the general decline in

mortgage rates on loans sold into the secondary market and an increase in the level of liquidations on

older, higher-rate loans. The liquidation rate on mortgages in portfolio (excluding sales) more than

doubled in 2001, increasing to 25 percent from 10 percent in 2000. Total mortgage liquidations

increased to $164 billion in 2001 from $57 billion in 2000 largely because of extensive reÑnancing in

response to falling mortgage interest rates.

Net unamortized premiums, discounts, and other deferred purchase price adjustments in Fannie

Mae's mortgage portfolio totaled $2.1 billion and $2.5 billion at December 31, 2001 and 2000,

respectively. Fannie Mae applies the interest method to amortize purchase price adjustments over the

estimated life of the loans. Calculating the constant eÅective yield necessary to apply the interest

method in the amortization of mortgage purchase discounts or premiums and other deferred purchase

price adjustments is a critical accounting policy that requires estimating future mortgage prepayments. Estimating prepayments requires signiÑcant judgment and assumptions that involve some

degree of uncertainty regarding factors such as the forecast of movements in interest rates and

predicting borrower patterns.

37
Fannie Mae tracks and monitors actual prepayments received against anticipated prepayments

and regularly assesses the sensitivity of prepayments to changes in interest rates on a monthly basis.

Based upon this analysis, Fannie Mae determines whether it should change the estimated prepayment

rates used in the amortization calculation. If changes are necessary, Fannie Mae recalculates the

constant eÅective yield and adjusts the net mortgage investment balance to reÖect the amount that

would have been recorded had the new eÅective yield been applied since acquisition of the mortgages

or MBS. Fannie Mae's premium, discount, and deferred price adjustment prepayment sensitivity

analysis at December 31, 2001 indicates that a 100 basis point increase in interest rates would result in

a decrease in projected net interest income of approximately 1 percent and a 100 basis point decrease

in interest rates would result in an increase in projected net interest income of approximately

2 percent over a one-year horizon. This is one component of Fannie Mae's overall net interest income

at risk assessment. A comprehensive analysis of the impact of interest rate changes on projected net

interest income is presented in MD&A in the ""Net Interest Income at Risk'' section under ""Risk

ManagementÌInterest Rate Risk Management.''

Table 11 summarizes mortgage portfolio activity on a gross basis and average yields from 1999

through 2001.

Table 11: Mortgage Portfolio Activity

Purchases Sales Repayments(1)

2001 2000 1999 2001 2000 1999 2001 2000 1999

(Dollars in millions)

Single-family:

Government insured or guaranteed $ 6,001 $ 6,940 $ 23,575 $ Ì $ 521 $ 360 $ 8,125 $ 3,423 $ 4,092

Conventional:

Long-term, Ñxed-rateÏÏÏÏÏÏÏÏÏÏÏ 226,516 113,444 146,6797,621 9,2195,779120,787 35,208 52,707

Intermediate-term, Ñxed-rateÏÏÏÏ 26,146 11,607 15,315 442 599 9 23,391 13,105 17,878

Adjustable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,777 17,683 6,073 228 374 Ì 9,937 4,293 3,829

Total single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 262,440 149,674 191,642 8,291 10,713 6,148 162,240 56,029 78,506

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,144 4,557 3,568 690 269 Ì 2,172 1,204 1,244

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $270,584 $154,231 $195,210 $8,981 $10,982 $6,148 $164,412 $57,233 $79,750

Average net yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.56% 7.62% 6.88% 7.23% 7.18% 7.39%

Repayments as a percentage of

average mortgage portfolio ÏÏÏÏÏÏÏÏ 24.7 10.3 16.9

(1) Includes mortgage loan prepayments, scheduled amortization, and foreclosures.

Investments

Fannie Mae's investments increased 36 percent to $75 billion at December 31, 2001, from

$55 billion at December 31, 2000. The Liquid Investment Portfolio accounts for the majority of

Fannie Mae's investments and consists primarily of high-quality short-term investments in nonmortgage assets, such as asset-backed securities, commercial paper, and federal funds. The Liquid

Investment Portfolio serves as a source of liquidity and an investment vehicle for Fannie Mae's

surplus capital. These investments totaled $65 billion at December 31, 2001, compared with $52 billion at the end of the prior year. The increase in liquid investments at December 31, 2001 was

primarily a result of the delayed settlement of purchase commitments at year-end, excess capital, and

opportunities in the market. The average yield on liquid investments decreased to 4.63 percent in 2001

from 6.60 percent in 2000, as a result of the sharp drop in average short-term interest rates.

Additional information on investment composition is presented in the Notes to Financial

Statements under Note 4, ""Investments.''

38
Financing Activities

Total debt outstanding increased 19 percent to $763 billion at December 31, 2001, from

$643 billion at December 31, 2000. Fluctuations in interest rate volatility and market pricing during

2001 gave Fannie Mae a valuable opportunity to repurchase $9 billion of debt that was trading at

historically wide spreads to other Ñxed-income securities. In addition, Fannie Mae called $173 billion

of debt in response to the sharp decline in short- and intermediate-term interest rates. Fannie Mae

reissued much of this debt with short-term maturities in anticipation of an increase in mortgage

liquidations. These asset-liability management strategies had the following impact on the debt

portfolio:

‚ The average cost of debt outstanding decreased to 6.00 percent in 2001 from 6.35 percent in

2000.

‚ EÅective long-term debt, which takes into consideration the eÅect of derivative instruments on

the maturity of long- and short-term debt, decreased to 82 percent of total debt outstanding at

December 31, 2001 from 85 percent at year-end 2000.

‚ EÅective long-term debt as a percentage of the net mortgage portfolio decreased to 89 percent

at December 31, 2001 from 90 percent at the end of 2000.

‚ The weighted-average maturity of eÅective long-term, Ñxed-rate debt outstanding decreased to

78 months at year-end 2001 from 79 months at year-end 2000.

To hedge against future increases in interest rates, Fannie Mae used interest rate swaps to

lengthen the Ñnal maturity of Fannie Mae's debt by 26 months at December 31, 2001, versus

24 months at December 31, 2000. Table 12 provides a summary of debt issuances and repayments

during 2001 compared with the previous two years as well as the average cost of debt outstanding at

year-end.

Table 12: Short-Term and Long-Term Debt Activity

2001 2000 1999

Dollars in millions

Issued during the year:

Short-term(1):

Amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,756,691 $1,143,131 $1,136,001

Average cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.69% 6.27% 5.17%

Long-term(1):

Amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 249,352 $ 110,215 $ 139,020

Average cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.83% 6.92% 6.07%

Repaid during the year:

Short-term(1):

Amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,691,240 $1,106,956 $1,125,748

Average cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.22% 6.15% 5.10%

Long-term(1):

Amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 196,610 $ 50,335 $ 61,790

Average cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.03% 6.33% 6.51%

Outstanding at year-end:

Due within one year:

Net amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 343,492 $ 280,322 $ 226,582

Average cost(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.81% 6.40% 5.80%

Due after one year:

Net amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 419,975 $ 362,360 $ 321,037

Average cost(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.52% 6.46% 6.22%

Total debt:

Net amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 763,467 $ 642,682 $ 547,619

Average cost(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.49% 6.47% 6.18%

39
(1) ""Short-term'' refers to the face amount of debt issued with an original term of one year or less. ""Long-term'' is the face

amount of debt issued with an original term greater than one year.

(2) Average cost includes the eÅects of currency and debt swaps and amortization of premiums, discounts, issuance costs,

and hedging results.

(3) Average cost includes the eÅects of currency, debt, and interest rate swaps and the amortization of premiums,

discounts, issuance costs and hedging results.

The total amount of option-embedded debt outstanding as a percentage of the net mortgage

portfolio increased to 54 percent at year-end 2001 versus 46 percent at the end of 2000. Table 13

presents option-embedded debt instruments as a percentage of mortgage purchases and the net

mortgage portfolio for the past three years. Option-embedded debt instruments include derivative

instruments.

Table 13: Option-Embedded Debt Instruments

2001 2000 1999

Dollars in billions

Issued during the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $286 $ 65 $114

Percentage of total mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 106% 42% 58%

Outstanding at year-end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $378 $280 $247

Percentage of total net mortgage portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54% 46% 47%

Additional information on the usage of derivatives is presented in MD&A under ""Balance Sheet

Analysis-Derivative Instruments.''

Fannie Mae's Benchmark SecuritiesSM program continued to grow in 2001. The Benchmark

Securities program encompasses large issues of noncallable and callable debt designed to provide

liquidity and performance to investors while reducing Fannie Mae's relative cost of debt. The

Benchmark Securities program has served to consolidate much of Fannie Mae's debt issuances from a

large number of small, unscheduled issues to a smaller number of larger, more liquid scheduled issues.

During 2001, Fannie Mae issued Benchmark Notes» and Benchmark Bonds» in each month.

Benchmark BillsSM served as Fannie Mae's weekly source for all of its three-month and six-month

discount debt securities during the year. One-year Benchmark Bills, which were introduced in October

2000, were issued regularly on a biweekly schedule during 2001. Fannie Mae reintroduced its Callable

Benchmark Notes in June 2001 and issued $10 billion of these securities during 2001. Callable

Benchmark Notes are intended to provide investors and other market participants with callable

structures that are brought to market in a scheduled manner. As part of its voluntary safety and

soundness initiatives, Fannie Mae began issuing Subordinated Benchmark Notes in the Ñrst quarter of

2001 on a periodic basis to create a new, liquid class of Ñxed income assets for investors. At

December 31, 2001, Fannie Mae had $5 billion of outstanding Subordinated Benchmark Notes.

Derivative Instruments

Derivative instruments are important tools that Fannie Mae uses to manage interest rate risk.

Fannie Mae uses derivatives to help match the duration of its debt with the duration of its mortgage

assets. This duration matching reduces the risk of mortgage assets held in portfolio. Fannie Mae also

uses derivative instruments to convert debt issued in foreign currencies to U.S. dollars and to hedge

certain debt prior to issuance. Fannie Mae acts only as an end user of derivatives and does not broker

or speculate in them.

Fannie Mae uses only the most straightforward types of derivative instruments such as interestrate swaps, basis swaps, swaptions, and caps, whose values are relatively easy to model and predict.

Swaps provide for the exchange of Ñxed and variable interest payments based on contractual notional

principal amounts. These may include callable swaps, which give counterparties or Fannie Mae the

right to terminate interest rate swaps before their stated maturities, and foreign currency swaps, in

which Fannie Mae and counterparties exchange payments in diÅerent types of currencies. Basis swaps

40
provide for the exchange of variable payments that have maturities similar to hedged debt, but have

payments based on diÅerent interest rate indices. Interest rate caps provide ceilings on the interest

rates of variable-rate debt. The use of purchased options also is an important risk management tool.

The reason is that American homeowners have ""options'' to pay oÅ their mortgages at any time.

When holding mortgage loans in portfolio, Fannie Mae must manage this option risk with options of

its own. Fannie Mae obtains these options by issuing callable debt or by purchasing stand-alone

options and linking them to debt. Swaptions are an example of an option. Swaptions give Fannie Mae

the option to enter into swaps at a future date, thereby mirroring the economic eÅect of callable debt.

Fannie Mae primarily uses derivatives as a substitute for notes and bonds it issues in the cash

debt markets. When Fannie Mae purchases mortgage assets, it funds the purchases with a combination of equity and debt. The debt issued is a mix that typically consists of short- and long-term bullet

and callable debt. The varied maturities and Öexibility of these debt combinations allow Fannie Mae to

match the durations of its assets and liabilities. A close though not perfect match of asset and liability

cash Öows and durations helps Fannie Mae maintain a relatively stable net interest margin.

Fannie Mae can use a mix of cash debt issuances and derivatives to achieve the same duration

matching achieved with all cash market debt issuances. The following is an example of funding

alternatives that Fannie Mae could use to achieve similar economic results:

‚ Rather than issuing a ten-year bullet note, Fannie Mae could issue short-term debt and enter

into a ten-year interest rate swap with a highly rated counterparty. The derivative counterparty

would pay a Öoating rate of interest to Fannie Mae on the swap, and Fannie Mae would pay the

counterparty a Ñxed rate of interest on the swap, thus achieving the economics of a ten-year

note issue.

‚ Similarly, instead of issuing a ten-year callable note, Fannie Mae could issue a three-year note

and enter into a swaption which would have the same economics of a ten-year callable note.

The ability to either issue debt in the cash market or modify debt through the derivatives market

increases the funding Öexibility of the company and reduces overall funding costs. Table 14 gives an

example of equivalent funding alternatives for a mortgage purchase with all cash funding versus a

blend of cash and derivatives.

Table 14: Equivalent Cash and Derivative Funding

Fund With:(1)

All Cash Funding Cash and Derivative Funding

Percentage Type of Debt Percentage Type of Debt

10 short-term debt 10 short-term debt

15 3-year bullet 15 3-year bullet

25 10-year bullet 25 short-term debt plus 10-year swap

50 10-year callable in 3 years 50 3-year bullet plus pay-Ñxed swaption

(1) This example indicates the possible funding mix and does not represent how an actual

purchase would necessarily be funded.

As illustrated by Table 14, Fannie Mae can achieve similar economic results by using either all

cash funding or cash and derivatives funding. Frequently, it is less expensive to use the cash and

derivatives alternative to achieve a given funding mix.

Fannie Mae occasionally issues debt in a foreign currency. Because all of Fannie Mae's assets are

denominated in U.S. dollars, Fannie Mae enters into currency swaps to eÅectively convert the foreign

currency debt into U.S. dollars.

Fannie Mae also hedges against Öuctuations in interest rates on planned debt issuances with

derivative instruments. The hedging of anticipated debt issuances enables Fannie Mae to maintain an

orderly and cost-eÅective debt issuance schedule so it can fund daily loan purchase commitments

41
without signiÑcantly increasing its interest rate risk or exposure to changes in the spread of its funding

costs versus benchmark interest rates.

Table 15 summarizes the notional balances of Fannie Mae's derivatives for the years ended

December 31, 2001 and 2000 by derivative category, along with the fair values of its derivatives at

year-end 2001.

Table 15: Derivative Activity and Maturity Data

Pay Generic Pay Fixed/ Variable/ Receive Variable Swaps(2) Receive

Pay Receive Fixed Basis Caps and

Amount Rate(3) Rate(3) Swaps Swaps Swaptions Other(4) Total

Dollars in millions

Notional Amounts:(1)

Notional balance at

January 1, 2000 ÏÏÏÏÏÏÏÏÏÏÏ $139,404 6.55% 6.03% $31,622 $19,544 $ 48,115 $12,219 $250,904

Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,170 6.83 6.74 48,482 14,600 42,163 4,550 146,965

MaturitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,837 5.75 6.63 20,930 19,585 7,750 2,027 73,129

Notional balance at

December 31, 2000ÏÏÏÏÏÏÏÏÏ 153,737 6.74 6.7959,174 14,55982,528 14,742 324,740

Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90,787 5.39 3.95 33,230 46,150 168,350 100 338,617

MaturitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,844 6.41 4.20 53,335 13,655 30,935 1,449 130,218

Notional balance at

December 31, 2001ÏÏÏÏÏÏÏÏÏ $213,680 6.21% 2.47% $39,069 $47,054 $219,943 $13,393 $533,139

Fair value at

December 31, 2001:(5) ÏÏÏÏÏ $ (9,792) $ 899 $ 1 $ 6,267 $(1,490) $ (4,115)

Future Maturities of Notional

Amounts:(6)

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 26,545 5.54% 2.70% $16,118 $33,704 $ 45,600 $ 4,705 $126,672

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,730 5.07 2.46 7,38913,050 43,643 458 90,270

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,470 6.02 2.37 2,755 150 8,200 1,200 31,775

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,675 6.52 2.44 1,225 Ì 4,900 594 22,394

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,975 6.21 2.31 3,635 100 4,750 Ì 30,460

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 104,285 6.66 2.47 7,947 50 112,850 6,436 231,568

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $213,680 6.21% 2.47% $39,069 $47,054 $219,943 $13,393 $533,139

(1) Dollars represent notional amounts that indicate only the amount on which payments are being calculated and do not

represent the amount at risk of loss.

(2) Included in the notional amounts are callable swaps of $32 billion and $35 billion with weighted-average pay rates of

6.72 percent and 6.67 percent and weighted-average receive rates of 2.54 percent and 6.83 percent at December 31,

2001 and December 31, 2000, respectively.

(3) The weighted-average interest rate payable and receivable is as of the date indicated. The interest rates of the swaps

may be variable-rate, so these rates may change as prevailing interest rates change.

(4) Includes foreign currency swaps, futures contracts, and derivative instruments that provide a hedge against interest

rate Öuctuations.

(5) Based on fair value at December 31, 2001, estimated by calculating the cost, on a net present value basis, to settle at

current market rates all outstanding derivative contracts.

(6) Based on stated maturities. Assumes that variable interest rates remain constant at December 31, 2001 levels.

Over 99 percent of the notional amount of Fannie Mae's outstanding derivative transactions were

with counterparties rated A or better by Standard & Poor's at December 31, 2001 (one counterparty

was downgraded below an A rating after the contract was entered into). Fannie Mae's derivative

instruments were diversiÑed among 23 counterparties at year-end 2001 to lower credit risk concentra42
tions. At year-end 2001, eight counterparties represented approximately 78 percent of the total

notional amount of outstanding derivatives transactions, and each had a credit rating of A or better.

Fannie Mae's primary credit exposure on a derivative transaction is that a counterparty might

default on payments due, which could result in Fannie Mae having to replace the derivative with a

diÅerent counterparty at a higher cost. The exposure to counterparty default after oÅsetting

arrangements, such as master netting agreements and the value of related collateral, is thus the

appropriate measure of the actual credit risk of derivative contracts.

The risk of loss to Fannie Mae on its derivatives book is extremely low for two primary reasons:

1) Fannie Mae's counterparties are of very high credit quality.

2) Fannie Mae has a conservative collateral management policy with provisions requiring

collateral on its derivative contracts in gain positions.

Fannie Mae has never experienced a loss on a derivative transaction due to credit default by a

counterparty. Fannie Mae's credit risk on derivative transactions is extremely low because Fannie

Mae's counterparties are of very high credit quality. These counterparties consist of large banks,

broker-dealers, and other Ñnancial institutions that have a signiÑcant presence in the derivatives

market, most of whom are based in the United States. Fannie Mae manages derivative counterparty

credit risk by contracting only with experienced counterparties that have high credit ratings. Fannie

Mae initiates derivative contracts only with counterparties rated A or higher. As an additional

precaution, Fannie Mae has a conservative collateral management policy with provisions for requiring

collateral on its derivative contracts in gain positions.

Fannie Mae regularly monitors credit exposures on its derivatives by valuing derivative positions

via internal pricing models and dealer quotes. Fannie Mae enters into master agreements that provide

for netting of amounts due to Fannie Mae and amounts due to counterparties under those agreements.

All of Fannie Mae's master derivatives agreements are governed by New York law.

The estimated total notional balance of the global derivatives market was $119 trillion in June

2001 based on combined data from the Bank for International Settlements for over-the-counter

derivatives and published Ñgures for exchange-traded derivatives. Fannie Mae's outstanding notional

principal balance of $533 billion at December 31, 2001 represents less than one-half of one percent of

the total estimated derivatives market. Although notional principal is a commonly used measure of

volume in the derivatives market, it is not a meaningful measure of market or credit risk since the

notional amount typically does not change hands. The notional amounts of derivative instruments are

used to calculate contractual cash Öows to be exchanged and are signiÑcantly greater than the

potential market or credit loss that could result from such transactions. The fair value gains on

derivatives is a more meaningful measure of the potential market exposure on derivatives.

The exposure to credit loss on derivative instruments can be estimated by calculating the cost, on

a present value basis, to replace at current market rates all outstanding derivative contracts in a gain

position. Fannie Mae's exposure on derivative contracts (taking into account master settlement

agreements that allow for netting of payments and excluding collateral received) was $766 million at

December 31, 2001, compared with $182 million at December 31, 2000. Fannie Mae expects the credit

exposure on derivative contracts to Öuctuate as interest rates change. Fannie Mae held $656 million of

collateral through custodians for derivative instruments at December 31, 2001 and $70 million of

collateral at December 31, 2000. Assuming the highly unlikely event that all of Fannie Mae's

derivative counterparties to which Fannie Mae was exposed at December 31, 2001 were to default

simultaneously, it would have cost an estimated $110 million to replace the economic value of those

contracts. This replacement cost represents less than 2 percent of Fannie Mae's 2001 pre-tax income.

