UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

Commission File No.: 0-50231

Federal National Mortgage Association

(Exact name of registrant as specified in its charter)

Fannie Mae

Federally chartered corporation 52-0883107

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

3900 Wisconsin Avenue,

NW Washington, DC

(Address of principal executive offices)

20016

(Zip Code)

Registrant’s telephone number, including area code:

(202) 752-7000

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

Title of Each Class Name of Each Exchange on Which Registered

None

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

Common Stock, without par value

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

(Title of class)

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes n No ¥

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months

(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¥ No n

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

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

files). Yes ¥ No n

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in

definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¥

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

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

Large accelerated filer n Accelerated filer ¥ Non-accelerated filer n

(Do not check if a smaller reporting company)

Smaller Reporting company n

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

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

York Stock Exchange on June 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $383 million.

As of January 31, 2011, there were 1,119,639,748 shares of common stock of the registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS

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

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

Overview ............................................................... 1

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

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

Mortgage Securitizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

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

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

Legislation and GSE Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Our Charter and Regulation of Our Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Making Home Affordable Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Our Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Where You Can Find Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Item 4. [Removed and Reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

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

of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . 76

Critical Accounting Policies and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Consolidated Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Business Segment Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

Consolidated Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

Supplemental Non-GAAP Information — Fair Value Balance Sheets . . . . . . . . . . . . . . . . . . . 126

Liquidity and Capital Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

Off-Balance Sheet Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

Glossary of Terms Used in This Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

Item 7A. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . 192

Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . 192

Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

i
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202

Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

Compensation Discussion and Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

Compensation Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

Compensation Risk Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

Compensation Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220

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

Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . 235

Policies and Procedures Relating to Transactions with Related Persons . . . . . . . . . . . . . . . . . 235

Transactions with Related Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244

PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246

Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246

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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

ii
MD&A TABLE REFERENCE

Table Description Page

— Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

1 Expected Lifetime Profitability of Single-Family Loans Acquired in 1991 through 2010. . . . . . . . 10

2 Single-Family Serious Delinquency Rates by Year of Acquisition . . . . . . . . . . . . . . . . . . . . . . . . 12

3 Credit Profile of Single-Family Conventional Loans Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

4 Credit Statistics, Single-Family Guaranty Book of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

5 Level 3 Recurring Financial Assets at Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

6 Summary of Consolidated Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

7 Analysis of Net Interest Income and Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

8 Rate/Volume Analysis of Changes in Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

9 Fair Value Losses, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

10 Credit-Related Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

11 Total Loss Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

12 Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves). . . . . . . 94

13 Nonperforming Single-Family and Multifamily Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

14 Credit Loss Performance Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

15 Credit Loss Concentration Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

16 Single-Family Credit Loss Sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

17 Impairments and Fair Value Losses on Loans in HAMP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

18 Business Segment Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

19 Business Segment Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

20 Single-Family Business Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

21 Multifamily Business Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

22 Capital Markets Group Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

23 Capital Markets Group’s Mortgage Portfolio Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

24 Capital Markets Group’s Mortgage Portfolio Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

25 Summary of Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

26 Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities. . . . . . . . . 123

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

Securities (Including Wraps) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

28 Changes in Risk Management Derivative Assets (Liabilities) at Fair Value, Net . . . . . . . . . . . . . . 126

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

Value of Net Assets (Net of Tax Effect) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

30 Supplemental Non-GAAP Consolidated Fair Value Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . 130

31 Activity in Debt of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

32 Outstanding Short-Term Borrowings and Long-Term Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

33 Outstanding Short-Term Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

34 Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year . . . . . . . . . . . . . 139

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Table Description Page

35 Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year . . . . . . . . 139

36 Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

37 Cash and Other Investments Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

38 Fannie Mae Credit Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

39 Composition of Mortgage Credit Book of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

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

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

41 Delinquency Status of Single-Family Conventional Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

42 Serious Delinquency Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

43 Single-Family Conventional Serious Delinquency Rate Concentration Analysis . . . . . . . . . . . . . . 162

44 Statistics on Single-Family Loan Workouts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

45 Loan Modification Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

46 Single-Family Foreclosed Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166

47 Single-Family Acquired Property Concentration Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

48 Multifamily Serious Delinquency Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

49 Multifamily Concentration Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

50 Multifamily Foreclosed Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

51 Mortgage Insurance Coverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174

52 Activity and Maturity Data for Risk Management Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

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

Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

54 Derivative Impact on Interest Rate Risk (50 Basis Points) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

55 Interest Rate Sensitivity of Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

iv
PART I

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

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

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

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

and has delegated to management the authority to conduct our day-to-day operations. We describe the

rights and powers of the conservator, key provisions of our agreements with the U.S. Department of the

Treasury (“Treasury”), and their impact on shareholders in “Conservatorship and Treasury Agreements.”

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

facts. Forward-looking statements often include words like “expects,” “anticipates,” “intends,” “plans,”

“believes,” “seeks,” “estimates,” “would,” “should,” “could,” “may,” or similar words. Actual results could

differ materially from those projected in the forward-looking statements as a result of a number of factors

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

Statements” for more information on the forward-looking statements in this report.

We provide a glossary of terms in “Management’s Discussion and Analysis of Financial Condition and Results

of Operations (“MD&A”)—Glossary of Terms Used in This Report.”

Item 1. Business

OVERVIEW

Fannie Mae is a government-sponsored enterprise that was chartered by Congress in 1938 to support liquidity,

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

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

the primary mortgage market. Our most significant activities include providing market liquidity by securitizing

mortgage loans originated by lenders in the primary mortgage market into Fannie Mae mortgage-backed

securities, which we refer to as Fannie Mae MBS, and purchasing mortgage loans and mortgage-related

securities in the secondary market for our mortgage portfolio. We acquire funds to purchase mortgage-related

assets for our mortgage portfolio by issuing a variety of debt securities in the domestic and international

capital markets. We also make other investments that increase the supply of affordable housing. During 2010,

we concentrated much of our efforts on minimizing our credit losses by using home retention solutions and

foreclosure alternatives to address delinquent mortgages, starting with solutions, such as modifications, that

permit people to stay in their homes. When there is no lower-cost alternative, our goal is to move to

foreclosure expeditiously. We describe our business activities below.

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

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

Development (“HUD”), and the Securities and Exchange Commission (“SEC”).

Although we are a corporation chartered by the U.S. Congress, our conservator is a U.S. government agency,

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

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

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

other obligations. Our common stock was delisted from the New York Stock Exchange and the Chicago Stock

Exchange on July 8, 2010 and since then has been traded in the over-the-counter market and quoted on the

OTC Bulletin Board under the symbol “FNMA.” Our debt securities are actively traded in the over-the-counter

market.

The conservatorship we have been under since September 2008, with FHFA acting as conservator, has no

specified termination date. There can be no assurance as to when or how the conservatorship will be

terminated, whether we will continue to exist following conservatorship, or what changes to our business

structure will be made during or following the conservatorship.

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Since our entry into conservatorship, we have entered into agreements with Treasury that include covenants

that significantly restrict our business activities and provide for substantial U.S. government financial support.

We provide additional information on the conservatorship, the provisions of our agreements with the Treasury,

and its impact on our business below under “Conservatorship and Treasury Agreements” and “Risk Factors.”

RESIDENTIAL MORTGAGE MARKET

The U.S. Residential Mortgage Market

We conduct business in the U.S. residential mortgage market and the global securities market. In response to

the financial crisis and severe economic recession that began in December 2007, the U.S. government took a

number of extraordinary measures designed to provide fiscal stimulus, improve liquidity and protect and

support the housing and financial markets. Examples of these measures include: (1) the Federal Reserve’s

temporary programs to purchase up to $1.25 trillion of GSE mortgage-backed securities and approximately

$175 billion of GSE debt by March 31, 2010, which were intended to provide support to mortgage lending

and the housing market and to improve overall conditions in private credit markets; (2) the Administration’s

Making Home Affordable Program, which was intended to stabilize the housing market by providing

assistance to homeowners and preventing foreclosures; and (3) the first-time and move-up homebuyer tax

credits, enacted to help increase home sales and stabilize home prices. The homebuyer tax credits were

available for qualifying home purchases by buyers who entered into binding contracts by April 30, 2010.

Total U.S. residential mortgage debt outstanding, which includes $10.6 trillion of single-family mortgage debt

outstanding, was estimated to be approximately $11.5 trillion as of September 30, 2010, the latest date for

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

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

steadily declining since then. We owned or guaranteed mortgage assets representing approximately 27.4% of

total U.S. residential mortgage debt outstanding as of September 30, 2010.

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

from and have no assets in geographic locations other than the United States and its territories.

Housing and Mortgage Market and Economic Conditions

During the fourth quarter of 2010, the United States economic recovery continued. The U.S. gross domestic

product, or GDP, rose by 3.2% on an annualized basis during the quarter after adjusting for inflation,

according to the Bureau of Economic Analysis advance estimate. The overall economy gained an estimated

128,000 jobs in the fourth quarter, with the private sector continuing its recent trend of moderate employment

growth throughout the quarter and into January 2011. The unemployment rate was 9.0% in January 2011,

compared with 9.6% in September 2010, based on data from the U.S. Bureau of Labor Statistics.

Housing activity rebounded modestly in the fourth quarter of 2010 after experiencing a pullback in the third

quarter. For all of 2010, home sales declined for the fourth time in the past five years, despite low mortgage

rates, reduced home prices and the first-time and move-up homebuyer tax credits that increased existing home

sales earlier in the year. Weak demand for homes, a weak labor market, strengthened lending standards in the

industry and elevated vacancy and foreclosure rates are the main obstacles to the housing recovery. Total

existing home sales fell by 4.8% in 2010 from 2009, according to data available through January 2011. Faced

with fierce competition from distressed sales, new home sales fared significantly worse, dropping by 14.2% in

2010, according to data available through January 2011, and accounting for just 5.5% of total home sales in

the fourth quarter of 2010, down from a peak of more than 19% at the beginning of 2005. After four

consecutive years of double-digit declines to an annual record low, total housing starts rose a modest 5.9% in

2010.

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

Housing and Mortgage Market Indicators(1)

2010 2009 2008 2010 2009

% Change

Home sales (units in thousands). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,229 5,530 5,398 (5.4)% 2.4%

New home sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321 374 485 (14.2) (22.9)

Existing home sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,908 5,156 4,913 (4.8) 4.9

Home price depreciation based on Fannie Mae Home Price Index

(“HPI”)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.1)% (3.7)% (10.3)% — —

Annual average fixed-rate mortgage interest rate(3). . . . . . . . . . . . . . . . 4.7% 5.0% 6.0% — —

Single-family mortgage originations (in billions) . . . . . . . . . . . . . . . . . $ 1,530 $ 1,917 $ 1,580 (20.2) 21.3

Type of single-family mortgage origination:

Refinance share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65% 69% 52% — —

Adjustable-rate mortgage share . . . . . . . . . . . . . . . . . . . . . . . . . . . 5% 4% 7% — —

Total U.S. residential mortgage debt outstanding (in billions)(4) . . . . . . . $11,459 $11,712 $11,915 (2.2) (1.7)

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

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

are based on information available through January 2011. Single-family mortgage originations, as well as refinance

shares, are based on February 2011 estimates from Fannie Mae’s Economics & Mortgage Market Analysis Group.

The adjustable-rate mortgage share is based on mortgage applications data reported by the Mortgage Bankers

Association. Certain previously reported data may have been changed to reflect revised historical data from any or all

of these organizations.

(2) Calculated internally using property data information on loans purchased by Fannie Mae, Freddie Mac and other

third-party home sales data. Fannie Mae’s HPI is a weighted repeat transactions index, meaning that it measures

average price changes in repeat sales on the same properties. Fannie Mae’s HPI excludes prices on properties sold in

foreclosure. The reported home price depreciation reflects the percentage change in Fannie Mae’s HPI from the

fourth quarter of the prior year to the fourth quarter of the reported year.

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

(4) Information for 2010 is through September 30, 2010 and has been obtained from the Federal Reserve’s September

2010 mortgage debt outstanding release.

Home prices, which rose in the second quarter of 2010 when the home buyer tax credits were available, have

fallen since the tax credits’ expiration. We estimate that home prices on a national basis declined by

approximately 3.1% in both the second half of 2010 and in 2010 overall. We estimate that home prices have

declined by 20.5% from their peak in the third quarter of 2006. Our home price estimates are based on

preliminary data and are subject to change as additional data become available.

As a result of the increase in existing home sales in the fourth quarter of 2010 and the pause in foreclosures

triggered by the discovery of deficiencies in servicers’ foreclosure processes, the supply of unsold singlefamily homes dropped during the quarter. According to the National Association of Realtors’ December 2010

Existing Home Sales Report, there was an 8.1 month average supply of existing unsold homes as of

December 31, 2010, compared with a 10.6 month average supply as of September 30, 2010 and a 7.2 month

average supply as of December 31, 2009. Although the supply of unsold homes dropped in the fourth quarter,

the inventory of unsold homes remains above long-term average levels. The national average inventory/sales

ratio masks significant regional variation as some regions, such as Florida, struggle with large inventory

overhang while others, such as California, are experiencing nearly depleted inventories in some market

segments.

An additional factor weighing on the market is the elevated level of vacant properties, as reported by the

Census Bureau. While the inventory of vacant homes for sale and for rent appears to be stabilizing, according

to the Bureau of the Census Housing Vacancy Survey, vacancy rates remain significantly above their normal

levels and will continue to weigh down the market. The serious delinquency rate has trended down since

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peaking in the fourth quarter of 2009 but has remained historically high, with an estimated four million loans

seriously delinquent (90 days or more past due or in the foreclosure process), based on the Mortgage Bankers

Association National Delinquency Survey. The shadow supply from these mortgages will also negatively affect

the market. According to the minutes of the December Federal Reserve Open Market Committee, members

expressed concern that the elevated supply of homes available for sale and the overhang of foreclosed homes

will contribute to further drops in home prices, reducing household wealth and thus restraining growth in

consumer spending. We provide information about Fannie Mae’s serious delinquency rate, which also

decreased during 2010, in “Executive Summary—Credit Performance.”

We estimate that total single-family mortgage originations decreased by 20.2% in 2010 to $1.5 trillion, with a

purchase share of 35% and a refinance share of 65%. For 2011, we expect an increase in mortgage rates will

likely reduce the share of refinance loans to approximately 35% and total single-family originations are

expected to decline to about $1.0 trillion.

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

several factors including rising foreclosures, declining house prices, increased cash sales, reduced household

formation, and reduced home equity extraction. We anticipate another approximately 2% decline in singlefamily mortgage debt outstanding in 2011. Total U.S. residential mortgage debt outstanding fell on an

annualized basis by approximately 2.4% in both the second and third quarters of 2010.

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

during the fourth quarter of 2010, according to the Mortgage Bankers Association National Delinquency

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

primary driver of the significant number of mortgage delinquencies and defaults in 2010. At the start of the

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

Statistics. The unemployment rate peaked at a 26-year high of 10.1% in October 2009, and remained as high

as 9.0% in January 2011. We expect the unemployment rate to decline modestly throughout 2011.

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

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

want to work and are available for work (discouraged workers), was 16.7% in December 2010, close to the

record high of 17.4% in October 2009.

The decline in house prices both nationally and regionally has left many homeowners with “negative equity”

in their homes, which means the principal balances on their mortgages exceed the current market value of

their homes. This provides an incentive for borrowers to walk away from their mortgage obligations and for

the loans to become delinquent and proceed to foreclosure. According to First American CoreLogic, Inc.

approximately 11 million, or 23%, of all residential properties with mortgages were in negative equity in the

third quarter of 2010. This potential supply also weighs on the supply/demand balance putting downward

pressure on both house prices and rents. See “Risk Factors” for a description of risks to our business

associated with the weak economy and housing market.

The multifamily sector improved during 2010 despite slow job growth. Multifamily fundamentals

strengthened, driven primarily by increases in non-farm payrolls and tenants renting rather than purchasing

homes due to uncertainty surrounding home values. Vacancy rates, which had climbed to record levels in

2009, have improved, and asking rents increased on a national basis. Preliminary third-party data suggest that

the rate of apartment vacancies held steady in the fourth quarter of 2010. Rents appear to have risen during

most of 2010, with overall rent growth up by an estimated 3%.

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

from the cash flows generated by the underlying property. Improvements in these fundamentals helped to

stabilize property values during 2010 in a number of metropolitan areas.

Prolonged periods of high vacancies and negative or flat rent growth will adversely affect multifamily

properties’ net operating incomes and related cash flows, which can strain the ability of borrowers to make

loan payments and thereby potentially increase delinquency rates and credit expenses.

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While national multifamily market fundamentals improved during 2010, certain local markets and properties

continue to exhibit weak fundamentals. As a result, we expect that our multifamily nonperforming assets will

increase in certain areas and we may continue to experience an increase in delinquencies and credit losses

despite generally improving market fundamentals. We expect the multifamily sector to continue to improve

modestly in 2011, even though unemployment levels remain elevated.

EXECUTIVE SUMMARY

Please read this Executive Summary together with our Management’s Discussion and Analysis of Financial

Condition and Results of Operations (“MD&A”) and our consolidated financial statements as of

December 31, 2010 and related notes. This discussion contains forward-looking statements that are based

upon management’s current expectations and are subject to significant uncertainties and changes in

circumstances. Please review “Forward-Looking Statements” for more information on the forward-looking

statements in this report and “Risk Factors” for a discussion of factors that could cause our actual results to

differ, perhaps materially, from our forward-looking statements. Please also see “MD&A—Glossary of Terms

Used in This Report.”

Our Mission

Our public mission is to support liquidity and stability in the secondary mortgage market and increase the

supply of affordable housing. In connection with our public mission, FHFA, as our conservator, and the

Obama Administration have given us an important role in addressing housing and mortgage market conditions.

As we discuss below and elsewhere in “Business,” we are concentrating our efforts on supporting liquidity,

stability and affordability in the secondary mortgage market and minimizing our credit losses from delinquent

loans.

Our Business Objectives and Strategy

Our Board of Directors and management consult with our conservator in establishing our strategic direction,

taking into consideration our role in addressing housing and mortgage market conditions. FHFA has approved

our business objectives. We face a variety of different, and potentially conflicting, objectives including:

• minimizing our credit losses from delinquent mortgages;

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

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

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

agreement;

• returning to long-term profitability; and

• protecting the interests of the taxpayers.

We therefore regularly consult with and receive direction from our conservator on how to balance these

objectives. Our pursuit of our mission creates conflicts in strategic and day-to-day decision-making that could

hamper achievement of some or all of these objectives.

We currently are concentrating our efforts on minimizing our credit losses. We use home retention solutions

and foreclosure alternatives to address delinquent mortgages, starting with solutions, such as modifications,

that permit people to stay in their homes. When there is no lower-cost alternative, our goal is to move to

foreclosure expeditiously. We also seek to minimize credit losses by actively managing our real estate owned

(“REO”) inventory and by pursuing contractual remedies where third parties such as lenders or providers of

credit enhancement are obligated to compensate us for losses.

Along with our efforts to minimize credit losses, we continue our significant role of providing support for

liquidity and affordability in the mortgage market through our guaranty and capital markets businesses. In

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2010, we continued our work to strengthen our book of business, acquiring loans with a strong overall credit

profile. We discuss the performance of single-family loans we acquired in 2009 and 2010 later in this

executive summary.

We will continue to need funds from Treasury as a result of ongoing adverse conditions in the housing and

mortgage markets, the deteriorated credit performance of loans in our mortgage credit book of business that

we acquired prior to 2009, the costs associated with our efforts pursuant to our mission, and the dividends we

are required to pay Treasury on the senior preferred stock. As a result of these factors, we do not expect to

earn profits in excess of our annual dividend obligation to Treasury for the indefinite future. Further, there is

significant uncertainty regarding the future of our company, as the Administration, Congress and our regulators

consider options for the future state of Fannie Mae, Freddie Mac and the U.S. government’s role in residential

mortgage finance.

On February 11, 2011, Treasury and HUD released a report to Congress on reforming America’s housing

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

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

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

the necessary financial support to Fannie Mae and Freddie Mac during the transition period. We discuss the

report’s recommendations for a new long-term structure for the housing finance system in more detail in

“Legislation and GSE Reform—GSE Reform.”

In the final quarter of 2010 we initiated a comprehensive review of our business processes, infrastructure and

organizational structure to assess the company’s readiness to operate effectively in the secondary mortgage

market of the future. We expect to implement the plan in phases with goals of providing value to our

customers, simplifying and standardizing our operating model, and reducing our costs.

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

discuss the following topics in this executive summary:

• Our 2010 financial performance;

• Actions we take to provide liquidity to the mortgage market;

• Our expectations regarding profitability, the book of business we have acquired since the beginning of

2009 and credit losses;

• Our strategies and actions to reduce credit losses;

• Our 2009 and 2010 credit performance;

• The servicer foreclosure process deficiencies discovered in 2010 and the related foreclosure pause;

• Our liquidity position; and

• Our outlook.

Summary of Our Financial Performance for 2010

Our financial results for 2010 reflect the continued weakness in the housing and mortgage markets, which

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

adoption of new accounting standards and the consolidation of the majority of our MBS trusts.

Effective January 1, 2010, we prospectively adopted new accounting standards on the transfers of financial

assets and the consolidation of variable interest entities. We refer to these accounting standards together as the

“new accounting standards.” In this report, we also refer to January 1, 2010 as the “transition date.”

Our adoption of the new accounting standards had a major impact on the presentation of our consolidated

financial statements. The new standards require that we consolidate the substantial majority of Fannie Mae

MBS trusts we guarantee and recognize the underlying assets (typically mortgage loans) and debt (typically

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bonds issued by the trusts in the form of Fannie Mae MBS certificates) of these trusts as assets and liabilities

in our consolidated balance sheets.

Although the new accounting standards did not change the economic risk to our business, we recorded a

decrease of $3.3 billion in our total deficit as of January 1, 2010 to reflect the cumulative effect of adopting

these new standards. We provide a detailed discussion of the impact of the new accounting standards on our

accounting and financial statements in “Note 2, Adoption of the New Accounting Standards on the Transfers

of Financial Assets and Consolidation of Variable Interest Entities.” Upon adopting the new accounting

standards, we changed the presentation of segment financial information that is currently evaluated by

management, as we discuss in “Business Segment Results — Changes to Segment Reporting.”

We recognized a net loss of $14.0 billion for 2010, a net loss attributable to common stockholders of

$21.7 billion, which includes $7.7 billion in dividends on senior preferred stock paid to Treasury, and a diluted

loss per share of $3.81. In comparison, we recognized a net loss of $72.0 billion, a net loss attributable to

common stockholders of $74.4 billion, including $2.5 billion in dividends on senior preferred stock, and a

diluted loss per share of $13.11 in 2009.

The $58.0 billion decrease in our net loss for 2010 compared with 2009 was due primarily to:

• a $46.9 billion decrease in credit-related expenses, which consist of the provision for loan losses, the

provision for guaranty losses (collectively referred to as the “provision for credit losses”) plus foreclosed

property expense, due to the factors described below;

• a $9.1 billion decrease in net other-than-temporary impairments due to slower deterioration of the

estimated credit component of the fair value losses of Alt-A and subprime securities. In addition, netother-than temporary impairment decreased in 2010 compared with 2009 because, effective beginning in

the second quarter of 2009, we recognize only the credit portion of other-than-temporary impairment in

our consolidated statements of operations due to the adoption of a new other-than-temporary impairment

accounting standard;

• a $6.7 billion decrease in losses from partnership investments resulting primarily from the recognition, in

the fourth quarter of 2009, of $5.0 billion in other-than-temporary impairment losses on our federal lowincome housing tax credit (“LIHTC”) investments; and

• a $2.3 billion decrease in net fair value losses primarily due to lower fair value losses on risk

management derivatives.

Our credit-related expenses were $26.6 billion for 2010 compared with $73.5 billion for 2009. Our provision

for credit losses was substantially lower in 2010, primarily because there was neither a significant increase in

the number of seriously delinquent loans, nor a sharp decline in home prices. Therefore, we did not need to

substantially increase our total loss reserves in 2010. Another contributing factor was the insignificant amount

of fair value losses on acquired credit-impaired loans recognized in 2010, because only purchases of creditdeteriorated loans from unconsolidated MBS trusts or as a result of other credit guarantees generate fair value

losses upon acquisition, due to our adoption of the new accounting standards. Additionally, on December 31,

2010, we entered into an agreement with Bank of America, N.A., and its affiliates, to address outstanding

repurchase requests for residential mortgage loans. Bank of America agreed, among other things, to a cash

payment of $1.3 billion, $930 million of which was recognized as a recovery of charge-offs, resulting in a

reduction to our provision for loan losses and allowance for loan losses, and $266 million as a reduction to

foreclosed property expense. For additional information on the terms of this agreement, see “Risk

Management — Credit Risk Management — Institutional Counterparty Credit Risk Management.”

We had a net worth deficit of $2.5 billion as of December 31, 2010 and $2.4 billion as of September 30, 2010,

compared with $15.3 billion as of December 31, 2009. Our net worth as of December 31, 2010 was negatively

impacted by the recognition of our net loss of $14.0 billion and the senior preferred stock dividends of

$7.7 billion. These reductions in our net worth were offset by our receipt of $27.7 billion in funds from

Treasury under our senior preferred stock purchase agreement with Treasury, a $3.3 billion cumulative effect

from the adoption of new accounting standards as of January 1, 2010, and a $3.1 billion reduction in

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unrealized losses in our holdings of available-for-sale securities. Our net worth, which is the basis for

determining the amount that Treasury has committed to provide us under the senior preferred stock purchase

agreement, equals the “Total deficit” reported in our consolidated balance sheets. In February 2011, the Acting

Director of FHFA submitted a request to Treasury on our behalf for $2.6 billion to eliminate our net worth

deficit as of December 31, 2010. When Treasury provides the requested funds, the aggregate liquidation

preference on the senior preferred stock will be $91.2 billion, which will require an annualized dividend

payment of $9.1 billion. This amount exceeds our reported annual net income for each of the last nine years,

in most cases by a significant margin. Through December 31, 2010, we have paid an aggregate of

$10.2 billion to Treasury in dividends on the senior preferred stock.

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

book of business, increased to $66.3 billion as of December 31, 2010 from $64.7 billion as of September 30,

2010, $61.4 billion as of January 1, 2010 and $64.9 billion as of December 31, 2009. Our total loss reserve

coverage to total nonperforming loans was 30.85% as of December 31, 2010, compared with 30.34% as of

September 30, 2010 and 29.98% as of December 31, 2009.

We recognized net income of $73 million for the fourth quarter of 2010, driven primarily by net interest

income of $4.6 billion and fair value gains of $366 million, which were partially offset by credit-related

expenses of $4.3 billion and administrative expenses of $592 million. Our fourth quarter results were

favorably impacted by the cash payment received from Bank of America, because it reduced our credit-related

expenses for the period. The net loss attributable to common stockholders, which includes $2.2 billion in

dividends on senior preferred stock, was $2.1 billion and our diluted loss per share was $0.37. In comparison,

we recognized a net loss of $1.3 billion, a net loss attributable to common stockholders of $3.5 billion and a

diluted loss per share of $0.61 for the third quarter of 2010. We recognized a net loss of $15.2 billion, a net

loss attributable to common stockholders of $16.3 billion and a diluted loss per share of $2.87 for the fourth

quarter of 2009.

Providing Mortgage Market Liquidity

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

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

financing through the activities of our three complementary businesses: our Single-Family business (“SingleFamily”), our Multifamily Mortgage Business (“Multifamily,” formerly “Housing and Community

Development,” or “HCD”) and our Capital Markets group. Our Single-Family and Multifamily businesses

work with our lender customers to purchase and securitize mortgage loans customers deliver to us into Fannie

Mae MBS. Our Capital Markets group manages our investment activity in mortgage-related assets, funding

investments primarily through proceeds we receive from the issuance of debt securities in the domestic and

international capital markets. The Capital Markets group works with lender customers to provide funds to the

mortgage market through short-term financing and other activities, making short-term use of our balance sheet.

These financing activities include whole loan conduit transactions, early funding transactions, Real Estate

Mortgage Investment Conduit (“REMIC”) and other structured securitization activities, and dollar rolls, which

we describe in more detail in “Business Segments — Capital Markets Group.”

In 2010, we purchased or guaranteed approximately $856 billion in loans, measured by unpaid principal

balance, which includes approximately $217 billion in delinquent loans we purchased from our single-family

MBS trusts. Our purchases and guarantees financed approximately 2,712,000 single-family conventional loans,

excluding delinquent loans purchased from our MBS trusts, and approximately 306,000 units in multifamily

properties.

Our mortgage credit book of business — which consists of the mortgage loans and mortgage-related securities

we hold in our investment portfolio, Fannie Mae MBS held by third parties and other credit enhancements that

we provide on mortgage assets — totaled $3.1 trillion as of September 30, 2010, which represented

approximately 27.4% of U.S. residential mortgage debt outstanding on September 30, 2010, the latest date for

which the Federal Reserve has estimated U.S. residential mortgage debt outstanding. We remained the largest

single issuer of mortgage-related securities in the secondary market, with an estimated market share of new

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single-family mortgage-related securities of 49.0% during the fourth quarter of 2010 and 44.0% for the full

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

was 44.5% in the third quarter of 2010 and 38.9% in the fourth quarter of 2009. If the Federal Housing

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

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

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

market, we remain a constant source of liquidity, guaranteeing an estimated 20.1% of multifamily mortgage

debt outstanding as of September 30, 2010, the latest date for which the Federal Reserve has estimated

mortgage debt outstanding for multifamily residences.

Our Expectations Regarding Profitability, the Single-Family Loans We Acquired Beginning in 2009, and

Credit Losses

In this section we discuss our expectations regarding the profitability, performance and credit profile of the

single-family loans we have purchased or guaranteed since the beginning of 2009, shortly after entering into

conservatorship in late 2008, and our expected single-family credit losses. We refer to loans we have

purchased or guaranteed as loans that we have “acquired.”

• Since the beginning of 2009, we have acquired single-family loans that have a strong overall credit profile

and are performing well. We expect these loans will be profitable, by which we mean they will generate

more fee income than credit losses and administrative costs, as we discuss in “Expected Profitability of

Our Single-Family Acquisitions” below. For further information, see “Table 2: Single-Family Serious

Delinquency Rates by Year of Acquisition” and “Table 3: Credit Profile of Single-Family Conventional

Loans Acquired.”

• The vast majority of our realized credit losses in 2009 and 2010 on single-family loans are attributable to

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

rise to additional credit losses that we have not yet realized, we estimate that we have reserved for the

substantial majority of the remaining losses.

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

In this discussion, we present a number of estimates and expectations regarding the profitability of singlefamily loans we have acquired, our single-family credit losses, and our draws from and dividends to be paid to

Treasury. These estimates and expectations are forward-looking statements based on our current assumptions

regarding numerous factors, including future home prices and the future performance of our loans. Our future

estimates of these amounts, as well as the actual amounts, may differ materially from our current estimates

and expectations as a result of home price changes, changes in interest rates, unemployment, direct and

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

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

availability, social behaviors, other macro-economic variables, the volume of loans we modify, the

effectiveness of our loss mitigation strategies, management of our REO inventory and pursuit of contractual

remedies, changes in the fair value of our assets and liabilities, impairments of our assets, or many other

factors, including those discussed in “Risk Factors” and “MD&A — Forward-Looking Statements.” For

example, if the economy were to enter a deep recession during this time period, we would expect actual

outcomes to differ substantially from our current expectations.

Expected Profitability of Our Single-Family Acquisitions

While it is too early to know how loans we have acquired since January 1, 2009 will ultimately perform,

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

low serious delinquency rate, we expect that, over their lifecycle, these loans will be profitable. Table 1

provides information about whether we expect loans we acquired in 1991 through 2010 to be profitable, and

the percentage of our single-family guaranty book of business represented by these loans as of December 31,

2010. The expectations reflected in Table 1 are based on the credit risk profile of the loans we have acquired,

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

and in “Table 40: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of

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

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

acquired in 2009 and 2010 to be profitable. If future macroeconomic conditions turn out to be significantly

more adverse than our expectations, these loans could become unprofitable. For example, we believe that these

loans would become unprofitable if home prices declined more than 20% from their December 2010 levels

over the next five years based on our home price index, which would be an approximately 36% decline from

their peak in the third quarter of 2006.

Table 1: Expected Lifetime Profitability of Single-Family Loans Acquired in 1991 through 2010

Acquisition Year Expectation for 

Percentage of

Single-Family Guaranty

Book of Business

Profitability as of December 31, 2010

1991 to 2000 Profitable

2001 Profitable

2002 Profitable

2003 Profitable

2004 Break-even

2005 Not Profitable

2006 Not Profitable

2007 Not Profitable

2008 Not Profitable

2009 Profitable

2010 Profitable

21%

39%

40%

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

through 2008, and the vast majority of our realized credit losses in 2009 and 2010 to date are attributable to

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

loans we acquired from 2005 through 2008; however, we expect them to perform close to break-even because

these loans were made as home prices were rapidly increasing and therefore suffered from the subsequent

decline in home prices.

Loans we have acquired since the beginning of 2009 comprised over 40% of our single-family guaranty book

of business as of December 31, 2010. Our 2005 to 2008 acquisitions are becoming a smaller percentage of our

guaranty book of business, having decreased from 50% of our guaranty book of business as of December 31,

2009 to 39% as of December 31, 2010.

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Performance of Our Single-Family Acquisitions

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

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

experienced historically low levels of delinquencies shortly after their acquisition. Table 2 shows, for singlefamily loans we acquired in each year from 2001 to 2009, the percentage that were seriously delinquent (three

or more months past due or in the foreclosure process) as of the end of the fourth quarter following the

acquisition year. Loans we acquired in 2010 are not included in this table because a substantial portion of

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

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

following their acquisition year was more than nine times lower than the average comparable serious

delinquency rate for loans acquired in 2005 through 2008. Table 2 also shows serious delinquency rates for

each year’s acquisitions as of December 31, 2010. Except for the most recent acquisition years, whose serious

delinquency rates are likely lower than they will be after the loans have aged, Table 2 shows that the serious

delinquency rate as of December 31, 2010 generally tracks the trend of the serious delinquency rate as of the

end of the fourth quarter following the year of acquisition. Below the table we provide information about the

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

unemployment levels.

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

Home Price 

Appreciation(1) 6.3 % 7.5% 7.6% 10.7% 11.5% 2.7%

%% % % % %

(4.1)% (10.3)% (3.7)% (3.1) %

%%% %

Unemployment 

rate 4.7 5.8 6.0 5.5 5.1 4.6 4.6 5.8 9.3 9.6

2001 2002 2003 2004 2005 2006 2007 2008 2010 2009

SDQ Rate

(2)

0.0%

0.8%

1.6%

2.4%

3.2%

4.0%

4.8%

5.6%

6.4%

7.2%

8.0%

8.8%

9.6%

10.4%

11.2%

12.0%

12.8%

13.6%

2001 2002 2003 2004 2005 2006 2007 2008 2009 *

SDQ Rate as of December 31, 2010

SDQ Rate as of end of 4th quarter following

acquisition year

* For 2009, the serious delinquency rate as of December 31, 2010 is the same as the serious delinquency rate as of the

end of the fourth quarter following the acquisition year.

(1) Based on Fannie Mae’s HPI, which measures average price changes based on repeat sales on the same properties. For

2010, the data show an initial estimate based on purchase transactions in Fannie-Freddie acquisition and public deed

data available through the end of January 2011. Previously reported data has been revised to reflect additional

available historical data. Including subsequently available data may lead to materially different results.

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

population survey (CPS), Bureau of Labor Statistics.

Credit Profile of Our Single-Family Acquisitions

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

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

standards were more relaxed than they are now. These loans were characterized, on average and as discussed

below, by higher LTV ratios and lower FICO credit scores than loans we have acquired since January 1, 2009.

In addition, many of these loans were Alt-A loans or had other higher-risk loan attributes such as interest-only

payment features. As a result of the sharp declines in home prices, 29% of the loans that we acquired from

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2005 through 2008 had mark-to-market LTV ratios that were greater than 100% as of December 31, 2010,

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

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

secure our loans are included. The sharp decline in home prices, the severe economic recession that began in

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

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

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

“Our Strategies and Actions to Reduce Credit Losses on Loans in our Single-Family Guaranty Book of

Business” and in “MD&A — Risk Management — Credit Risk Management — Single-Family Mortgage

Credit Risk Management.”

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

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

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

acquisitions of loans with higher-risk loan attributes. The loans we have purchased or guaranteed since

January 1, 2009 have had a better credit risk profile overall than loans we acquired in 2005 through 2008, and

their early performance has been strong. Our experience has been that loans with stronger credit risk profiles

perform better than loans without stronger credit risk profiles. For example, one measure of a loan’s credit risk

profile that we believe is a strong predictor of performance is LTV ratio, which indicates the amount of equity

a borrower has in the underlying property. As Table 3 demonstrates, the loans we have acquired since

January 1, 2009 have a strong credit risk profile, with lower original LTV ratios, higher FICO credit scores,

and a product mix with a greater percentage of fully amortizing fixed-rate mortgage loans than loans we

acquired from 2005 through 2008.

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

Acquisitions from 2009

through 2010

Acquisitions from 2005

through 2008

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

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

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

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

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

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

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

* Represent less than 0.5% of the total acquisitions.

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

(2) Newly originated Alt-A loans acquired in 2009 and 2010 consist of the refinance of existing Alt-A loans.

Improvements in the credit risk profile of our 2009 and 2010 acquisitions over acquisitions in prior years

reflect changes that we made to our pricing and eligibility standards, as well as changes that mortgage insurers

made to their eligibility standards. In addition, FHA’s role as the lower-cost option for some consumers for

loans with higher LTV ratios has also reduced our acquisitions of these types of loans. The credit risk profile

of our 2009 and 2010 acquisitions has been influenced further by a significant percentage of refinanced loans,

which generally perform well as they demonstrate a borrower’s desire to maintain homeownership. In 2010

our acquisitions of refinanced loans included a significant number of loans under the Refi PlusTM initiative,

which involves refinancing existing, performing Fannie Mae loans with current LTV ratios up to 125%, and

possibly lower FICO credit scores, into loans that reduce the borrowers’ monthly payments or are otherwise

more sustainable. A substantial portion of the refinances with higher LTV ratios were done as part of the

Home Affordable Refinance Program (“HARP”), which is for loans on primary residences with current LTV

ratios in excess of 80% and up to 125%. Due to the volume of HARP loans, the LTV ratios at origination for

our 2010 acquisitions are higher than for our 2009 acquisitions. However, the overall credit profile of our 2010

acquisitions remained significantly stronger than the credit profile of our 2005 through 2008 acquisitions.

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

January 1, 2009 will depend on a number of factors, including our future eligibility standards and those of

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

market and competitive conditions.

Beginning in 2008, we made changes to our pricing and eligibility standards and underwriting that were

intended to more accurately reflect the risk in the housing market and to significantly reduce our acquisitions

of loans with higher-risk attributes. These changes included the following:

• Established a minimum FICO credit score and reduced maximum debt-to-income ratio for most loans;

• Limited or eliminated certain loan products with higher-risk characteristics, including discontinuing the

acquisition of newly originated Alt-A loans, except for those that represent the refinancing of an existing

Alt-A Fannie Mae loan (we may also continue to selectively acquire seasoned Alt-A loans that meet

acceptable eligibility and underwriting criteria; however, we expect our acquisitions of Alt-A mortgage

loans to continue to be minimal in future periods);

• Updated our comprehensive risk assessment model in Desktop Underwriter», our proprietary automated

underwriting system, and implemented a comprehensive risk assessment worksheet to assist lenders in the

manual underwriting of loans;

• Increased our guaranty fee pricing to better align risk and pricing;

• Updated our policies regarding appraisals of properties backing loans; and

• Established a national down payment policy requiring borrowers to have a minimum down payment (or

minimum equity, for refinances) of 3%, in most cases.

If we had applied our current pricing and eligibility standards and underwriting to loans we acquired in 2005

through 2008, our losses on loans acquired in those years would have been lower, although we would still

have experienced losses due to the rise and subsequent sharp decline in home prices and increased

unemployment.

Expectations Regarding Credit Losses

The single-family credit losses we realized in 2009 and 2010, combined with the amounts we have reserved

for single-family credit losses as of December 31, 2010, total approximately $110 billion. The vast majority of

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

While loans we acquired in 2005 through 2008 will give rise to additional credit losses that we have not yet

realized, we estimate that we have reserved for the substantial majority of the remaining losses. While we

believe our results of operations have already reflected a substantial majority of the credit losses we have yet

to realize on these loans, we expect that defaults on these loans and the resulting charge-offs will occur over a

period of years. In addition, given the large current and anticipated supply of single-family homes in the

market, we anticipate that it will take years before our REO inventory approaches pre-2008 levels.

We show how we calculate our realized credit losses in “Table 14: Credit Loss Performance Metrics.” Our

reserves for credit losses consist of (1) our allowance for loan losses, (2) our allowance for accrued interest

receivable, (3) our allowance for preforeclosure property taxes and insurance receivables, and (4) our reserve

for guaranty losses (collectively, our “total loss reserves”), plus the portion of fair value losses on loans

purchased out of MBS trusts reflected in our consolidated balance sheets that we estimate represents

accelerated credit losses we expect to realize. For more information on our reserves for credit losses, please

see “Table 11: Total Loss Reserves.”

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

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

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

charge-offs against our reserve for guaranty losses to the extent that the acquisition cost of these loans

exceeded their estimated fair value. We expect to realize a portion of these fair value losses as credit losses in

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the future (for loans that eventually involve charge-offs or foreclosure), yet these fair value losses have already

reduced the mortgage loan balances reflected in our consolidated balance sheets and have effectively been

recognized in our consolidated statements of operations through our provision for guaranty losses. We consider

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

to realize them as credit losses in the future.

As a result of the substantial reserving for and realizing of our credit losses to date, we have drawn a

significant amount of funds from Treasury through December 31, 2010. As our draws from Treasury for credit

losses abate, we expect our draws instead to be driven increasingly by dividend payments to Treasury.

Our Strategies and Actions to Reduce Credit Losses on Loans in our Single-Family Guaranty Book of

Business

To reduce the credit losses we ultimately incur on our single-family guaranty book of business, we are

focusing our efforts on the following strategies:

• Reducing defaults to avoid losses that otherwise would occur;

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

• Pursuing foreclosure alternatives to reduce the severity of the losses we incur;

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

• Pursuing contractual remedies from lenders and providers of credit enhancement, including mortgage

insurers.

We refer to actions taken by our servicers with borrowers to resolve the problem of existing or potential

delinquent loan payments as “workouts,” which include our home retention solutions and foreclosure

alternatives discussed below. As “Table 4: Credit Statistics, Single-Family Guaranty Book of Business”

illustrates, our single-family serious delinquency rate decreased to 4.48% as of December 31, 2010 from

5.38% as of December 31, 2009. This decrease is primarily the result of workouts and foreclosed property

acquisitions completed during the year and reflects our work with servicers to reduce delays in determining

and executing the appropriate approach for a given loan. During 2010, we completed approximately 772,000

workouts and foreclosed property acquisitions. The decrease is also attributable to our acquisition of loans

with stronger credit profiles in 2010. Serious delinquency rates declined in 2010 and, as of September 30,

2010, we experienced the first year-over-year decline in our serious delinquency rate since 2007. This

year-over-year decline continued as of December 31, 2010. We expect serious delinquency rates will continue

to be affected in the future by home price changes, changes in other macroeconomic conditions, and the extent

to which borrowers with modified loans again become delinquent in their payments.

Reducing Defaults. We are working to reduce defaults through improved servicing, refinancing initiatives and

solutions that help borrowers retain their homes, such as modifications.

• Improved Servicing. Our mortgage servicers are the primary point of contact for borrowers and perform

a vital role in our efforts to reduce defaults and pursue foreclosure alternatives. We seek to improve the

servicing of our delinquent loans through a variety of means, including increasing our resources for

managing the oversight of servicers, increasing our communications with servicers, and holding servicers

accountable for following our requirements. We are also working with some of our servicers to test and

implement high-touch protocols for servicing our higher risk loans, including lowering the ratio of loans

per servicer employee, prescribing borrower outreach strategies to be used at earlier stages of delinquency,

and providing distressed borrowers a single point of contact to resolve issues.

• Refinancing Initiatives. Through our Refi PlusTM initiative, which provides expanded refinance

opportunities for eligible Fannie Mae borrowers, we acquired or guaranteed approximately 659,000 loans

in 2010 that helped borrowers obtain more affordable monthly payments now and in the future or a more

stable mortgage product (for example, by moving from an adjustable-rate mortgage to a fixed-rate

mortgage). These refinancing activities may help prevent future delinquencies and defaults. Loans

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refinanced through the Refi Plus initiative in 2010 reduced our borrowers’ monthly mortgage payments by

an average of $149.

• Home Retention Solutions. Our home retention solutions are intended to help borrowers stay in their

homes and include loan modifications, repayment plans and forbearances. We provide information on our

home retention solutions completed during 2010 in Table 4. Please also see “Risk Management—Credit

Risk Management—Single-Family Mortgage Credit Risk Management—Management of Problem Loans

and Loan Workout Metrics” for a discussion of our home retention strategies.

Managing Timelines. We believe that repayment plans, short-term forbearances and loan modifications can

be most effective in preventing defaults when completed at an early stage of delinquency. Similarly, we

believe that our foreclosure alternatives are more likely to be successful in reducing our loss severity if they

are executed expeditiously. Accordingly, it is important for servicers to work with delinquent borrowers early

in the delinquency to determine whether home retention solutions or foreclosure alternatives will be viable

and, where no workout is viable, to reduce delays in proceeding to foreclosure.