Table 16 provides a summary of counterparty credit ratings for the exposure on derivatives in a

gain position at December 31, 2001.

43
Table 16: Derivative Credit Loss Exposure(1)

Years to Maturity Maturity Exposure

Less than 1 to Over Distribution Collateral Net of

1 year 5 years 5 years Netting(2) Exposure Held Collateral

(Dollars in millions)

Credit Rating

AAA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $Ì $Ì $ 136 $(136) $ Ì $ Ì $ Ì

AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 43 671 (528) 186 95 91

A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 43 826 (289) 580 561 19

Total ÏÏÏÏÏÏÏÏÏÏÏ $Ì $86 $1,633 $(953) $766 $656 $110

(1) Represents the exposure to credit loss on derivative instruments, which is estimated by

calculating the cost, on a present value basis, to replace all outstanding derivative contracts

in a gain position. Reported on a net-by-counterparty basis where a legal right of oÅset exists

under an enforceable master settlement agreement. Derivative gains and losses with the same

counterparty in the same maturity category are presented net within the maturity category.

(2) Represents impact of netting of derivatives in a gain position and derivatives in a loss

position for the same counterparty across maturity categories.

The majority of Fannie Mae's credit exposure of $1.719 billion based on these maturity categories

was oÅset by $953 million of exposure that counterparties had to Fannie Mae, resulting in net

exposure, excluding collateral held, of $766 million to counterparties. At December 31, 2001,

100 percent of Fannie Mae's exposure on derivatives excluding collateral held was with counterparties

rated A or better by Standard & Poor's, and 83 percent of Fannie Mae's exposure net of collateral held

was with counterparties rated AA by Standard & Poor's. Five counterparties accounted for approximately 98 percent of exposure on derivatives (excluding collateral held) to counterparties at year-end

2001, and each had a credit rating of A or better.

Fannie Mae mitigates its net exposure on derivative transactions through its collateral management policy, which consists of four primary components: (1) minimum collateral thresholds;

(2) collateral valuation percentages; (3) overcollateralization based on rating downgrades; and

(4) frequent monitoring procedures.

Minimum Collateral Thresholds

Derivative counterparties are obligated to post collateral when Fannie Mae is exposed to credit

losses exceeding agreed-upon thresholds, which are based on counterparty credit ratings. The amount

of collateral to be posted is determined based on counterparty credit ratings and the level of credit

exposure and must equal the excess of Fannie Mae's exposure over the threshold amount. Table 17

presents Fannie Mae's general ratings-based collateral thresholds.

Table 17: Fannie Mae Ratings-Based Collateral Thresholds

Credit Rating

S&P Moody's Exposure Threshold

(Dollars in millions)

AAA Aaa ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mutually agreed on

AA° Aa1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $100

AA Aa2 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50

AA¿ Aa3 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50

A° A1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25

A A2 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10

A¿ or below A3 or below ÏÏÏÏÏÏÏÏÏÏÏ 0 (see Table 18)

44
Collateral Valuation Percentages

Fannie Mae requires its counterparties to post speciÑc types of collateral to meet their collateral

requirements. All of the collateral posted by Fannie Mae counterparties was in the form of cash or

U.S. Treasury securities at December 31, 2001. Each type of collateral is given a speciÑc valuation

percentage based on its relative risk. For example, counterparties receive a 100 percent valuation for

cash but may receive only a 98 percent valuation percentage for certain U.S. Treasury instruments. In

cases where the valuation percentage for a certain type of collateral is less than 100 percent,

counterparties must post an additional amount of collateral to meet their collateral requirements to

Fannie Mae.

Overcollateralization Based on Low Credit Ratings

Fannie Mae further reduces its net exposure on derivatives by generally requiring overcollateralization from counterparties whose credit ratings have dropped below predetermined levels.

Counterparties falling below these levels must post additional collateral (beyond the collateral

requirements previously noted) to meet their overall collateral requirements. Table 18 presents

Fannie Mae's standard valuation percentages for overcollateralization based on counterparty credit

ratings.

Table 18: Fannie Mae Standard Collateral Valuation Percentages

Additional

Percentage

of Collateral

Credit Rating to be Posted

A/A2 or aboveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0%

A¿/A3 to BBB°/Baa1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10

BBB/Baa2 or belowÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25

Frequent Monitoring Procedures

Fannie Mae marks its collateral position against exposure using internal valuation models and

market prices and compares the calculations to its counterparties' valuations. Fannie Mae and its

derivative counterparties transfer collateral within one business day based on the agreed-upon

valuation. Fannie Mae marks to market daily when interest rate movements or credit issues make it

appropriate, and never less frequently than weekly. Pursuant to Fannie Mae's collateral agreements,

Fannie Mae reserves the right to value exposure and collateral adequacy at any time. All of the

collateral posted to Fannie Mae is held by a New York-based third-party custodian, which monitors

the value of posted collateral on a daily basis.

Additional information on derivative instruments is presented in MD&A under ""Risk Management-Interest Rate Risk Management'' and in the Notes to Financial Statements under Note 13,

""Derivative Instruments and Hedging Activities.''

Liquidity and Capital Resources

Fannie Mae's statutory mission requires that it provide ongoing assistance to the secondary

market for mortgages. Fannie Mae therefore must continually raise funds to support its mortgage

purchase activity. As a result of Fannie Mae's credit quality, eÇciency, and standing in the capital

market, Fannie Mae has had ready access to funding. However, the U.S. government does not

guarantee, directly or indirectly, Fannie Mae's debt.

One of the components of Fannie Mae's voluntary initiatives was a commitment to obtain an

annual ""risk to the government'' credit rating or Ñnancial strength rating from a nationally recognized

rating agency. In February 2001, Standard & Poor's assigned a AA¿ ""risk to the government'' rating

to Fannie Mae. In February 2002, Moody's Investors Service assigned an A¿ Bank Financial Strength

Rating to Fannie Mae. The highest possible levels for these ratings are AAA from Standard & Poor's

45
and A from Moody's. Fannie Mae also committed to maintain a portfolio of high-quality, liquid, nonmortgage securities, equal to at least 5 percent of total assets as part of its voluntary safety and

soundness initiatives. At December 31, 2001, Fannie Mae's ratio of liquid assets to total assets was

9.5 percent, compared with 8.2 percent at December 31, 2000.

Fannie Mae's primary sources of cash are issuances of debt obligations, mortgage repayments,

interest income, and MBS guaranty fees. Fannie Mae had cash and cash equivalents and short-term

investments totaling $76 billion at December 31, 2001, compared with $56 billion at December 31,

2000. Primary uses of cash include the purchase of mortgages and other securities, repayment of debt,

interest payments, administrative expenses, taxes, and fulÑllment of its MBS guaranty obligation.

Additional information on MBS is presented in MD&A in the ""Mortgage-Backed Securities'' section.

At December 31, 2001, Fannie Mae had $55 billion in outstanding mandatory commitments and

$2 billion in outstanding optional commitments for the purchase and delivery of mortgages in 2002

that were funded in 2001. At December 31, 2000, Fannie Mae had $16 billion in outstanding

mandatory commitments and $2 billion in outstanding optional commitments for the purchase and

delivery of mortgages in 2001.

Fannie Mae's core capital (deÑned by its regulator, OFHEO, as the stated value of outstanding

common stock, the stated value of outstanding noncumulative perpetual preferred stock, paid-in

capital, and retained earnings) grew to $25.2 billion at December 31, 2001 from $20.8 billion at

December 31, 2000. Fannie Mae's core capital, which excludes accumulated other comprehensive

income (AOCI), is a more accurate reÖection of its capital resources than total stockholder's equity.

Core capital excludes AOCI because AOCI incorporates unrealized gains (losses) on derivatives and

certain investment securities, but not the unrealized losses (gains) on the remaining mortgages and

securities or liabilities used to fund the purchase of these items.

At December 31, 2001, AOCI totaled negative $7 billion, compared with a positive balance of

$10 million at December 31, 2000. Upon adoption of FAS 133 on January 1, 2001, Fannie Mae

recorded a $3.9 billion reduction in AOCI, which was primarily attributable to recording derivatives

(mostly interest rate swaps used as substitutes for non-callable debt) that qualify as cash Öow hedges

on the balance sheet at fair value. The balance of the decline in AOCI was attributable to a decline in

the fair value of these derivatives during the year with the reduction in interest rates. FAS 133

requires a mark-to-market through AOCI for derivatives that qualify as cash Öow hedges to the extent

they are eÅective hedges.

Fannie Mae had approximately 997 million common shares outstanding, net of shares held in

treasury, as of December 31, 2001, versus 999 million common shares outstanding at the end of the

prior year. Common stock issuances during 2001 totaled 4.5 million shares for employee and other

stock compensation plans. Fannie Mae repurchased 6.0 million shares of stock at a weighted average

cost of $76.95 per share as part of the continuation of its capital restructuring program. In 2000,

Fannie Mae repurchased 25 million shares of common stock. The stock repurchases were made

pursuant to the Board's approval to repurchase up to 6 percent of outstanding common shares as of

December 27, 1995 (adjusted for a stock split) and to repurchase shares to oÅset the dilutive eÅect of

common shares issued in conjunction with various stock compensation programs.

Fannie Mae raised $400 million in additional equity in 2001 by issuing variable-rate noncumulative preferred stock. In April 2001, Fannie Mae issued 8.0 million shares of Series H preferred stock at

a stated value of $50 per share and initial rate of 5.81 percent. On March 1, 2001, Fannie Mae

redeemed all of the outstanding shares of its 6.41 percent Series A preferred stock at a redemption

price of $50.53 per share, which included dividends of $.53417 per share for the period commencing

December 31, 2000, up to, but excluding, March 1, 2001. On February 28, 2002, Fannie Mae redeemed

all outstanding shares of its 6.5 percent noncumulative preferred stock, Series B at $50.51458 per

share, which represents the stated redemption price of $50.00 per share plus an amount equal to the

dividend for the quarterly dividend period ending March 31, 2002, accrued to, but excluding the

redemption date of February 28, 2002.

46
In January 2002, the Board of Directors approved a quarterly common stock dividend for 2002 of

$.33 per common share. In 2001, the quarterly dividend rate was $.30 per common share. The Board

of Directors also approved preferred stock dividends for the period commencing December 31, 2001,

up to but excluding March 31, 2002, as identiÑed in Table 19.

Table 19: Preferred Stock Dividends

Dividend

Preferred Stock Series per Share

Series B(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $.81250

Series C ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .80625

Series DÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .65625

Series EÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .63750

Series F ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .78690

Series GÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .75290

Series H ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .72630

(1) Fannie Mae redeemed all of the outstanding shares of its 6.50 percent Series B preferred

stock on February 28, 2002 at $50.5148 per share. The redemption price included dividends

of $.5148 per share for the period commencing December 31, 2001, up to, but excluding,

February 28, 2002.

During 2001, Fannie Mae issued $5 billion of subordinated debt that received a rating of AA¿

from Standard & Poor's and Aa2 from Moody's Investors Service. Fannie Mae's subordinated debt

serves as a supplement to Fannie Mae's equity capital, although it is not a component of core capital.

It provides a risk-absorbing layer to supplement core capital for the beneÑt of senior debt holders and

serves as a consistent and early market signal of credit risk for investors. By the end of 2003, Fannie

Mae intends to issue suÇcient subordinated debt to bring the sum of total capital and outstanding

subordinated debt to at least 4 percent of on-balance-sheet assets, after providing adequate capital to

support oÅ-balance sheet MBS. Total capital and outstanding subordinated debt represented 3.4 percent of on-balance sheet assets at December 31, 2001.

Fannie Mae's Portfolios and Capital Committee, chaired by the Chief Financial OÇcer, determines interest rate risk and credit risk pricing thresholds, formulates corporate hedging strategies, and

ensures compliance with economic and regulatory risk-based capital requirements. Fannie Mae

assesses capital adequacy using an internally developed stress test methodology. The stress test model

calculates the amount of capital required under diÅerent economic scenarios based on the company's

statutory standard. Fannie Mae also uses this model to estimate the potential amount of capital

needed to carry out the company's mission during a period of economic distress. Based on the results

of this model and other factors, Fannie Mae makes decisions on the risk structure of its business.

Regulatory Environment

Fannie Mae is subject to capital adequacy standards established by the Federal Housing

Enterprises Financial Safety and Soundness Act of 1992 (1992 Act) and continuous examination by

OFHEO, which was also established by the 1992 Act. The capital adequacy standards require that

Fannie Mae's core capital equal or exceed a minimum capital standard and a critical capital standard.

Table 20 shows Fannie Mae's core capital at year-end 2001 and 2000 compared with the requirements.

47
Table 20: Capital Requirements

December 31,

2001 2000

Dollars in millions

Core capital(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $25,182 $20,827

Required minimum capital(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,182 20,294

Excess of core capital over minimum capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,000 $ 533

Required critical capital(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,324 10,337

Excess of core capital over required critical capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,85910,490

(1) The sum of (a) the stated value of outstanding common stock; (b) the stated value of

outstanding noncumulative perpetual preferred stock; (c) paid-in capital; and (d) retained

earnings. Core capital excludes accumulated other comprehensive income (AOCI).

(2) The sum of (a) 2.50 percent of on-balance sheet assets; (b) .45 percent of outstanding MBS;

and (c) .45 percent of other oÅ-balance sheet obligations, which may be adjusted by the

Director of OFHEO under certain circumstances (See 12 CFR 1750.4 for existing adjustments made by the Director of OFHEO).

(3) The sum of (a) 1.25 percent of on-balance sheet assets; (b) .25 percent of outstanding MBS;

and (c) .25 percent of other oÅ-balance sheet obligations, which may be adjusted by the

Director of OFHEO under certain circumstances.

The 1992 Act also established risk-based capital requirements for Fannie Mae and required

OFHEO to adopt regulations establishing a risk-based capital test. On September 13, 2001, OFHEO

published a Ñnal risk-based capital rule in the Federal Register. On February 20, 2002, OFHEO

Ñnalized amendments to the Ñnal rule. Under the 1992 Act, the Ñnal regulations are enforceable one

year after publication in the Federal Register. Management is continuing its review and analysis of the

Ñnal rule and the Ñnalized amendments. Results of Fannie Mae's interim risk-based capital stress test,

which Fannie Mae discloses under its voluntary safety and soundness initiatives, indicate that Fannie

Mae is in full compliance with its capital requirements.

Mortgage-Backed Securities

Outstanding MBS held by investors other than Fannie Mae grew 22 percent to $859 billion at

December 31, 2001 from $707 billion at December 31, 2000. MBS issues acquired by other investors

increased $240 billion to $345 billion from $105 billion in 2000, while liquidations of outstanding MBS

acquired by other investors increased $112 billion to $201 billion. The increase in MBS issuances and

liquidations in 2001 was attributable to the decline in mortgage interest rates during the year.

Total MBS outstanding, including MBS held in Fannie Mae's portfolio, grew 22 percent to $1.290

trillion at year-end 2001 from $1.058 trillion at year-end 2000. Total MBS issues, including MBS held

in Fannie Mae's portfolio, increased 150 percent to $528 billion from $212 billion in 2000, while total

MBS liquidations grew 158 percent to $296 billion from $115 billion in 2000.

Table 21 summarizes the risk distribution for MBS issued and outstanding for the years ended

December 31, 2001, 2000, and 1999.

48
Table 21: MBS Risk Distribution

Total Issued(1) Outstanding(1)

Outstanding

Lender or MBS Issues Lender of MBS Held

Fannie Mae Shared Acquired by Fannie Mae Shared by Other

Risk Risk Total Others Risk Risk(2) Total(3) Investors

(Dollars in millions)

2001ÏÏÏÏÏÏ $ 482,956 $ 42,365 $ 525,321 $ 344,739 $ 1,091,631 $ 198,720 $ 1,290,351 $ 858,867

2000ÏÏÏÏÏÏ 183,016 27,295 210,311 105,407 837,538 220,212 1,057,750 706,684

1999ÏÏÏÏÏÏ 225,161 75,187 300,348 174,850 751,693 209,190 960,883 679,169

(1) Based on primary default risk category. Includes MBS that have been pooled to back Fannie

Megas, SMBS, or REMICs. Total issued includes $181 billion, $105 billion, and $125 billion

Fannie Mae MBS purchased by portfolio in 2001, 2000, and 1999, respectively. Total issued

excludes $3 billion and $2 billion of Fannie Mae originated MBS in 2001 and 2000,

respectively.

(2) Included in lender risk are $154 billion, $173 billion, and $163 billion at December 31, 2001,

2000, and 1999, respectively, on which the lender or a third party has agreed to bear default

risk limited to a certain portion or percentage of the loans delivered and, in some cases,on

which the lender has pledged collateral to secure that obligation. Fannie Mae is ultimately

responsible for bearing default risk if the lender or third party fails to fulÑll its obligation.

(3) Included are $431 billion, $351 billion, and $282 billion at December 31, 2001, 2000, and

1999, respectively, of MBS in Fannie Mae's portfolio.

Fannie Mae issues MBS that are backed by mortgage loans from a single lender or from multiple

lenders, or that are transferred from Fannie Mae's mortgage portfolio. Single-lender MBS are issued

through lender swap transactions whereby a lender exchanges pools of mortgages for MBS. Multiplelender MBS allow several lenders to pool mortgages and receive, in return, MBS (called Fannie

Majors») representing a proportionate share of a larger pool. Lenders may retain the MBS or sell

them to other investors. MBS are not assets of Fannie Mae except when acquired for investment

purposes, nor are they recorded as liabilities. In some instances Fannie Mae buys mortgage loans and

concurrently enters into a forward sale commitment. These loans are designated as held for sale when

acquired and sold from the portfolio as MBS.

Sellers of pools of mortgage loans may retain or transfer to one or more third parties the primary

default risk on loans constituting the MBS pools, or they may elect to transfer this credit risk to

Fannie Mae. Fannie Mae receives a guaranty fee for assuming the credit risk and guaranteeing timely

payment of principal and interest to MBS investors. The guaranty fee paid by the lender varies,

depending on the risk proÑle of the loans securitized as well as the level of credit risk assumed by

Fannie Mae. Fannie Mae ultimately is responsible for guaranteeing timely payment of principal and

interest to MBS investors whether or not Fannie Mae shares primary default risk on loans underlying

MBS. Fannie Mae accrues a liability on its balance sheet for its guarantee obligation based on the

probability that mortgages underlying MBS will not perform according to contractual terms and the

level of credit risk it has assumed. At December 31, 2001, Fannie Mae had an accrued liability of $598

million for estimated losses on its guaranty of MBS, compared with $603 million at December 31,

2000.

Fannie Mae may adjust the monthly MBS guaranty fee rate through an upfront cash payment or

receipt at securitization. Fannie Mae applies the interest method to amortize the guaranty fee

adjustment over the estimated life of the loans underlying the MBS. Calculating the constant eÅective

yield method necessary to apply the interest method is a critical accounting policy that requires

estimating future mortgage prepayments. Estimating prepayments requires signiÑcant judgment and

assumptions that involve some degree of uncertainty regarding factors such as the forecast of

movements in interest rates and predicting borrower patterns.

49
Fannie Mae tracks and monitors actual prepayments received against anticipated prepayments

and regularly assesses the sensitivity of prepayments to changes in interest rates on a monthly basis.

Based upon this analysis, Fannie Mae determines if changes in the estimated prepayment rates used

in the amortization calculation are necessary. If so, Fannie Mae recalculates the constant eÅective

yield and adjusts the deferred guaranty fee balance to reÖect the amount that would have been

recorded if the new eÅective yield been applied since acquisition of the loans. Fannie Mae's MBS

prepayment sensitivity analysis at December 31, 2001 indicates that a 100 basis point increase in

interest rates would result in an increase in projected guaranty fee income of approximately 2 percent

and a 100 basis point decrease in interest rates would result in a decrease in projected guaranty fee

income of approximately 4 percent over a one-year horizon.

Fannie Mae also issues Real Estate Mortgage Investment Conduits (REMICs) backed by MBS,

Stripped MBS (SMBS), Government National Mortgage Association (Ginnie Mae) mortgage-backed

securities, other REMIC securities, or whole loans. REMICs backed by MBS or SMBS provide an

additional source of fee income from issuances that do not subject Fannie Mae to added credit risk.

REMIC issuances totaled $124 billion in 2001, up from $34 billion in 2000. Fannie Mae REMIC

issuances rebounded in 2001 with the rest of the REMIC market. REMIC market volumes increased

primarily because of the steeper yield curve, which made the REMIC market more attractive. In

addition, lower interest rates contributed to higher MBS issuances and increased collateral available

for REMICs. The outstanding balance of REMICs at December 31, 2001 was $346 billion, compared

with $292 billion at December 31, 2000. REMICs are not assets of Fannie Mae except when acquired

for investment purposes, nor are they recorded as liabilities.