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

problem loan, we seek to offer foreclosure alternatives and complete them in a timely manner. These

foreclosure alternatives are primarily preforeclosure sales, which are sometimes referred to as “short sales,” as

well as deeds-in-lieu of foreclosure. These alternatives are intended to reduce the severity of our loss resulting

from a borrower’s default while permitting the borrower to avoid going through a foreclosure. We provide

information about the volume of foreclosure alternatives we completed during 2010 in Table 4.

Managing Our REO Inventory. Since January 2009, we have strengthened our REO sales capabilities by

significantly increasing the number of resources in this area, and we are working to manage our REO

inventory to reduce costs and maximize sales proceeds. As Table 4 shows, in 2010 we increased our

dispositions of foreclosed single-family properties by 51% as compared with 2009, while our acquisition of

properties increased by 80%. Given the large number of seriously delinquent loans in our single-family

guaranty book of business and the large current and anticipated supply of single-family homes in the market,

we expect it will take years before our REO inventory approaches pre-2008 levels.

Pursuing Contractual Remedies. We conduct reviews of delinquent loans and, when we discover loans that

do not meet our underwriting and eligibility requirements, we make demands for lenders to repurchase these

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

compensate us for loans for which the mortgage insurer rescinds coverage. We increased the volume of our

repurchase requests in 2010 as compared with 2009, and we expect the number of repurchase requests we

make in 2011 to remain high. During 2010, lenders repurchased from us or reimbursed us for losses on

approximately $8.8 billion in loans, measured by unpaid principal balance, pursuant to their contractual

obligations. In addition, as of December 31, 2010, we had outstanding requests for lenders to repurchase from

us or reimburse us for losses on $5.0 billion in loans, of which 30% had been outstanding for more than

120 days.

These dollar amounts represent the unpaid principal balance of the loans underlying the repurchase requests,

not the actual amounts we have received or requested from the lenders. When lenders pay us for these

requests, they pay us either to repurchase the loans or else to make us whole for our losses in cases where we

have acquired and disposed of the property underlying the loans. Make-whole payments are typically for less

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

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

significantly lower than the unpaid principal balance of the loans.

We entered into an agreement on December 31, 2010, with Bank of America, N.A., BAC Home Loans

Servicing LP, and Countrywide Home Loans, Inc., each of which is an affiliate of Bank of America

Corporation. The agreement addresses outstanding repurchase requests on loans with an unpaid principal

balance of approximately $3.9 billion delivered to Fannie Mae by affiliates of Countrywide Financial

Corporation (collectively, “Countrywide”), with which Bank of America Corporation merged in 2008. For

16
more information regarding this agreement, please see “MD&A—Risk Management—Credit Risk

Management—Institutional Counterparty Credit Risk Management.”

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

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

$1.9 billion for the fourth quarter of 2010. Please see “Risk Management—Credit Risk Management—

Institutional Counterparty Credit Risk Management” for a discussion of our repurchase and reimbursement

requests and outstanding receivables from mortgage insurers, as well as the risk that one or more of these

counterparties fails to fulfill its obligations to us.

While the actions we have taken to stabilize the housing market and minimize our credit losses have been

undertaken with the goal of reducing our future credit losses below what they otherwise would have been, it is

difficult to predict how effective these actions ultimately will be in reducing our credit losses and, in the

future, it may be difficult to measure the impact our actions ultimately have on our credit losses.

Credit Performance

Table 4 presents information for each quarter of 2010 and for 2009 about the credit performance of mortgage

loans in our single-family guaranty book of business and our loan workouts. The workout information in Table

4 does not reflect repayment plans and forbearances that have been initiated but not completed, nor does it

reflect trial modifications that have not become permanent.

Table 4: Credit Statistics, Single-Family Guaranty Book of Business(1)

Full

Year Q4 Q3 Q2 Q1

Full

Year

2010 2009

(Dollars in millions)

As of the end of each period:

Serious delinquency rate(2) . . . . . . . . . . . . 4.48% 4.48% 4.56% 4.99% 5.47% 5.38%

Nonperforming loans(3) . . . . . . . . . . . . . . $ 212,858 $212,858 $212,305 $217,216 $222,892 $ 215,505

Foreclosed property inventory:

Number of properties . . . . . . . . . . . . . . 162,489 162,489 166,787 129,310 109,989 86,155

Carrying value . . . . . . . . . . . . . . . . . . . $ 14,955 $ 14,955 $ 16,394 $ 13,043 $ 11,423 $ 8,466

Combined loss reserves(4) . . . . . . . . . . . . . $ 60,163 $ 60,163 $ 58,451 $ 59,087 $ 58,900 $ 62,312

Total loss reserves(5) . . . . . . . . . . . . . . . . $ 64,469 $ 64,469 $ 63,105 $ 64,877 $ 66,479 $ 62,848

During the period:

Foreclosed property (number of properties):

Acquisitions(6) . . . . . . . . . . . . . . . . . . . 262,078 45,962 85,349 68,838 61,929 145,617

Dispositions. . . . . . . . . . . . . . . . . . . . . (185,744) (50,260) (47,872) (49,517) (38,095) (123,000)

Credit-related expenses(7) . . . . . . . . . . . . . $ 26,420 $ 4,064 $ 5,559 $ 4,871 $ 11,926 $ 71,320

Credit losses(8) . . . . . . . . . . . . . . . . . . . . $ 23,133 $ 3,111 $ 8,037 $ 6,923 $ 5,062 $ 13,362

Loan workout activity (number of loans):

Home retention loan workouts(9) . . . . . . . . 440,276 89,691 113,367 132,192 105,026 160,722

Preforeclosure sales and deeds-in-lieu of

foreclosure . . . . . . . . . . . . . . . . . . . . . 75,391 15,632 20,918 21,515 17,326 39,617

Total loan workouts . . . . . . . . . . . . . . . . . 515,667 105,323 134,285 153,707 122,352 200,339

Loan workouts as a percentage of our

delinquent loans in our guaranty book of

business(10) . . . . . . . . . . . . . . . . . . . . . 37.30% 30.47% 37.86% 41.18% 31.59% 12.24%

(1) Our single-family guaranty book of business consists of (a) single-family mortgage loans held in our mortgage

portfolio, (b) single-family mortgage loans underlying Fannie Mae MBS, and (c) other credit enhancements that we

provide on single-family mortgage assets, such as long-term standby commitments. It excludes non-Fannie Mae

mortgage-related securities held in our mortgage portfolio for which we do not provide a guaranty.

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(2) Calculated based on the number of single-family conventional loans that are three or more months past due and loans

that have been referred to foreclosure but not yet foreclosed upon, divided by the number of loans in our singlefamily conventional guaranty book of business. We include all of the single-family conventional loans that we own

and those that back Fannie Mae MBS in the calculation of the single-family serious delinquency rate.

(3) Represents the total amount of nonperforming loans, including troubled debt restructurings and HomeSaver Advance

first-lien loans, which are unsecured personal loans in the amount of past due payments used to bring mortgage loans

current, that are on accrual status. A troubled debt restructuring is a restructuring of a mortgage loan in which a

concession is granted to a borrower experiencing financial difficulty. We generally classify loans as nonperforming

when the payment of principal or interest on the loan is two months or more past due.

(4) Consists of the allowance for loan losses for loans recognized in our consolidated balance sheets and the reserve for

guaranty losses related to both single-family loans backing Fannie Mae MBS that we do not consolidate in our

consolidated balance sheets and single-family loans that we have guaranteed under long-term standby commitments.

Prior period amounts have been restated to conform to the current period presentation. The amounts shown as of

March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010 reflect a decrease from the amount

shown as of December 31, 2009 as a result of the adoption of the new accounting standards. For additional

information on the change in our loss reserves see “Consolidated Results of Operations—Credit-Related Expenses—

Provision for Credit Losses.”

(5) Consists of (a) the combined loss reserves, (b) allowance for accrued interest receivable, and (c) allowance for

preforeclosure property taxes and insurance receivables.

(6) Includes acquisitions through deeds-in-lieu of foreclosure.

(7) Consists of the provision for loan losses, the provision (benefit) for guaranty losses and foreclosed property expense.

(8) Consists of (a) charge-offs, net of recoveries and (b) foreclosed property expense; adjusted to exclude the impact of

fair value losses resulting from credit-impaired loans acquired from MBS trusts and HomeSaver Advance loans.

(9) Consists of (a) modifications, which do not include trial modifications or repayment plans or forbearances that have

been initiated but not completed; (b) repayment plans and forbearances completed and (c) HomeSaver Advance firstlien loans. See “Table 44: Statistics on Single-Family Loan Workouts” in “Risk Management—Credit Risk

Management” for additional information on our various types of loan workouts.

(10) Calculated based on annualized problem loan workouts during the period as a percentage of delinquent loans in our

single-family guaranty book of business as of the end of the period.

We provide additional information on our credit-related expenses in “Consolidated Results of Operations—

Credit-Related Expenses” and on the credit performance of mortgage loans in our single-family book of

business and our loan workouts in “Risk Management—Credit Risk Management—Single-Family Mortgage

Credit Risk Management.”

Servicer Foreclosure Process Deficiencies and Foreclosure Pause

In the fall of 2010, a number of our single-family mortgage servicers temporarily halted foreclosures in some

or all states after discovering deficiencies in their processes and the processes of their lawyers and other

service providers relating to the execution of affidavits in connection with the foreclosure process.

Deficiencies include improperly notarized affidavits and affidavits signed without appropriate knowledge and

review of the documents. These foreclosure process deficiencies have generated significant concern and are

currently being investigated by various government agencies and by the attorneys general of all fifty states.

This has resulted in new foreclosure laws and court rules in several states that we anticipate will increase costs

and may lengthen the time to foreclose.

We have directed our servicers and certain of the law firms that handle foreclosure processes for our mortgage

servicers to review their policies and procedures relating to the execution of affidavits, verifications and other

legal documents in connection with the foreclosure process. We are also addressing concerns that have been

raised regarding the practices of some law firms that handle the foreclosure process for our mortgage servicers

in Florida. In the case of one firm under investigation by the Florida attorney general’s office, we terminated

the firm’s handling of Fannie Mae matters and moved all Fannie Mae matters pending with the firm to other

firms. We have also served a termination notice on a second Florida law firm handling foreclosure related

matters for us. We have expanded the list of law firms that our servicers may use to process foreclosures in

Florida.

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The Acting Director of FHFA issued statements on October 1 and October 13, 2010 regarding servicers’

foreclosure processing issues. We are currently coordinating with FHFA regarding appropriate corrective

actions consistent with the four-point policy framework issued by FHFA on October 13, 2010. Under this

framework, servicers are required to: (1) review their processes and verify that all documents are in

compliance with legal requirements; (2) remediate problems identified through this review in an appropriate,

timely and sustainable manner; (3) report suspected fraudulent activity; and (4) without delay, proceed to

foreclose on mortgage loans that have no problems relating to process, on which the borrower has stopped

payment, and for which home retention solutions and foreclosure alternatives have been unsuccessful.

Due to the servicer affidavit issues, we temporarily suspended certain eviction proceedings and the closing of

some REO sales. On November 24, 2010, we authorized the scheduling and closing of REO sale transactions

to resume. Effective January 18, 2011, we issued instructions to counsel to proceed with scheduling and

completing the eviction actions previously placed on hold.

Although the foreclosure pause has negatively affected our serious delinquency rates, credit-related expenses

and foreclosure timelines, we cannot yet predict the full extent of its impact. The foreclosure pause also could

negatively affect housing market conditions and delay the recovery of the housing market. Some servicers

have lifted the foreclosure pause in certain jurisdictions, while continuing the pause in others. At this time, we

cannot predict how long the pause on foreclosures will last, how many of our loans will be affected by it or its

ultimate impact on our business or the housing market. See “Risk Factors” for further information about the

potential impact of the servicer foreclosure process deficiencies and the foreclosure pause on our business,

results of operations, financial condition and liquidity position.

Liquidity

In response to the strong demand that we experienced for our debt securities during 2010, we issued a variety

of non-callable and callable debt securities in a wide range of maturities to achieve cost-efficient funding and

to extend our debt maturity profile. In particular, we issued a significant amount of long-term debt during this

period, which we then used to repay maturing debt and prepay more expensive callable long-term debt.

We believe that our ready access to long-term debt funding during 2009 and 2010 has been primarily due to

the actions taken by the federal government to support us and the financial markets. Accordingly, we believe

that continued federal government support of our business and the financial markets, as well as our status as a

GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in the

government’s support could materially and adversely affect our ability to refinance our debt as it becomes due,

which could have a material adverse impact on our liquidity, financial condition, results of operations and

ability to continue as a going concern. Demand for our debt securities could decline in the future, as the

Administration, Congress and our regulators debate our future. Despite the conclusion of the Federal Reserve’s

program to purchase agency debt and MBS during the first quarter of 2010, as of the date of this filing,

demand for our long-term debt securities continues to be strong. See “MD&A—Liquidity and Capital

Management—Liquidity Management” for more information on our debt funding activities and “Risk Factors”

for a discussion of the risks to our business posed by our reliance on the issuance of debt securities to fund

our operations.

Outlook

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

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

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

In addition, the servicer foreclosure process deficiencies described above create uncertainty for potential home

buyers, because foreclosed homes account for a substantial part of the existing home market. Thus, widespread

concerns about foreclosure process deficiencies could suppress home sales in the near term and interfere with

the housing recovery.

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

remain high in 2011. Despite the initial signs of multifamily sector improvement, we expect multifamily

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charge-offs to remain commensurate with 2010 levels throughout 2011. All of these conditions as well as our

single-family serious delinquency rate may worsen if the unemployment rate increases on either a national or

regional basis. We expect our overall business volume in 2011 will be lower than in 2010 as a result of our

expectations that, in 2011 (1) residential mortgage debt outstanding will continue to decline, (2) total

originations will decline, and (3) the portion of originations represented by refinancings will decline.

Approximately 78% of our single-family business in 2010 consisted of refinancings.

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

declines in some geographic areas than others, before stabilizing later in 2011, and that the peak-to-trough

home price decline on a national basis will range between 21% and 26%. These estimates are based on our

home price index, which is calculated differently from the S&P/Case-Shiller U.S. National Home Price Index

and therefore results in different percentages for comparable declines. These estimates also contain significant

inherent uncertainty in the current market environment regarding a variety of critical assumptions we make

when formulating these estimates, including the effect of actions the federal government has taken and may

take with respect to the national economic recovery; the management of the Federal Reserve’s MBS holdings;

and the impact of those actions on home prices, unemployment and the general economic and interest rate

environment. Because of these uncertainties, the actual home price decline we experience may differ

significantly from these estimates. We also expect significant regional variation in home price declines and

stabilization.

Our 21% to 26% peak-to-trough home price decline estimate corresponds to an approximate 32% to 40%

peak-to-trough decline using the S&P/Case-Shiller index method. Our estimates differ from the S&P/CaseShiller index in two principal ways: (1) our estimates weight expectations by number of properties, whereas

we believe the S&P/Case-Shiller index weights expectations based on property value, causing home price

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

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

nature of the sales make foreclosed home prices less representative of market values, whereas we believe the

S&P/Case-Shiller index includes foreclosed homes sales. The S&P/Case-Shiller comparison numbers are

calculated using our models and assumptions, but modified to account for weighting based on property value

and the impact of foreclosed property sales. In addition to these differences, our estimates are based on our

own internally available data combined with publicly available data, and are therefore based on data collected

nationwide, whereas the S&P/Case-Shiller index is based on publicly available data, which may be limited in

certain geographic areas of the country. Our comparative calculations to the S&P/Case-Shiller index provided

above are not modified to account for this data pool difference. We are working on enhancing our home price

estimates to identify and exclude a greater portion of foreclosed home sales. When we begin reporting these

enhanced home price estimates, we expect that some period to period comparisons of home prices may differ

from those determined using our current estimates.

Credit-Related Expenses and Credit Losses. We expect that our credit-related expenses will remain high in

2011 and that our credit losses will increase in 2011 as compared to 2010. We describe our credit loss outlook

above under “Our Expectations Regarding Profitability, the Single-Family Loans We Acquired Beginning in

2009, and Credit Losses.”

Uncertainty Regarding our Long-Term Financial Sustainability and Future Status. There is significant

uncertainty in the current market environment, and any changes in the trends in macroeconomic factors that

we currently anticipate, such as home prices and unemployment, may cause our future credit-related expenses

and credit losses to vary significantly from our current expectations. Although Treasury’s funds under the

senior preferred stock purchase agreement permit us to remain solvent and avoid receivership, the resulting

dividend payments are substantial. Given our expectations regarding future losses, which we describe above

under “Our Expectations Regarding Profitability, the Single-Family Loans We Acquired Beginning in 2009,

and Credit Losses,” we do not expect to earn profits in excess of our annual dividend obligation to Treasury

for the indefinite future. As a result of these factors, there is significant uncertainty as to our long-term

financial sustainability.

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In addition, there is significant uncertainty regarding the future of our company, including how long we will

continue to be in existence, the extent of our role in the market, what form we will have, and what ownership

interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is

terminated. We expect this uncertainty to continue. In December 2009, while announcing amendments to the

senior preferred stock purchase agreement and to Treasury’s preferred stock purchase agreement with Freddie

Mac, Treasury noted that the amendments “should leave no uncertainty about the Treasury’s commitment to

support [Fannie Mae and Freddie Mac] as they continue to play a vital role in the housing market during this

current crisis.” Treasury and HUD’s February 11, 2011 report to Congress on reforming America’s housing

finance market provides that the Administration will work with FHFA to determine the best way to

responsibly wind down both Fannie Mae and Freddie Mac. The report emphasizes the importance of providing

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

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

GSEs. Please see “Legislation and GSE Reform” for a discussion of recent legislative reform of the financial

services industry, and proposals for GSE reform, that could affect our business and “Risk Factors” for a

discussion of the risks to our business relating to the uncertain future of our company.

MORTGAGE SECURITIZATIONS

We support market liquidity by securitizing mortgage loans, which means we place loans in a trust and Fannie

Mae MBS backed by the mortgage loans are then issued. We guarantee to the MBS trust that we will

supplement amounts received by the MBS trust as required to permit timely payment of principal and interest

on the trust certificates. In return for this guaranty, we receive guaranty fees.

Below we discuss (1) two broad categories of securitization transactions: lender swaps and portfolio

securitizations; (2) features of our MBS trusts; (3) circumstances under which we purchase loans from MBS

trusts; and (4) single-class and multi-class Fannie Mae MBS.

Lender Swaps and Portfolio Securitizations

We currently securitize a majority of the single-family and multifamily mortgage loans we acquire. Our

securitization transactions primarily fall within two broad categories: lender swap transactions and portfolio

securitizations.

Our most common type of securitization transaction is our “lender swap transaction.” Mortgage lenders that

operate in the primary mortgage market generally deliver pools of mortgage loans to us in exchange for

Fannie Mae MBS backed by these mortgage loans. A pool of mortgage loans is a group of mortgage loans

with similar characteristics. After receiving the mortgage loans in a lender swap transaction, we place them in

a trust that is established for the sole purpose of holding the mortgage loans separate and apart from our

assets. We deliver to the lender (or its designee) Fannie Mae MBS that are backed by the pool of mortgage

loans in the trust and that represent an undivided beneficial ownership interest in each of the mortgage loans.

We guarantee to each MBS trust that we will supplement amounts received by the MBS trust as required to

permit timely payment of principal and interest on the related Fannie Mae MBS. We retain a portion of the

interest payment as the fee for providing our guaranty. Then, on behalf of the trust, we make monthly

distributions to the Fannie Mae MBS certificateholders from the principal and interest payments and other

collections on the underlying mortgage loans. The structured securitization transactions we describe below in

“Business Segments—Capital Markets—Securitization Activities” involve a process that is very similar to the

process involved in our lender swap securitizations.

In contrast to our lender swap securitizations, in which lenders deliver pools of mortgage loans to us that we

immediately place in a trust for securitization, our “portfolio securitization transactions” involve creating and

issuing Fannie Mae MBS using mortgage loans and mortgage-related securities that we hold in our mortgage

portfolio.

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Features of Our MBS Trusts

We serve as trustee for our MBS trusts, each of which is established for the sole purpose of holding mortgage

loans separate and apart from our assets. Our MBS trusts hold either single-family or multifamily mortgage

loans or mortgage-related securities. Each trust operates in accordance with a trust agreement or a trust

indenture. Each MBS trust is also governed by an issue supplement documenting the formation of that MBS

trust, the identification of its related assets and the issuance of the related Fannie Mae MBS. The trust

agreement or the trust indenture, together with the issue supplement and any amendments, are considered the

“trust documents” that govern an individual MBS trust.

In 2010 we established a new multifamily master trust agreement that governs our multifamily MBS trusts

formed on or after October 1, 2010. The new master trust agreement provides greater flexibility in certain

servicing activities related to multifamily mortgage loans held in an MBS trust formed on or after that date.

Purchases of Loans from our MBS Trusts

Under the terms of our MBS trust documents, we have the option or, in some instances, the obligation, to

purchase mortgage loans that meet specific criteria from an MBS trust. In particular, we have the option to

purchase a loan from an MBS trust if the loan is delinquent as to four or more consecutive monthly payments.

Our acquisition cost for these loans is the unpaid principal balance of the loan plus accrued interest.

In deciding whether and when to purchase a loan from a single-family MBS trust, we consider a variety of

factors, including: our legal ability or obligation to purchase loans under the terms of the trust documents; our

mission and public policy; our loss mitigation strategies and the exposure to credit losses we face under our

guaranty; our cost of funds; the impact on our results of operations; relevant market yields; the accounting

impact; the administrative costs associated with purchasing and holding the loans; counterparty exposure to

lenders that have agreed to cover losses associated with delinquent loans; general market conditions; our

statutory obligations under our Charter Act; and other legal obligations such as those established by consumer

finance laws. The weight we give to these factors changes depending on market circumstances and other

factors.

With the adoption of new accounting standards on January 1, 2010, we no longer recognize the acquisition of

loans from the MBS trusts that we have consolidated as a purchase with an associated fair value loss for the

difference between the fair value of the acquired loan and its acquisition cost, as these loans are already

reflected on our consolidated balance sheet. Currently, the cost of purchasing most delinquent loans from

Fannie Mae MBS trusts and holding them in our portfolio is less than the cost of advancing delinquent

payments to security holders. In light of these factors, in the first half of 2010 we significantly increased these

purchases, purchasing the substantial majority of our previously outstanding delinquent loan population in our

single-family MBS trusts. As a result, during 2010 we reduced the total unpaid principal balance of loans in

single-family MBS trusts that were delinquent for four or more consecutive months to approximately

$8 billion as of December 31, 2010 from approximately $127 billion as of December 31, 2009. We expect to

continue to purchase loans from MBS trusts as they become four or more consecutive monthly payments

delinquent subject to market conditions, economic benefit, servicer capacity, and other constraints, including

the limit on mortgage assets that we may own pursuant to the senior preferred stock purchase agreement. We

continue to review the economics of purchasing loans that are four or more months delinquent in the future

and may reevaluate our delinquent loan purchase practices and alter them if circumstances warrant.

For our multifamily MBS trusts, we typically exercise our option to purchase a loan from the trust if the loan

is delinquent, in whole or in part, as to four or more consecutive monthly payments.

Single-Class and Multi-Class Fannie Mae MBS

Fannie Mae MBS trusts may be single-class or multi-class. Single-class MBS are MBS in which the investors

receive principal and interest payments in proportion to their percentage ownership of the MBS issuance.

Multi-class MBS are MBS, including REMICs, in which the cash flows on the underlying mortgage assets are

divided, creating several classes of securities, each of which represents an undivided beneficial ownership

22
interest in the assets of the related MBS trust and entitles the related holder to a specific portion of cash flows.

Terms to maturity of some multi-class Fannie Mae MBS, particularly REMIC classes, may match or be

shorter than the maturity of the underlying mortgage loans and/or mortgage-related securities. After these

classes expire, cash flows received on the underlying mortgage assets are allocated to the remaining classes in

accordance with the terms of the securities’ structures. As a result, each of the classes in a multi-class MBS

may have a different coupon rate, average life, repayment sensitivity or final maturity. Structured Fannie Mae

MBS are either multi-class MBS or single-class MBS that are typically resecuritizations of other singleclass Fannie Mae MBS. In a resecuritization, pools of MBS are collected and securitized.

BUSINESS SEGMENTS

We have three business segments for management reporting purposes: Single-Family Credit Guaranty,

Multifamily, and Capital Markets. We refer to our business groups that run these segments as our

“Single-Family business,” our “Multifamily business” and our “Capital Markets group.” These groups engage

in complementary business activities in pursuing our mission of providing liquidity, stability and affordability

to the U.S. housing market. These activities are summarized in the table below and described in more detail

following this table. We also summarize in the table below the key sources of revenue for each of our

segments and the primary expenses.

Business

Segment Primary Business Activities Primary Revenues Primary Expenses

Single-Family

Credit

Guaranty, or

Single-Family

• Mortgage securitizations:

Works with our lender

customers to securitize

single-family mortgage loans

delivered to us by lenders

into Fannie Mae MBS, which

we refer to as “lender swap”

transactions

• Mortgage acquisitions:

Works with our Capital

Markets group to facilitate

the purchase of single-family

mortgage loans for our

mortgage portfolio

• Credit risk management:

Prices and manages the

credit risk on loans in our

single-family guaranty book

of business

• Credit loss management:

Works to prevent

foreclosures and reduce costs

of defaulted loans through

foreclosure alternatives,

through management of REO

we acquire upon foreclosure

or through a deed-in-lieu of

foreclosure, and through

lender repurchases

• Guaranty fees: Compensation

for assuming and managing

the credit risk on our singlefamily guaranty book of

business

• Fee and other income:

Compensation received for

providing lender services

• Credit-related expenses.

Consists of provision for

single-family loan losses,

provision for single-family

guaranty losses and

foreclosed property expense

on loans underlying our

single-family guaranty book

of business

• Administrative expenses:

Consists of salaries and

benefits, occupancy costs,

professional services, and

other expenses associated

with the Single-Family

business operations

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Business

Segment Primary Business Activities Primary Revenues Primary Expenses

Multifamily • Mortgage securitizations:

Works with our lender

customers to securitize

multifamily mortgage loans

delivered to us by lenders

into Fannie Mae MBS in

lender swap transactions

• Mortgage acquisitions:

Works with our Capital

Markets group to facilitate

the purchase of multifamily

mortgage loans for our

mortgage portfolio

• Affordable housing

investments: Provides

funding for investments in

affordable multifamily rental

housing projects

• Credit risk management:

Prices and manages the

credit risk on loans in our

multifamily guaranty book of

business

• Credit loss management:

Works to prevent

foreclosures and reduce costs

of defaulted loans through

foreclosure alternatives,

through management of REO

we acquire upon foreclosure

or through a deed-in-lieu of

foreclosure, and through

lender repurchases

• Guaranty fees: Compensation

for assuming and managing

the credit risk on our

multifamily guaranty book of

business

• Fee and other income:

Compensation received for

engaging in multifamily

transactions and bond credit

enhancements

• Credit-related expenses:

Consists of provision for

multifamily loan losses,

provision for multifamily

guaranty losses and

foreclosed property expense

on loans underlying our

multifamily guaranty book of

business

• Net operating losses:

Generated by our affordable

housing investments, net of

any tax benefits generated by

these investments that we are

able to utilize

• Administrative expenses:

Consists of salaries and

benefits, occupancy costs,

professional services, and

other expenses associated

with our Multifamily

business operations

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Business

Segment Primary Business Activities Primary Revenues Primary Expenses

Capital Markets • Mortgage and other

investments: Purchases

mortgage assets and makes

investments in other nonmortgage interest-earning

assets

• Mortgage securitizations:

Purchases loans from a large

group of lenders, securitizes

them, and may sell the

securities to dealers and

investors

• Structured mortgage

securitizations and other

customer services: Issues

structured Fannie Mae MBS

for customers in exchange

for a transaction fee and

provides other fee-related

services to our lender

customers

• Interest rate risk

management: Manages the

interest rate risk on our

portfolio by issuing a variety

of debt securities in a wide

range of maturities and by

using derivatives

• Net interest income:

Generated from the

difference between the

interest income earned on

our interest-earning assets

and the interest expense

associated with the debt

funding those assets

• Fee and other income:

Compensation received for

providing structured

transactions and other lender

services

• Fair value gains and losses:

Primarily consists of fair

value gains and losses on

derivatives and trading

securities

• Investment gains and losses:

Primarily consists of gains

and losses on the sale or

securitization of mortgage

assets

• Other-than-temporary

impairment: Consists of

impairment recognized on

our investments

• Administrative expenses:

Consists of salaries and

benefits, occupancy costs,

professional services, and

other expenses associated

with our Capital Markets

business operations

Revenues from our Business Segments

The following table shows the percentage of our total net revenues accounted for by our business segments for

each of the last three years. Our prospective adoption of the new accounting standards had a significant impact

on our financial statements. Also, effective in 2010 we changed the presentation of segment financial

information that is currently evaluated by management. As a result of the new accounting standards and

changes to our segment presentation, our 2010 segment results are not comparable to prior years’ segment

results. We have not restated prior years’ results, nor have we presented 2010 results under the old

presentation, because we determined that it was impracticable to do so. For more information about changes in

our segment reporting and the financial results and performance of each of our segments, please see

“MD&A—Business Segment Results” and “Note 15, Segment Reporting.”

Business Segment Revenues(1)

2010(2) 2009 2008

For the Year Ended

December 31,

Single-Family Credit Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12% 39% 54%

Multifamily(3) ............................................................ 5 3 3

Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 58 43

(1) Amounts presented represent the percentage of our total net revenues accounted for by each of our business

segments.

(2) Segment results for 2010 are not comparable with prior years’ results. In addition, under our current segment reporting

structure, the sum of net revenues for our three business segments does not equal our consolidated total net revenues

because we separate the activity related to our consolidated trusts from the results generated by our three segments.

(3) These amounts do not include the net interest income we earn on our multifamily investments in our mortgage

portfolio, which is reflected in the revenues of our Capital Markets segment.

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Under the terms of our intracompany guaranty arrangement, Capital Markets receives reimbursements

primarily from Single-Family for the contractual interest due on mortgage loans held in our portfolio when

interest income on the loans is no longer recognized in accordance with our nonaccrual accounting policy. As

a result, the substantial increase in the number of nonaccrual loans purchased from our consolidated MBS

trusts in 2010 significantly increased Capital Markets’ net revenue in 2010, while reducing the net revenues of

Single-Family.

Single-Family Business

Our Single-Family business works with our lender customers to provide funds to the mortgage market by

securitizing single-family mortgage loans into Fannie Mae MBS. Our Single-Family business also works with

our Capital Markets group to facilitate the purchase of single-family mortgage loans for our mortgage

portfolio. Our Single-Family business has primary responsibility for pricing and managing the credit risk on

our single-family guaranty book of business, which consists of single-family mortgage loans underlying Fannie

Mae MBS and single-family loans held in our mortgage portfolio.

A single-family loan is secured by a property with four or fewer residential units. Our Single-Family business

and Capital Markets group securitize and purchase primarily conventional (not federally insured or guaranteed)

single-family fixed-rate or adjustable-rate, first lien mortgage loans, or mortgage-related securities backed by

these types of loans. We also securitize or purchase loans insured by FHA, loans guaranteed by the

Department of Veterans Affairs (“VA”), and loans guaranteed by the Rural Development Housing and

Community Facilities Program of the Department of Agriculture, manufactured housing loans, reverse

mortgage loans, multifamily mortgage loans, subordinate lien mortgage loans (for example, loans secured by

second liens) and other mortgage-related securities.

Revenues for our Single-Family business are derived primarily from guaranty fees received as compensation

for assuming the credit risk on the mortgage loans underlying single-family Fannie Mae MBS. We also

allocate guaranty fee revenues to the Single-Family business for assuming and managing the credit risk on the

single-family mortgage loans held in our portfolio. The aggregate amount of single-family guaranty fees we

receive or that are allocated to our Single-Family business in any period depends on the amount of singlefamily Fannie Mae MBS outstanding and loans held in our mortgage portfolio during the period and the

applicable guaranty fee rates. The amount of Fannie Mae MBS outstanding at any time is primarily

determined by the rate at which we issue new Fannie Mae MBS and by the repayment rate for the loans

underlying our outstanding Fannie Mae MBS. Other factors affecting the amount of Fannie Mae MBS

outstanding are the extent to which (1) we purchase loans from our MBS trusts because of borrower defaults

(with the amount of these purchases affected by the rate of borrower defaults on the loans and the extent of

loan modification programs in which we engage) and (2) sellers and servicers repurchase loans from us upon

our demand based on a breach in the selling representations and warranties provided upon delivery of the

loans.

We describe the credit risk management process employed by our Single-Family business, including its key

strategies in managing credit risk and key metrics used in measuring and evaluating our single-family credit

risk in “MD&A—Risk Management—Credit Risk Management.”

Single-Family Mortgage Securitizations and Acquisitions

Our Single-Family business securitizes single-family mortgage loans and issues single-class Fannie Mae MBS,

which are described above in “Mortgage Securitizations—Single-Class and Multi-Class Fannie Mae MBS,” for

our lender customers. Unlike our Capital Markets group, which securitizes loans from our portfolio, our

Single-Family business securitizes loans solely in lender swap transactions, in which lenders deliver pools of

mortgage loans to us, which are placed immediately in a trust, in exchange for Fannie Mae MBS backed by

these loans. We describe lender swap transactions, and how they differ from portfolio securitizations, in

“Mortgage Securitizations—Lender Swaps and Portfolio Securitizations.”

Loans from our lender customers are delivered to us through either our “flow” or “bulk” transaction channels.

In our flow business, we enter into agreements that generally set agreed-upon guaranty fee prices for a

26
lender’s future delivery of individual loans to us over a specified time period. Our bulk business generally

consists of transactions in which a set of loans is delivered to us in bulk, typically with guaranty fees and

other contract terms negotiated individually for each transaction.

Single-Family Mortgage Servicing

Servicing

Generally, the servicing of the mortgage loans held in our mortgage portfolio or that back our Fannie Mae

MBS is performed by mortgage servicers on our behalf. Typically, lenders who sell single-family mortgage

loans to us service these loans for us. For loans we own or guarantee, the lender or servicer must obtain our

approval before selling servicing rights to another servicer.

Our mortgage servicers typically collect and deliver principal and interest payments, administer escrow

accounts, monitor and report delinquencies, perform default prevention activities, evaluate transfers of

ownership interests, respond to requests for partial releases of security, and handle proceeds from casualty and

condemnation losses. Our mortgage servicers are the primary point of contact for borrowers and perform a key

role in the effective implementation of our homeownership assistance initiatives, negotiation of workouts of

troubled loans, and loss mitigation activities. If necessary, mortgage servicers inspect and preserve properties

and process foreclosures and bankruptcies. Because we generally delegate the servicing of our mortgage loans

to mortgage servicers and do not have our own servicing function, our ability to actively manage troubled

loans that we own or guarantee may be limited. For more information on the risks of our reliance on servicers,

refer to “Risk Factors” and “MD&A—Risk Management—Credit Risk Management—Institutional

Counterparty Credit Risk Management.”

We compensate servicers primarily by permitting them to retain a specified portion of each interest payment

on a serviced mortgage loan as a servicing fee. Servicers also generally retain prepayment premiums,

assumption fees, late payment charges and other similar charges, to the extent they are collected from

borrowers, as additional servicing compensation. We also compensate servicers for negotiating workouts on

problem loans.

In January 2011, FHFA announced that it directed Fannie Mae and Freddie Mac to work on a joint initiative,

in coordination with FHFA and HUD, to consider alternatives for future mortgage servicing structures and

servicing compensation for their single-family mortgage loans. Alternatives that may be considered include a

fee for service compensation structure for nonperforming loans, as well as the possibility of reducing or

eliminating the minimum mortgage servicing fee for performing loans, or other structures. In its

announcement, FHFA stated that any implementation of a new servicing compensation structure would not be

expected to occur before summer 2012.

REO Management and Lender Repurchase Evaluations

In the event a loan defaults and we acquire a home through foreclosure or a deed-in-lieu of foreclosure, we

focus on selling the home through a national network of real estate agents. Our primary objectives are both to

minimize the severity of loss to Fannie Mae by maximizing sales prices and also to stabilize neighborhoods—

to prevent empty homes from depressing home values. We also continue to seek non-traditional ways to sell

properties, including by selling homes to cities, municipalities and other public entities, and by selling

properties in bulk or through public auctions.

We also conduct post-purchase quality control file reviews to ensure that loans sold to and serviced for us

meet our guidelines. If we discover violations through reviews, we issue repurchase demands to the seller and

seek to collect on our repurchase claims.

Multifamily Business

A core part of Fannie Mae’s mission is to support the U.S. multifamily housing market to help serve the

nation’s rental housing needs, focusing on low- to middle-income households and communities. Multifamily

mortgage loans relate to properties with five or more residential units, which may be apartment communities,

27
cooperative properties or manufactured housing communities. During 2010, we changed the name of our

multifamily business division from Housing and Community Development to Multifamily Mortgage Business.

The new name better reflects the division’s realignment to focus on our core multifamily activities and the

discontinuation of some of our non-mortgage secured debt and equity investment activities as instructed by

FHFA.

Our Multifamily business works with our lender customers to provide funds to the mortgage market by

securitizing multifamily mortgage loans into Fannie Mae MBS. Through our Multifamily business, we provide

liquidity and support to the U.S. multifamily housing market principally by purchasing or securitizing loans

that finance multifamily rental housing properties. We also provide some limited debt financing for other

acquisition, development, construction and rehabilitation activity related to projects that complement this

business. Our Multifamily business also works with our Capital Markets group to facilitate the purchase and

securitization of multifamily mortgage loans and securities for Fannie Mae’s portfolio, as well as to facilitate

portfolio securitization and resecuritization activities. Our multifamily guaranty book of business consists of

multifamily mortgage loans underlying Fannie Mae MBS and multifamily loans and securities held in our

mortgage portfolio. Our Multifamily business has primary responsibility for pricing the credit risk on our

multifamily guaranty book of business and for managing the credit risk on multifamily loans and Fannie Mae

MBS backed by multifamily loans that are held in our mortgage portfolio.

Revenues for our Multifamily business are derived from a variety of sources, including: (1) guaranty fees

received as compensation for assuming the credit risk on the mortgage loans underlying multifamily Fannie

Mae MBS and on the multifamily mortgage loans held in our portfolio and on other mortgage-related

securities; (2) transaction fees associated with the multifamily business and (3) other bond credit enhancement

related fees.

We describe the credit risk management process employed by our Multifamily business, along with our

Multifamily Enterprise Risk Management group, including its key strategies in managing credit risk and key

metrics used in measuring and evaluating our multifamily credit risk, in “MD&A—Risk Management—Credit

Risk Management—Multifamily Mortgage Credit Risk Management.”

Key Characteristics of the Multifamily Mortgage Market and Multifamily Transactions

The multifamily mortgage market and our transactions in that market have a number of key characteristics that

affect our multifamily activities and distinguish them from our activities in the single-family residential

mortgage market.

• Funding sources: Unlike the single-family residential mortgage market in which the GSEs’

predominance makes us a driver of market standards and rates, the multifamily market is made up of a

wide variety of lending sources, including commercial banks, life insurance companies, investment banks,

small community banks, FHA, state and local housing finance agencies and the GSEs.

• Number of lenders; lender relationships: In 2010, we executed multifamily transactions with 32 lenders.

Of these, 24 lenders delivered loans to us under our Delegated Underwriting and Servicing, or DUS»,

product line. In determining whether to do business with a multifamily lender, we consider the lender’s

financial strength, multifamily underwriting and servicing experience, portfolio performance and

willingness and ability to share in the risk of loss associated with the multifamily loans they originate.

• Loan size: On average, loans in our multifamily guaranty book of business are several million dollars in

size. A significant number of our multifamily loans are under $5 million, and some of our multifamily

loans are greater than $25 million.

• Collateral: Multifamily loans are collateralized by properties that generate cash flows, such as garden

and high-rise apartment complexes, seniors housing communities, cooperatives, dedicated student housing

and manufactured housing communities. These rental properties are operated as businesses.

• Borrower profile: Most multifamily borrowers are for-profit corporations, limited liability companies,

partnerships, real estate investment trusts and individuals who invest in real estate for cash flow and

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equity returns in exchange for their original investment in the asset. Multifamily loans are generally nonrecourse to the borrower. When considering a multifamily borrower, creditworthiness is evaluated through

a combination of quantitative and qualitative data including liquid assets, net worth, number of units

owned, experience in a market and/or property type, multifamily portfolio performance, access to

additional liquidity, debt maturities, asset/property management platform, senior management experience,

reputation and lender exposure.

• Borrower and lender investment: Borrowers are required to contribute cash equity into multifamily

properties on which they borrow, while lenders generally share in any losses realized from the loans that

we purchase.

• Underwriting process: Some multifamily loans require a detailed underwriting process due to the size of

the loan or the complexity of the collateral or transaction.

• Term and lifecycle: In contrast to the standard 30-year single-family residential loan, multifamily loans

typically have terms of 5, 7 or 10 years, with balloon payments due at maturity.

• Prepayment terms: Multifamily Fannie Mae loans and MBS trade in a market in which investors expect

commercial investment terms, particularly limitations on prepayments of loans and the imposition of

prepayment premiums.

Multifamily Mortgage Securitizations and Acquisitions

Our Multifamily business generally creates multifamily Fannie Mae MBS and acquires multifamily mortgage

assets in the same manner as our Single-Family business, as described above in “Single-Family Business—

Mortgage Securitizations and Acquisitions.”

Delegated Underwriting and Servicing (DUS)

In an effort to promote product standardization in the multifamily marketplace, in 1988 Fannie Mae initiated

the DUS product line for acquiring individual multifamily loans.

DUS is a unique business model in the commercial mortgage industry. The standard industry practice for a

multifamily loan requires the purchaser or guarantor to underwrite or re-underwrite each loan prior to deciding

whether to purchase or guaranty the loan. Under our model, DUS lenders are pre-approved and delegated the

authority to underwrite and service loans on behalf of Fannie Mae. In exchange for this authority, DUS

lenders are required to share with us the risk of loss over the life of the loan, generally retaining one-third of

the underlying credit risk on each loan sold to Fannie Mae. Since DUS lenders share in the credit risk, the

servicing fee to the lenders includes compensation for credit risk. Delegation permits lenders to respond to

customers more rapidly, as the lender generally has the authority to approve a loan within prescribed

parameters, which provides an important competitive advantage.

We believe our DUS model aligns the interests of the borrower, lender and Fannie Mae. Our current 25-

member DUS lender network, which is comprised of large financial institutions and independent mortgage

lenders, continues to be our principal source of multifamily loan deliveries.

Fannie Mae MBS secured by DUS loans are typically backed by a single mortgage loan, which is often a

fixed-rate loan. We believe this structure increases the liquidity of the securities in the market. Structuring

MBS to be backed by a single multifamily loan also facilitates securitizations by our smaller lenders.

Multifamily Mortgage Servicing

As with the servicing of single-family mortgages, multifamily mortgage servicing is typically performed by

the lenders who sell the mortgages to us. Many of our multifamily mortgage servicers have agreed, as part of

the DUS relationship, to accept loss sharing, which we believe increases the alignment of interests between us

and our multifamily loan servicers. Because of our loss-sharing arrangements with our multifamily lenders,

transfers of multifamily servicing rights are infrequent, and we carefully monitor all our servicing relationships

and enforce our right to approve all servicing transfers. As a seller-servicer, the lender is responsible for

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evaluating the financial condition of properties and property owners, administering various types of

agreements (including agreements regarding replacement reserves, completion or repair, and operations and

maintenance), as well as conducting routine property inspections.

The Multifamily Markets in which We Operate

In the multifamily mortgage market, we aim to address the rental housing needs of a wide range of the

population, from those at the lower end of the income range up through middle-income households. Our

mission requires us to serve the market steadily, rather than moving in and out depending on market

conditions. Through the secondary mortgage market, we support rental housing for the workforce, for senior

citizens and students, and for families with the greatest economic need. Our Multifamily business is organized

and operated as an integrated commercial real estate finance business, with dedicated teams that address the

spectrum of multifamily housing finance needs, including the teams described below.

• To meet the growing need for affordable financing, we have a team that focuses on the purchase and

guarantee of multifamily loans under $3 million ($5 million in high income areas), which finance

affordable housing. We purchase these loans from DUS lenders as well as small community banks and

nonprofits or similar entities. Over the years, we have been an active purchaser of these loans from both

DUS and non-DUS lenders and, as of December 31, 2010, they represented 70% of our multifamily

guaranty book of business by loan count and 18% based on unpaid principal balance.

• To serve low- and very low-income households, we also have a team that focuses exclusively on

relationships with lenders financing privately-owned multifamily properties that receive public subsidies in

exchange for maintaining long-term affordable rents. We enable borrowers to leverage housing programs

and subsidies provided by local, state and federal agencies. These public subsidy programs are largely

targeted to providing housing to families earning less than 60% of area median income (as defined by

HUD) and are structured to ensure that the low and very low-income households who benefit from the

subsidies pay no more than 30% of their gross monthly income for rent and utilities. As of December 31,

2010, this type of financing represented approximately 14% of our multifamily guaranty book of business,

based on unpaid principal balance, including $16.5 billion in bond credit enhancements.