Housing Goals

The 1992 Act gives the Secretary of HUD the authority to establish low- and moderate-income,

underserved areas, and special aÅordable housing goals for Fannie Mae. By regulation, HUD has

established the low- and moderate- income housing goal at 50 percent of Fannie Mae's conventional

mortgage business, the underserved areas housing goal at 31 percent, and the special aÅordable

housing goal, a more targeted measure, at 20 percent. In addition, HUD has established Fannie Mae's

targeted multifamily subgoal at $2.85 billion. Each of these goals applies annually during 2001 through

2003. The goals also include certain provisions that reduce penalties for missing data and provide

incentive points for serving small multifamily and owner-occupied rental housing.

Although the 2001 goals represent a signiÑcant increase above Fannie Mae's historic level of

performance, Fannie Mae achieved these goals in 2001. Table 22 shows Fannie Mae's housing goals

and results for 2001 and 2000.

Table 22: Housing Goals

Year Ended December 31,

2001 2000

Dollars in billions

Goal(1) Result Goal(1) Result

Low- and moderate-income housing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50.0% 51.6% 42.0% 49.5%

Underserved areas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31.0 32.5 24.0 31.0

Special aÅordable housing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20.0 21.6 14.0 22.3

Targeted multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2.85 $7.40 $1.30 $3.78

(1) Goals are expressed as a percentage of the units Ñnanced through Fannie Mae's conventional

mortgage business during the period, except for the targeted multifamily goal.

Performance Outlook

Fannie Mae is optimistic in its outlook for future performance because of anticipated growth in

the housing market, Fannie Mae's disciplined interest rate risk and credit risk management strategies,

50
and the strong credit quality of the current book of business. With operating EPS growth of 21 percent

in 2001, Fannie Mae is on track to achieve its Ñve-year goal of doubling operating EPS to $6.46 by the

end of 2003. Management expects the company's exceptional Ñnancial performance to continue in

2002 with operating EPS growth to be signiÑcantly above the very positive long-term EPS trend

projected for the company for the following reasons:

‚ The carryover eÅects of the very high levels of business activity during the second half of 2001

is expected to have a beneÑcial impact on 2002.

Ì Fannie Mae ended 2001 with $55 billion in outstanding commitments to purchase

mortgages, an increase of $39 billion over the prior year-end. The settlement of these

additional commitments will add over 5 percentage points to portfolio growth in 2002.

Ì With outstanding MBS at year-end 2001 up 10 percent over the average outstanding

MBS balance for 2001, Fannie Mae is positioned to produce double-digit growth in

guaranty fee income in 2002.

‚ The recent sharp rebound in long-term interest rates is expected to signiÑcantly lower the

volume of liquidations over the Ñrst half of 2002. As a result, management anticipates that

Fannie Mae's net interest marginÌwhich beneÑted from the call and refunding of a large

volume of debt during 2001Ìwill remain at elevated levels for a longer period than previously

anticipated.

‚ Management expects that weaker economic conditions will result in only modest increases in

credit-related expenses and Fannie Mae's credit loss ratio. Fannie Mae believes its current book

of business is better positioned to withstand the eÅects of an economic slowdown than in prior

slowdowns because of improved loan underwriting through the automated Desktop Underwriter, lower loan-to-value ratios, less geographic concentration, more third-party credit

enhancements, and superior credit loss mitigation eÅorts.

‚ Revenue growth should more than oÅset higher than normal administrative costs in 2002

associated with Fannie Mae's initiative to upgrade the technology underlying its core operating

infrastructure and systems.

The demand for the American dream will grow even stronger in 2002, and so will Fannie Mae's

determination to meet that demand. In furthering its mission to increase homeownership, Fannie Mae

developed several strategic initiatives that it will continue to pursue in 2002, including:

‚ The $2 trillion American Dream CommitmentSM, which involves a six-point plan to invest

$2 trillion and serve 18 million households over ten years to close homeownership gaps,

strengthen communities and stabilize neighborhoods, and Ñght discrimination and unfair

practices in the mortgage marketplace.

‚ E-commerce strategies and core infrastructure project to:

Ì allow for rapid acquisition and risk assessment of mortgage assets through multiple

channels,

Ì facilitate new revenue generating products, and

Ì generate cost reductions for the consumer, Fannie Mae partners, and the company.

Management expects that the fundamental economic drivers behind the demand for housing Ì

household formation, homeownership rates, home price appreciation, and debt-to-value ratios Ì will

remain strong throughout the next decade and expand the volume of mortgage debt outstanding.

Fannie Mae expects that the continued growth in residential mortgage debt throughout the decade will

positively impact Fannie Mae's long-term earnings trend.

Comparison of 2000 with 1999

The following discussion and analysis compares Fannie Mae's results of operations for the years

ended December 31, 2000 and 1999.

51
Results of Operations

Operating net income increased 14 percent to $4.448 billion in 2000 from $3.912 billion in 1999.

Diluted operating EPS rose 15 percent to $4.29, up from $3.72 in 1999.

Total taxable-equivalent revenues grew 12 percent to $7.825 billion in 2000 from $6.975 billion in

1999. The growth was attributable largely to solid increases in net interest income.

Net interest income increased 16 percent to $5.674 billion in 2000 because of 18 percent growth in

the net mortgage portfolio combined with a stable average net interest margin.

Guaranty fee income increased 5 percent to $1.351 billion in 2000 from $1.282 billion in 1999.

Guaranty fee income grew due to the combination of 4 percent growth in average net Fannie

Mae MBS outstanding and a slight increase in the average eÅective guaranty fee rate.

Fee and other income (expense) declined to an expense of $44 million in 2000 from income of

$191 million in 1999. The $235 million decrease was primarily due to an increase in net operating

losses from certain tax-advantaged investments and a hedging loss on an anticipated Benchmark note

issuance.

Credit-related expenses decreased $33 million to $94 million in 2000 from $127 million in 1999

despite continued growth in Fannie Mae's book of business. Credit-related losses fell as a percentage

of the average book of business to .7 basis points in 2000 from 1.1 basis points in 1999. The provision

for losses remained stable at negative $120 million in conjunction with Fannie Mae's current policy of

recording a negative loss provision in line with net recoveries.

Administrative expenses grew 13 percent to $905 million in 2000 from $800 million in 1999

primarily due to increased expenses associated with eBusiness technology, Single-Family Mortgage

Business infrastructure, and housing and community development initiatives.

The provision for federal income taxes, net of the tax impact from debt extinguishments,

increased to $1.583 billion in 2000 from $1.514 billion in 1999. The eÅective federal income tax rate

decreased to 26 percent in 2000 from 28 percent in 1999. The reduction in the 2000 eÅective federal

income tax rate was attributable primarily to increased tax credits from a higher volume of aÅordable

housing investments.

During 2000, Fannie Mae called or repurchased $18 billion in debt and notional principal of

interest rate swaps carrying a weighted-average cost of 7.10 percent. The comparable amount in 1999

was $42 billion, with a weighted-average cost of 6.80 percent. As a result of repurchase and call

activity, Fannie Mae recognized net extraordinary gains of $49 million ($32 million after tax) in 2000,

compared with net extraordinary losses of $14 million ($9 million after tax) in 1999.

52
INDEX TO FINANCIAL STATEMENTS

Page

Report of Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54

Independent Auditors' Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55

Statements of Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56

Balance SheetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57

Statements of Changes in Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58

Statements of Cash FlowsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59

Notes to Financial StatementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60

Quarterly Results of Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 89

Net Interest Income and Average Balances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91

Rate/Volume Analysis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92

Financial and Statistical Summary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 93

53
REPORT OF MANAGEMENT

To the Stockholders of Fannie Mae:

The management of Fannie Mae is responsible for the preparation, integrity, and fair presentation of the accompanying Ñnancial statements and other information appearing elsewhere in this

report. In our opinion, the Ñnancial statements have been prepared in conformity with accounting

principles generally accepted in the United States of America appropriate in the circumstances, and

the other Ñnancial information in this report is consistent with such statements. In preparing the

Ñnancial statements and in developing the other Ñnancial information, it has been necessary to make

informed judgments and estimates of the eÅects of business events and transactions. We believe that

these judgments and estimates are reasonable, that the Ñnancial information contained in this report

reÖects in all material respects the substance of all business events and transactions to which the

corporation was a party, and that all material uncertainties have been appropriately accounted for or

disclosed.

The management of Fannie Mae is also responsible for maintaining internal control over Ñnancial

reporting that provides reasonable assurance that transactions are executed in accordance with

appropriate authorization, permits preparation of Ñnancial statements in conformity with accounting

principles generally accepted in the United States of America, and establishes accountability for the

assets of the corporation.

Internal control over Ñnancial reporting includes controls for the execution, documentation, and

recording of transactions, and an organizational structure that provides an eÅective segregation of

duties and responsibilities. Fannie Mae has an internal OÇce of Auditing whose responsibilities

include monitoring compliance with established controls and evaluating the corporation's internal

controls over Ñnancial reporting. Organizationally, the internal OÇce of Auditing is independent of

the activities it reviews.

Fannie Mae's Ñnancial statements are audited by KPMG LLP, the corporation's independent

auditors, whose audit is performed in accordance with auditing standards generally accepted in the

United States of America. In addition, KPMG LLP obtained an understanding of our internal controls

over Ñnancial reporting and conducted such tests and other auditing procedures as they considered

necessary to express the opinion on the Ñnancial statements in their report that follows.

The Board of Directors of Fannie Mae exercises its oversight of Ñnancial reporting and related

controls through an Audit Committee, which is composed solely of directors who are not oÇcers or

employees of the corporation. The Audit Committee meets with management and the internal OÇce

of Auditing periodically to review the work of each and to evaluate the eÅectiveness with which they

discharge their respective responsibilities. In addition, the committee meets periodically with KPMG

LLP, who has free access to the committee, without management present. The appointment of the

independent auditors is made annually by the Board of Directors subject to ratiÑcation by the

stockholders.

Management recognizes that there are inherent limitations in the eÅectiveness of any internal

control environment. However, management believes that, as of December 31, 2001, Fannie Mae's

internal control environment, as described herein, provided reasonable assurance as to the integrity

and reliability of the Ñnancial statements and related Ñnancial information.

Timothy Howard Leanne G. Spencer

Executive Vice President and Senior Vice President and

Chief Financial OÇcer Controller

54
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Fannie Mae:

We have audited the accompanying balance sheets of Fannie Mae as of December 31, 2001 and

2000, and the related statements of income, changes in stockholders' equity, and cash Öows for each of

the years in the three-year period ended December 31, 2001. These Ñnancial statements are the

responsibility of Fannie Mae's management. Our responsibility is to express an opinion on these

Ñnancial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United

States of America. Those standards require that we plan and perform the audit to obtain reasonable

assurance about whether the Ñnancial statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial

statements. An audit also includes assessing the accounting principles used and signiÑcant estimates

made by management, as well as evaluating the overall Ñnancial statement presentation. We believe

that our audits provide a reasonable basis for our opinion.

In our opinion, the Ñnancial statements referred to above present fairly, in all material respects,

the Ñnancial position of Fannie Mae as of December 31, 2001 and 2000, and the results of its

operations and its cash Öows for each of the years in the three-year period ended December 31, 2001,

in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 13 to the Ñnancial statements, the Company changed its method of

accounting for derivative instruments and hedging activities in 2001 in accordance with the adoption

of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging

Activities.

We also have audited in accordance with auditing standards generally accepted in the United

States of America the supplemental fair value balance sheets of Fannie Mae as of December 31, 2001

and 2000, included in Note 16 to the Ñnancial statements. As described in Note 16, the supplemental

fair value balance sheets have been prepared by management to present relevant Ñnancial information

that is not provided by the Ñnancial statements and is not intended to be a presentation in conformity

with accounting principles generally accepted in the United States of America. In addition, the

supplemental fair value balance sheets do not purport to present the net realizable, liquidation, or

market value of Fannie Mae as a whole. Furthermore, amounts ultimately realized by Fannie Mae

from the disposal of assets may vary signiÑcantly from the fair values presented. In our opinion, the

supplemental fair value balance sheets included in Note 16 present fairly, in all material respects, the

information set forth therein.

Washington, DC

January 10, 2002

55
FANNIE MAE

FINANCIAL STATEMENTS AND REPORTS

STATEMENTS OF INCOME

Year Ended December 31,

2001 2000 1999

(Dollars and shares in millions,

except per common share amounts)

Interest income:

Mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $46,478 $39,403 $32,672

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,692 3,378 2,823

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49,170 42,781 35,495

Interest expense:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,897 4,204 3,952

Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,183 32,903 26,649

Total interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,080 37,107 30,601

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,090 5,674 4,894

Other income:

Guaranty fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,482 1,351 1,282

Fee and other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 151 (44) 191

Total other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,633 1,307 1,473

Other expenses:

Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (115) (120) (120)

Foreclosed property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 193 214 247

Administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,017 905 800

Special contributionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 300 Ì Ì

Purchased options expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37 Ì Ì

Total other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,432 999 927

Income before federal income taxes, extraordinary item and

cumulative eÅect of change in accounting principleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,291 5,982 5,440

Provision for federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,224 1,566 1,519

Income before extraordinary item and cumulative eÅect of change in

accounting principleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,067 4,416 3,921

Extraordinary item-(loss) gain on early extinguishment of debt (net

of tax beneÑt of $183 million in 2001, tax expense of $17 million in

2000, and tax beneÑt of $5 million in 1999) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (341) 32 (9)

Cumulative effect of change in accounting principle, net of tax effectÏÏÏ 168 Ì Ì

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,894 $ 4,448 $ 3,912

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 138 121 78

Net income available to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,756 $ 4,327 $ 3,834

Basic earnings per common share:

Earnings before extraordinary item and cumulative eÅect of

change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.92 $ 4.28 $ 3.75

Extraordinary (loss) gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.34) .03 Ì

Cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏ .17 Ì Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.75 $ 4.31 $ 3.75

Diluted earnings per common share:

Earnings before extraordinary item and cumulative eÅect of

change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.89$ 4.26 $ 3.73

Extraordinary (loss) gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.34) .03 (.01)

Cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏ .17 Ì Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.72 $ 4.29$ 3.72

Cash dividends per common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.20 $ 1.12 $ 1.08

Weighted-average common shares outstanding:

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,000 1,003 1,024

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,006 1,0091,031

See Notes to Financial Statements.

56
FANNIE MAE

BALANCE SHEETS

December 31,

2001 2000

(Dollars in millions,

except share stated

values)

Assets

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $705,167 $607,399

Investments:

Held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,671 33,832

Available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,883 21,136

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,518 617

Accrued interest receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,705 4,529

Acquired property and foreclosure claims, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 684 636

Derivatives in gain positionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 954 Ì

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,2096,923

Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $799,791 $675,072

Liabilities and Stockholders' Equity

Liabilities:

Debentures, notes and bonds, net:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $343,492 $280,322

Due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 419,975 362,360

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 763,467 642,682

Accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,5298,236

Derivatives in loss positions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,069Ì

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,608 3,316

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 781,673 654,234

Stockholders' Equity:

Preferred stock, $50 stated value, 100 million shares authorizedÌ

46 million shares issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,303 2,278

Common stock, $.525 stated value, no maximum authorizationÌ

1,129 million shares issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 593 593

Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,651 1,588

Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,175 21,619

Accumulated other comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7,065) 10

23,657 26,088

Less: Treasury stock, at cost, 132 million shares in 2001 and

130 million shares in 2000. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,5395,250

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,118 20,838

Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $799,791 $675,072

See Notes to Financial Statements.

57
FANNIE MAE

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Accumulated

Other

Net Additional Comprehensive Total

Common Shares Preferred Common Paid-In Retained Income Treasury Stockholders'

Outstanding Stock Stock Capital Earnings (Loss) Stock Equity

(Dollars and shares in millions)

Balance, January 1, 1999 ÏÏÏÏÏÏÏÏ 1,025 $1,150 $593 $1,533 $15,689 $ (13) $(3,499) $15,453

Comprehensive income:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 3,912 Ì Ì 3,912

Other comprehensive income, net

of tax eÅect:

Unrealized losses on availablefor-sale securities ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì (233) Ì (233)

Total comprehensive income ÏÏÏÏÏ 3,679

Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (1,184) Ì Ì (1,184)

Shares repurchased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10) Ì Ì Ì Ì Ì (653) (653)

Preferred stock issuedÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 150 Ì (2) Ì Ì Ì 148

Treasury stock issued for stock

options and beneÑt plans ÏÏÏÏÏÏÏÏ 4 Ì Ì 54 Ì Ì 132 186

Balance, December 31, 1999 ÏÏÏÏÏ 1,0191,300 593 1,585 18,417 (246) (4,020) 17,629

Comprehensive income:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 4,448 Ì Ì 4,448

Other comprehensive income, net

of tax eÅect:

Unrealized losses on availablefor-sale securities ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 256 Ì 256

Total comprehensive income ÏÏÏÏÏ 4,704

Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (1,246) Ì Ì (1,246)

Shares repurchased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (25) Ì Ì Ì Ì Ì (1,406) (1,406)

Preferred stock issuedÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 978 Ì (10) Ì Ì Ì 968

Treasury stock issued for stock

options and beneÑt plans ÏÏÏÏÏÏÏÏ 5 Ì Ì 13 Ì Ì 176 189

Balance, December 31, 2000 ÏÏÏÏÏ 999 2,278 593 1,588 21,619 10 (5,250) 20,838

Comprehensive income:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 5,894 Ì Ì 5,894

Other comprehensive income, net

of tax eÅect:

Transition adjustment from the

adoption of FAS 133 ÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì (3,972) Ì (3,972)

Unrealized gain on securities

transferred to available-forsale upon adoption of

FAS 133 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 86 Ì 86

Net cash Öow hedging losses ÏÏÏ Ì Ì Ì Ì Ì (3,387) Ì (3,387)

Unrealized gains on availablefor-sale securities ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 198 Ì 198

Total comprehensive loss ÏÏÏÏÏÏÏÏ (1,181)

Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (1,338) Ì Ì (1,338)

Shares repurchased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6) Ì Ì Ì Ì Ì (464) (464)

Preferred stock issuedÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 400 Ì (4) Ì Ì Ì 396

Preferred stock redeemedÏÏÏÏÏÏÏÏÏÏ Ì (375) Ì Ì Ì Ì Ì (375)

Treasury stock issued for stock

options and beneÑt plans ÏÏÏÏÏÏÏÏ 4 Ì Ì 67 Ì Ì 175 242

Balance, December 31, 2001 ÏÏÏÏÏ 997 $2,303 $593 $1,651 $26,175 $(7,065) $(5,539) $18,118

See Notes to Financial Statements.

58
FANNIE MAE

STATEMENTS OF CASH FLOWS

Year Ended December 31,

2001 2000 1999

(Dollars in millions)

Cash Öows from operating activities:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,894 $ 4,448 $ 3,912

Adjustments to reconcile net income to net cash provided

by (used in) operating activities:

Amortization of discount/premium ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,561 10,025 7,730

Negative provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (115) (120) (120)

Gain (loss) on early extinguishment of debt ÏÏÏÏÏÏÏÏÏÏ 524 (49) 14

Cumulative eÅect of change in accounting principle

(net of tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (168) Ì Ì

Purchased options expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37 Ì Ì

Other (decreases) increases, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,032) (913) 1,307

Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,701 13,391 12,843

Cash Öows from investing activities:

Purchases of mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (270,609) (152,075) (193,434)

Proceeds from sales of mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,967 10,599 5,950

Mortgage principal repayments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 164,408 56,568 77,402

Net proceeds from disposition of foreclosed properties 2,035 2,0192,462

Net (increase) decrease in held-to-maturity investments (4,839) (12,172) 20,639

Net (increase) in available-for-sale investments ÏÏÏÏÏÏÏÏ (14,770) (3,057) (1,847)

Net cash used in investing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (114,808) (98,118) (88,828)

Cash flows from financing activities:

Proceeds from issuance of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 249,454 110,298 138,491

Payments to redeem long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (196,931) (50,320) (62,464)

Proceeds from issuance of short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,746,381 1,130,698 1,129,246

Payments to redeem short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,690,805) (1,104,694) (1,125,754)

Net payments to purchase or settle hedge instrumentsÏÏÏ (5,569) (1,245) (629)

Net payments from stock activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,522) (1,492) (1,549)

Net cash provided by financing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 101,008 83,245 77,341

Net increase (decrease) in cash and cash equivalentsÏÏÏÏÏÏ 901 (1,482) 1,356

Cash and cash equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏ 617 2,099 743

Cash and cash equivalents at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,518 $ 617 $ 2,099

Supplemental disclosures of cash flow information:

Cash paid during the year for:

InterestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 40,361 $ 34,863 $ 28,447

Income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,088 1,595 1,276

See Notes to Financial Statements.