Capital Markets

Our Capital Markets group manages our investment activity in mortgage-related assets and other interestearning non-mortgage investments. We fund our investments primarily through proceeds we receive from the

issuance of debt securities in the domestic and international capital markets. Our Capital Markets group has

primary responsibility for managing the interest rate risk associated with our investments in mortgage assets.

The business model for our Capital Markets group has evolved in recent years. Our business activity is now

focused on making short-term use of our balance sheet rather than long-term investments. As a result, our

Capital Markets group works with lender customers to provide funds to the mortgage market through shortterm financing and investing activities. Activities we are undertaking to provide liquidity to the mortgage

market include the following:

• Whole Loan Conduit. Whole loan conduit activities involve our purchase of both single-family and

multifamily loans principally for the purpose of securitizing them. We purchase loans from a large group

of lenders and then securitize them as Fannie Mae MBS, which may then be sold to dealers and investors.

• Early Funding. Lenders who deliver whole loans or pools of whole loans to us in exchange for MBS

typically must wait between 30 and 45 days from the closing and settlement of the loans or pools and the

issuance of the MBS. This delay may limit lenders’ ability to originate new loans. Under our early lender

funding programs, we purchase whole loans or pools of loans on an accelerated basis, allowing lenders to

receive quicker payment for the whole loans and pools, which replenishes their funds and allows them to

originate more mortgage loans.

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• REMICs and Other Structured Securitizations. We issue structured Fannie Mae MBS (including

REMICs), typically for our lender customers or securities dealer customers, in exchange for a transaction

fee.

• Dollar Roll Transactions. We engaged in dollar roll activity in 2010, but the transaction volume was

lower than in 2009 and 2008 due to lower market demand for short-term financing. A dollar roll

transaction is a commitment to purchase a mortgage-related security with a concurrent agreement to resell a substantially similar security at a later date or vice versa.

In 2010, our Capital Markets group substantially increased the amount of loans purchased out of our singlefamily MBS trusts because, as a result of the adoption of the new accounting standards, the cost of purchasing

most delinquent loans from Fannie Mae MBS trusts and holding them in our portfolio is less than the cost of

advancing delinquent payments to security holders.

Securitization Activities

Our Capital Markets group is engaged in issuing both single-class and multi-class Fannie Mae MBS through

both portfolio securitizations and structured securitizations involving third party assets.

• Portfolio securitizations. Our Capital Markets group creates single-class and multi-class Fannie Mae

MBS from mortgage-related assets held in our mortgage portfolio. Our Capital Markets group may sell

these Fannie Mae MBS into the secondary market or may retain the Fannie Mae MBS in our investment

portfolio.

• Structured securitizations: Our Capital Markets group creates single-class and multi-class structured

Fannie Mae MBS, typically for our lender customers or securities dealer customers, in exchange for a

transaction fee. In these transactions, the customer “swaps” a mortgage-related asset that it owns

(typically a mortgage security) in exchange for a structured Fannie Mae MBS we issue. Our Capital

Markets group earns transaction fees for creating structured Fannie Mae MBS for third parties. The

process for issuing Fannie Mae MBS in a structured securitization is similar to the process involved in our

lender swap securitizations. For more information about that process and how it differs from portfolio

securitizations, please see “Mortgage Securitizations—Lender Swaps and Portfolio Securitizations.”

For a description of single-class Fannie Mae MBS, please see “Mortgage Securitizations—Single-Class and

Multi-Class Fannie Mae MBS.”

Other Customer Services

Our Capital Markets group provides our lender customers and their affiliates with services that include

offering to purchase a wide variety of mortgage assets, including non-standard mortgage loan products;

segregating customer portfolios to obtain optimal pricing for their mortgage loans; and assisting customers

with hedging their mortgage business. These activities provide a significant flow of assets for our mortgage

portfolio, help to create a broader market for our customers and enhance liquidity in the secondary mortgage

market.

Mortgage Asset Portfolio

Although our Capital Markets group’s business activities are focused on short-term financing and investing,

revenue from our Capital Markets group is derived primarily from the difference, or spread, between the

interest we earn on our mortgage and non-mortgage investments and the interest we incur on the debt we issue

to fund these assets. Our Capital Markets revenues are primarily derived from our mortgage asset portfolio.

Over time, we expect these revenues to decrease as the maximum allowable size of our mortgage asset

portfolio decreases by 10% annually under our senior preferred stock purchase agreement with Treasury. See

“Conservatorship and Treasury Agreements—Treasury Agreements—Covenants under Treasury Agreements”

for more information on the decreasing limits on the amount of mortgage assets we are permitted to hold.

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We describe the interest rate risk management process employed by our Capital Markets group, including its

key strategies in managing interest rate risk and key metrics used in measuring and evaluating our interest rate

risk in “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk.”

Investment and Financing Activities

Our Capital Markets group seeks to increase the liquidity of the mortgage market by maintaining a presence

as an active investor in mortgage loans and mortgage-related securities and, in particular, supports the liquidity

and value of Fannie Mae MBS in a variety of market conditions.

Our Capital Markets group funds its investments primarily through the issuance of a variety of debt securities

in a wide range of maturities in the domestic and international capital markets. The most active investors in

our debt securities include commercial bank portfolios and trust departments, investment fund managers,

insurance companies, pension funds, state and local governments, and central banks. The approved dealers for

underwriting various types of Fannie Mae debt securities may differ by funding program. See “MD&A—

Liquidity and Capital Management—Liquidity Management” for information on the composition of our

outstanding debt and a discussion of our liquidity.

Our Capital Markets group’s investment and financing activities are affected by market conditions and the

target rates of return that we expect to earn on the equity capital underlying our investments. When we

estimate that we can earn returns in excess of our targets, we generally will be an active purchaser of

mortgage loans and mortgage-related securities. When potential returns are below our investment targets, we

generally will be a less active purchaser, and may be a net seller, of mortgage assets. Our investment activities

also are subject to contractual limitations, the provisions of the senior preferred stock agreement with

Treasury, capital requirements (although our regulator has announced that these are not binding on us during

conservatorship) and other regulatory constraints, to the extent described below under “Conservatorship and

Treasury Agreements” and “Our Charter and Regulation of Our Activities.”

CONSERVATORSHIP AND TREASURY AGREEMENTS

Conservatorship

On September 6, 2008, the Director of FHFA appointed FHFA as our conservator, pursuant to its authority

under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the

Federal Housing Finance Regulatory Reform Act of 2008, or 2008 Reform Act (together, the “GSE Act”). The

conservatorship is a statutory process designed to preserve and conserve our assets and property, and put the

company in a sound and solvent condition.

The conservatorship has no specified termination date and there continues to be uncertainty regarding the

future of our company, including how long we will continue to be in existence, the extent of our role in the

market, what form we will have, and what ownership interest, if any, our current common and preferred

stockholders will hold in us after the conservatorship is terminated. For more information on the risks to our

business relating to the conservatorship and uncertainties regarding the future of our company and business, as

well as the adverse effects of the conservatorship on the rights of holders of our common stock, please see

“Risk Factors.”

Management of the Company during Conservatorship

Upon its appointment, the conservator immediately succeeded to (1) all rights, titles, powers and privileges of

Fannie Mae, and of any shareholder, officer or director of Fannie Mae with respect to Fannie Mae and its

assets, and (2) title to the books, records and assets of any other legal custodian of Fannie Mae. The

conservator has since delegated specified authorities to our Board of Directors and has delegated to

management the authority to conduct our day-to-day operations. The conservator retains the authority to

withdraw its delegations at any time.

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Our directors serve on behalf of the conservator and exercise their authority as directed by and with the

approval, where required, of the conservator. Our directors do not have any duties to any person or entity

except to the conservator. Accordingly, our directors are not obligated to consider the interests of the company,

the holders of our equity or debt securities or the holders of Fannie Mae MBS unless specifically directed to

do so by the conservator. In addition, the conservator directed the Board to consult with and obtain the

approval of the conservator before taking action in specified areas, as described in “Directors, Executive

Officers and Corporate Governance—Corporate Governance—Conservatorship and Delegation of Authority to

Board of Directors.”

Because we are in conservatorship, our common shareholders currently do not have the ability to elect

directors or to vote on other matters. The conservator eliminated common and preferred stock dividends (other

than dividends on the senior preferred stock issued to Treasury) during the conservatorship, and we are no

longer managed with a strategy to maximize shareholder returns. In a letter to Congress dated February 2,

2010, the Acting Director of FHFA stated that minimizing our credit losses is our central goal and that we will

be limited to continuing our existing core business activities and taking actions necessary to advance the goals

of the conservatorship. The Acting Director also stated that FHFA does not expect that we will be a

substantial buyer or seller of mortgages for our retained portfolio, except for purchases of delinquent

mortgages out of our guaranteed MBS pools. For additional information about our business strategy, please see

“Executive Summary—Our Business Objectives and Strategy.”

Powers of the Conservator under the GSE Act

FHFA has broad powers when acting as our conservator. As conservator, FHFA can direct us to enter into

contracts or enter into contracts on our behalf. Further, FHFA may transfer or sell any of our assets or

liabilities (subject to limitations and post-transfer notice provisions for transfers of certain types of financial

contracts), without any approval, assignment of rights or consent of any party. The GSE Act provides,

however, that mortgage loans and mortgage-related assets that have been transferred to a Fannie Mae MBS

trust must be held by the conservator for the beneficial owners of the Fannie Mae MBS and cannot be used to

satisfy the general creditors of the company. As of February 24, 2011, FHFA has not exercised its power to

transfer or sell our assets or liabilities.

In addition, FHFA has the power to disaffirm or repudiate most contracts that we entered into prior to its

appointment as conservator, provided that it exercises this power within a “reasonable period” following such

appointment. FHFA’s proposed rule on conservatorship and receivership operations, published on July 9, 2010,

defines a “reasonable period” as a period of 18 months following the appointment of a conservator or receiver.

This proposed rule has not been finalized. As of February 24, 2011, FHFA has not disaffirmed or repudiated

any contracts we entered into prior to its appointment as conservator.

Neither the conservatorship nor the terms of our agreements with Treasury changes our obligation to make

required payments on our debt securities or perform under our mortgage guaranty obligations.

Under the GSE Act, FHFA must place us into receivership if the Director of FHFA makes a written

determination that our assets are less than our obligations (that is, we have a net worth deficit) or if we have

not been paying our debts, in either case, for a period of 60 days. In addition, the Director of FHFA may place

us in receivership at his discretion at any time for other reasons, including conditions that FHFA has already

asserted existed at the time the Director of FHFA placed us into conservatorship. Placement into receivership

would have a material adverse effect on holders of our common stock, preferred stock, debt securities and

Fannie Mae MBS. Should we be placed into receivership, different assumptions would be required to

determine the carrying value of our assets, which could lead to substantially different financial results. For

more information on the risks to our business relating to conservatorship and uncertainties regarding the future

of our business, see “Risk Factors.”

Treasury Agreements

On September 7, 2008, we, through FHFA, in its capacity as conservator, and Treasury entered into a senior

preferred stock purchase agreement, which was subsequently amended on September 26, 2008, May 6, 2009

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and December 24, 2009. Unless the context indicates otherwise, references in this report to the senior

preferred stock purchase agreement refer to the agreement as amended through December 24, 2009. The terms

of the senior preferred stock purchase agreement, senior preferred stock and the warrant discussed below will

continue to apply to us even if we are released from the conservatorship. Please see “Risk Factors” for a

description of the risks to our business relating to the Treasury agreements, as well as the adverse effects of

the senior preferred stock and the warrant on the rights of holders of our common stock and other series of

preferred stock.

Senior Preferred Stock Purchase Agreement and Related Issuance of Senior Preferred Stock and Common

Stock Warrant

Senior Preferred Stock Purchase Agreement

Under the senior preferred stock purchase agreement, we issued to Treasury (a) one million shares of Variable

Liquidation Preference Senior Preferred Stock, Series 2008-2, which we refer to as the “senior preferred

stock,” and (b) a warrant to purchase, for a nominal price, shares of common stock equal to 79.9% of the total

number of shares of our common stock outstanding on a fully diluted basis at the time the warrant is

exercised, which we refer to as the “warrant.”

The senior preferred stock and warrant were issued to Treasury as an initial commitment fee in consideration

of the commitment from Treasury to provide funds to us under the terms and conditions set forth in the senior

preferred stock purchase agreement. The senior preferred stock purchase agreement provides that, on a

quarterly basis, we generally may draw funds up to the amount, if any, by which our total liabilities exceed

our total assets, as reflected on our consolidated balance sheet, prepared in accordance with GAAP, for the

applicable fiscal quarter (referred to as the “deficiency amount”).

On December 24, 2009, the maximum amount of Treasury’s funding commitment to us under the senior

preferred stock purchase agreement was increased pursuant to an amendment to the agreement. The

amendment provides that the maximum amount under the senior preferred stock purchase agreement will

increase as necessary to accommodate any net worth deficits for calendar quarters in 2010 through 2012. For

any net worth deficits after December 31, 2012, Treasury’s remaining funding commitment will be

$124.8 billion, ($200 billion less the $75.2 billion cumulatively drawn through March 31, 2010), less the

smaller of either (a) our positive net worth as of December 31, 2012 or (b) our cumulative draws from

Treasury for the calendar quarters in 2010 through 2012.

In announcing the December 24, 2009 amendments to the senior preferred stock purchase agreement and to

Treasury’s preferred stock purchase agreement with Freddie Mac, Treasury noted that the amendments “should

leave no uncertainty about the Treasury’s commitment to support [Fannie Mae and Freddie Mac] as they

continue to play a vital role in the housing market during this current crisis.” The senior preferred stock

purchase agreement provides that the deficiency amount will be calculated differently if we become subject to

receivership or other liquidation process. We discuss our net worth deficits and FHFA’s requests on our behalf

for funds from Treasury in “Executive Summary—Summary of our Financial Performance for 2010.”

Under the senior preferred stock purchase agreement, beginning on March 31, 2011, we were scheduled to

begin paying a quarterly commitment fee to Treasury. On December 29, 2010, Treasury notified FHFA that

Treasury was waiving the commitment fee for the first quarter of 2011 due to adverse conditions in the

U.S. mortgage market and because it believed that imposing the commitment fee would not generate increased

compensation for taxpayers. Treasury further noted that it would reevaluate matters in the next calendar

quarter to determine whether to set the quarterly commitment fee under the senior preferred stock purchase

agreement.

The senior preferred stock purchase agreement provides that the Treasury’s funding commitment will

terminate under any of the following circumstances: (1) the completion of our liquidation and fulfillment of

Treasury’s obligations under its funding commitment at that time, (2) the payment in full of, or reasonable

provision for, all of our liabilities (whether or not contingent, including mortgage guaranty obligations), or

(3) the funding by Treasury of the maximum amount that may be funded under the agreement. In addition,

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Treasury may terminate its funding commitment and declare the senior preferred stock purchase agreement

null and void if a court vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the

appointment of the conservator or otherwise curtails the conservator’s powers. Treasury may not terminate its

funding commitment under the agreement solely by reason of our being in conservatorship, receivership or

other insolvency proceeding, or due to our financial condition or any adverse change in our financial

condition.

The senior preferred stock purchase agreement provides that most provisions of the agreement may be waived

or amended by mutual written agreement of the parties; however, no waiver or amendment of the agreement is

permitted that would decrease Treasury’s aggregate funding commitment or add conditions to Treasury’s

funding commitment if the waiver or amendment would adversely affect in any material respect the holders of

our debt securities or guaranteed Fannie Mae MBS.

In the event of our default on payments with respect to our debt securities or guaranteed Fannie Mae MBS, if

Treasury fails to perform its obligations under its funding commitment and if we and/or the conservator are

not diligently pursuing remedies in respect of that failure, the holders of our debt securities or Fannie Mae

MBS may file a claim in the United States Court of Federal Claims for relief requiring Treasury to fund to us

the lesser of (1) the amount necessary to cure the payment defaults on our debt and Fannie Mae MBS and

(2) the lesser of (a) the deficiency amount and (b) the maximum amount that may be funded under the

agreement less the aggregate amount of funding previously provided under the commitment. Any payment that

Treasury makes under those circumstances will be treated for all purposes as a draw under the senior preferred

stock purchase agreement that will increase the liquidation preference of the senior preferred stock.

Senior Preferred Stock

Pursuant to the senior preferred stock purchase agreement, we issued one million shares of senior preferred

stock to Treasury on September 8, 2008 with an aggregate initial liquidation preference of $1.0 billion. The

stock’s liquidation preference is subject to adjustment. Dividends that are not paid in cash for any dividend

period will accrue and be added to the liquidation preference. In addition, any amounts Treasury pays to us

pursuant to its funding commitment under the senior preferred stock purchase agreement and any quarterly

commitment fees that are either not paid in cash to Treasury or not waived by Treasury will be added to the

liquidation preference. Accordingly, the aggregate liquidation preference of the senior preferred stock was

$88.6 billion as of December 31, 2010 and will increase to $91.2 billion as a result of FHFA’s request on our

behalf for funds to eliminate our net worth deficit as of December 31, 2010.

Treasury, as holder of the senior preferred stock, is entitled to receive, when, as and if declared by our Board

of Directors, out of legally available funds, cumulative quarterly cash dividends at the annual rate of 10% per

year on the then-current liquidation preference of the senior preferred stock. If at any time we fail to pay cash

dividends in a timely manner, then immediately following such failure and for all dividend periods thereafter

until the dividend period following the date on which we have paid in cash full cumulative dividends

(including any unpaid dividends added to the liquidation preference), the dividend rate will be 12% per year.

The senior preferred stock ranks ahead of our common stock and all other outstanding series of our preferred

stock, as well as any capital stock we issue in the future, as to both dividends and rights upon liquidation. The

senior preferred stock provides that we may not, at any time, declare or pay dividends on, make distributions

with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any common

stock or other securities ranking junior to the senior preferred stock unless (1) full cumulative dividends on the

outstanding senior preferred stock (including any unpaid dividends added to the liquidation preference) have

been declared and paid in cash, and (2) all amounts required to be paid with the net proceeds of any issuance

of capital stock for cash (as described in the following paragraph) have been paid in cash. Shares of the senior

preferred stock are not convertible. Shares of the senior preferred stock have no general or special voting

rights, other than those set forth in the certificate of designation for the senior preferred stock or otherwise

required by law. The consent of holders of at least two-thirds of all outstanding shares of senior preferred

stock is generally required to amend the terms of the senior preferred stock or to create any class or series of

stock that ranks prior to or on parity with the senior preferred stock.

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We are not permitted to redeem the senior preferred stock prior to the termination of Treasury’s funding

commitment under the senior preferred stock purchase agreement. Moreover, we are not permitted to pay

down the liquidation preference of the outstanding shares of senior preferred stock except to the extent of

(1) accrued and unpaid dividends previously added to the liquidation preference and not previously paid down;

and (2) quarterly commitment fees previously added to the liquidation preference and not previously paid

down. In addition, if we issue any shares of capital stock for cash while the senior preferred stock is

outstanding, the net proceeds of the issuance must be used to pay down the liquidation preference of the

senior preferred stock; however, the liquidation preference of each share of senior preferred stock may not be

paid down below $1,000 per share prior to the termination of Treasury’s funding commitment. Following the

termination of Treasury’s funding commitment, we may pay down the liquidation preference of all outstanding

shares of senior preferred stock at any time, in whole or in part.

Common Stock Warrant

Pursuant to the senior preferred stock purchase agreement, on September 7, 2008, we, through FHFA, in its

capacity as conservator, issued a warrant to purchase common stock to Treasury. The warrant gives Treasury

the right to purchase shares of our common stock equal to 79.9% of the total number of shares of our

common stock outstanding on a fully diluted basis on the date of exercise, for an exercise price of $0.00001

per share. The warrant may be exercised in whole or in part at any time on or before September 7, 2028.

Covenants under Treasury Agreements

The senior preferred stock purchase agreement and warrant contain covenants that significantly restrict our

business activities and require the prior written consent of Treasury before we can take certain actions. These

covenants prohibit us from:

• paying dividends or other distributions on or repurchasing our equity securities (other than the senior

preferred stock or warrant);

• issuing additional equity securities (except in limited instances);

• selling, transferring, leasing or otherwise disposing of any assets, other than dispositions for fair market

value, except in limited circumstances including if the transaction is in the ordinary course of business

and consistent with past practice;

• issuing subordinated debt; and

• entering into any new compensation arrangements or increasing amounts or benefits payable under

existing compensation arrangements for any of our executive officers (as defined by SEC rules) without

the consent of the Director of FHFA, in consultation with the Secretary of the Treasury.

In November 2009, Treasury withheld its consent under these covenants to our proposed transfer of LIHTC

investments. Please see “MD&A—Consolidated Results of Operations—Losses from Partnership Investments”

for information on the resulting other-than-temporary impairment losses we recognized during the fourth

quarter of 2009.

We also are subject to limits, which are described below, on the amount of mortgage assets that we may own

and the total amount of our indebtedness. As a result, we can no longer obtain additional equity financing

(other than pursuant to the senior preferred stock purchase agreement) and we are limited in the amount and

type of debt financing we may obtain.

• Mortgage Asset Limit. We are restricted in the amount of mortgage assets that we may own. The

maximum allowable amount was reduced by $90 billion to $810 billion on December 31, 2010. On each

December 31 thereafter, we are required to reduce our mortgage assets to 90% of the maximum allowable

amount that we were permitted to own as of December 31 of the immediately preceding calendar year,

until the amount of our mortgage assets reaches $250 billion. Accordingly, the maximum allowable

amount of mortgage assets we may own on December 31, 2011 is $729 billion. The definition of

mortgage asset is based on the unpaid principal balance of such assets and does not reflect market

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valuation adjustments, allowance for loan losses, impairments, unamortized premiums and discounts and

the impact of consolidation of variable interest entities. Under this definition, our mortgage assets on

December 31, 2010 were $788.8 billion. We disclose the amount of our mortgage assets on a monthly

basis under the caption “Gross Mortgage Portfolio” in our Monthly Summaries, which are available on

our Web site and announced in a press release.

• Debt Limit. We are subject to a limit on the amount of our indebtedness. Our debt limit in 2010 was

$1,080 billion and in 2011 is $972 billion. For every year thereafter, our debt cap will equal 120% of the

amount of mortgage assets we are allowed to own on December 31 of the immediately preceding calendar

year. The definition of indebtedness is based on the par value of each applicable loan for purposes of our

debt cap. Under this definition, our indebtedness as of December 31, 2010 was $793.9 billion. We

disclose the amount of our indebtedness on a monthly basis under the caption “Total Debt Outstanding”

in our Monthly Summaries, which are available on our Web site and announced in a press release.

Under the terms of the senior preferred stock purchase agreement, “mortgage assets” and “indebtedness” are

calculated without giving effect to changes made after May 2009 to the accounting rules governing the

transfer and servicing of financial assets and the extinguishment of liabilities or similar accounting standards.

Accordingly, our adoption in 2010 of new accounting policies regarding consolidation and transfers of

financial assets did not affect these calculations.

LEGISLATION AND GSE REFORM

Financial Regulatory Reform Legislation: The Dodd-Frank Act

On July 21, 2010, President Obama signed into law financial regulatory reform legislation known as the DoddFrank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act will

significantly change the regulation of the financial services industry, including by its creation of new standards

related to regulatory oversight of systemically important financial companies, derivatives transactions, assetbacked securitization, mortgage underwriting and consumer financial protection. The Dodd-Frank Act will

directly affect our business because new and additional regulatory oversight and standards will apply to us. We

may also be affected by provisions of the Dodd-Frank Act and implementing regulations that impact the

activities of our customers and counterparties in the financial services industry. Extensive regulatory guidance

is needed to implement and clarify many of the provisions of the Dodd-Frank Act and regulators have not

completed the required administrative processes. It is therefore difficult to assess fully the impact of this

legislation on our business and industry at this time. We discuss the potential risks to our business resulting

from the Dodd-Frank Act in “Risk Factors.” Below we summarize some key provisions of the legislation.

The Dodd-Frank Act established the Financial Stability Oversight Council (the “FSOC”), chaired by the

Secretary of the Treasury, to ensure that all financial companies whose failure could pose a threat to the

financial stability of the United States—not just banks—will be subject to strong oversight. The FSOC has

held meetings and issued a proposed rule describing the criteria that will inform the FSOC’s designation of

systemically important nonbank financial companies. Under the proposed rule, the FSOC will make such a

designation if it determines that material financial distress at the nonbank financial company, or the nature,

scope, size, scale, concentration, interconnectedness, or mix of the activities of the company, could pose a

threat to the financial stability of the United States. FSOC action on the final designation criteria and process

is expected later this year. If we are so designated, we may be subject to stricter prudential standards to be

established by the Federal Reserve, including standards related to risk-based capital, leverage limits, liquidity,

credit concentrations, resolution plans, reporting credit exposures and other risk management measures. The

Federal Reserve may also impose other standards related to contingent capital, enhanced public disclosure,

short-term debt limits and other requirements as appropriate.

The Dodd-Frank Act requires certain institutions meeting the definition of “swap dealer” or “major swap

participant” to register with the Commodity Futures Trading Commission (the “CFTC”). The CFTC and SEC

have issued a joint proposed rule regarding certain definitions in the Dodd-Frank Act, including the definition

of “major swap participant.” If we are determined to be a major swap participant, minimum capital and

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margin requirements would apply to our swap transactions, including transactions that are not subject to

clearing. Even if we are not deemed to be a major swap participant, the Dodd-Frank Act includes provisions

that may require us to submit new swap transactions for clearing to a derivatives clearing organization.

The Dodd-Frank Act requires creditors to determine that borrowers have a “reasonable ability to repay”

mortgage loans prior to making such loans. The act provides a presumption of compliance for mortgage loans

that meet certain terms and characteristics (so-called “qualified mortgages”); however, the presumption is

rebuttable by a borrower bringing a claim. If a creditor fails to comply, a borrower may be able to offset

amounts owed as part of a foreclosure or recoup monetary damages. The new Bureau of Consumer Financial

Protection, created by the Dodd-Frank Act, is responsible for prescribing the criteria that define a qualified

mortgage.

The Dodd-Frank Act requires financial regulators to jointly prescribe regulations requiring securitizers and/or

originators to maintain a portion of the credit risk in assets transferred, sold or conveyed through the issuance

of asset-backed securities, with certain exceptions. This risk retention requirement does not appear to apply to

us and, in any event, we already retain the credit risk on mortgages we own or guarantee. How this

requirement will affect our customers and counterparties on loans sold to and guaranteed by us will depend on

how the regulations are implemented.

In accordance with the Dodd-Frank Act’s requirements, the SEC recently adopted a rule requiring securitizers

to disclose certain information regarding fulfilled and unfulfilled repurchase requests, to allow investors to

identify asset originators with clear underwriting deficiencies. As adopted, the rule will require us to file

quarterly reports on our repurchase activity, with our initial report to cover a three-year period and be filed in

February 2012. We anticipate that providing the required disclosure will involve a significant operational

burden.

GSE Reform

The Dodd-Frank Act does not contain substantive GSE reform provisions, but does state that it is the sense of

Congress that efforts to regulate the terms and practices related to residential mortgage credit would be

incomplete without enactment of meaningful structural reforms of Fannie Mae and Freddie Mac. The DoddFrank Act also required the Treasury Secretary to submit a report to Congress with recommendations for

ending the conservatorships of Fannie Mae and Freddie Mac.

On February 11, 2011, Treasury and HUD released their report to Congress on reforming America’s housing

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

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

institutions.

The report identifies a number of policy steps that could be used to wind down Freddie Mac and Fannie Mae,

reduce the government’s role in housing finance and help bring private capital back to the mortgage market.

These steps include (1) increasing guaranty fees, (2) gradually increasing the level of required down payment

so that any mortgages insured by Freddie Mac or Fannie Mae eventually have at least a 10% down payment,

(3) reducing conforming loan limits to those established in the 2008 Reform Act, (4) encouraging Freddie Mac

and Fannie Mae to pursue additional credit loss protection and (5) reducing Freddie Mac and Fannie Mae’s

portfolios, consistent with Treasury’s senior preferred stock purchase agreements with the companies.

In addition, the report outlines three potential options for a new long-term structure for the housing finance

system following the wind-down of Fannie Mae and Freddie Mac. The first option would privatize housing

finance almost entirely. The second option would add a government guaranty mechanism that could scale up

during times of crisis. The third option would involve the government offering catastrophic reinsurance behind

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

FHA, the Department of Agriculture and the VA to assist targeted groups of borrowers. The report does not

state whether or how the existing infrastructure or human capital of Fannie Mae may be used in the

establishment of such a reformed system. The report emphasizes the importance of proceeding with a careful

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transition plan and providing the necessary financial support to Fannie Mae and Freddie Mac during the

transition period.

A copy of the report can be found on the Housing Finance Reform section of Treasury’s Web site,

www.Treasury.gov. We are providing Treasury’s Web site address solely for your information, and information

appearing on Treasury’s Web site is not incorporated into this annual report on Form 10-K.

During 2010, Congress held hearings on the future status of Fannie Mae and Freddie Mac, the Congressional

Budget Office released a study examining various alternatives for the future of the secondary mortgage

market, and members of Congress offered legislative proposals relating to the future status of the GSEs. We

expect hearings on GSE reform to continue in 2011 and additional proposals to be discussed, including

proposals that would result in a substantial change to our business structure or that involve Fannie Mae’s

liquidation or dissolution. We cannot predict the prospects for the enactment, timing or content of legislative

proposals regarding the future status of the GSEs.

On January 27, 2011, the Financial Crisis Inquiry Commission released its Final Report on the Causes of the

Financial and Economic Crisis in the United States, which consists of a majority report and two dissenting

views. The report addresses, among other things, the roles that the GSEs played in the financial crisis, and

may be considered by policymakers as they assess legislative proposals related to the future status of the

GSEs. We cannot predict how the report may impact such deliberations.

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

continue to be in existence, the extent of our role in the market, what form we will have, and what ownership

interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is

terminated. Please see “Risk Factors” for a discussion of the risks to our business relating to the uncertain

future of our company.

Energy Loan Tax Assessment Legislation

A number of states have enacted or are considering legislation allowing localities to create energy loan

assessment programs for the purpose of financing energy efficient home improvements. These programs are

typically named Property Assessed Clean Energy, or PACE, programs. While the specific terms may vary,

these laws generally grant lenders of energy efficient loans the equivalent of a tax lien, giving them priority

over all other liens on the property, including previously recorded first lien mortgage loans.

On July 6, 2010, FHFA announced that it had determined that certain of these programs present significant

safety and soundness concerns that must be addressed by the GSEs. FHFA directed Fannie Mae and Freddie

Mac to waive the uniform mortgage document prohibitions against senior liens for any homeowner who

obtained a PACE or PACE-like loan with a first priority lien before July 6, 2010 and to undertake actions to

protect the safe and sound operation of the companies as it relates to loans originated under PACE programs.

On August 31, 2010, we released a new directive to our seller-servicers in which we reinforced our longstanding requirement that mortgages sold to us must be and remain in the first-lien position, while also

providing guidance on our requirements for refinancing loans that were originated with PACE obligations

before July 6, 2010.

During 2010, legislation was introduced in Congress that would require us to adopt standards to support PACE

programs. We and FHFA are also subject to a number of lawsuits relating to PACE programs. We cannot

predict the outcome of the litigation, or the prospects for enactment, timing or content of federal or state

legislative proposals relating to PACE or PACE-like programs.

OUR CHARTER AND REGULATION OF OUR ACTIVITIES

Charter Act

We are a shareholder-owned corporation, originally established in 1938, organized and existing under the

Federal National Mortgage Association Charter Act, as amended, which we refer to as the Charter Act or our

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charter. The Charter Act sets forth the activities that we are permitted to conduct, authorizes us to issue debt

and equity securities, and describes our general corporate powers. The Charter Act states that our purposes are

to:

• provide stability in the secondary market for residential mortgages;

• respond appropriately to the private capital market;

• provide ongoing assistance to the secondary market for residential mortgages (including activities relating

to mortgages on housing for low- and moderate-income families involving a reasonable economic return

that may be less than the return earned on other activities) by increasing the liquidity of mortgage

investments and improving the distribution of investment capital available for residential mortgage

financing; and

• promote access to mortgage credit throughout the nation (including central cities, rural areas and

underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of

investment capital available for residential mortgage financing.

It is from these sections of the Charter Act that we derive our mission of providing liquidity, increasing

stability and promoting affordability in the residential mortgage market. In addition to the alignment of our

overall strategy with these purposes, all of our business activities must be permissible under the Charter Act.

Our charter authorizes us to: purchase, service, sell, lend on the security of, and otherwise deal in certain

mortgage loans; issue debt obligations and mortgage-related securities; and “do all things as are necessary or

incidental to the proper management of [our] affairs and the proper conduct of [our] business.”

Loan Standards

Mortgage loans we purchase or securitize must meet the following standards required by the Charter Act.

• Principal Balance Limitations. Our charter permits us to purchase and securitize mortgage loans secured

by either a single-family or multifamily property. Single-family conventional mortgage loans are subject

to maximum original principal balance limits, known as “conforming loan limits.” The conforming loan

limits are established each year based on the average prices of one-family residences.

In 2010, the national conforming loan limit for mortgages that finance one-family residences was

$417,000, with higher limits for mortgages secured by two- to four-family residences and in four

statutorily-designated states and territories (Alaska, Hawaii, Guam and the U.S. Virgin Islands). Higher

loan limits also apply in high-cost areas (counties or county-equivalent areas) that are designated by

FHFA annually. Our charter sets permanent loan limits for high-cost areas up to 150% of the national

loan limit ($625,500 for a one-family residence; higher for two- to four-family residences and in the four

statutorily-designated states and territories). Since early 2008, however, a series of legislative acts have

increased our loan limits for loans originated during a designated time period in high-cost areas, to up to

175% of the national loan limit ($729,750 for a one-family residence; higher for two- to four-family

residences and in the four statutorily-designated states and territories). These loan limits are currently in

effect for mortgages originated through September 30, 2011.

No statutory limits apply to the maximum original principal balance of multifamily mortgage loans that

we purchase or securitize. In addition, the Charter Act imposes no maximum original principal balance

limits on loans we purchase or securitize that are insured by FHA or guaranteed by the VA.

• Loan-to-Value and Credit Enhancement Requirements. The Charter Act generally requires credit

enhancement on any conventional single-family mortgage loan that we purchase or securitize if it has a

loan-to-value ratio over 80% at the time of purchase. We also do not purchase or securitize second lien

single-family mortgage loans when the combined loan-to-value ratio exceeds 80%, unless the second lien

mortgage loan has credit enhancement in accordance with the requirements of the Charter Act. The credit

enhancement required by our charter may take the form of one or more of the following: (1) insurance or

a guaranty by a qualified insurer of the over-80% portion of the unpaid principal balance of the mortgage;

(2) a seller’s agreement to repurchase or replace the mortgage in the event of default (for such period and

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under such circumstances as we may require); or (3) retention by the seller of at least a 10% participation

interest in the mortgage. Regardless of loan-to-value ratio, the Charter Act does not require us to obtain

credit enhancement to purchase or securitize loans insured by FHA or guaranteed by the VA.

Authority of U.S. Treasury to Purchase GSE Securities

Pursuant to our charter, at the discretion of the Secretary of the Treasury, Treasury may purchase our

obligations up to a maximum of $2.25 billion outstanding at any one time. While the 2008 Reform Act gave

Treasury expanded temporary authority to purchase our obligations and other securities in unlimited amounts

(up to the national debt limit), this authority expired on December 31, 2009. We describe Treasury’s

investment in our senior preferred stock and a common stock warrant pursuant to this expanded temporary

authority under “Conservatorship and Treasury Agreements—Treasury Agreements.”

Other Charter Act Provisions

The Charter Act has the following additional provisions.

• Issuances of Our Securities. We are authorized, upon the approval of the Secretary of the Treasury, to

issue debt obligations and mortgage-related securities. Neither the U.S. government nor any of its

agencies guarantees, directly or indirectly, our debt or mortgage-related securities.

• Exemptions for Our Securities. The Charter Act generally provides that our securities are exempt under

the federal securities laws administered by the SEC. As a result, we are not required to file registration

statements with the SEC under the Securities Act of 1933 with respect to offerings of any of our

securities. Our non-equity securities are also exempt securities under the Securities Exchange Act of 1934

(the “Exchange Act”). However, our equity securities are not treated as exempted securities for purposes

of Sections 12, 13, 14 or 16 of the Exchange Act. Consequently, we are required to file periodic and

current reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and

current reports on Form 8-K.

• Exemption from Specified Taxes. We are exempt from taxation by states, territories, counties,

municipalities and local taxing authorities, except for taxation by those authorities on our real property.

We are not exempt from the payment of federal corporate income taxes.

• Other Limitations and Requirements. We may not originate mortgage loans or advance funds to a

mortgage seller on an interim basis, using mortgage loans as collateral, pending the sale of the mortgages

in the secondary market. In addition, we may only purchase or securitize mortgages on properties located

in the United States and its territories.

Regulation and Oversight of Our Activities

As a federally chartered corporation, we are subject to government regulation and oversight. FHFA is an

independent agency of the federal government with general supervisory and regulatory authority over Fannie

Mae, Freddie Mac and the 12 Federal Home Loan Banks. FHFA was established in July 2008, assuming the

duties of our former safety and soundness regulator, the Office of Federal Housing Enterprise Oversight

(“OFHEO”), and our former mission regulator, HUD. HUD remains our regulator with respect to fair lending

matters. Our regulators also include the SEC and Treasury.

The GSE Act provides FHFA with safety and soundness authority that is comparable to and in some respects

broader than that of the federal banking agencies. Even if we were not in conservatorship, the GSE Act gives

FHFA the authority to raise capital levels above statutory minimum levels, regulate the size and content of our

portfolio and approve new mortgage products, among other things.

FHFA is responsible for implementing the various provisions of the GSE Act. In general, we remain subject to

existing regulations, orders and determinations until new ones are issued or made.

Capital. The GSE Act provides FHFA with broad authority to increase the level of our required minimum

capital and to establish capital or reserve requirements for specific products and activities. FHFA also has

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broad authority to establish risk-based capital requirements, to ensure that we operate in a safe and sound

manner and maintain sufficient capital and reserves. During the conservatorship, FHFA has suspended our

capital classifications. We continue to submit capital reports to FHFA during the conservatorship, and FHFA

continues to monitor our capital levels. We describe our capital requirements below under “Capital Adequacy

Requirements.”

Portfolio. The GSE Act requires FHFA to establish standards governing our portfolio holdings, to ensure that

they are backed by sufficient capital and consistent with our mission and safe and sound operations. FHFA is

also required to monitor our portfolio and, in some circumstances, may require us to dispose of or acquire

assets. On December 28, 2010, FHFA published a final rule adopting, as the standard for our portfolio

holdings, the portfolio limits specified in the senior preferred stock purchase agreement described under

“Treasury Agreements—Covenants under Treasury Agreements,” as it may be amended from time to time.

The rule is effective for as long as we remain subject to the terms and obligations of the senior preferred stock

purchase agreement.

New Products. The GSE Act requires us to obtain FHFA’s approval before initially offering any product,

subject to certain exceptions. The GSE Act also requires us to provide FHFA with written notice before

commencing any new activity. On July 2, 2009, FHFA published an interim final rule implementing these

provisions of the GSE Act. Subsequently, the Acting Director of FHFA concluded that permitting us to offer

new products at this time is inconsistent with the goals of the conservatorship. He therefore instructed us not

to submit requests for approval of new products under the interim final rule. We cannot predict when or if

FHFA will permit us to submit new product requests under the rule.

Receivership. Under the GSE Act, FHFA must place us into receivership if it determines that our assets are

less than our obligations for 60 days, or we have not been paying our debts as they become due for 60 days.

FHFA has notified us that the measurement period for any mandatory receivership determination with respect

to our assets and liabilities would commence no earlier than the SEC public filing deadline for our quarterly

or annual financial statements and would continue for 60 calendar days thereafter. FHFA has advised us that

if, during that 60-day period, we receive funds from Treasury in an amount at least equal to the deficiency

amount under the senior preferred stock purchase agreement, the Director of FHFA will not make a mandatory

receivership determination.

In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other

reasons, including conditions that FHFA has already asserted existed at the time the then-Director of FHFA

placed us into conservatorship. The statutory grounds for discretionary appointment of a receiver include: a

substantial dissipation of assets or earnings due to unsafe or unsound practices; the existence of an unsafe or

unsound condition to transact business; an inability to meet our obligations in the ordinary course of business;

a weakening of our condition due to unsafe or unsound practices or conditions; critical undercapitalization; the

likelihood of losses that will deplete substantially all of our capital; or by consent.

On July 9, 2010, FHFA published a proposed rule to establish a framework for conservatorship and

receivership operations for the GSEs. The proposed rule would, among other things, clarify that: (1) all claims

arising from an equity interest in a regulated entity in receivership would be given the same treatment as the

interests of shareholders; and (2) claims by shareholders would receive the lowest priority in a receivership,

behind administrative expenses of the receiver, general liabilities of the regulated entity and liabilities

subordinated to those of general creditors. The proposed rule would also provide that payment of certain

securities litigation claims would be held in abeyance during conservatorship, except as otherwise ordered by

FHFA. The proposed rule is part of FHFA’s implementation of the powers provided by the 2008 Reform Act,

and does not seek to anticipate or predict future conservatorships or receiverships. In announcing the

publication of this proposed rule for comment, the Acting Director of FHFA said it had “no impact” on

current conservatorship operations. This rule has not been finalized.

Prudential Management and Operational Standards. The GSE Act requires FHFA to establish prudential

standards for a broad range of our operations. These standards must address internal controls, independence

and adequacy of internal audit systems, management of interest rate risk exposure, management of market

risk, adequacy and maintenance of liquidity and reserves, management of asset and investment portfolio

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growth, investments and asset acquisitions, overall risk management processes, management of credit and

counterparty risk and recordkeeping. FHFA may also establish any additional operational and management

standards the Director of FHFA deems appropriate.

Affordable Housing Goals and Duty to Serve. We discuss our affordable housing goals and our duty to serve

underserved markets below under “Housing Goals and Duty to Serve Underserved Markets.”

Affordable Housing Allocations. The GSE Act requires us to set aside in each fiscal year an amount equal to

4.2 basis points for each dollar of the unpaid principal balance of our total new business acquisitions, and to

allocate such amount to certain government funds. The GSE Act also allows FHFA to suspend allocations on a

temporary basis. In November 2008, FHFA advised us that it was suspending our allocations until further

notice.

Executive Compensation. The GSE Act directs FHFA to prohibit us from providing unreasonable or noncomparable compensation to our executive officers. FHFA may at any time review the reasonableness and

comparability of an executive officer’s compensation and may require us to withhold any payment to the

officer during such review. FHFA is also authorized to prohibit or limit certain golden parachute and

indemnification payments to directors, officers and certain other parties. FHFA has issued rules relating to

golden parachute payments, setting forth factors to be considered by the Director of FHFA in acting upon his

authority to limit such payments.

Fair Lending. The GSE Act requires the Secretary of HUD to assure that the GSEs meet their fair lending

obligations. Among other things, HUD is required to periodically review and comment on the underwriting

and appraisal guidelines of each company to ensure consistency with the Fair Housing Act. HUD is currently

conducting such a review.

Capital Adequacy Requirements

The GSE Act establishes capital adequacy requirements. The statutory capital framework incorporates two

different quantitative assessments of capital—a minimum capital requirement and a risk-based capital

requirement. The minimum capital requirement is ratio-based, while the risk-based capital requirement is

based on simulated stress test performance. The GSE Act requires us to maintain sufficient capital to meet

both of these requirements in order to be classified as “adequately capitalized.” However, during the

conservatorship, FHFA has suspended capital classification of us and announced that our existing statutory and

FHFA-directed regulatory capital requirements will not be binding. FHFA has advised us that, because we are

under conservatorship, we will not be subject to corrective action requirements that would ordinarily result

from our receiving a capital classification of “undercapitalized.”

Minimum Capital Requirement. Under the GSE Act, we must maintain an amount of core capital that equals

or exceeds our minimum capital requirement. The GSE Act defines core capital as the sum of the stated value

of outstanding common stock (common stock less treasury stock), the stated value of outstanding noncumulative perpetual preferred stock, paid-in capital, and retained earnings, as determined in accordance with

GAAP. Our minimum capital requirement is generally equal to the sum of 2.50% of on-balance sheet assets

and 0.45% of off-balance sheet obligations.

Effective January 1, 2010, we adopted new accounting standards that resulted in our recording on our

consolidated balance sheet substantially all of the loans backing our Fannie Mae MBS. However, FHFA has

directed us, for purposes of minimum capital, to continue reporting loans backing Fannie Mae MBS held by

third parties based on 0.45% of the unpaid principal balance. FHFA retains authority under the GSE Act to

raise the minimum capital requirement for any of our assets or activities.

Risk-Based Capital Requirement. The GSE Act requires FHFA to establish risk-based capital requirements

for Fannie Mae and Freddie Mac, to ensure that we operate in a safe and sound manner. Existing risk-based

capital regulation ties our capital requirements to the risk in our book of business, as measured by a stress test

model. The stress test simulates our financial performance over a ten-year period of severe economic

conditions characterized by both extreme interest rate movements and high mortgage default rates. FHFA has

stated that it does not intend to publish our risk-based capital level during the conservatorship and has

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discontinued stress test simulations under the existing rule. We continue to submit detailed profiles of our

books of business to FHFA to support FHFA’s monitoring of our business activity and their research into

future risk-based capital rules.