59
FANNIE MAE

NOTES TO FINANCIAL STATEMENTS

1. Summary of SigniÑcant Accounting Policies

Fannie Mae is a federally chartered and stockholder-owned corporation operating in the residential mortgage Ñnance industry.

The accounting and reporting policies of Fannie Mae conform with accounting principles

generally accepted in the United States of America. Certain amounts in prior years' Ñnancial

statements have been reclassiÑed to conform to the current presentation.

The preparation of Ñnancial statements in conformity with accounting principles generally

accepted in the United States of America requires management to make estimates and assumptions

that aÅect the reported amounts of assets and liabilities and disclosure of contingent assets and

liabilities at the date of the Ñnancial statements and the reported amounts of revenues and expenses

during the reporting period. Actual results could diÅer from those estimates.

Mortgage Portfolio

Mortgages and mortgage-backed securities that Fannie Mae has the ability and positive intent to

hold to maturity are classiÑed as ""held-to-maturity'' and are carried at their unpaid principal balance

(UPB) adjusted for unamortized purchase discount or premium and other deferred price adjustments.

Mortgage loans held for sale are carried at the lower of cost or fair value, determined on a portfolio

basis, with any unrealized losses included in current period earnings. Mortgage-backed securities that

Fannie Mae intends to hold for an undetermined period, but not necessarily to maturity, are classiÑed

as ""available-for-sale'' and are carried at fair value, with any valuation adjustments reported as a

component of accumulated other comprehensive income (AOCI), net of deferred taxes, in stockholders' equity.

Fannie Mae uses actual principal prepayment experience and estimates of future principal

prepayments in calculating the constant eÅective yield necessary to apply the interest method in the

amortization of purchase discount or premium and other deferred price adjustments. In evaluating

prepayments, loans are aggregated by similar characteristics (e.g., loan type, acquisition date, and

maturity). Factors used in determining estimates of future prepayments include historical prepayment

data and expected prepayment performance under varying interest rate scenarios.

Interest income is not accrued on nonperforming loans. Conventional single-family and multifamily loans are classiÑed as nonperforming and previously accrued interest is reversed against current

period income when payment on the loan is 90 days or more delinquent. Once loans become

performing (payment on the loan is less than 90 days or more delinquent), they are placed on accrual

status and all reversed income is recognized in the period the loans become performing.

Investments

Investments consist of Fannie Mae's Liquid Investment Portfolio and other investments.

Investments are classiÑed as either held-to-maturity or available-for-sale. Investments classiÑed as

held-to-maturity are carried at historical cost, adjusted for unamortized discount or premium.

Investments classiÑed as available-for-sale are carried at fair value as of the balance sheet date, with

any valuation adjustments reported as a component of AOCI, net of deferred taxes, in stockholders'

equity. Interest income is recognized on an accrual basis unless the collection of interest income is

considered doubtful, in which case interest income is recognized on a cash basis.

60
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Guaranteed Mortgage-Backed Securities

Fannie Mae guarantees the timely payment of principal and interest on most Fannie Mae

Mortgage-Backed Securities (MBS). These securities represent beneÑcial interests in pools of

mortgages or other MBS held in trust by Fannie Mae. The pools of mortgages or MBS are not assets

of Fannie Mae, except when acquired for investment purposes, nor are the related outstanding

securities liabilities; accordingly, neither are reÖected on the accompanying balance sheets. Fannie

Mae receives monthly guaranty fees for each MBS mortgage pool based on a percentage of the pool's

outstanding balance. Adjustments to the guaranty fee rate eÅected through an upfront payment at

securitization are deferred and amortized into guaranty fee income over the estimated life of the

underlying loans using the interest method. For MBS pools held in Fannie Mae's portfolio, the

guaranty fee is reÖected as interest income.

Allowance for Losses

The allowance for losses is determined based on an analysis of portfolio loans and MBS

outstanding and provides for known probable losses and losses inherent in the mortgage portfolio and

MBS. Management's analysis considers current delinquency levels, historical loss experience, current

economic conditions, payment performance in areas of geographic concentration, and mortgage

characteristics. The allowance for losses is established by recording an expense for the provision for

losses and may be reduced by recording a negative provision if management believes the allowance

amount exceeds expected losses. The allowance for losses is subsequently reduced through charge-oÅs

and is increased through recoveries, including those related to credit enhancements and the resale of

properties. In management's judgment, the allowance for losses is adequate to provide for expected

losses. The primary components of the allowance for losses are an allowance for losses on loans in the

retained mortgage portfolio, which is included in the balance sheet under ""Mortgage portfolio, net,''

and an allowance for losses on loans underlying guaranteed MBS, which is included in the balance

sheet under ""Other liabilities.''

Acquired Property

Foreclosed assets are carried at the lower of cost or fair value less estimated costs to sell. Cost is

determined based on the fair value of the collateral at the date of the foreclosure and represents the

amount that a willing seller could reasonably expect from a willing buyer in an arm's-length

transaction. The diÅerence between the estimated fair value of the collateral at foreclosure and the

principal owed on the underlying loan is recorded as either a charge-oÅ or recovery against the

allowance for losses at foreclosure. Subsequent changes in the fair value of the collateral and

foreclosure, holding, and disposition costs are charged directly to earnings.

Derivative Instruments and Hedging Activities

EÅective January 1, 2001, Fannie Mae adopted Financial Accounting Standard No. 133 (FAS

133), Accounting for Derivative Instruments and Hedging Activities, as amended by Financial

Accounting Standard No. 138, Accounting for Certain Derivative Instruments and Certain Hedging

Activities. FAS 133 requires that all derivatives be recognized as either assets or liabilities on the

balance sheet at their fair value. Subject to certain qualifying conditions, a derivative may be

designated as either a hedge of the cash Öows of a variable-rate instrument or anticipated transaction

(cash Öow hedge) or a hedge of the fair value of a Ñxed-rate instrument (fair value hedge). For a

derivative qualifying as a cash Öow hedge, fair value gains or losses are reported in a separate

component of AOCI, net of deferred taxes, in stockholders' equity to the extent the hedge is perfectly

eÅective and then recognized in earnings during the period(s) in which the hedged item aÅects

61
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

earnings. For a derivative qualifying as a fair value hedge, fair value gains or losses on the derivative

are reported in earnings along with fair value gains or losses on the hedged item attributable to the risk

being hedged. For a derivative not qualifying as a hedge, or components of a derivative that are

excluded from any hedge eÅectiveness assessment, fair value gains and losses are reported in earnings.

If a derivative no longer qualiÑes as a cash Öow or fair value hedge, Fannie Mae discontinues

hedge accounting prospectively. The derivative continues to be carried on the balance sheet at fair

value with fair value gains and losses recorded in earnings until the derivative is settled. For

discontinued cash Öow hedges, the gains or losses previously deferred in AOCI are recognized in

earnings in the same period(s) that the hedged item impacts earnings. For discontinued fair value

hedges, the hedged asset or liability is no longer adjusted for changes in its fair value and previous fair

value adjustments to the basis of the hedged item are subsequently amortized to earnings over the

remaining life of the hedged item using the eÅective yield method.

The adoption of FAS 133 on January 1, 2001, resulted in a cumulative after-tax increase to

income of $168 million and an after-tax reduction in AOCI of $3.9 billion. In addition, investment

securities and MBS with an amortized cost of approximately $20 billion were reclassiÑed from held-to

maturity to available-for-sale upon the adoption of FAS 133. At the time of this non-cash transfer,

these securities had gross unrealized gains and losses of $164 million and $32 million, respectively.

Cash and Cash Equivalents

Fannie Mae considers highly liquid investment instruments, generally with an original maturity of

three months or less, to be cash equivalents. Cash equivalents are carried at cost, which approximates

fair value.

Income Taxes

Deferred federal income tax assets and liabilities are established for temporary diÅerences

between Ñnancial and taxable income and are measured using the current marginal statutory tax rate.

Investment and other tax credits are generally recognized when recorded on the tax return.

Comprehensive Income

Comprehensive income is deÑned as the change in equity of a business enterprise, on a net of tax

basis, from transactions and other events and circumstances from nonowner sources during a period.

It includes all changes in equity during a period except those resulting from investments by owners

and distributions to owners.

62
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

2. Mortgage Portfolio, Net

The mortgage portfolio consisted of the following at December 31, 2001 and 2000.

2001 2000

(Dollars in millions)

Single-family mortgages:

Government insured or guaranteed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 42,181 $ 44,166

Conventional:

Long-term, Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 552,463 454,349

Intermediate-term, Ñxed-rate(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,412 67,099

Adjustable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,765 27,135

684,821 592,749

Multifamily mortgages:

Government insured ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,032 7,184

Conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,623 10,189

22,655 17,373

Total unpaid principal balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 707,476 610,122

Less:

Unamortized discount and deferred price adjustments, netÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,104 2,520

Allowance for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 205 203

Net mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $705,167 $607,399

(1) Intermediate-term consists of portfolio loans with contractual maturities at purchase equal

to or less than 20 years and MBS held in portfolio with maturities of 15 years or less at issue

date.

Included in the mortgage portfolio are $542 billion and $455 billion of MBS and other mortgagerelated securities at December 31, 2001 and 2000, respectively, with fair values of $549 billion and

$459 billion, respectively. MBS held in portfolio at December 31, 2001 and 2000 included $129 billion

and $114 billion, respectively, of Real Estate Mortgage Investment Conduits (REMICs) and Stripped

MBS (SMBS). REMICs and SMBS backed by MBS do not subject Fannie Mae to added credit risk

but generally have diÅerent interest rate risks than MBS. At December 31, 2001, these securities had

aggregate gross unrealized losses of $819 million and gross unrealized gains of $2.6 billion. At

December 31, 2000, the aggregate gross unrealized losses and gains on these securities were $716 million and $1.8 billion, respectively.

Mortgage securities classiÑed as available-for-sale were $32 billion with unrealized gains of

$462 million at December 31, 2001 and $11 billion with unrealized losses of $3 million at December 31,

2000.

63
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

3. Allowance for Losses

Changes in the allowance for the years 1999 through 2001 are summarized below.

Total

(Dollars in millions)

Balance, January 1, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 802

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (120)

Net recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 122

Balance, December 31, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 804

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (120)

Net recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 125

Balance, December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 809

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (115)

Net recoveries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 112

Balance, December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 806

At December 31, 2001, $205 million of the allowance for losses was included in the balance sheet

under ""Mortgage portfolio, net,'' which represents the allocation for portfolio loan losses; $598 million

was included in liabilities under ""Other'' for estimated losses on MBS; and the remainder, or

$3 million, which relates to unrecoverable losses on Federal Housing Administration loans, was

included in ""Acquired property and foreclosure claims, net.'' The corresponding amounts at December 31, 2000 were $203 million, $603 million, and $3 million, respectively.

The UPB of impaired loans at December 31, 2001 was $320 million, of which $213 million had a

speciÑc loss allowance of $13 million. At December 31, 2000, the UPB of impaired loans was

$186 million, of which $67 million had a speciÑc loss allowance of $2 million. The average balance of

impaired loans during 2001 and 2000 was $204 million and $210 million, respectively. During 2001,

Fannie Mae established $18 million of speciÑc allowances for impaired loans, compared with

$11 million in 2000. A loan is impaired when, based on current information and events, it is probable

that all of the contractual principal and interest payments will not be collected as scheduled in the loan

agreement. All of Fannie Mae's impaired loans are multifamily loans as single-family loans are exempt

from Financial Accounting Standard No. 114, Accounting by Creditors for Impairment of a Loan.

Nonperforming loans outstanding totaled $3.7 billion at the end of 2001, compared with

$1.9 billion at the end of 2000. If nonperforming loans had been fully performing at year-end, they

would have contributed an additional $70 million to net interest income in 2001, $43 million in 2000,

and $108 million in 1999.

64
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

4. Investments

Presented below are the amortized cost and fair value of the Liquid Investment Portfolio and

other investments classiÑed as held-to-maturity at December 31, 2001 and 2000.

2001 2000

Average Average

Amortized Unrealized Unrealized Fair Maturity % Rated A Amortized Unrealized Unrealized Fair Maturity % Rated A

Cost Gains Losses Value in Months or Better Cost Gains Losses Value in Months or Better

(Dollars in millions)

Held-to-maturity

investments:

Eurodollar time

deposits ÏÏÏÏÏÏÏÏÏÏÏÏ $11,185 $ Ì $Ì $11,185 .3 100.0 $ 4,046 $Ì $Ì $ 4,046 1.2 100.0

Repurchase agreements 9,380 Ì Ì 9,380 .5 100.0 2,722 Ì Ì 2,722 .5 100.0

Asset-backed

securities(1) ÏÏÏÏÏÏÏÏ 6,065 88 Ì 6,153 10.6 100.0 9,043 23 Ì 9,066 22.6 100.0

Federal funds ÏÏÏÏÏÏÏÏÏ 4,904 Ì Ì 4,904 .4 100.0 3,493 Ì Ì 3,493 2.1 100.0

Commercial paper ÏÏÏÏÏ 2,844 1 Ì 2,845 .6 100.0 8,893 2 Ì 8,895 .7 90.1

Auction rate preferred

stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,127 Ì Ì 2,127 1.7 100.0 1,812 Ì Ì 1,812 1.998.6

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,166 73 Ì 2,23916.7 56.4 3,823 29 Ì 3,852 17.6 100.0

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $38,671 $162 $Ì $38,833 3.0 97.5 $33,832 $54 $Ì $33,886 8.7 97.3

(1) Contractual maturity of asset-backed securities is not a reliable indicator of their expected

life because borrowers generally have the right to repay their obligations at any time.

Presented below are the amortized cost and fair value of the Liquid Investment Portfolio and

other investments classiÑed as available-for-sale at December 31, 2001 and 2000.

2001 2000

Average Average

Amortized Unrealized Unrealized Fair Maturity % Rated A Amortized Unrealized Unrealized Fair Maturity % Rated A

Cost Gains(2) Losses(3) Value in Months or Better Cost Gains Losses Value in Months or Better

(Dollars in millions)

Available-for-sale

investments:

Asset-backed

securities(1) ÏÏÏÏÏÏÏÏ $14,876 $Ì $ 4 $14,872 26.2 99.9 $ 8,469 $Ì $Ì $ 8,469 49.6 100.0

Floating rate notes(1) 12,114 Ì 33 12,081 18.2 84.3 12,237 Ì 13 12,224 18.5 99.7

Commercial paper ÏÏÏÏÏ 8,8791 Ì 8,880 .9100.0 443 Ì Ì 443 .6 100.0

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 Ì Ì 50 9.5 100.0 Ì Ì Ì Ì Ì Ì

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $35,919 $ 1 $37 $35,883 17.2 94.7 $21,149 $Ì $13 $21,136 30.6 99.8

(1) As of December 31, 2001, 100 percent of asset-backed securities and Öoating rate notes

reprice at intervals of 90 days or less.

(2) Gross realized gains of $9.9 million, $6.6 million, and $1.1 million were recorded in 2001,

2000 and 1999, respectively.

(3) Gross realized losses of $6.1 million, $4.3 million, and $1.9 million were recorded in 2001,

2000 and 1999, respectively.

65
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

The following table shows the amortized cost, fair value, and yield of the Liquid Investment

Portfolio and other investments at December 31, 2001 and 2000 by remaining maturity.

2001 2000

Amortized Fair Amortized Fair

Cost Value Yield Cost Value Yield

(Dollars in millions)

Due within one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $42,190 $42,210 2.41% $27,026 $27,010 6.85%

Due after one year through Ñve years ÏÏÏÏÏ 11,45911,481 3.01 10,443 10,477 7.12

53,649 53,691 2.54 37,469 37,487 6.93

Asset-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,941 21,025 3.07 17,512 17,535 6.84

Total $74,590 $74,716 2.69% $54,981 $55,022 6.90%

(1) Contractual maturity of asset-backed securities is not a reliable indicator of their expected

life because borrowers generally have the right to repay their obligations at any time.

5. Debentures, Notes, and Bonds, Net

Borrowings Due Within One Year

Borrowings due within one year at December 31, 2001 and 2000 are summarized below. Amounts

are net of unamortized discount and premium.

2001 2000

Outstanding Average Outstanding Average Maximum Maximum at Outstanding at Outstanding Outstanding Outstanding December 31 During Year December 31 During Year at Any at Any

Amount Cost(1) Amount Cost(1) Month-end Amount Cost(1) Amount Cost(1) Month-end

(Dollars in millions)

Short-term notesÏÏÏÏÏÏ $256,905 2.58% $247,060 4.31% $265,953 $178,292 6.50% $150,242 6.33% $178,292

Other short-term debt 29,891 1.96 31,479 4.40 43,811 42,157 6.58 37,880 6.36 42,157

Current portion of

borrowings due after

one year(2)

Universal Standard

debt ÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,413 3.67 51,185 6.02

Universal Benchmark

debt ÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,987 5.31 6,984 5.71

Universal Retail debt Ì Ì 785 6.62

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 296 4.96 919 6.57

Total due within

one year ÏÏÏÏÏÏÏ $343,492 2.81% $280,322 6.38%

(1) Represents weighted-average cost, which includes the amortization of discounts, premiums,

issuance costs, hedging results, and the eÅects of currency and debt swaps.

(2) Information on average amount and cost of debt outstanding during the year and maximum

amount outstanding at any month-end is not meaningful. See ""Borrowings Due After One

Year'' for additional information.

66
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Borrowings Due After One Year

Borrowings due after one year at December 31, 2001 and 2000 consisted of the following:

2001 2000

Maturity Amount Average Amount Average

Date Outstanding Cost(1) Outstanding Cost(1)

(Dollars in millions)

Universal Benchmark debt, net of $896 of

discount for 2001 ($1,106 for 2000) ÏÏÏ 2002-2030 $251,448 5.88% $185,771 6.42%

Universal Standard debt, net of $332 of

discount for 2001 ($404 for 2000)ÏÏÏ 2002-2038 156,738 4.85 165,680 6.42

Universal Retail debt, net of $62 of

discount for 2001 ($52 for 2000) ÏÏÏÏ 2002-2021 7,098 5.87 7,083 6.82

Long-term other, net of $12,653 of

discount for 2001 ($14,749 for 2000) ÏÏ 2002-2018 4,543 7.93 4,788 8.58

419,827 5.52% 363,322 6.46%

Adjustment for FAS 133(2) ÏÏÏÏÏÏÏÏÏÏ 1,423 Ì

Adjustment for foreign currency

translation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,275) (962)

Total due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $419,975 $362,360

(1) Represents weighted-average cost, which includes the amortization of discounts, premiums,

issuance costs, hedging results, and the eÅects of currency and debt swaps.

(2) Represents losses on hedged debt in fair value hedges.

Universal debt represents a consolidation of Fannie Mae's outstanding debt agreements for its

various funding programs into one comprehensive oÅering document, the Universal Debt Facility,

which supersedes and replaces the Global Debt Facility, Medium-Term Notes, Short-Term Notes and

Debenture Programs and applies to debt settling after January 3, 2000.

Debentures, notes, and bonds at December 31, 2001 included $140 billion of callable debt, which

generally is redeemable, in whole or in part, at the option of Fannie Mae any time on or after a

speciÑed date. At December 31, 2001, debentures, notes, and bonds did not include any debt

instruments that are subject to mandatory redemptions tied to certain indices or rates after an initial

nonredemption period.

67
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

The following table summarizes the amounts and call periods of callable debt, callable swaps, and

receive-Ñxed swaptions, excluding $15 billion of callable debt that was swapped to variable-rate debt

and the notional amount of pay-Ñxed swaptions and caps. Universal debt that is redeemable at Fannie

Mae's option is also included in the table.

Year of Amount Average

Call Date Maturity Outstanding Cost

(Dollars in millions)

Callable debt, callable swaps and receive-Ñxed

swaptions:

Currently callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002-2008 $ 295 5.88%

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002-2027 110,920 5.56

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003-2031 39,173 5.94

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004-2021 42,853 6.43

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008-2014 10,632 6.60

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008-2031 19,995 6.30

2007 and later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2012-2030 8,725 7.20

232,593 5.96%

Pay-Ñxed swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,650

Caps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75,893

Total option-embedded Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏ $378,136

Principal amounts at December 31, 2001 of total debt payable in the years 2003-2007, assuming

callable debt is paid at maturity and assuming callable debt is redeemed at the initial call date, were as

follows:

Assuming

Total Debt by Callable Debt

Year of Redeemed at Initial

Maturity(1) Call Date(1)

(Dollars in millions)

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $83,791 $86,396

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71,83951,572

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,470 27,719

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53,238 30,514

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,604 17,991

(1) Includes $15 billion of callable debt that was swapped to variable-rate debt.

Fannie Mae repurchased or called $183 billion of debt and notional principal amount of interest

rate swaps with an average cost of 6.23 percent in 2001 and $18 billion with an average cost of

7.10 percent in 2000. Fannie Mae recorded extraordinary losses of $524 million ($341 million after

tax) in 2001, extraordinary gains of $49 million ($32 million after tax) in 2000, and extraordinary

losses of $14 million ($9 million after tax) in 1999 on the early extinguishment of debt.

Pursuant to Fannie Mae's Charter Act, approval of the Secretary of the Treasury is required for

Fannie Mae's issuance of its debt obligations.

68
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

6. Income Taxes

Components of the provision for federal income taxes for the years ended December 31, 2001,

2000, and 1999 were as follows:

2001 2000 1999

(Dollars in millions)

CurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,429$1,412 $1,289

Deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (205) 154 230

2,224 1,566 1,519

Tax (beneÑt) expense of extraordinary (loss) gain ÏÏÏ (183) 17 (5)

Tax expense of cumulative eÅect of change in

accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90 Ì Ì

Net federal income tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,131 $1,583 $1,514

The preceding table does not reÖect the tax eÅects of unrealized gains and losses on available-forsale securities and derivatives. The unrealized gains and losses on these items are recorded in AOCI,

net of deferred taxes. The cumulative tax impact of these items was $3,804 million in tax savings at

December 31, 2001, tax expense of $6 million at December 31, 2000, and $133 million in tax savings at

December 31, 1999.

The tax eÅects of temporary diÅerences that gave rise to signiÑcant portions of the deferred tax

assets and deferred tax liabilities at December 31, 2001 and 2000 consisted of the following:

2001 2000

(Dollars in millions)

Deferred tax assets:

Derivatives in loss positionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,679$ Ì

MBS guaranty and REMIC fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 915 633

Allowance for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 314 317

Unrealized gains on available-for-sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (158) (6)

Other items, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 143 124

Deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,893 1,068

Deferred tax liabilities:

Debt-related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 536 576

Purchase discount and deferred fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 356 490

BeneÑts from tax-advantaged investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 125 108

Other items, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57 43

Deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,074 1,217

Net deferred tax asset (liability) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,819$ (149)

Management anticipates it is more likely than not that the results of future operations will

generate suÇcient taxable income to realize the entire balance of deferred tax assets.

69
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Fannie Mae's eÅective tax rates diÅered from statutory federal rates for the years ended

December 31, 2001, 2000, and 1999 as follows:

2001 2000 1999

Statutory corporate rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35% 35% 35%

Tax-exempt interest and dividends received deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4) (5) (4)

Equity investments in aÅordable housing projects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4) (4) (3)

EÅective rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27% 26% 28%

Fannie Mae is exempt from state and local taxes, except for real estate taxes.

7. Earnings per Common Share

The following table sets forth the computation of basic and diluted earnings per common share.

Year Ended December 31,

2001 2000 1999

Basic Diluted Basic Diluted Basic Diluted

(Dollars and shares in millions, except

per share amounts)

Net income before extraordinary item and

cumulative eÅect of change in accounting

principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6,067 $6,067 $4,416 $4,416 $3,921 $3,921

Extraordinary (loss) gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (341) (341) 32 32 (9) (9)

Cumulative eÅect of change in accounting principle 168 168 ÌÌÌÌ

Preferred stock dividend ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (138) (138) (121) (121) (78) (78)

Net income available to common stockholders ÏÏÏ $5,756 $5,756 $4,327 $4,327 $3,834 $3,834

Weighted average common shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,000 1,000 1,003 1,003 1,024 1,024

Dilutive potential common shares(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 6 Ì 6 Ì 7

Average number of common shares outstanding

used to calculate earnings per common share ÏÏ 1,000 1,006 1,003 1,0091,024 1,031

Earnings per common share before extraordinary

item and cumulative eÅect of change in

accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5 92 $ 5.89 $ 4.28 $ 4.26 $ 3.75 $ 3.73

Extraordinary (loss) gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.34) (.34) .03 .03 Ì (.01)

Cumulative eÅect of change in accounting

principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 .17 ÌÌÌÌ

Net earnings per common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.75 $ 5.72 $ 4.31 $ 4.29$ 3.75 $ 3.72

(1) Dilutive potential common shares consist primarily of the dilutive eÅect from employee stock

options and other stock compensation plans.

For additional disclosures regarding Fannie Mae's stock compensation plans and the outstanding

preferred stock, refer to Notes 8 and 12, respectively.

70
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

8. Stock Compensation Plans

At December 31, 2001, Fannie Mae had Ñve stock-based compensation plans, which are described

below. Financial Accounting Standard No. 123 (FAS 123), Accounting for Stock-Based Compensation, gives companies the option of either recording an expense for all stock compensation awards

based on the fair value at grant date or continuing to follow Accounting Principles Board Opinion

No. 25 (APB Opinion 25) with the additional requirement that they disclose, in a footnote, pro forma

net income and earnings per share as if they had adopted the expense recognition provisions of

FAS 123. Fannie Mae elected to apply APB Opinion 25 and related interpretations in accounting for

its plans. Thus, no compensation expense has been recognized for the nonqualiÑed stock options and

Employee Stock Purchase Plan. Fannie Mae's reported net income and reported diluted earnings per

common share were $5.894 billion and $5.72, $4.448 billion and $4.29, and $3.912 billion and $3.72 for

the years ended December 31, 2001, 2000, and 1999, respectively. If compensation expense had been

recognized for beneÑts under all Ñve plans, based on their fair value at grant date and consistent with

FAS 123, Fannie Mae's net income, net income available to common stockholders, and diluted

earnings per common share would have been $5.653 billion, $5.515 billion, and $5.62; $4.187 billion,

$4.066 billion, and $4.15; and $3.840 billion, $3.762 billion, and $3.65 for the years ended December 31, 2001, 2000, and 1999, respectively.

Fannie Mae determined the fair value of beneÑts under its stock-based plans using a BlackScholes pricing model. The following table summarizes the major assumptions used in the model.

2001 2000 1999

Risk-free rate(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.62 - 4.99% 4.97 - 6.81% 4.56 - 6.02%

Volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34 - 37 29 - 34 27 - 29

Forfeiture ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15 15 15

Dividend(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.20 $1.12 $1.08

ExpirationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 - 10 yrs. 1 - 10 yrs. 1 - 10 yrs.

(1) The closing yield on the comparable average life U.S. Treasury on the day prior to grant.

(2) Dividend rate on common stock at date of grant. Dividend rate assumed to remain constant

over the option life.

Employee Stock Purchase Plan

Fannie Mae has an Employee Stock Purchase Plan that allows issuance of up to 41 million shares

of common stock to qualiÑed employees at a price equal to 85 percent of the fair market value on the

grant date. This plan meets the deÑnition of a noncompensatory plan under APB 25; therefore,

Fannie Mae does not recognize any compensation expense for grants under the plan. Employees have

the option of either receiving cash through a Cashless Exercise Program or purchasing shares directly.

In 2001, Fannie Mae granted each qualiÑed employee, excluding certain oÇcers and other highly

compensated employees, the right to purchase up to 321 shares of common stock in January 2002.

Under the 2001 oÅering, 1,274,396 shares were purchased at $66.00 per share, compared with

1,522,869 common shares purchased at $50.68 per share under the 2000 oÅering. The Board of

Directors approved a 2002 oÅering under the plan, granting each qualiÑed employee the right to

purchase 310 common shares at $68.46 per share in January 2003.

71
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Employee Stock Ownership Plan

Fannie Mae has an Employee Stock Ownership Plan (ESOP) for qualiÑed employees. Fannie

Mae may contribute to the ESOP an amount based on deÑned earnings goals, not to exceed 4 percent

of the aggregate base salary for all participants. The contribution is made in the subsequent year either

in shares of Fannie Mae common stock or in cash that is used to purchase such stock. Vested beneÑts

are based on years of service. Eligible employees are 100 percent vested in their ESOP accounts either

upon attainment of age 65 or more than Ñve years of service. Employees who are at least 55 years of

age, and have at least 10 years of participation in the ESOP, may qualify to diversify vested ESOP

shares into the same types of funds available under the Retirement Savings Plan, without losing the

tax deferred status of the money in the ESOP. At December 31, 2001, 2000, and 1999, 1,397,339

common shares, 1,366,170 common shares, and 1,345,388 common shares, respectively, were outstanding under the ESOP.

Performance Shares

Fannie Mae's Stock Compensation Plan of 1993 authorizes eligible employees to receive performance awards, generally issued with an award period that can range from three to Ñve years. The

performance awards become actual awards only if Fannie Mae attains the goals set for the award

period. At the end of such time, the awards generally are payable in common stock in either two or

three installments over a period not longer than three years. The outstanding contingent grants made

for the 2002-2004, 2001-2003, and 2000-2002 periods were 492,868 common shares, 447,000 common

shares, and 375,910 common shares, respectively.

NonqualiÑed Stock Options

Stock options may be granted to eligible employees and nonmanagement members of the Board of

Directors. The options generally do not become exercisable until at least one year after the grant date

for employees and on the grant date for nonmanagement directors and generally expire ten years from

the grant date. The exercise price of the common stock covered by each option is equal to the fair

value of the stock on the date the option is granted, so Fannie Mae does not record compensation

expense for grants under this plan.

Under the Stock Compensation Plan of 1993, Fannie Mae's Board of Directors approved the EPS

Challenge Option Grant in January 2000 for all regular full-time and part-time Fannie Mae employees.

All employees, other than management group employees, received an option grant of 350 shares at a

price of $62.50 per share, the fair market value of the stock on the grant date. Management group

employees received option grants equivalent to a percentage of their November 1999 stock grants.

Vesting for options granted is tied to achievement of an earnings per share (EPS) goal, which is $6.46

by the end of 2003. If Fannie Mae's EPS for 2003 is $6.46 or greater, then 100 percent of the EPS

Challenge options will vest in January 2004. If Fannie Mae does not reach an EPS of $6.46 by the end

of 2003, vesting is delayed one year and then begins at a rate of 25 percent per year. The Board of

Directors may choose, at its discretion, to oÅset future option grants or other forms of compensation if

the goal is not reached. Options expire January 18, 2010.

72
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

The following table summarizes nonqualiÑed stock option activity for the years 1999-2001.

2001 2000 1999

Weighted-Average Weighted-Average Weighted-Average

Options Exercise Price Options Exercise Price Options Exercise Price

(Options in thousands)

Balance, January 1, ÏÏÏÏÏÏÏÏ 25,310 $50.86 22,349 $40.90 21,994 $34.55

Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,173 80.37 7,741 66.793,224 71.20

Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,611) 31.92 (4,003) 23.88 (2,499) 22.52

Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (638) 66.93 (777) 61.98 (370) 51.85

Balance, December 31, ÏÏÏÏÏ 26,234 $57.05 25,310 $50.86 22,349$40.90

Options vested,

December 31, ÏÏÏÏÏÏÏÏÏÏÏÏ 13,919 $44.10 13,551 $36.83 14,727 $29.26

The following table summarizes information about nonqualiÑed stock options outstanding at

December 31, 2001.

Options Outstanding Options Exercisable

Number Weighted-Average

Range of of Remaining Weighted-Average Number Weighted-Average

Exercise Prices Options(1) Contractual Life Exercise Price of Options(1) Exercise Price

$18.00 Ó $35.00 ÏÏÏÏÏÏÏÏÏÏ 5,543 3.0 yrs. $22.45 5,543 $22.45

35.01 Ó 52.00 ÏÏÏÏÏÏÏÏÏÏ 3,961 5.4 45.72 3,954 45.71

52.01 Ó 70.00 ÏÏÏÏÏÏÏÏÏÏ 7,335 7.5 63.63 2,426 66.59

70.01 Ó 87.00 ÏÏÏÏÏÏÏÏÏÏ 9,395 9.0 77.11 1,996 73.71

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,234 6.8 yrs. $57.05 13,919 $44.10

(1) Options in thousands.

Restricted Stock

In 2001, 117,447 shares of restricted stock were awarded, issued, and placed in escrow under the

Stock Compensation Plan of 1993 (192,301 shares in 2000); 105,560 shares were released as vesting

of participants occurred (92,141 shares in 2000).

Options Available for Future Issuance

At December 31, 2001, 4,757,107 and 12,935,066 shares remained available for grant under the

Employee Stock Purchase Plan and the Stock Compensation Plan of 1993, respectively.

9. Employee Retirement BeneÑts

Retirement Savings Plan

All regular employees of Fannie Mae scheduled to work 1,000 hours or more in a calendar year are

eligible to participate in the company's Retirement Savings Plan, which includes a 401(k) option. In

2001, employees could contribute up to the lesser of 15 percent of their base salary or the current

annual dollar cap established and revised annually by the Internal Revenue Service. Fannie Mae

amended the plan for 2002, to allow employees to contribute up to the lesser of 25 percent of their base

salary or the current annual dollar cap established and revised annually by the Internal Revenue

Service. Fannie Mae matches employee contributions up to 3 percent of base salary in cash.

Employees may allocate investment balances to a variety of investment options under the plan. As of

December 31, 2001, there was no option to invest balances in the plan directly in stock of Fannie Mae.

73
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Postretirement BeneÑt Plans

All regular employees of Fannie Mae scheduled to work 1,000 hours or more in a calendar year are

covered by a noncontributory corporate retirement plan or by the contributory Civil Service Retirement Law. BeneÑts payable under the corporate plan are based on years of service and compensation

using the average pay during the 36 consecutive highest-paid months of the last 120 months of

employment. Fannie Mae's policy is to contribute an amount no less than the minimum required

employer contribution under the Employee Retirement Income Security Act of 1974. Contributions to

the corporate plan are made in cash and reÖect beneÑts attributed to employees' service to date and

compensation expected to be paid in the future. No contribution was made to the corporate plan in

2001. Corporate plan assets consist primarily of listed stocks, Ñxed-income securities, and other liquid

assets. Plan assets do not directly include any shares of Fannie Mae stock.

At December 31, 2001 and 2000, the projected beneÑt obligations for services rendered were

$319 million and $263 million, respectively, while the plan assets were $237 million and $261 million,

respectively. The pension liability (included in liabilities under ""Other'') at December 31, 2001 and

2000 was $65 million and $51 million, respectively. Net periodic pension costs were $14 million,

$5 million, and $8 million for the years ended December 31, 2001, 2000, and 1999, respectively. Fannie

Mae uses the straight-line method of amortization for prior service costs.

At December 31, 2001 and 2000, the weighted-average discount rates used in determining the

actuarial present value of the projected beneÑt obligation were 7.25 percent and 7.75 percent,

respectively. The assumptions used in determining the net periodic pension costs were as follows:

2001 2000 1999

Weighted-average discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.75% 8.00% 7.13%

Average rate of increase in future compensation levels ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.50 6.50 5.75

Expected long-term weighted average rate of return on plan assets ÏÏÏÏÏÏÏÏÏ 9.50 9.00 9.25

Fannie Mae also has an Executive Pension Plan and a Supplemental Pension Plan, which

supplement the beneÑts payable under the retirement plan for key senior oÇcers. Accrued beneÑts

under the Executive Pension Plan generally are funded through a Rabbi trust. Estimated beneÑts

under the supplementary plans are accrued as an expense over the period of employment.

Fannie Mae sponsors a Postretirement Health Care Plan that covers substantially all full-time

employees. The plan pays stated percentages of most necessary medical expenses incurred by retirees,

after subtracting payments by Medicare or other providers and after a stated deductible has been met.

Participants become eligible for the subsidized beneÑts as follows: (1) for employees hired prior to

January 1, 1998, if they retire from Fannie Mae after reaching age 55 with Ñve or more years of

service; or (2) for employees hired January 1, 1998, or later, if they retire from Fannie Mae after

reaching age 55 with ten or more years of service. Employees hired January 1, 1998 or later who retire

with less than ten years of service may purchase coverage by paying the full premium. The plan is

contributory, with retiree contributions adjusted annually. The expected cost of these postretirement

beneÑts is charged to expense during the years that employees render service. Cost-sharing percentages are based on length of service with Fannie Mae, eligibility for and date of retirement, and a

deÑned dollar beneÑt cap. Fannie Mae does not fund this plan.

Fannie Mae's accrued postretirement health care cost liability for the years ending December 31,

2001 and 2000 was $52 million and $46 million, respectively. The net postretirement health care costs

were $9 million, $8 million, and $9 million for the years ended December 31, 2001, 2000, and 1999,

respectively. In determining the net postretirement health care cost for 2001, a 4.75 percent annual

74
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

rate of increase in the per capita cost of covered health care claims was assumed with the rate

decreasing over the next year to 4.50 percent and remaining at that level thereafter. In determining

the net postretirement health care cost for 2000, a 5.00 percent annual rate of increase in the per

capita cost of covered health care claims was assumed with the rate decreasing gradually over the next

two years to 4.50 percent and remaining at that level thereafter. In determining the net postretirement

health care cost for 1999, a 5.25 percent annual rate of increase in the per capita cost of covered health

care claims was assumed with the rate decreasing gradually over the next three years to 4.50 percent

and remaining at that level thereafter. The health care cost trend rate assumption has a signiÑcant

eÅect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by

one percentage point in each year would increase the accumulated postretirement beneÑt obligation as

of December 31, 2001 by $8 million and the aggregate of the service and interest cost components of

net postretirement health care cost for the year by $2 million.

The weighted-average discount rates used in determining the health care cost and the year end

accumulated postretirement beneÑt obligation were 7.25 percent at December 31, 2001, 7.75 percent

at December 31, 2000, and 8.00 percent at December 31, 1999.

10. Line of Business Reporting

Management analyzes corporate performance on the basis of two lines of business: Portfolio

Investment and Credit Guaranty.

The Portfolio Investment business includes the management of asset purchases and funding

activities for Fannie Mae's mortgage portfolio and investment portfolio. Income is derived primarily

from the diÅerence, or spread, between the yield on mortgage loans and investments and the

borrowing costs related to those loans and investments.

The Credit Guaranty business involves guaranteeing the credit performance of both single-family

and multifamily book of business for a fee. Guaranty fees for MBS are based on a market rate of

return for the credit risk assumed. For mortgages held in portfolio, the Credit Guaranty business

charges the Portfolio Investment business a guaranty fee similar to what it would charge on an MBS.

These ""notional'' guaranty fees are classiÑed as net interest income for the Credit Guaranty business.

Net interest income for the Credit Guaranty business also includes interest on capital invested in

guaranty activities and income from temporary investment of principal and interest payments on

guaranteed mortgages prior to remittance to investors, and it is net of interest charges paid to the

Portfolio Investment business for delinquent loans.

Fannie Mae assigns actual direct revenues and expenses among its lines of business and uses

estimates to apportion overhead and other corporate items. For instance, administrative expenses are

allocated on the basis of direct expenses for the line of business or, where not assignable to a particular

associated business, are based on revenues, proÑts, or volumes, as applicable. Capital is allocated to

the lines of business through an assessment of the interest rate and credit risk associated with each

business.

75
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

The following table sets forth Fannie Mae's Ñnancial performance by line of business for the years

ended December 31, 2001, 2000, and 1999.