Critical Capital Requirement. The GSE Act also establishes a critical capital requirement, which is the

amount of core capital below which we would be classified as “critically undercapitalized.” Under the GSE

Act, such classification is a discretionary ground for appointing a conservator or receiver. Our critical capital

requirement is generally equal to the sum of 1.25% of on-balance sheet assets and 0.25% of off-balance sheet

obligations. FHFA has directed us, for purposes of critical capital, to continue reporting loans backing Fannie

Mae MBS held by third parties based on 0.25% of the unpaid principal balance, notwithstanding our

consolidation of substantially all of the loans backing these securities. FHFA has stated that it does not intend

to publish our critical capital level during the conservatorship.

Bank Capital Requirements. In the wake of the financial crisis and as a result of the Dodd-Frank Act and of

actions by international bank regulators, the capital regime for the banking industry is undergoing major

changes. The Basel Committee on Banking Supervision finalized a set of revisions (known as Basel III) to the

international capital requirements in December 2010. Basel III generally narrows the definition of capital that

can be used to meet risk-based standards and raises the amount of capital that must be held. U.S. bank

regulators are expected to issue detailed implementing regulations for U.S. banks in the coming months.

Although the GSEs are not currently subject to bank capital requirements, any revised framework for GSE

capital standards may be based on bank requirements, particularly if the GSEs are deemed to be systemically

important financial companies subject to Federal Reserve oversight.

Housing Goals and Duty to Serve Underserved Markets

Since 1993, we have been subject to housing goals. For 2010, the structure of our housing goals changed as a

result of the 2008 Reform Act. The 2008 Reform Act also created a new duty for us to serve three

underserved markets, which we discuss below.

Housing Goals

FHFA published a final rule establishing our 2010 and 2011 housing goals on September 14, 2010. FHFA’s

final rule and subsequent notices dated October 29, 2010 and January 28, 2011 established the following

single-family home purchase and refinance housing goal benchmarks for 2010 and 2011. A home purchase

mortgage may be counted toward more than one home purchase benchmark.

• Low-Income Families Home Purchase Benchmark: At least 27% of our acquisitions of single-family

owner-occupied mortgage loans financing home purchases must be affordable to low-income families

(defined as families with income no higher than 80% of area median income).

• Very Low-Income Families Home Purchase Benchmark: At least 8% of our acquisitions of single-family

owner-occupied mortgage loans financing home purchases must be affordable to very low-income families

(defined as families with income no higher than 50% of area median income).

• Low-Income Areas Home Purchase Benchmarks: At least 24% of our acquisitions of single-family owneroccupied mortgage loans financing home purchases must be for families in low-income census tracts, for

moderate-income families (defined as families with income no higher than 100% of area median income) in

designated disaster areas or for moderate-income families in minority census tracts. In addition, at least 13%

of our acquisitions of single-family owner-occupied purchase money mortgage loans must be for families in

low-income census tracts or for moderate-income families in minority census tracts.

• Low-Income Families Refinancing Benchmark: At least 21% of our acquisitions of single-family owneroccupied refinance mortgage loans must be affordable to low-income families, which may include

qualifying permanent modifications of mortgages under HAMP completed during the year.

If we do not meet these benchmarks, we may still meet our goals. The final rule specifies that our singlefamily housing goals performance will be measured against these benchmarks and against goals-qualifying

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originations in the primary mortgage market. We will be in compliance with the housing goals if we meet

either the benchmarks or market share measures.

The final rule also established a new multifamily goal and subgoal. For each of 2010 and 2011, our

multifamily mortgage acquisitions must finance at least 177,750 units affordable to low-income families, and

at least 42,750 units affordable to very low-income families. There is no market-based alternative

measurement for the multifamily goals.

FHFA’s final rule made significant changes to prior housing goals regulations regarding the types of products

that count towards the housing goals. Private-label mortgage-related securities, second liens and single-family

government loans do not count towards the housing goals. In addition, only permanent modifications of

mortgages under HAMP completed during the year will count towards the housing goals; trial modifications

will not be counted. Moreover, these modifications will count only towards the single-family low-income

families refinance goal, not any of the home purchase goals.

The final rule notes that “FHFA does not intend for [Fannie Mae] to undertake uneconomic or high-risk

activities in support of the [housing] goals. However, the fact that [Fannie Mae is] in conservatorship should

not be a justification for withdrawing support from these market segments.” If our efforts to meet our goals

prove to be insufficient, FHFA will determine whether the goals were feasible. If FHFA finds that our goals

were feasible, we may become subject to a housing plan that could require us to take additional steps that

could have an adverse effect on our results of operations and financial condition. The housing plan must

describe the actions we would take to meet the goal in the next calendar year and be approved by FHFA. The

potential penalties for failure to comply with housing plan requirements include a cease-and-desist order and

civil money penalties. See “Risk Factors” for a description of how we may be unable to meet our housing

goals and how actions we may take to meet these goals and other regulatory requirements could adversely

affect our business, results of operations and financial condition.

The following table presents our performance against our 2010 single-family housing benchmarks and

multifamily housing goals. These performance results have not yet been validated by FHFA.

2010 Housing Goals Performance

Result(1) Benchmark(2)

Single-family housing goals:(3)

Low-income families home purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.1% 27.0%

Very low-income families home purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 8.0

Low-income areas home purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.0 24.0

Low-income and high-minority areas home purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 13.0

Low-income families refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.9 21.0

Result(1) Goal

Multifamily housing goals:

Affordable to families with incomes no higher than 80% of area median income . . . . . 212,768 units 177,750 units

Affordable to families with incomes no higher than 50% of area median income . . . . . 53,184 units 42,750 units

(1) Our 2010 results have not been validated by FHFA, and after validation they may differ from the results reported

above.

(2) Even if our results do not meet the benchmarks, we may still meet our goals. The final rule specifies that our singlefamily housing goals performance will be measured not only against these benchmarks, but also against the share of

goals-qualifying originations in the primary mortgage market. We will be in compliance with the housing goals if we

meet either the benchmarks or market share measures. The amount of goals-qualifying originations in the market

during 2010 will not be available until the release of data reported by primary market originators under the Home

Mortgage Disclosure Act in the fall of 2011.

(3) Our single-family results and benchmarks are expressed as a percentage of the total number of eligible mortgages

acquired during the period.

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We believe we met our single-family low-income areas home purchase benchmark for 2010, as well as our

2010 multifamily goals. To determine whether we met our other 2010 single-family goals, we and FHFA will

have to compare our performance with that of the market after the release of data reported by primary market

originators under the Home Mortgage Disclosure Act in the fall of 2011, because we believe we did not meet

the benchmarks for these goals. As noted in FHFA’s final rule establishing our 2010 housing goals, FHFA has

indicated that we should not undertake uneconomic or high-risk activities in support of our housing goals.

We will file our assessment of our performance with FHFA in mid-March. FHFA will then determine our final

performance numbers and whether we met our goals.

Duty to Serve

The 2008 Reform Act created the duty to serve underserved markets in order for us and Freddie Mac to

“provide leadership to the market in developing loan products and flexible underwriting guidelines to facilitate

a secondary market for very low-, low-, and moderate-income families” with respect to three underserved

markets: manufactured housing, affordable housing preservation, and rural areas.

The duty to serve is a new oversight responsibility for FHFA. The Director of FHFA is required to establish

by regulation a method for evaluating and rating the performance by us and Freddie Mac of the duty to serve

underserved markets. On June 7, 2010, FHFA published its proposed rule to implement this new duty,

although the final rule has not been issued.

Under the proposed rule, we would be required to submit an underserved markets plan at least 90 days before

the plan’s effective date of January 1st of a particular year establishing benchmarks and objectives against

which FHFA would evaluate and rate our performance. The plan term is two years. We will likely need to

submit a plan as soon as practicable after the publication of the final rule that will be effective for the first

plan period.

The 2008 Reform Act requires FHFA to separately evaluate the following four assessment factors:

• The loan product assessment factor requires evaluation of our “development of loan products, more

flexible underwriting guidelines, and other innovative approaches to providing financing to each”

underserved market.

• The outreach assessment factor requires evaluation of “the extent of outreach to qualified loan sellers and

other market participants.” We are expected to engage market participants and pursue relationships with

qualified sellers that serve each underserved market.

• The loan purchase assessment factor requires FHFA to consider the volume of loans acquired in each

underserved market relative to the market opportunities available to us. The 2008 Reform Act prohibits

the establishment of specific quantitative targets by FHFA. However, in its evaluation FHFA could

consider the volume of loans acquired in past years.

• The investment and grants assessment factor requires evaluation of the amount of investment and grants in

projects that assist in meeting the needs of underserved markets.

Under the proposed rule, FHFA would give the loan purchase and outreach assessment factors significant

weight. Because we are in conservatorship, the investment and grants assessment factor would receive little or

no weight. In addition, FHFA would consider the loan product assessment factor, even though we are currently

prohibited from entering into new lines of business and developing new products. The proposed rule states that

acquisitions and activities pursuant to the duty to serve should be profitable, even if less profitable than other

activities.

FHFA would evaluate our performance on each assessment factor annually, and assign a rating of

“satisfactory” or “unsatisfactory” to each factor in each underserved market. The evaluation would be based

on whether we have substantially met our benchmarks and objectives as outlined in our underserved markets

plan. FHFA would also consider the impact of overall market conditions and other factors outside our control

that could impact our ability to meet our benchmarks and objectives. Based on the assessment factor findings,

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FHFA would assign a rating of “in compliance” or “noncompliance” with the duty to serve each underserved

market.

With some exceptions, the counting rules and other requirements would be similar to those established for the

housing goals. For the loan purchase assessment factor, FHFA proposes to measure performance in terms of

units rather than mortgages or unpaid principal balance. All single-family loans we acquire must meet the

standards in the Interagency Statement on Subprime Mortgage Lending and the Interagency Guidance on

Nontraditional Mortgage Product Risks. We are expected to review the operations of loan sellers to ensure

compliance with these standards.

If we fail to comply with, or there is a substantial probability that we will not comply with, our duty to serve

a particular underserved market in a given year, FHFA would determine whether the benchmarks and

objectives in our underserved markets plan are or were feasible. If we fail to meet our duty to serve, and

FHFA determines that the benchmarks and objectives in our underserved markets plan are or were feasible,

then, in the Director’s discretion, we may be required to submit a housing plan. Under the proposed rule, the

housing plan must describe the activities that we will take to comply with the duty to serve a particular

underserved market for the next calendar year, or improvements and changes in operations that we will make

during the remainder of the current year.

Under the proposed rule, we would be required to provide quarterly and annual reports on our performance

and progress towards meeting our duty to serve.

See “Risk Factors” for a description of how changes we may make in our business strategies in order to meet

our housing goals and duty to serve requirement may increase our credit losses and adversely affect our results

of operations.

MAKING HOME AFFORDABLE PROGRAM

The Obama Administration’s Making Home Affordable Program, which was introduced in February 2009, is

intended to provide assistance to homeowners and prevent foreclosures. Working with our conservator, we

have devoted significant effort and resources to help distressed homeowners through initiatives that support the

Making Home Affordable Program. Below we describe key aspects of the Making Home Affordable Program

and our role in the program. For additional information about our activities under the program, please see

“Business—Making Home Affordable Program” in our Annual Report on Form 10-K for the year ended

December 31, 2009. For information about the program’s financial impact on us, please see “MD&A—

Consolidated Results of Operations—Financial Impact of the Making Home Affordable Program on Fannie

Mae.”

The Making Home Affordable Program is comprised primarily of a Home Affordable Refinance Program

(“HARP”), under which we acquire or guarantee loans that are refinancings of mortgage loans we own or

guarantee, and Freddie Mac does the same, and a Home Affordable Modification Program (“HAMP”), which

provides for the modification of mortgage loans owned or guaranteed by us or Freddie Mac, as well as other

mortgage loans. These two programs were designed to expand the number of borrowers who can refinance or

modify their mortgages to achieve a monthly payment that is more affordable now and into the future or to

obtain a more stable loan product, such as a fixed-rate mortgage loan in lieu of an adjustable-rate mortgage

loan. We participate in the Making Home Affordable Program, and our sellers and servicers offer HARP and

HAMP to Fannie Mae borrowers. We also serve as Treasury’s program administrator for HAMP and other

initiatives under the Making Home Affordable Program.

Our Role as Program Administrator

Treasury has engaged us to serve as program administrator for HAMP and other initiatives under the Making

Home Affordable Program. Our principal activities as program administrator include the following:

• Implementing the guidelines and policies of the Treasury program;

• Preparing the requisite forms, tools and training to facilitate efficient loan modifications by servicers;

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• Creating, making available and managing the process for servicers to report modification activity and

program performance;

• Calculating incentive compensation consistent with program guidelines;

• Acting as record-keeper for executed loan modifications and program administration;

• Coordinating with Treasury and other parties toward achievement of the program’s goals, including

assisting with development and implementation of updates to the program and initiatives expanding the

program’s reach; and

• Performing other tasks as directed by Treasury from time to time.

In our capacity as program administrator for the program, we support over 100 servicers that have signed up

to participate with respect to non-agency loans under the program. To help servicers implement the program,

we have provided information and resources through a Web site dedicated to servicers under the program. We

have also communicated information about the program to servicers and helped servicers implement and

integrate the program with new systems and processes. As program administrator, we have taken the following

steps to help servicers implement the program:

• dedicated Fannie Mae personnel to work closely with participating servicers;

• established a servicer support call center;

• conducted ongoing conference calls with the leadership of participating servicers;

• provided training through live Web seminars and recorded tutorials; and

• made checklists and job aids available on the program Web site.

OUR CUSTOMERS

Our principal customers are lenders that operate within the primary mortgage market where mortgage loans

are originated and funds are loaned to borrowers. Our customers include mortgage banking companies, savings

and loan associations, savings banks, commercial banks, credit unions, community banks, insurance

companies, and state and local housing finance agencies. Lenders originating mortgages in the primary

mortgage market often sell them in the secondary mortgage market in the form of whole loans or in the form

of mortgage-related securities.

During 2010, approximately 1,100 lenders delivered single-family mortgage loans to us, either for

securitization or for purchase. We acquire a significant portion of our single-family mortgage loans from

several large mortgage lenders. During both 2010 and 2009, our top five lender customers, in the aggregate,

accounted for approximately 62% of our single-family business volume. Three lender customers, Wells

Fargo & Company, Bank of America Corporation, and JPMorgan Chase & Co., including their respective

affiliates, in the aggregate accounted for more than 52% of our single-family business volume for 2010.

Due to ongoing consolidation within the mortgage industry, as well as the number of mortgage lenders that

have gone out of business since late 2006, we, as well as our competitors, seek business from a decreasing

number of large mortgage lenders. To the extent we become more reliant on a smaller number of lender

customers, our negotiating leverage with these customers decreases, which could diminish our ability to price

our products and services optimally. In addition, many of our lender customers are experiencing financial and

liquidity problems that may affect the volume of business they are able to generate. We discuss these and

other risks that this customer concentration poses to our business in “Risk Factors.”

COMPETITION

Historically, our competitors have included Freddie Mac, FHA, Ginnie Mae (which primarily guarantees

securities backed by FHA-insured loans), the 12 Federal Home Loan Banks (“FHLBs”), financial institutions,

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securities dealers, insurance companies, pension funds, investment funds and other investors. During 2008,

almost all of our competitors, other than Freddie Mac, FHA, Ginnie Mae and the FHLBs, ceased their

activities in the residential mortgage finance business, and we remained the largest single issuer of mortgagerelated securities in the secondary market in 2010.

We compete to acquire mortgage assets in the secondary market both for securitization into Fannie Mae MBS

and, to a significantly lesser extent, for our investment portfolio. We also compete for the issuance of

mortgage-related securities to investors. Competition in these areas is affected by many factors, including the

amount of residential mortgage loans offered for sale in the secondary market by loan originators and other

market participants, the nature of the residential mortgage loans offered for sale (for example, whether the

loans represent refinancings), the current demand for mortgage assets from mortgage investors, the interest

rate risk investors are willing to assume and the yields they will require as a result, and the credit risk and

prices associated with available mortgage investments.

Competition to acquire mortgage assets is significantly affected by pricing and eligibility standards. Changes

in our pricing and eligibility standards and in the eligibility standards of the mortgage insurance companies in

2008 and 2009 have reduced our acquisition of loans with higher LTV ratios and other high-risk features. In

addition, FHA has become the lower-cost option, or in some cases the only option, for loans with higher LTV

ratios.

During 2010, our primary competitors for the issuance of mortgage-related securities were Ginnie Mae and

Freddie Mac. Prior to the severe market downturn, there was a significant increase in the issuance of

mortgage-related securities by non-agency issuers, which caused a decrease in our share of the market for new

issuances of single-family mortgage-related securities from 2003 to 2006. Non-agency issuers, also referred to

as private-label issuers, are those issuers of mortgage-related securities other than agency issuers Fannie Mae,

Freddie Mac and Ginnie Mae. The subsequent mortgage and credit market disruption led to a significant

decline in the issuance of private-label mortgage-related securities. Accordingly, our market share significantly

increased during 2008 and has remained high since then. Our estimated market share of new single-family

mortgage-related securities issuances was 44.0% in 2010, compared with 46.3% in 2009, 45.4% in 2008, and

33.9% in 2007. Our estimated market share of 46.3% in 2009 includes $94.6 billion of whole loans held for

investment in our mortgage portfolio that were securitized into Fannie Mae MBS in the second quarter, but

retained in our mortgage portfolio and consolidated on our consolidated balance sheets. Excluding these

Fannie Mae MBS from the estimate of our market share, our estimated 2009 market share of new singlefamily mortgage-related securities issuances was 43.2%.

We also compete for low-cost debt funding with institutions that hold mortgage portfolios, including Freddie

Mac and the FHLBs.

Although we do not know the structure that long-term GSE reform will ultimately take, we expect that, if our

company continues, we will face more competition in the future. Please see “Business—Legislation and GSE

Reform” for a discussion of proposals for GSE reform, as well as recent legislative reform of the financial

services industry that could affect our business.

EMPLOYEES

As of January 31, 2011, we employed approximately 7,300 personnel, including full-time and part-time

employees, term employees and employees on leave.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We make available free of charge through our Web site our annual reports on Form 10-K, quarterly reports on

Form 10-Q, current reports on Form 8-K and all other SEC reports and amendments to those reports as soon

as reasonably practicable after we electronically file the material with, or furnish it to, the SEC. Our Web site

address is www.fanniemae.com. Materials that we file with the SEC are also available from the SEC’s Web

site, www.sec.gov. You may also request copies of any filing from us, at no cost, by calling the Fannie Mae

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Fixed-Income Securities Helpline at (800) 237-8627 or (202) 752-7115 or by writing to Fannie Mae,

Attention: Fixed-Income Securities, 3900 Wisconsin Avenue, NW, Area 2H-3S, Washington, DC 20016.

We are providing our Web site addresses and the Web site address of the SEC solely for your information.

Information appearing on our Web site or on the SEC’s Web site is not incorporated into this annual report on

Form 10-K.

FORWARD-LOOKING STATEMENTS

This report includes statements that constitute forward-looking statements within the meaning of Section 21E

of the Exchange Act. In addition, our senior management may from time to time make forward-looking

statements orally to analysts, investors, the news media and others. Forward-looking statements often include

words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “forecast,” “project,”

“would,” “should,” “could,” “may,” “prospects,” or similar words.

Among the forward-looking statements in this report are statements relating to:

• Our expectation that mortgage interest rates will increase in 2011, which will likely reduce the share of

refinance loans;

• The size of the declines nationwide in total single-family originations and mortgage debt outstanding that

we expect in 2011;

• Our expectation that the unemployment rate will decline modestly throughout 2011;

• Our expectations that our multifamily nonperforming assets will increase in certain geographic areas and

that we may continue to experience an increase in delinquencies and credit losses despite improving

market fundamentals;

• Our expectation that the multifamily sector will continue to improve modestly in 2011, even though

unemployment levels remain elevated;

• Our expectation that we will not earn profits in excess of our annual dividend obligation to Treasury for

the indefinite future;

• Our expectation that, if FHA continues to be the lower-cost option for some consumers, and in some

cases the only option, for loans with higher LTV ratios, our market share could be adversely impacted if

the market shifts away from refinance activity;

• Our expectation that the single-family loans we have acquired since 2009 will be profitable;

• Our estimate that, while single-family loans that we acquired from 2005 through 2008 will give rise to

additional credit losses that we have not yet realized, we have reserved for the substantial majority of the

remaining losses;

• Our expectation that our draws from Treasury for credit losses will abate and our draws will increasingly

be driven by dividend payments;

• Our belief that loans we have acquired since 2009 would become unprofitable if home prices declined by

more than 20% from their December 2010 levels over the next five years based on our home price index;

• Our expectations regarding whether loans we acquired in specific years prior to 2009 will be profitable or

unprofitable;

• Our expectation that defaults on loans we acquired from 2005 through 2008 and the resulting charge-offs

will occur over a period of years;

• Our expectation that it will take years before our REO inventory approaches pre-2008 levels;

• Our expectation that the number of our repurchase requests to seller/servicers will remain high in 2011;

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• Our expectation that we will realize as credit losses an estimated two-thirds of the fair value losses on

loans purchased out of MBS trusts that are reflected in our consolidated balance sheets, and recover the

remaining third through our consolidated statements of operations;

• Our belief that continued federal government support of our business and the financial markets, as well as

our status as a GSE, are essential to maintaining our access to debt funding;

• Our expectation that weakness in the housing and mortgage markets will continue in 2011;

• Our expectation that home sales are unlikely to increase until the unemployment rate improves;

• Our expectation that single-family default and severity rates and the level of single-family foreclosures

will remain high in 2011;

• Our expectation that multifamily charge-offs will remain commensurate with 2010 levels throughout

2011;

• Our expectation that our overall business volume in 2011 will be lower than in 2010;

• Our expectation that home prices on a national basis will decline slightly, with greater declines in some

geographic areas than others, before stabilizing later in 2011, and that the peak-to-trough home price

decline on a national basis will range between 21% and 26%;

• Our expectation that our credit-related expenses will remain high in 2011 and that our credit losses will

increase in 2011 as compared to 2010;

• Our expectation that we will continue to purchase loans from MBS trusts as they become delinquent for

four or more consecutive monthly payments subject to market conditions, servicer capacity, and other

constraints, including the limit on mortgage assets that we may own pursuant to the senior preferred stock

purchase agreement;

• Our expectation that revenues from our mortgage asset portfolio will decrease over time;

• Whether during conservatorship we will be limited to continuing our existing core business activities and

taking actions necessary to advance the goals of the conservatorship;

• Our not being a substantial buyer or seller of mortgages for our retained portfolio, except for purchases of

delinquent mortgages out of our guaranteed MBS pools;

• Our expectations that FHFA will request additional funds from Treasury on our behalf to ensure we

maintain a positive net worth and avoid mandatory receivership, that Treasury will provide such funds,

and that the dividends on Treasury’s investments in us will therefore increase;

• Our expectation that the Dodd-Frank Act will significantly change the regulation of the financial services

industry, directly affect our business, and may involve a significant operational burden;

• Our expectation that some or all of the conditions that negatively affected our ability to meet our 2010

single-family housing goals are likely to continue in 2011;

• Our expectation that the pause in foreclosures as a result of servicer foreclosure process deficiencies will

likely result in higher serious delinquency rates, longer foreclosure timelines and higher foreclosed

property expenses;

• Our expectation that we may continue to experience substantial changes in management, employees and

our business structure and practices;

• Our intention to maximize the value of nonperforming loans over time, utilizing loan modification,

foreclosure, repurchases and other preferable loss mitigation actions;

• Our estimation of the amount that we could realize over the fair value of our nonperforming loans

reported in our non-GAAP consolidated fair value balance sheet;

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• Our expectation that the current market premium portion of our current estimate of fair value will not

impact future Treasury draws, which is based on our intention not to have another party assume the credit

risk inherent in our book of business;

• Our expectation that our debt funding needs will decline in future periods as we reduce the size of our

mortgage portfolio in compliance with the requirements of the senior preferred stock purchase agreement;

• Our expectation that, due to the large size of our portfolio of mortgage-related securities, current market

conditions and the significant amount of distressed assets in our mortgage portfolio, it is unlikely that

there would be sufficient market demand for large amounts of these securities over a prolonged period of

time, particularly during a liquidity crisis;

• Our expectation that our acquisitions of Alt-A mortgage loans will continue to be minimal in future

periods and the percentage of the book of business attributable to Alt-A will decrease over time;

• Our belief that we have limited exposure to losses on home equity conversion mortgages, a type of

reverse mortgage insured by the federal government;

• Our expectation that serious delinquency rates will continue to be affected in the future by home price

changes, changes in other macroeconomic conditions and the extent to which borrowers with modified

loans again become delinquent in their payments;

• Our expectation that we will increase our use of foreclosure alternatives;

• Our belief that the performance of our workouts will be highly dependent on economic factors, such as

unemployment rates, household wealth and home prices;

• Our belief that one or more of our financial guarantor counterparties may not be able to fully meet their

obligations to us in the future;

• Our assumption that the guaranty fee income generated from future business activity will largely replace

guaranty fee income lost due to mortgage prepayments; and

• Our anticipated 2011 contributions to our benefit plans.