2001 2000 1999

Portfolio Credit Portfolio Credit Portfolio Credit

Investment Guaranty Total Investment Guaranty Total Investment Guaranty Total

(Dollars in millions)

Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,369 $ 721 $ 8,090 $ 5,055 $ 619 $ 5,674 $4,317 $ 577 $ 4,894

Guaranty fee incomeÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,109) 2,591 1,482 (1,079) 2,430 1,351 (974) 2,256 1,282

Fee and other income (expense) ÏÏ 211 (60) 151 27 (71) (44) 120 71 191

Credit-related expenses ÏÏÏÏÏÏÏÏÏÏ Ì (78) (78) Ì (94) (94) Ì (127) (127)

Administrative expenses ÏÏÏÏÏÏÏÏÏ (302) (715) (1,017) (254) (651) (905) (233) (567) (800)

Special contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏ (192) (108) (300) Ì Ì Ì Ì Ì Ì

Purchased options expense ÏÏÏÏÏÏÏ (590) Ì (590) Ì Ì Ì Ì Ì Ì

Federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏ (1,557) (473) (2,030) (1,036) (530) (1,566) (906) (613) (1,519)

Extraordinary itemÌ(loss) gain

on early extinguishment of debt (341) Ì (341) 32 Ì 32 (9) Ì (9)

Operating net income(1)ÏÏÏÏÏÏÏÏÏ $ 3,489 $1,878 $ 5,367 $ 2,745 $1,703 $ 4,448 $2,315 $1,597 $ 3,912

(1) Excludes the cumulative after-tax gain of $168 million from the change in accounting

principle upon adoption of FAS 133 on January 1, 2001 and the after-tax loss of $24 million

recognized during the year 2001 for the change in fair value of time value of purchased

options under FAS 133. Includes after-tax charges of $383 million for the amortization

expense of purchased option premiums during the year ended December 31, 2001.

11. Dividend Restrictions

Fannie Mae's payment of dividends is subject to certain statutory restrictions, including approval

by the Director of the OÇce of Federal Housing Enterprise Oversight of any dividend payment that

would cause Fannie Mae's capital to fall below speciÑed capital levels.

Fannie Mae has exceeded the applicable capital standard since the adoption of these restrictions

in 1992 and, consequently, has been making dividend payments without the need for Director

approval.

Payment of dividends on common stock is also subject to payment of dividends on preferred stock

outstanding.

76
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

12. Preferred Stock

The following table presents preferred stock outstanding as of December 31, 2001.

Shares Issued Stated

and Value per Annual Redeemable on or

Issue Date Outstanding Share Dividend Rate After

Series B(1) April 12, 1996 7,500,000 $50 6.50% April 12, 2001

Series C ÏÏÏ September 20, 1996 5,000,000 50 6.45 September 20, 2001

Series D ÏÏÏ September 30, 1998 3,000,000 50 5.25 September 30, 1999

Series E ÏÏÏ April 15, 1999 3,000,000 50 5.10 April 15, 2004

Series F ÏÏÏ March 20, 2000 13,800,000 50 6.30(2) March 31, 2002(4)

Series G ÏÏÏ August 8, 2000 5,750,000 50 6.02(3) September 30, 2002(4)

Series H ÏÏÏ April 6, 2001 8,000,000 50 5.81 April 6, 2006

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46,050,000

(1) Fannie Mae redeemed all of the outstanding shares of its 6.50 percent Series B preferred

stock on February 28, 2002 at $50.51 per share. The redemption price included dividends of

$.51458 per share for the period commencing December 31, 2001, up to, but excluding,

February 28, 2002.

(2) Initial rate. Variable dividend rate that resets every two years thereafter at the Constant

Maturity U.S. Treasury Rate minus .16 percent with a cap of 11 percent per year.

(3) Initial rate. Variable dividend rate that resets every two years thereafter at the Constant

Maturity U.S. Treasury Rate minus .18 percent with a cap of 11 percent per year.

(4) Initial call date and every two years thereafter.

Holders of preferred stock are entitled to receive noncumulative, quarterly dividends when, and if,

declared by Fannie Mae's Board of Directors. Payment of dividends on preferred stock is not

mandatory, but has priority over payment of dividends on common stock. After the speciÑed period,

preferred stock is redeemable at its stated value at the option of Fannie Mae. All outstanding preferred

stock is nonvoting.

13. Derivative Instruments and Hedging Activities

Fannie Mae issues various types of debt to Ñnance the acquisition of mortgages. Fannie Mae

typically uses derivative instruments, such as interest rate swaps, swaptions, interest rate caps,

deferred rate-setting agreements, and foreign currency swaps, to hedge against the impact of interest

rate movements on its debt costs to preserve its mortgage-to-debt interest spreads. Fannie Mae does

not engage in trading or other speculative use of derivative instruments.

Swaps provide for the exchange of Ñxed and variable interest payments based on contractual

notional principal amounts. These may include callable swaps, which give counterparties or Fannie

Mae the right to terminate interest rate swaps before their stated maturities, and foreign currency

swaps, in which Fannie Mae and counterparties exchange payments in diÅerent types of currencies.

Basis swaps provide for the exchange of variable payments that have maturities similar to hedged

debt, but the payments are based on diÅerent interest rate indices. Swaptions give Fannie Mae the

option to enter into swaps at a future date, thereby mirroring the economic eÅect of callable debt.

Interest rate caps provide ceilings on the interest rates of variable-rate debt.

77
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Fannie Mae formally documents all relationships between hedging instruments and the hedged

items, including the risk-management objective and strategy for undertaking various hedge transactions. Fannie Mae links all derivatives to speciÑc assets and liabilities on the balance sheet or to

speciÑc forecasted transactions and designates them as cash Öow or fair value hedges. Fannie Mae also

formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that

are used in hedging transactions are highly eÅective in oÅsetting changes in the cash Öows or fair

values of the hedged items.

The following table reÖects the hedge classiÑcation of the notional balances of derivatives by type

that were held by Fannie Mae at December 31, 2001.

2001

Fair Value Cash Flow

Hedges Hedges Total

(Dollars in millions)

Interest rate swaps:

Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,063 $206,617 $213,680

Receive-Ñxed and basis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,989 75,134 86,123

Interest rate caps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 75,893 75,893

Swaptions:

Pay-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 69,650 69,650

Receive-Ñxed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74,400 Ì 74,400

Other(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,843 4,550 13,393

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $101,295 $431,844 $533,139

(1) Includes foreign currency swaps, forward starting swaps and asset swaps.

Fannie Mae discontinues hedge accounting prospectively when (1) it determines that the

derivative is no longer eÅective in oÅsetting changes in the cash Öows or fair value of a hedged item;

(2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is dedesignated as a

hedge instrument because it is unlikely that a forecasted transaction will occur; or (4) it determines

that designation of the derivative as a hedge instrument is no longer appropriate.

Cash Flow Hedges

Objectives and Context

Fannie Mae employs cash Öow hedges to lock in the interest spread on purchased assets by

hedging existing variable-rate debt and forecasted issuances of debt through its Benchmark Program.

The issuance of short-term Discount Notes and variable-rate long-term debt during periods of rising

interest rates can result in a mismatch of cash Öows relative to Ñxed-rate mortgage assets. Management minimizes the risk of mismatched cash Öows by converting variable-rate interest expense to

Ñxed-rate interest expense to lock-in Fannie Mae's funding costs.

Risk Management Strategies and Policies

To meet these objectives, Fannie Mae enters into interest rate swaps, swaptions, and caps to

hedge the variability of cash Öows resulting from changes in interest rates. Fannie Mae enters into

pay-Ñxed interest rate swaps to hedge the interest rate risk associated with issuing debt after

committing to purchase assets.

78
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Fannie Mae enters into pay-Ñxed interest rate swaps and swaptions, as well as interest rate caps

to change the variable-rate cash Öow exposure on its short-term Discount Notes and long-term

variable-rate debt to Ñxed-rate cash Öows. Under the swap agreements, Fannie Mae receives variable

interest payments and makes Ñxed interest payments, thereby eÅectively creating Ñxed-rate debt.

Fannie Mae also purchases swaptions that give it the option to enter into a pay-Ñxed, receive variable

interest rate swap at a future date. Under interest rate cap agreements, Fannie Mae reduces the

variability of cash Öows on its variable-rate debt by purchasing the right to receive cash if interest

rates rise above a speciÑed level.

Fannie Mae continually monitors changes in interest rates and identiÑes interest rate exposures

that may adversely impact expected future cash Öows on its mortgage and debt portfolios. Fannie Mae

uses analytical techniques, including cash Öow sensitivity analysis, to estimate the expected impact of

changes in interest rates on Fannie Mae's future cash Öows. Fannie Mae did not discontinue any cash

Öow hedges during the year because it was no longer probable that the hedged debt would be issued.

Fannie Mae had no open positions for hedging the forecasted issuance of long-term debt at

December 31, 2001.

Financial Statement Impact

Consistent with FAS 133, Fannie Mae records changes in the fair value of derivatives used as cash

Öow hedges in AOCI to the extent they are perfectly eÅective hedges. Fair value gains or losses in

AOCI are amortized into the income statement and are reÖected as either a reduction or increase in

interest expense over the life of the hedged item. The income or expense associated with derivatives

has historically been recognized in interest expense as an adjustment to the eÅective cost on the

hedged debt. Fannie Mae estimates it will amortize approximately $4.7 billion out of AOCI and into

interest expense during the next 12 months. The amortization of the $4.7 billion into interest expense

from AOCI does not produce a diÅerent result in the income statement versus prior periods. Actual

results in 2002 will likely diÅer from the amortization estimate because actual swap yields during 2002

will change from the swap yield curve assumptions at December 31, 2001.

The reconciliation below reÖects the change in AOCI, net of taxes, during the year ended

December 31, 2001 associated with FAS 133:

Year Ended

Dollars in millions December 31, 2001

Transition adjustment to adopt FAS 133, January 1, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(3,972)

Losses on cash Öow hedges, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,530)

Less: reclassiÑcations to earnings, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,143

Balance at December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(7,359)

If there is any hedge ineÅectiveness or derivatives do not qualify as cash Öow hedges, Fannie Mae

records the ineÅective portion in the fee and other income (expense) line item on the income

statement. For the year ended December 31, 2001, fee and other income (expense) includes a pre-tax

loss of $3 million related to the ineÅective portion of cash Öow hedges.

Fannie Mae includes only changes in the intrinsic value of pay-Ñxed swaptions and interest rate

caps in its assessment of hedge eÅectiveness. Therefore, Fannie Mae excludes changes in the time

value of these contracts from the assessment of hedge eÅectiveness and recognizes them as purchased

options expense on the income statement. For the year ended December 31, 2001, Fannie Mae

recorded a pre-tax loss of $34 million in purchased options expense for the change in time value of

options designated as cash Öow hedges.

79
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Fair Value Hedges

Objectives and Context

Fannie Mae employs fair value hedges to preserve its mortgage-to-debt interest spreads when

there is a decrease in interest rates by converting its Ñxed-rate debt to variable-rate debt. A decline in

interest rates increases the risk of mortgage assets repricing at lower yields while Ñxed-rate debt

remains at above-market costs. Management limits the interest rate risk inherent in its Ñxed-rate debt

instruments by using fair value hedges to convert its Ñxed-rate debt to variable-rate debt.

Risk Management Strategies and Policies

Fannie Mae enters into various types of derivative instruments, such as receive-Ñxed interest rate

swaps and swaptions, to convert its Ñxed-rate debt to Öoating-rate debt and preserve its mortgage-todebt interest spreads when interest rates decrease. Under receive-Ñxed interest rate swaps, Fannie

Mae receives Ñxed interest payments and makes variable interest payments, thereby creating Öoatingrate debt. Receive-Ñxed swaptions give Fannie Mae the option to enter into an interest rate swap at a

future date where Fannie Mae will receive Ñxed interest payments and make variable interest

payments, eÅectively creating callable debt that reprices at a lower interest rate.

Financial Statement Impact

Fannie Mae records changes in the fair value of derivatives used as fair value hedges in the fee and

other income (expense) line item on the income statement along with oÅsetting changes in the fair

value of the hedged items attributable to the risk being hedged. Fannie Mae's fair value hedges

produced no hedge ineÅectiveness during the year ended December 31, 2001.

Fannie Mae only includes changes in the intrinsic value of receive-Ñxed swaptions in its

assessment of hedge eÅectiveness. Fannie Mae excludes changes in the time value of receive-Ñxed

swaptions used as fair value hedges from the assessment of hedge eÅectiveness and records them in

purchased options expense on the income statement. For the year ended December 31, 2001, Fannie

Mae recorded pre-tax purchased options expense of $3 million in the income statement for the change

in the time value of these contracts.

Credit Risk Associated with Derivative Activities

The primary credit risk associated with Fannie Mae's derivative transactions is that a

counterparty might default on its payments to Fannie Mae, which could result in Fannie Mae having

to replace derivatives with a diÅerent counterparty at a higher cost. Fannie Mae reduces credit risk on

derivatives by dealing only with experienced counterparties of high credit quality, generally executing

master agreements that provide for netting of certain amounts payable by each party, requiring that

counterparties post collateral if the value of Fannie Mae's gain positions exceeds an agreed-upon

threshold, and diversifying these derivative instruments across counterparties. Fannie Mae regularly

monitors the exposures on its derivative instruments by valuing the positions via dealer quotes and

internal pricing models. The exposure to credit loss for derivative instruments can be estimated by

calculating the cost, on a present value basis, to replace at current market rates all those derivative

instruments outstanding for which Fannie Mae was in a gain position.

80
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Fannie Mae's exposure (taking into account master agreements) was $766 million at December 31, 2001, compared with $182 million at December 31, 2000. Fannie Mae expects the credit

exposure to Öuctuate as interest rates change. Fannie Mae mitigates this credit exposure by requiring

collateral from counterparties based on counterparty credit ratings and the level of credit exposure.

Fannie Mae generally requires overcollateralization from counterparties whose credit ratings have

dropped below predetermined levels. Fannie Mae held $656 million of collateral through custodians for

derivative instruments at December 31, 2001 and $70 million of collateral at December 31, 2000.

Fannie Mae's exposure, net of collateral, was $110 million at year-end 2001 and $112 million at yearend 2000.

The following table provides a summary of counterparty credit ratings for the exposure on

derivatives in a gain position at December 31, 2001.

Years to Maturity(1) Maturity Exposure

Less than 1 to Over Distribution Collateral Net of

1 year 5 years 5 years Netting(2) Exposure Held Collateral

(Dollars in millions)

Derivative Credit Loss Exposure:

Credit Rating

AAA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $Ì $Ì $ 136 $(136) $ Ì $ Ì $ Ì

AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 43 671 (528) 186 95 91

A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 43 826 (289) 580 561 19

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $Ì $86 $1,633 $(953) $766 $656 $110

(1) Represents the exposure to credit loss on derivative instruments, which is estimated by

calculating the cost, on a present value basis, to replace all outstanding derivative contracts

in a gain position. Reported on a net-by-counterparty basis where a legal right of oÅset exists

under an enforceable master settlement agreement. Derivative gains and losses with the same

counterparty in the same maturity category are presented net within the maturity category.

(2) Represents impact of netting of derivatives in a gain position and derivatives in a loss

position for the same counterparty across maturity categories.

At December 31, 2001, over 99 percent of the notional amount of Fannie Mae's outstanding

derivative transactions was with counterparties rated A or better by Standard & Poor's (73 percent

with counterparties rated AA or better). At December 31, 2001, eight counterparties represented

approximately 78 percent of the total notional amount of outstanding derivative transactions, and

each had a credit rating of A or better (70 percent of this notional amount was held by counterparties

with a credit rating of AA or better).

At December 31, 2001, 100 percent of Fannie Mae's exposure on derivatives in a gain position

excluding collateral held was with counterparties rated A or better by Standard & Poor's. 83 percent of

Fannie Mae's exposure, net of collateral, is with counterparties rated AA or better. At December 31,

2001, Ñve out of twenty-three counterparties comprised approximately 98 percent of exposure on

derivatives in a gain position excluding collateral held. Each of these Ñve counterparties had a credit

rating of A or better. Of these Ñve counterparties, 23 percent of the exposure on derivatives in a gain

position excluding collateral held was with counterparties rated AA or better.

14. Financial Instruments with OÅ-Balance-Sheet Risk

Fannie Mae is a party to transactions involving Ñnancial instruments with oÅ-balance-sheet risk.

Fannie Mae uses these instruments to fulÑll its statutory purpose of meeting the Ñnancing needs of the

81
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

secondary mortgage market and to reduce its own exposure to Öuctuations in interest rates. These

Ñnancial instruments include guaranteed MBS, commitments to purchase mortgages or to issue and

guarantee MBS, and credit enhancements. These instruments involve, to varying degrees, elements of

credit and interest rate risk in excess of amounts recognized on the balance sheet.

Guaranteed Mortgage-Backed Securities

As issuer and guarantor of MBS, Fannie Mae is obligated to disburse scheduled monthly

installments of principal and interest (at the certiÑcate rate) and the full UPB of any foreclosed

mortgage to MBS investors, whether or not any such amounts have been received. Fannie Mae is also

obligated to disburse unscheduled principal payments received from borrowers.

Fannie Mae's credit risk is mitigated to the extent that sellers of pools of mortgages elect to

remain at risk for the loans sold to the company as recourse or the borrower, lender, or Fannie Mae

purchases other credit enhancements, such as mortgage insurance, to protect against the risk of loss

from borrower default. Lenders that keep recourse retain the primary default risk, in whole or in part,

in exchange for a lower guaranty fee. Fannie Mae, however, bears the ultimate risk of default.

Accordingly, Fannie Mae accrues a liability on its balance sheet for its guarantee obligation based on

the probability that mortgages underlying MBS will not perform according to contractual terms and

the level of credit risk it has assumed.

Commitments

Fannie Mae enters into master delivery commitments with lenders on either a mandatory or an

optional basis. Under a mandatory master commitment, a lender must either deliver loans under an

MBS contract at a speciÑed guaranty fee rate or enter into a mandatory portfolio commitment with

the yield established upon executing the portfolio commitment.

Fannie Mae will also accept mandatory or lender-option delivery commitments not issued

pursuant to a master commitment. These commitments may be for portfolio or MBS. The guaranty

fee rate on MBS lender-option commitments is speciÑed in the contract, while the yield for portfolio

lender-option commitments is set at the date of conversion to a mandatory commitment.

The cost of funding future portfolio purchases generally is hedged upon issuance of, or conversion

to, a mandatory commitment. Therefore, the interest rate risk relating to loans purchased pursuant to

those commitments is largely mitigated.

Credit Enhancements

Fannie Mae provides credit enhancement and, in some cases, liquidity support for certain

Ñnancings involving taxable or tax-exempt housing bonds issued by state and local governmental

entities to Ñnance multifamily housing for low- and moderate-income families. In these transactions,

Fannie Mae issues MBS, pledges an interest in certain mortgages it owns, or otherwise provides

contractual assurance of payment to a trustee for the bonds or another credit party in the transaction.

Fannie Mae's direct credit enhancement in a multifamily housing bond transaction improves the

rating on the bond, thus resulting in lower-cost Ñnancing for multifamily housing.

82
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Credit Exposure for OÅ-Balance-Sheet Financial Instruments

The following table presents the contractual or notional amount of oÅ-balance-sheet Ñnancial

instruments at December 31, 2001 and 2000.

2001 2000

(Dollars in

billions)

Contractual amounts:

Total MBS outstanding(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,290 $1,057

MBS in portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (431) (351)

Outstanding MBS(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 859$ 706

Master commitments:

Mandatory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 24 $ 25

OptionalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 10

Portfolio commitments:

Mandatory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55 16

OptionalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 2

Other investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 2

Notional amounts(3):

Credit enhancements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 9

Other guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 5

(1) Net of allowance for losses. Includes $199 billion and $223 billion of MBS with lender or

third-party recourse at December 31, 2001 and 2000, respectively.

(2) MBS held by investors other than Fannie Mae.

(3) Notional amounts do not necessarily represent the credit risk of the positions.

15. Concentrations of Credit Risk

Concentrations of credit risk exist when a signiÑcant number of counterparties (e.g., borrowers,

lenders, and mortgage insurers) engage in similar activities or are susceptible to similar changes in

economic conditions that could aÅect their ability to meet contractual obligations.

Many servicers employ Risk ProÑlerSM, a default prediction model created by Fannie Mae, to

enhance their loss mitigation eÅorts on loans serviced for Fannie Mae. Risk ProÑler uses credit risk

indicators such as updated borrower credit data, current property values, and mortgage product

characteristics to predict the likelihood that a loan will default.

In the event mortgages become at risk to default, Fannie Mae employs strategies to reduce loss

exposure through resolutions other than foreclosure. Fannie Mae encourages early intervention,

workout alternatives, and preforeclosure sales. If a loan modiÑcation or preforeclosure sale is not

possible, Fannie Mae's goal is to handle the foreclosure process expeditiously and cost eÅectively to

maximize the proceeds from the sale of the property and to minimize the time it retains a nonearning

asset.

Fannie Mae reviews such elements as the current estimated market value of the property, the

property value in relation to Fannie Mae's outstanding loan, the credit strength of the borrower, and

the potential volatility of those measures to ascertain the current level of credit risk in the total book

83
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

of business. Based on the sensitivity analysis and loan performance analytics, Fannie Mae employs

various credit enhancement contracts to protect itself against losses on higher risk loans, including

loans with high loan-to-value ratios.

The following table presents the regional geographic distribution of properties underlying

mortgages in the portfolio and underlying MBS outstanding by primary default risk at December 31,

2001 and 2000.

Geographic Distribution

2001 Gross UPB Northeast Southeast Midwest Southwest West Total

(Dollars in millions)

Fannie Mae riskÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,323,622 19% 20% 19% 16% 26% 100%

Lender or shared risk ÏÏÏÏÏÏÏÏ 242,721 15 22 21 17 25 100

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,566,343 18% 21% 19% 16% 26% 100%

Geographic Distribution

2000 Gross UPB Northeast Southeast Midwest Southwest West Total

(Dollars in millions)

Fannie Mae riskÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,049,657 19% 20% 19% 16% 26% 100%

Lender or shared risk ÏÏÏÏÏÏÏÏ 267,14914 20 22 17 27 100

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,316,806 19% 20% 19% 16% 26% 100%

No signiÑcant concentration existed at the state level at December 31, 2001, except for California

where 18 percent of the gross UPB of mortgages in portfolio and underlying MBS were located, the

same level as December 31, 2000.

To minimize credit risk, Fannie Mae requires primary mortgage insurance or other credit

protection if the loan-to-value (LTV) ratio of a single-family conventional mortgage loan (the UPB of

the loan divided by the value of the mortgaged property) is greater than 80 percent when the loan is

delivered to Fannie Mae.

At December 31, 2001, $314 billion in UPB of single-family conventional mortgage loans in

portfolio and underlying MBS outstanding was covered by primary mortgage insurance at acquisition.

Seven mortgage insurance companies, all rated AA or higher by Standard & Poor's, provided

approximately 96 percent of the total coverage. Fannie Mae monitors the performance and Ñnancial

strength of its mortgage insurers on a regular basis.

The following table presents the distribution of conventional single-family loans in portfolio and

underlying MBS outstanding by original LTV and primary default risk at December 31, 2001 and

2000.

84
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

LTV Ratio

60% Over

2001 Gross UPB or less 61-70% 71-75% 76-80% 81-90% 90% Total

(Dollars in millions)

Fannie Mae risk ÏÏÏÏÏÏÏÏÏÏÏ $1,260,770 19% 15% 15% 29% 11% 11% 100%

Lender or shared risk ÏÏÏÏÏÏ 187,998 5 7 11 35 21 21 100

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,448,768 17% 14% 14% 29% 13% 13% 100%

LTV Ratio

60% Over

2000 Gross UPB or less 61-70% 71-75% 76-80% 81-90% 90% Total

(Dollars in millions)

Fannie Mae risk ÏÏÏÏÏÏÏÏÏÏÏ $1,003,068 19% 15% 15% 26% 14% 11% 100%

Lender or shared risk ÏÏÏÏÏÏ 208,464 5 8 11 34 22 20 100

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,211,532 16% 14% 15% 27% 15% 13% 100%

The rate at which mortgage loans prepay tends to be sensitive to the level and direction of

prevailing market interest rates. In a declining interest rate environment, higher-rate mortgage loans

will pay oÅ at a faster rate. Conversely, in an increasing interest rate environment, lower-rate

mortgage loans will prepay at a slower rate. The following table presents the distribution of Ñxed-rate,

single-family loans in the mortgage portfolio or underlying MBS by note rate at December 31, 2001

and 2000.

Fixed-Rate Loans by Note Rate(1)

7.00% 8.00% 9.00% 10.00%

Under to to to and

Gross UPB at December 31, 7.00% 7.99% 8.99% 9.99% over Total

(Dollars in billions)

2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $478 $641 $159$24 $10 $1,312

Percent of total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36% 49% 12% 2% 1% 100%

2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $285 $536 $218 $28 $10 $1,077

Percent of total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26% 50% 20% 3% 1% 100%

(1) Excludes housing revenue bonds and non-Fannie Mae securities.

16. Disclosures of Fair Value of Financial Instruments

The basic assumptions used and the estimates disclosed in the Fair Value Balance Sheets

represent management's best judgment of appropriate valuation methods. These estimates are based

on pertinent information available to management as of December 31, 2001 and 2000. In certain cases,

fair values are not subject to precise quantiÑcation or veriÑcation and may change as economic and

market factors, and management's evaluation of those factors, change.

Although management uses its best judgment in estimating the fair value of these Ñnancial

instruments, there are inherent limitations in any estimation technique. Therefore, these fair value

estimates are not necessarily indicative of the amounts that Fannie Mae would realize in a market

transaction. The accompanying Fair Value Balance Sheets do not represent an estimate of the overall

market value of Fannie Mae as a going concern, which would take into account future business

opportunities.

85
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Fair Value Balance Sheets

Assets

December 31, 2001 December 31, 2000

Carrying Estimated Carrying Estimated

Amount Fair Value Amount Fair Value

(Dollars in millions)

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $705,167 $720,174 $607,399 $613,095

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74,554 74,716 54,968 55,022

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,518 1,518 617 617

Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,598 12,822 12,088 9,418

Derivatives in gain positions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 954 954 Ì 518

799,791 810,184 675,072 678,670

OÅ-balance-sheet items:

Guaranty fee income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 6,451 Ì 5,915

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $799,791 $816,635 $675,072 $684,585

Liabilities and Net Assets

Liabilities:

Noncallable debt:

Due within one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $336,670 $337,144 $252,537 $252,619

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 287,229301,046 217,735 226,764

Callable debt:

Due within one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,822 6,834 27,785 22,412

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 132,746 133,458 144,625 148,277

763,467 778,482 642,682 650,072

Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,137 10,040 11,552 10,169

Derivatives in loss positionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,0695,069 Ì 3,667

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 781,673 793,591 654,234 663,908

Net assets, net of tax eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 18,118 $ 23,044 $ 20,838 $ 20,677

See accompanying Notes to Fair Value Balance Sheets.

86
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Notes to Fair Value Balance Sheets

The following discussion summarizes the signiÑcant methodologies and assumptions used in

estimating the fair values presented in the accompanying Fair Value Balance Sheets.

Mortgage Portfolio, Net

The fair value calculations of Fannie Mae's mortgage portfolio considered such variables as

interest rates, credit quality, and loan collateral. Because an active market does not exist for a portion

of mortgage loans in the portfolio, the portfolio's unsecuritized mortgages were aggregated into pools

by product type, coupon, and maturity and converted into notional MBS. A normal guaranty fee that

Fannie Mae's securitization business would charge for a pool of loans with similar characteristics was

subtracted from the weighted-average coupon rate less servicing fees. The method for estimating this

guaranty fee and the credit risk associated with the mortgage portfolio is described under ""Guaranty

Fee Income, Net.''

Fannie Mae then employed an option-adjusted spread (OAS) approach to estimate fair values for

both notional MBS and MBS held in portfolio. The OAS approach represents the risk premium or

incremental interest spread over Fannie Mae debt rates that is included in a security's yield to

compensate an investor for the uncertain eÅects of embedded prepayment options on mortgages. The

OAS was calculated using quoted market values for selected benchmark securities and provided a

generally applicable return measure that considers the eÅect of prepayment risk and interest rate

volatility.

Investments

Fair values of Fannie Mae's investment portfolio were based on actual quoted prices or prices

quoted for similar Ñnancial instruments.

Cash and Cash Equivalents

The carrying amount of cash and cash equivalents was used as a reasonable estimate of their fair

value.

Other Assets

Other assets include accrued interest receivable, net currency swap receivables, and several other

smaller asset categories. The fair value of other assets, excluding certain deferred items that have no

fair value and net currency swap receivables, approximates their carrying amount. The fair value of

net currency swap receivables was estimated based on either the expected cash Öows or quoted market

values of these instruments.

The fair value amount also includes the estimated eÅect on deferred income taxes of providing for

federal income taxes for the diÅerence between net assets at fair value and at cost at the statutory

corporate tax rate of 35 percent.

Derivatives

Fannie Mae enters into interest rate swaps, including callable swaps that, in general, extend or

adjust the eÅective maturity of certain debt obligations. Under these swaps, Fannie Mae generally

pays a Ñxed rate and receives a Öoating rate based on a notional amount. Fannie Mae also enters into

interest rate swaps that are linked to speciÑc investments (asset swaps) or speciÑc debt issues (debt

swaps). The fair value of interest rate swaps was estimated based on either the expected cash Öows or

87
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

quoted market values of these instruments, net of tax. The eÅect of netting under master agreements

was included in determining swap obligations in a gain position or loss position.

In addition, Fannie Mae enters into swaptions and interest rate caps. Under a swaption, Fannie

Mae has the option to enter into a swap, as described above, at a future date. Fannie Mae uses interest

rate caps to eÅectively manage its interest expense in a period of rising interest rates by entering into

an agreement whereby a counterparty makes payments to the company for interest rates above a

speciÑed rate. The fair values of these derivative instruments were estimated based on either the

expected cash Öows or the quoted market values of these instruments, net of tax.

Guaranty Fee Income, Net

MBS are not assets owned by Fannie Mae, except when acquired for investment purposes, nor are

MBS recorded as liabilities of Fannie Mae. Fannie Mae receives a guaranty fee calculated on the

outstanding principal balance of the related mortgages for guaranteed MBS held by third-party

investors. The guaranty fee represents a future income stream for Fannie Mae. Under generally

accepted accounting principles, this guaranty fee is recognized as income over the life of the securities.

The Fair Value Balance Sheets reÖect the present value of guaranty fees, net of estimated future

administrative costs and credit losses, and taking into account estimated prepayments.

Fannie Mae estimates the credit loss exposure attached to the notional amount of guaranteed

MBS held by third-party investors where Fannie Mae has the primary risk of default. Fannie Mae

deducts estimated credit losses from the projected guaranty fee cash Öows to arrive at the fair value.

Estimated credit losses were calculated with an internal forecasting model based on actual historical

loss experience for the company. The net guaranty fee cash Öows were then valued through an OAS

method similar to that described under ""Mortgage Portfolio, Net.''

Noncallable and Callable Debt

The fair value of Fannie Mae's noncallable debt was estimated by using quotes for selected debt

securities of the company with similar terms. Similar to the valuation of the mortgage portfolio, the

fair value of callable debt was estimated with an OAS model.

Other Liabilities

Other liabilities include accrued interest payable, amounts payable to MBS holders, estimated

losses on guaranteed MBS, net currency swap payables, and several other smaller liability categories.

The fair value of other liabilities, excluding certain deferred items that have no fair value, net currency

swap payables, and credit loss exposure for guaranteed MBS, which is included as a component of the

net MBS guaranty fee, approximates their carrying amount. The fair value of net currency swap

payables was estimated based on the expected cash Öows or quoted market values of these

instruments.

88
FANNIE MAE

QUARTERLY RESULTS OF OPERATIONS (Unaudited)

The following unaudited results of operations include, in the opinion of management, all adjustments

necessary for a fair presentation of the results of operations for such periods.

2001 Quarter Ended

December September June March

(Dollars in millions, except per common share amounts)

Operating net income(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,438 $ 1,377 $ 1,314 $ 1,238

Operating earnings per diluted common share ÏÏÏÏÏÏÏÏÏÏÏ 1.40 1.33 1.27 1.20

Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12,510 $12,447 $12,218 $11,995

Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,106 10,368 10,318 10,288

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,404 2,0791,900 1,707

Guaranty fee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 398 384 357 343

Fee and other incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51 4924 27

Provision for lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30 30 30 25

Foreclosed property expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (46) (45) (48) (54)

Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (251) (273) (254) (239)

Special contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (300) Ì Ì Ì

Purchased options income (expense)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 578 (413) 36 (238)

Income before federal income taxes, extraordinary item

and cumulative eÅect of change in accounting

principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,864 1,811 2,045 1,571

Provision for federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (836) (447) (550) (391)

Income before extraordinary item and cumulative eÅect

of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,028 1,364 1,495 1,180

Extraordinary itemÌloss on early extinguishment of

debt, net of tax eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (59) (135) (92) (55)

Cumulative eÅect of change in accounting principle, net

of tax eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 168

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,969 $ 1,229 $ 1,403 $ 1,293

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (35) (35) (35) (33)

Net income available to common stockholders ÏÏÏÏÏÏÏÏÏÏ $ 1,934 $ 1,194 $ 1,368 $ 1,260

Basic earnings per common share(2):

Earnings before extraordinary item and cumulative

eÅect of change in accounting principleÏÏÏÏÏÏÏÏÏÏÏ $ 1.99 $ 1.33 $ 1.46 $ 1.15

Extraordinary lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.06) (.14) (.09) (.06)

Cumulative eÅect of change in accounting principleÏÏ Ì Ì Ì .17

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.93 $ 1.19 $ 1.37 $ 1.26

Diluted earnings per common share(2):

Earnings before extraordinary item and cumulative

eÅect of change in accounting principleÏÏÏÏÏÏÏÏÏÏÏ $ 1.98 $ 1.32 $ 1.45 $ 1.14

Extraordinary lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.06) (.13) (.09) (.06)

Cumulative eÅect of change in accounting principleÏÏ Ì Ì Ì .17

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.92 $ 1.19 $ 1.36 $ 1.25

Cash dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .30 $ .30 $ .30 $ .30

(1) Excludes the cumulative after-tax gain of $168 million from the change in accounting principle upon

adoption of FAS 133 on January 1, 2001 and the after-tax loss of $24 million recognized during the year

2001 for the change in fair value of time value of purchased options under FAS 133. Includes after-tax

charges of $383 million for the amortization expense of purchased options premiums during the year ended

December 31, 2001.

(2) The total of the four quarters may not equal the amount for the year because the amount for each period is

calculated independently based on the weighted-average number of common shares outstanding during the

period.

89
FANNIE MAE

QUARTERLY RESULTS OF OPERATIONS (Unaudited)Ì(Continued)

The following unaudited results of operations include, in the opinion of management, all

adjustments necessary for a fair presentation of the results of operations for such periods.

2000 Quarter Ended

December September June March

(Dollars in millions, except per common share amounts)

Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,581 $10,862 $10,365 $ 9,973

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,096 9,434 8,966 8,611

Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,485 1,428 1,399 1,362

Guaranty fee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 339341 339332

Fee and other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏ 1 1 (46) Ì

Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30 30 30 30

Foreclosed property expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (51) (52) (51) (60)

Administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (232) (232) (224) (217)

Income before federal income taxes and

extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,572 1,516 1,447 1,447

Provision for federal income taxesÏÏÏÏÏÏÏÏÏÏÏ (405) (393) (383) (385)

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏ 1,167 1,123 1,064 1,062

Extraordinary itemÌ(loss) gain on early

extinguishment of debt, net of tax eÅect ÏÏÏ (2) 1 33 Ì

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,165 $ 1,124 $ 1,097 $ 1,062

Preferred stock dividendsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (36) (33) (32) (20)

Net income available to common stockholders $ 1,129$ 1,091 $ 1,065 $ 1,042

Basic earnings per common share(1):

Earnings before extraordinary itemÏÏÏÏÏÏ $ 1.13 $ 1.09$ 1.03 $ 1.03

Extraordinary gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì .03 Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.13 $ 1.09$ 1.06 $ 1.03

Diluted earnings per common share(1):

Earnings before extraordinary itemÏÏÏÏÏÏ $ 1.13 $ 1.09$ 1.02 $ 1.02

Extraordinary (loss) gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.01) Ì .03 Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.12 $ 1.09$ 1.05 $ 1.02

Cash dividends per common share ÏÏÏÏÏÏÏÏÏÏ $ .28 $ .28 $ .28 $ .28

(1) The total of the four quarters may not equal the amount for the year because the amount for

each period is calculated independently based on the weighted-average number of common

shares outstanding during the period.

90
FANNIE MAE

NET INTEREST INCOME AND AVERAGE BALANCES (Unaudited)

2001 2000 1999

(Dollars in millions)

Interest income:

Mortgage portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 46,478 $ 39,403 $ 32,672

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,692 3,378 2,823

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49,170 42,781 35,495

Interest expense(1):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,897 4,204 3,952

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,183 32,903 26,649

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,080 37,107 30,601

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,090 5,674 4,894

Taxable-equivalent adjustment(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 470 414 341

Amortization of purchased options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (590) Ì Ì

Adjusted net interest income taxable-equivalent basis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,970 $ 6,088 $ 5,235

Average balances:

Interest-earning assets(3):

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $658,195 $553,531 $468,320

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58,811 51,490 51,459

Total interest-earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $717,006 $605,021 $519,779

Interest-bearing liabilities(4):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $137,078 $ 73,351 $ 81,028

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 556,298 511,075 419,538

Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 693,376 584,426 500,566

Interest-free fundsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,630 20,595 19,213

Total interest-bearing liabilities and interest-free funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $717,006 $605,021 $519,779

Average interest rates(2):

Interest-earning assets:

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.11% 7.16% 7.04%

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.63 6.60 5.52

Total interest-earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.90 7.11 6.89

Interest-bearing liabilities(5):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.28 5.70 4.84

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.43 6.44 6.35

Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.00 6.35 6.11

Investment spread(6)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .90 .76 .78

Interest-free return(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .21 .25 .23

Net interest margin(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.11% 1.01% 1.01%

(1) ClassiÑcation of interest expense and interest-bearing liabilities as short-term or long-term is based on

eÅective maturity or repricing date, taking into consideration the eÅect of derivative Ñnancial instruments. The cost of debt includes expense for the amortization of purchased options in 2000 and 1999.

(2) ReÖects pro forma adjustments to permit comparison of yields on tax-advantaged and taxable assets.

(3) Includes average balance of nonperforming loans of $2.6 billion in 2001, $2.1 billion in 2000, and

$3.1 billion in 1999.

(4) ClassiÑcation of interest expense and interest-bearing liabilities as short-term or long-term is based on

eÅective maturity or repricing date, taking into consideration the eÅect of derivative Ñnancial

instruments.

(5) ClassiÑcation of interest expense and interest-bearing liabilities as short-term or long-term is based on

eÅective maturity or repricing date, taking into consideration the eÅect of derivative Ñnancial instruments. The cost of debt includes expense for the amortization of purchased options.

(6) Consists primarily of the diÅerence between the yield on interest-earning assets, adjusted for tax

beneÑts of nontaxable income, and the eÅective cost of funds on interest-bearing liabilities.

(7) Consists primarily of the return on that portion of the investment portfolio funded by equity and noninterest-bearing liabilities.

(8) Net interest income, on a taxable-equivalent basis, as a percentage of the average investment portfolio.

91
FANNIE MAE

RATE/VOLUME ANALYSIS (Unaudited)

Attributable to

Changes in(1) Increase

(Decrease) Volume Rate

(Dollars in millions)

2001 vs. 2000

Interest income:

Mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $7,075 $7,393 $ (318)

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (686) 434 (1,120)

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,3897,827 (1,438)

Interest expense(2):

Short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,693 2,945 (1,252)

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,280 2,868 (588)

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,973 5,813 (1,840)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,416 $2,014 $ 402

2000 vs. 1999

Interest income:

Mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6,731 $6,053 $ 678

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 555 2 553

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,286 6,055 1,231

Interest expense(2):

Short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 252 (398) 650

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,254 5,889365

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,506 5,491 1,015

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 780 $ 564 $ 216

(1) Combined rate/volume variances, a third element of the calculation, are allocated to the rate

and volume variances based on their relative size.

(2) ClassiÑcation of interest expense and interest-bearing liabilities as short-term or long-term is

based on the eÅective maturity or repricing date, taking into consideration the eÅect of

derivative Ñnancial instruments.

92
FINANCIAL AND STATISTICAL SUMMARY (Unaudited)

For the Year

2001 2000 1999 1998 1997

(Dollars in millions, except per common share amounts)

Operating net income(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,367 $ 4,448 $ 3,912 $ 3,418 $ 3,056

Operating earnings per diluted common share ÏÏÏÏÏÏÏÏÏÏÏÏ 5.20 4.293.72 3.23 2.83

Summary Statements of Income: Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 49,170 $ 42,781 $ 35,495 $ 29,995 $ 26,378

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,080 37,107 30,601 25,885 22,429

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,090 5,674 4,894 4,110 3,949

Guaranty fee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,482 1,351 1,282 1,2291,274

Fee and other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 151 (44) 191 275 125

Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 115 120 120 50 (100)

Foreclosed property expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (193) (214) (247) (311) (275)

Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,017) (905) (800) (708) (636)

Special contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (300) Ì Ì Ì Ì

Purchased options expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (37) Ì Ì Ì Ì

Income before federal income taxes, extraordinary item

and cumulative eÅect of change in accounting

principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,291 5,982 5,440 4,645 4,337

Provision for federal income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,224) (1,566) (1,519) (1,201) (1,269)

Income before extraordinary item and cumulative

eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏ 6,067 4,416 3,921 3,444 3,068

Extraordinary itemÌ(loss) gain on early

extinguishment of debt, net of tax eÅect ÏÏÏÏÏÏÏÏÏÏÏ (341) 32 (9) (26) (12)

Cumulative eÅect of change in accounting principle,

net of tax eÅectÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 168 Ì Ì Ì Ì

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,894 $ 4,448 $ 3,912 $ 3,418 $ 3,056

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (138) (121) (78) (66) (65)

Net income available to common stockholders ÏÏÏÏÏÏÏÏ $ 5,756 $ 4,327 $ 3,834 $ 3,352 $ 2,991

Basic earnings per common share:

Earnings before extraordinary item and cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.92 $ 4.28 $ 3.75 $ 3.28 $ 2.87

Extraordinary (loss) gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.34) .03 Ì (.02) (.02)

Cumulative eÅect of change in accounting principle ÏÏÏ .17 Ì Ì Ì Ì

Net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.75 $ 4.31 $ 3.75 $ 3.26 $ 2.85

Diluted earnings per common share:

Earnings before extraordinary item and cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.89$ 4.26 $ 3.73 $ 3.26 $ 2.84

Extraordinary (loss) gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.34) .03 (.01) (.03) (.01)

Cumulative eÅect of change in accounting principle ÏÏÏ .17 Ì Ì Ì Ì

Net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.72 $ 4.29$ 3.72 $ 3.23 $ 2.83

Cash dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.20 $ 1.12 $ 1.08 $ .96 $ .84

Mortgages purchased:

Single-family: Government insured or guaranteed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,001 $ 6,940 $ 23,575 $ 6,016 $ 5,539

Conventional:

Long-term, Ñxed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 226,516 113,444 146,679147,615 55,925

Intermediate-term, Ñxed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,146 11,607 15,315 28,725 6,030

Adjustable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,777 17,683 6,073 3,507 1,977

Total single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 262,440 149,674 191,642 185,863 69,471

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,144 4,557 3,568 2,585 994

Total mortgages purchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 270,584 $ 154,231 $ 195,210 $188,448 $ 70,465

Average net yield on mortgages purchased ÏÏÏÏÏÏÏÏÏÏÏÏ 6.56% 7.62% 6.88% 6.61% 7.40%

Debt issued:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,756,691 $1,143,131 $1,136,001 $695,495 $755,281

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 249,352 110,215 139,020 147,430 86,325

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,006,043 $1,253,346 $1,275,021 $842,925 $841,606

Average cost of debt issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.97% 6.34% 5.33% 5.49% 5.63%

MBS issues acquired by others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 344,739$ 105,407 $ 174,850 $220,723 $108,120

Financial ratios:

Return on average assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .78% .71% .73% .78% .81%

Operating return on average realized common equity ÏÏ 25.4 25.2 25.0 25.2 24.6

Dividend payout ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20.9 26.0 28.8 29.5 29.4

Average equity to average assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.3 3.1 3.1 3.3 3.6

(1) Excludes the cumulative after-tax gain of $168 million from the change in accounting principle upon adoption of FAS 133 on January 1, 2001 and the after-tax loss of $24 million recognized during the year 2001 for the change in fair

value of time value of purchased options under FAS 133. Includes after-tax charges of $383 million for the

amortization expense of purchased options premiums during the year ended December 31, 2001.

93
FINANCIAL AND STATISTICAL SUMMARY (Unaudited)Ì(Continued)

At December 31,

2001 2000 1999 1998 1997

(Dollars in millions, except per common share amounts)

Summary Balance Sheets:

Mortgage portfolio, net:

Single-family:

Government insured or guaranteed ÏÏÏÏÏ $ 42,181 $ 44,166 $ 41,029$ 21,805 $ 19,478

Conventional:

Long-term, Ñxed-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 552,463 454,349385,321 297,106 211,541

Intermediate-term, Ñxed-rateÏÏÏÏÏÏÏÏÏ 69,412 67,099 69,195 71,766 61,839

Adjustable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,765 27,135 14,107 11,873 11,373

Total single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 684,821 592,749 509,652 402,550 304,231

Multifamily ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,655 17,373 14,28911,965 12,447

Total unpaid principal balance ÏÏÏÏÏÏÏÏÏ 707,476 610,122 523,941 414,515 316,678

Less unamortized discount

(premium), price adjustments,

and allowance for losses ÏÏÏÏÏÏÏÏÏ 2,3092,723 1,161 (708) 362

Net mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 705,167 607,399 522,780 415,223 316,316

Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 94,624 67,673 52,387 69,791 75,357

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $799,791 $675,072 $575,167 $485,014 $391,673

Debentures, notes, and bonds, net:

Due within one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $343,492 $280,322 $226,582 $205,413 $175,400

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 419,975 362,360 321,037 254,878 194,374

Total debentures, notes, and bonds,

net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 763,467 642,682 547,619 460,291 369,774

Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,206 11,552 9,919 9,270 8,106

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 781,673 654,234 557,538 469,561 377,880

Stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,118 20,838 17,62915,453 13,793

Total liabilities and stockholders' equity $799,791 $675,072 $575,167 $485,014 $391,673

Core capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 25,182 $ 20,827 $ 17,876 $ 15,465 $ 13,793

Excess core capital over minimum requiredÏÏ 1,000 533 106 131 1,090

Yield on net mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏ 6.95% 7.24% 7.08% 7.12% 7.60%

Yield on total interest earning assetsÏÏÏÏÏÏÏÏ 6.53 7.21 7.01 6.95 7.32

Cost of debt outstandingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.496.47 6.18 6.10 6.46

Book value per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 15.86 $ 18.58 $ 16.02 $ 13.95 $ 12.34

Common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 997 999 1,019 1,025 1,037

Outstanding MBSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $858,867 $706,684 $679,169 $637,143 $579,138

94
MANAGEMENT

Directors

The age and background, as of March 26, 2002, of each of the members of the Board of Directors

of Fannie Mae are as follows:

First

Principal Occupation and Became Other

Name and Age Business Experience Director Directorships(1)

Victor H. Ashe(2), 57 Mayor of the City of Knoxville, Tennessee 2001

since 1987; Member, U.S. Conference of

Mayors Executive Board; past President of

the United States Conference of Mayors.

Stephen B. Ashley, 62 Chairman and Chief Executive OÇcer, The 1995 Exeter Fund, Inc.; The GeneAshley Group, a group of commercial and see Corporation; Hahn Automultifamily real estate, brokerage and in- motive Warehouse, Inc.;

vestment companies, since January 1997. Manning & Napiers Insurance

Fund, Inc.

Molly H. Bordonaro(2), 33 Associate, Norris, Beggs & Simpson, a com- 2001

mercial real estate service company, since

2001; owner and President of The

Bordonaro Group, a Portland, Oregon strategic consulting Ñrm specializing in economic and health care issues, from 1995 to

1999; Commissioner on the Commission on

the Advancement of Women and Minorities

in Science, Engineering and Technology

from 1999 to 2000.

Kenneth M. Duberstein, 57 Chairman and Chief Executive OÇcer, The 1998 The Boeing Company; Conoco

Duberstein Group, an independent strategic Inc.; Fleming Companies, Inc.;

planning and consulting company, since St. Paul Companies, Inc.

July 1989; Chief of StaÅ to the President of

the United States from 1988 to 1989.

Stephen Friedman, 64 Senior Principal, Marsh McLennan Risk 1996 Wal-Mart Stores, Inc.

Capital Corp., an insurance brokerage,

money management and consulting Ñrm,

since March 1998; Limited Partner since

1994, Senior Chairman from 1994 to 1998,

and Co-Chairman or Chairman from 1990

to 1994, Goldman, Sachs & Co., an investment banking Ñrm.

Thomas P. Gerrity, 60 Professor of Management since 1990, Direc- 1991 CVS Corporation; Reliance

tor since 1999 (Wharton Electronic Busi- Group Holdings, Inc.; Sunoco,

ness Initiative), Dean from 1990 to 1999, Inc.; Knight-Ridder, Inc.; InThe Wharton School of the University of ternet Capital Group, Inc.;

Pennsylvania; President of CSC Consulting Morgan Stanley Institutional

and Vice President of Computer Sciences Funds (formerly MAS Fund)

Corporation from 1989 to 1990; Chairman

and Chief Executive OÇcer, Index Group, a

technology-oriented consulting company,

from 1969 to 1989.

Jamie S. Gorelick, 51 Vice Chair of Fannie Mae since May 1997; 1997 United Technologies CorporaDeputy Attorney General of the United tion

States from 1994 to 1997; General Counsel

to the U.S. Department of Defense from

1993 to 1994; Partner, Miller, Cassidy, Larroca & Lewin, a law Ñrm, from 1981 to 1993.

William R. Harvey(2), 60 President of Hampton University since 2001 Wachovia Bank

1978; board member, First Union National

Bank (Atlantic Division) and Trigon Blue

Cross Blue Shield of Virginia.

Manuel J. Justiz(2), 53 Dean, College of Education at the Univer- 2001

sity of Texas at Austin, since 1990.

95
First

Principal Occupation and Became Other

Name and Age Business Experience Director Directorships(1)

Ann McLaughlin Korologos, Senior Advisor, Benedetto, Gartland & 1994 AMR Corporation (and its

60 Company, Inc., an investment banking Ñrm; subsidiary, American AirVice Chairman of the RAND Board of lines); Harman International

Trustees, a non-proÑt institution; Chairman Industries, Inc.; Host Marriott

Emeritus since August 2000, Chairman Corporation; Kellogg Comfrom October 1996 to August 2000, Vice pany; Microsoft Corporation;

Chairman from 1993 to 1996, The Aspen Vulcan Materials Company

Institute, a nonproÑt organization; U.S.

Secretary of Labor from 1987 to 1989.

Vincent A. Mai, 61 Chairman since 1999, Chairman and Chief 1991

Executive OÇcer from 1998 to 1999 and

President and Chief Executive OÇcer from

1989 to 1998 of AEA Investors Inc., a private investment company; Managing Director, Shearson Lehman Brothers, Inc., an

investment banking Ñrm, from 1974 to

1989.

Donald B. Marron, 67 Managing General Partner, Lightyear Fund, 1999

an independent private equity fund, since

November 2000; Chairman, UBS

PaineWebber Inc., an investment services

company, from 2000 to 2001; CEO of

PaineWebber Incorporated from 1980 to

2000.

Daniel H. Mudd, 43 Vice Chairman and Chief Operating OÇcer 2000

of Fannie Mae since February 2000; President and Chief Executive OÇcer of GE Capital, Japan from 1999 to 2000. He was with

GE Capital, a diversiÑed Ñnancial services

company and subsidiary of General Electric

Company, since 1991 in a variety of positions including President and Chief Executive OÇcer of GE Capital, Asia PaciÑc from

1996 to 1999.

Anne M. Mulcahy, 49Chairman and Chief Executive OÇcer since 2000 Target Corporation; Xerox

January 2002, President and Chief Operat- Corporation

ing OÇcer from May 2000 to December 2001, President, General Markets

Operations from January 1998 to May 2000,

of the Xerox Corporation, a global company

serving document processing markets. She

has been with Xerox since 1976 in a variety

of positions including Senior Vice President

and Chief StaÅ OÇcer.

Joe K. Pickett, 56 Former Chairman HomeSide International, 1996

Inc. Chairman from February 1996 to June

2001 and Chief Executive OÇcer from February 1996 to February 2001 of Homeside

International, Inc., and Chairman of its subsidiary, HomeSide Lending, Inc. (successor

entity to BancBoston Mortgage Corporation), a mortgage banking company, from

1990 to February 2001.

Franklin D. Raines, 53 Chairman of the Board of Directors and 1991 AOL Time Warner Inc.;

Chief Executive OÇcer of Fannie Mae since PÑzer Inc.; Pepsico, Inc.

January 1999; Chairman of the Board and

Chief Executive OÇcer-Designate, from

May 1998 to December 1998; Director, U.S.

OÇce of Management and Budget, from

1996 to 1998; Vice Chairman of Fannie

Mae, from 1991 to 1996.

96
First

Principal Occupation and Became Other

Name and Age Business Experience Director Directorships(1)

Taylor C. Segue, III (2), 47 Partner, Butzel Long, P.C., a Detroit, Mich- 2001

igan law Ñrm since 1999; partner, Segue,

Fair, Adams & Pope, P.L.C. from 1991 to

1999; board member, Michigan Education

Trust and American Red Cross Southeastern Michigan Blood Services Region.

H. Patrick Swygert, 59 President of Howard University since 1995. 1999 The Hartford Financial SerPresident of the State University of New vices Group, Inc.; United

York at Albany from 1995 to 1999. Technologies Corporation

(1) Companies with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934

or subject to the requirements of Section 15(d) of that Act or any company registered as an investment

company under the Investment Company Act of 1940. Certain directorships of other companies also are noted

in the principal occupation column.

(2) Appointed by the President of the United States, who has authority to appoint Ñve directors.

The term of each director will end on the date of the May 2001 annual meeting of stockholders,

except that the President of the United States may remove any director that the President appointed

for good cause.

Executive OÇcers

The age and business experience, as of March 27, 2002, of each of the executive oÇcers of Fannie

Mae, are as follows:

Franklin D. Raines, 53, has been Chairman of the Board of Directors and Chief Executive OÇcer

since January 1999. Mr. Raines was Chairman of the Board and Chief Executive OÇcer-Designate

from May 1998 to December 1998. Mr. Raines was Director, OÇce of Management and Budget from

September 1996 to May 1998, and Vice Chairman of Fannie Mae from September 1991 to

August 1996.

Daniel H. Mudd, 43, has been Vice Chairman and Chief Operating OÇcer since February 2000.

Mr. Mudd was with GE Capital from 1991 to 2000 in a variety of positions including, most recently,

President and Chief Executive OÇcer of GE Capital, Japan, from 1999 to 2000 and of GE Capital,

Asia PaciÑc, from 1996 to 1999.

Jamie S. Gorelick, 51, has been Vice Chair since May 1997. Ms. Gorelick was Deputy Attorney

General of the United States from March 1994 to April 1997. Ms. Gorelick served as General Counsel

to the United States Department of Defense from May 1993 to March 1994.

J. Timothy Howard, 53, has been Executive Vice President and Chief Financial OÇcer since

February 1990.

Thomas E. Donilon, 46, has been Executive Vice PresidentÌLaw and Policy since May 2000. He

was Senior Vice President, General Counsel and Secretary from September 1999 to May 2000. Mr.

Donilon was a partner with the law Ñrm of O'Melveny & Myers from 1991 to 1993 and 1997 to 1999.

He was Assistant Secretary of State for Public AÅairs and Chief of StaÅ to the Secretary of State from

1993 to 1996.

Louis W. Hoyes, 53, has been Executive Vice PresidentÌSingle Family Mortgage Business since

May, 2000. Mr. Hoyes was Senior Vice PresidentÌMultifamily Lending and Investment from July

1995 to May 2000. Prior to his employment with Fannie Mae, Mr. Hoyes was with Citicorp Real

Estate from 1982 until 1995, in various positions, including a managing director of the residential

segment of Citicorp's real estate business in North America.

Robert J. Levin, 46, has been Executive Vice PresidentÌHousing and Community Development

since June 1998. Mr. Levin was Executive Vice PresidentÌMarketing from June 1990 to June 1998.

97
Adolfo Marzol, 41, has been Executive Vice President and Chief Credit OÇcer since July 1998.

Mr. Marzol was Senior Vice PresidentÌSingle-Family Business Management from July 1996 to July

1998. Mr. Marzol was Senior Vice PresidentÌCapital Markets from February 1996 to July 1996.

Julie St. John, 50, has been Executive Vice President and Chief Technology OÇcer since July

2000. She was Senior Vice PresidentÌMortgage Business Technology (previously Senior Vice

PresidentÌGuaranty and Franchise Technologies and Senior Vice President of Transaction Processing and Management Systems) from June 1993 to July 2000.

Michael J. Williams, 44, has been PresidentÌFannie Mae e-Business since January 2001. He was

Senior Vice PresidentÌe-commerce from February 2000 to January 2001 and Senior Vice PresidentÌCustomer Applications and Technology Integration from 1993 to 2000.

Kenneth J. Bacon, 47, has been Senior Vice PresidentÌMultifamily Lending and Investment

since November 2000. He was Senior Vice PresidentÌAmerican Communities Fund from September

1998 to November 2000 and Senior Vice PresidentÌNortheastern Regional OÇce from April 1993 to

September 1998.

Arne L. Christenson, 40, has been Senior Vice PresidentÌRegulatory Policy since January 1999.

Prior to his employment with Fannie Mae, Mr. Christenson was Chief of StaÅ for the former Speaker

of the House, Congressman Newt Gingrich.

Kathy G. Gallo, 42, has been Senior Vice PresidentÌHuman Resources since March 2002. Prior

to her employment with Fannie Mae, Ms. Gallo was a partner at McKinsey and Company.

Vada Hill, 42, has been Senior Vice President and Chief Marketing OÇcer since November 2001.

Mr. Hill was Chief Marketing OÇcerÌFannie Mae e-Business from January 2001 to November 2001

and Senior Vice PresidentÌMarketing from September 1999 to January 2001. Prior to his employment with Fannie Mae, Mr. Hill was a brand manager at Procter & Gamble.

Ann M. Kappler, 45, has been Senior Vice President and General Counsel since May 2000.

Ms. Kappler was Senior Vice President and Deputy General Counsel from January 1999 to May 2000

and a partner in the law Ñrm of Jenner & Block from 1994 to 1998.

Linda K. Knight, 52, has been Senior Vice President and Treasurer since February 1993.

Thomas A. Lawler, 49, has been Senior Vice PresidentÌPortfolio Management since

November 1989.

Thomas A. Lund, 43, has been Senior Vice PresidentÌInvestor Channel since August 2000.

Mr. Lund was Senior Vice PresidentÌSouthwestern Regional OÇce from July 1996 to August 2000

and Vice PresidentÌMarketing in the Southwestern Regional OÇce from January 1995 to July 1996.

William R. Maloni, 57, has been Senior Vice PresidentÌGovernment and Industry Relations

since March 1989. Mr. Maloni was Vice PresidentÌGovernment and Industry Relations from 1984 to

1989 and director of Congressional Relations from 1983 to 1984.

Peter Niculescu, 42, has been Senior Vice PresidentÌPortfolio Strategy since March 1999. Prior

to his employment with Fannie Mae, Mr. Niculescu was a Managing Director and Co-Head of Fixed

Income Research for Goldman Sachs. He joined Goldman Sachs in 1990 and held a variety of

positions including Managing DirectorÌMortgage Research, Vice PresidentÌMortgage Research and

Corporate Bond Strategist.

Michael A. Quinn, 47, has been Senior Vice PresidentÌSingle Family Mortgage Business since

June 1998. He was Senior Vice PresidentÌCredit Loss Management from April 1994 to June 1998.

Mr. Quinn was Senior Vice President and Controller from March 1991 to April 1994.

Leanne G. Spencer, 46, has been Senior Vice President and Controller since November 1998.

Ms. Spencer was Vice President of Financial Reporting from 1993 to 1998.

98
Additional Information

For information for 2001 concerning executive compensation, stock ownership of management

and directors, certain transactions of executive oÇcers, and any person or group owning more than

Ñve percent of the voting stock of Fannie Mae, reference is made to the proxy statement for Fannie

Mae's 2002 annual meeting of stockholders and any later proxy statement published prior to Fannie

Mae's publication of a new Information Statement, which are incorporated herein by this reference.

The proxy statement for Fannie Mae's 2002 annual meeting of stockholders will be available in

April 2002.

Fannie Mae will provide without charge a copy of Fannie Mae's most recent proxy statement to

each person to whom this Information Statement has been delivered, upon the written or oral request

of such person. Requests for such copies should be directed to the oÇce speciÑed on page 2 of this

Information Statement.

99
[THIS PAGE INTENTIONALLY LEFT BLANK] 

6,000,000 Shares

5.375% Non-Cumulative Preferred Stock, Series I

(stated value $50 per share)

OFFERING CIRCULAR

Bear, Stearns & Co. Inc.

FTN Financial Capital Markets

Lehman Brothers

Blaylock & Partners, L.P.

Deutsche Bank Securities

Vining-Sparks IBG, L.P.