Forward-looking statements reflect our management’s expectations or predictions of future conditions, events

or results based on various assumptions and management’s estimates of trends and economic factors in the

markets in which we are active, as well as our business plans. They are not guarantees of future performance.

By their nature, forward-looking statements are subject to risks and uncertainties. Our actual results and

financial condition may differ, possibly materially, from the anticipated results and financial condition

indicated in these forward-looking statements. There are a number of factors that could cause actual

conditions, events or results to differ materially from those described in the forward-looking statements

contained in this report, including, but not limited to, the following: the uncertainty of our future; legislative

and regulatory changes affecting us; challenges we face in retaining and hiring qualified employees; the

deteriorated credit performance of many loans in our guaranty book of business; the conservatorship and its

effect on our business; the investment by Treasury and its effect on our business; adverse effects from

activities we undertake to support the mortgage market and help borrowers; limitations on our ability to access

the debt capital markets; further disruptions in the housing and credit markets; defaults by one or more

institutional counterparties; our reliance on mortgage servicers; deficiencies in servicer and law firm

foreclosure processes and the consequences of those deficiencies; guidance by the Financial Accounting

Standards Board (“FASB”); operational control weaknesses; our reliance on models; the level and volatility of

interest rates and credit spreads; changes in the structure and regulation of the financial services industry; and

those factors described in this report, including those factors described in “Risk Factors.”

Readers are cautioned to place forward-looking statements in this report or that we make from time to time

into proper context by carefully considering the factors discussed in “Risk Factors.” These forward-looking

statements are representative only as of the date they are made, and we undertake no obligation to update any

forward-looking statement as a result of new information, future events or otherwise, except as required under

the federal securities laws.

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Item 1A. Risk Factors

This section identifies specific risks that should be considered carefully in evaluating our business. The risks

described in “Risks Relating to Our Business” are specific to us and our business, while those described in

“Risks Relating to Our Industry” relate to the industry in which we operate. Refer to “MD&A—Risk

Management” for a more detailed description of the primary risks to our business and how we seek to manage

those risks.

In addition to the risks we discuss below, we face risks and uncertainties not currently known to us or that we

currently deem to be immaterial. The risks we face could materially adversely affect our business, results of

operations, financial condition, liquidity and net worth and could cause our actual results to differ materially

from our past results or the results contemplated by the forward-looking statements contained in this report.

RISKS RELATING TO OUR BUSINESS

The future of our company is uncertain.

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

be in existence, the extent of our role in the market, what form we will have, and what ownership interest, if

any, our current common and preferred stockholders will hold in us after the conservatorship is terminated.

On February 11, 2011, Treasury and HUD released a report to Congress on reforming America’s housing

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

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

institutions. The report does not state whether or how the existing infrastructure or human capital of Fannie

Mae may be used in the establishment of such a reformed system. The report emphasizes the importance of

proceeding with a careful transition plan and providing the necessary financial support to Fannie Mae and

Freddie Mac during the transition period.

During 2010, Congress held hearings on the future status of Fannie Mae and Freddie Mac, the Congressional

Budget Office released a study examining various alternatives for the future of the secondary mortgage

market, and legislative proposals were introduced that would substantially change our business structure and

the operation of our business. We expect hearings on GSE reform to continue in 2011 and additional proposals

to be discussed, including proposals that would result in a substantial change to our business structure or that

involve Fannie Mae’s liquidation or dissolution. We cannot predict the prospects for the enactment, timing or

content of legislative proposals regarding the future status of the GSEs. See “Business—Legislation and GSE

Reform” for more information about the Treasury report and Congressional proposals regarding reform of the

GSEs.

We expect FHFA to request additional funds from Treasury on our behalf to ensure we maintain a positive

net worth and avoid mandatory receivership. The dividends we must pay or that accrue on Treasury’s

investments are substantial and are expected to increase, and we likely will not be able to fund them

through net income.

FHFA must place us into receivership if the Director of FHFA makes a written determination that our assets

are less than our obligations (which we refer to as a net worth deficit) or if we have not been paying our

debts, in either case, for a period of 60 days after the filing deadline for our Form 10-K or Form-Q with the

SEC. We have had a net worth deficit as of the end of each of the last nine fiscal quarters, including as of

December 31, 2010. Treasury provided us with funds under the senior preferred stock purchase agreement to

cure the net worth deficits in prior periods before the end of the 60-day period, and we expect Treasury to do

the same with respect to the December 31, 2010 deficit. When Treasury provides the additional $2.6 billion

FHFA has requested on our behalf, the aggregate liquidation preference on the senior preferred stock will be

$91.2 billion, and will require an annualized dividend of $9.1 billion. The prospective $9.1 billion annual

dividend obligation exceeds our reported annual net income for each of the last nine years, in most cases by a

significant margin. Our ability to maintain a positive net worth has been and continues to be adversely

affected by market conditions. To the extent we have a negative net worth as of the end of future fiscal

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quarters, we expect that FHFA will request on our behalf additional funds from Treasury under the senior

preferred stock purchase agreement. Further funds from Treasury under the senior preferred stock purchase

agreement will increase the liquidation preference of and the dividends we owe on the senior preferred stock

and, therefore, we will need additional funds from Treasury in order to meet our dividend obligation to

Treasury.

In addition, beginning in 2011, the senior preferred stock purchase agreement requires that we pay a quarterly

commitment fee to Treasury. Although Treasury has waived this fee for the first quarter of 2011 due to

adverse conditions in the mortgage market and its belief that imposing the commitment fee would not generate

increased compensation for taxpayers, Treasury indicated that it would reevaluate whether to set the fee next

quarter. The aggregate liquidation preference and dividend obligations relating to the preferred stock also will

increase by the amount of any required dividend on the senior preferred stock that we fail to pay in cash and

by the amount of any required quarterly commitment fee on the senior preferred stock that we fail to pay. The

substantial dividend obligations and potentially substantial quarterly commitment fees on the senior preferred

stock, coupled with our effective inability to pay down draws under the senior preferred stock purchase

agreement, will continue to strain our financial resources and have an adverse impact on our results of

operations, financial condition, liquidity and net worth, both in the short and long term.

Our regulator is authorized or required to place us into receivership under specified conditions, which

would result in the liquidation of our assets. Amounts recovered from the liquidation may be insufficient to

cover our obligations or aggregate liquidation preference on our preferred stock, or provide any proceeds to

common shareholders.

Because of the weak economy, conditions in the housing market and our dividend obligation to Treasury, we

will continue to need funding from Treasury to avoid a trigger of mandatory receivership under the GSE Act.

In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other

reasons, including conditions that FHFA has already asserted existed at the time the former Director of FHFA

placed us into conservatorship.

A receivership would terminate the conservatorship. In addition to the powers FHFA has as our conservator,

the appointment of FHFA as our receiver would terminate all rights and claims that our shareholders and

creditors may have against our assets or under our charter arising from their status as shareholders or creditors,

except for their right to payment, resolution or other satisfaction of their claims as permitted under the GSE

Act. Unlike a conservatorship, the purpose of which is to conserve our assets and return us to a sound and

solvent condition, the purpose of a receivership is to liquidate our assets and resolve claims against us.

In the event of a liquidation of our assets, only after payment of the secured and unsecured claims against the

company (including repaying all outstanding debt obligations), the administrative expenses of the receiver and

the liquidation preference of the senior preferred stock, would any liquidation proceeds be available to repay

the liquidation preference on any other series of preferred stock. Finally, only after the liquidation preference

on all series of preferred stock is repaid would any liquidation proceeds be available for distribution to the

holders of our common stock. It is unlikely that there would be sufficient proceeds to repay the liquidation

preference of any series of our preferred stock or to make any distribution to the holders of our common

stock. To the extent we are placed into receivership and do not or cannot fulfill our guaranty to the holders of

our Fannie Mae MBS, the MBS holders could become unsecured creditors of ours with respect to claims made

under our guaranty.

Our business and results of operations may be materially adversely affected if we are unable to retain and

hire qualified employees.

Our business processes are highly dependent on the talents and efforts of our employees. The uncertainty of

our future and the public policy debate surrounding GSE reform, as well as limitations on employee

compensation, our inability to offer equity compensation and our conservatorship, have adversely affected and

may in the future adversely affect our ability to retain and recruit well-qualified employees. We face

competition from within the financial services industry and from businesses outside of the financial services

industry for qualified employees. An improving economy is likely to put additional pressures on turnover, as

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attractive opportunities become available to our employees. If we lose a significant number of employees and

are not able to quickly recruit and train new employees, it could negatively affect customer relationships and

goodwill, and could have a material adverse effect on our ability to do business and our results of operations.

In addition, management turnover may impair our ability to manage our business effectively. Since August

2008, we have had significant departures by various members of senior management, including two Chief

Executive Officers and two Chief Financial Officers. Further turnover in key management positions and

challenges in integrating new management could harm our ability to manage our business effectively and

ultimately adversely affect our financial performance.

Since 2008, we have experienced substantial deterioration in the credit performance of mortgage loans that

we own or that back our guaranteed Fannie Mae MBS, which we expect to continue and result in

additional credit-related expenses.

We are exposed to mortgage credit risk relating to the mortgage loans that we hold in our investment portfolio

and the mortgage loans that back our guaranteed Fannie Mae MBS. When borrowers fail to make required

payments of principal and interest on their mortgage loans, we are exposed to the risk of credit losses and

credit-related expenses.

While serious delinquency rates improved in recent months, conditions in the housing market contributed to a

deterioration in the credit performance of our book of business, negatively impacting serious delinquency

rates, default rates and average loan loss severity on the mortgage loans we hold or that back our guaranteed

Fannie Mae MBS, as well as increasing our inventory of foreclosed properties. Increases in delinquencies,

default rates and loss severity cause us to experience higher credit-related expenses. The credit performance of

our book of business has also been negatively affected by the extent and duration of the decline in home

prices and high unemployment. These credit performance trends have been notable in certain of our higher

risk loan categories, states and vintages. Home price declines, adverse market conditions and continuing high

levels of unemployment also have affected the credit performance of our broader book of business. Further,

home price declines have resulted in a large number of borrowers with “negative equity” in their properties

(that is, they owe more on their mortgage loans than their houses are worth), which increases the likelihood

that either these borrowers will strategically default on their mortgage loans even if they have the ability to

continue to pay the loans or that their homes will be sold in a “short sale” for significantly less than the

unpaid amount of the loans. We present detailed information about the risk characteristics of our conventional

single-family guaranty book of business in “MD&A—Risk Management—Credit Risk Management—

Mortgage Credit Risk Management,” and we present detailed information on our 2010 credit-related expenses,

credit losses and results of operations in “MD&A—Consolidated Results of Operations.”

Adverse credit performance trends may resume, particularly if we experience further national and regional

declines in home prices, weak economic conditions and high unemployment.

We expect further losses and write-downs relating to our investment securities.

We experienced significant fair value losses and other-than-temporary impairment write-downs relating to our

investment securities in 2008 and recorded significant other-than-temporary impairment write-downs of some

of our available-for-sale securities in 2009. A substantial portion of these fair value losses and write-downs

related to our investments in private-label mortgage-related securities backed by Alt-A and subprime mortgage

loans and, in the case of fair value losses, our investments in commercial mortgage-backed securities

(“CMBS”) due to the decline in home prices and the weak economy. We expect to experience additional

other-than-temporary impairment write-downs of our investments in private-label mortgage-related securities,

including those that continue to be AAA-rated. See “MD&A—Consolidated Balance Sheet Analysis—

Investments in Mortgage-Related Securities—Investments in Private-Label Mortgage-Related Securities” for

detailed information on our investments in private-label mortgage-related securities backed by Alt-A and

subprime mortgage loans.

If the market for securities we hold in our investment portfolio is not liquid, we must use a greater amount of

management judgment to value these securities. Later valuations and any price we ultimately would realize if

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we were to sell these securities could be materially lower than the estimated fair value at which we carry them

on our balance sheet.

Any of the above factors could require us to record additional write-downs in the value of our investment

portfolio, which could have a material adverse effect on our business, results of operations, financial condition,

liquidity and net worth.

Our business activities are significantly affected by the conservatorship and the senior preferred stock

purchase agreement.

We are currently under the control of our conservator, FHFA, and we do not know when or how the

conservatorship will be terminated. As conservator, FHFA can direct us to enter into contracts or enter into

contracts on our behalf, and generally has the power to transfer or sell any of our assets or liabilities. In

addition, our directors do not have any duties to any person or entity except to the conservator. Accordingly,

our directors are not obligated to consider the interests of the company, the holders of our equity or debt

securities or the holders of Fannie Mae MBS in making or approving a decision unless specifically directed to

do so by the conservator.

The conservator has determined that while we are in conservatorship, we will be limited to continuing our

existing core business activities and taking actions necessary to advance the goals of the conservatorship. In

view of the conservatorship and the reasons stated for its establishment, it is likely that our business model

and strategic objectives will continue to change, possibly significantly, including in pursuit of our public

mission and other non-financial objectives. Among other things, we could experience significant changes in

the size, growth and characteristics of our guarantor and investment activities, and we could further change

our operational objectives, including our pricing strategy in our core mortgage guaranty business. Accordingly,

our strategic and operational focus going forward may not be consistent with the investment objectives of our

investors. In addition, we may be directed to engage in activities that are operationally difficult, costly to

implement or unprofitable.

The senior preferred stock purchase agreement with Treasury includes a number of covenants that significantly

restrict our business activities. We cannot, without the prior written consent of Treasury: pay dividends (except

on the senior preferred stock); sell, issue, purchase or redeem Fannie Mae equity securities; sell, transfer, lease

or otherwise dispose of assets in specified situations; engage in transactions with affiliates other than on arm’slength terms or in the ordinary course of business; issue subordinated debt; or incur indebtedness that would

result in our aggregate indebtedness exceeding 120% of the amount of mortgage assets we are allowed to own.

In deciding whether to consent to any request for approval it receives from us under the agreement, Treasury

has the right to withhold its consent for any reason and is not required by the agreement to consider any

particular factors, including whether or not management believes that the transaction would benefit the

company. Pursuant to the senior preferred stock purchase agreement, the maximum allowable amount of

mortgage assets we may own on December 31, 2010 is $810 billion. (Our mortgage assets were approximately

$788.8 billion as of that date.) On December 31, 2011, and each December 31 thereafter, our mortgage assets

may not exceed 90% of the maximum allowable amount that we were permitted to own as of December 31 of

the immediately preceding calendar year. The maximum allowable amount is reduced annually until it reaches

$250 billion. This limit on the amount of mortgage assets we are permitted to hold could constrain the amount

of delinquent loans we purchase from single-family MBS trusts, which could increase our costs.

We discuss the powers of the conservator, the terms of the senior preferred stock purchase agreement, and

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

may adversely affect our business, results of operations, financial condition, liquidity and net worth.

The conservatorship and investment by Treasury have had, and will continue to have, a material adverse

effect on our common and preferred shareholders.

We do not know when or how the conservatorship will be terminated. Moreover, even if the conservatorship is

terminated, we remain subject to the terms of the senior preferred stock purchase agreement, senior preferred

stock and warrant, which can only be cancelled or modified by mutual consent of Treasury and the

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conservator. The conservatorship and investment by Treasury have had, and will continue to have, material

adverse effects on our common and preferred shareholders, including the following:

No voting rights during conservatorship. The rights and powers of our shareholders are suspended during the

conservatorship. The conservatorship has no specified termination date. During the conservatorship, our

common shareholders do not have the ability to elect directors or to vote on other matters unless the

conservator delegates this authority to them.

Dividends to common and preferred shareholders, other than to Treasury, have been eliminated. Under the

terms of the senior preferred stock purchase agreement, dividends may not be paid to common or preferred

shareholders (other than on the senior preferred stock) without the consent of Treasury, regardless of whether

we are in conservatorship.

Liquidation preference of senior preferred stock will increase, likely substantially. The senior preferred stock

ranks prior to our common stock and all other series of our preferred stock, as well as any capital stock we

issue in the future, as to both dividends and distributions upon liquidation. Accordingly, if we are liquidated,

the senior preferred stock is entitled to its then-current liquidation preference, plus any accrued but unpaid

dividends, before any distribution is made to the holders of our common stock or other preferred stock. As of

December 31, 2010, the liquidation preference on the senior preferred stock was $88.6 billion; however, it will

increase to $91.2 billion when Treasury provides the additional $2.6 billion FHFA has already requested on

our behalf. The liquidation preference could increase substantially as we draw on Treasury’s funding

commitment, if we do not pay dividends owed on the senior preferred stock or if we do not pay the quarterly

commitment fee under the senior preferred stock purchase agreement. If we are liquidated, it is unlikely that

there would be sufficient funds remaining after payment of amounts to our creditors and to Treasury as holder

of the senior preferred stock to make any distribution to holders of our common stock and other preferred

stock.

Exercise of the Treasury warrant would substantially dilute investment of current shareholders. If Treasury

exercises its warrant to purchase shares of our common stock equal to 79.9% of the total number of shares of

our common stock outstanding on a fully diluted basis, the ownership interest in the company of our then

existing common shareholders will be substantially diluted, and we would thereafter have a controlling

shareholder.

No longer managed for the benefit of shareholders. Because we are in conservatorship, we are no longer

managed with a strategy to maximize shareholder returns.

For additional description of the restrictions on us and the risks to our shareholders, see “Business—

Conservatorship and Treasury Agreements.”

Efforts we are required or asked to undertake by FHFA, other government agencies or Congress in pursuit

of providing liquidity, stability and affordability to the mortgage market and providing assistance to

struggling homeowners, or in pursuit of other goals, may adversely affect our business, results of

operations, financial condition, liquidity and net worth.

Prior to the conservatorship, our business was managed with a strategy to maximize shareholder returns, while

fulfilling our mission. Our conservator has directed us to focus primarily on minimizing our credit losses from

delinquent mortgages and providing assistance to struggling homeowners to help them remain in their homes.

As a result, we may continue to take a variety of actions designed to address this focus that could adversely

affect our economic returns, possibly significantly, such as: reducing our guaranty fees and modifying loans to

extend the maturity, lower the interest rate or defer or forgive principal owed by the borrower. These activities

may have short- and long-term adverse effects on our business, results of operations, financial condition,

liquidity and net worth. Other agencies of the U.S. government or Congress also may ask us to undertake

significant efforts to support the housing and mortgage markets, as well as struggling homeowners. For

example, under the Administration’s Making Home Affordable Program, we are offering HAMP. We have

incurred substantial costs in connection with the program, as we discuss in “MD&A—Consolidated Results of

Operations—Financial Impact of the Making Home Affordable Program on Fannie Mae.”

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We may be unable to meet our housing goals and duty to serve requirements, and actions we take to meet

those requirements may adversely affect our business, results of operations, financial condition, liquidity

and net worth.

To meet our housing goals obligations, a portion of the mortgage loans we acquire must be for low- and verylow income families, families in low-income census tracts and moderate-income families in minority census

tracts or designated disaster areas. In addition, when a final duty-to-serve rule is issued, we will have a duty to

serve three underserved markets: manufactured housing, affordable housing preservation and rural areas. We

may take actions to meet these obligations that could increase our credit losses and credit-related expenses. If

we fail to meet our housing goals in a given year and FHFA finds that they were feasible, or if we fail to

comply with our duty to serve requirements, we may become subject to a housing plan that could require us

to take additional steps that could have an adverse effect on our financial condition. The housing plan must

describe the actions we would take to meet the goals and/or duty to serve in the next calendar year and be

approved by FHFA. With respect to our housing goals, the potential penalties for failure to comply with

housing plan requirements are a cease-and-desist order and civil money penalties.

Mortgage market conditions during 2010 negatively affected our ability to meet our goals. These conditions

included a reduction in single-family borrowing by low-income purchasers following the expiration of the

home buyer tax credits, an increase in the share of mortgages made to moderate-income borrowers due to low

interest rates, continuing high unemployment, strengthened underwriting and eligibility standards, increased

standards of private mortgage insurers and the increased role of FHA in acquiring goals-qualifying mortgage

loans. Some or all of these conditions are likely to continue in 2011. We cannot predict the impact that market

conditions during 2011 will have on our ability to meet our 2011 housing goals and duty to serve

requirements.

For more information about our housing goals and duty to serve requirements, as well as our 2010 housing

goals performance, please see “Business—Our Charter and Regulation of Our Activities—Housing Goals and

Duty to Serve Underserved Markets.”

Limitations on our ability to access the debt capital markets could have a material adverse effect on our

ability to fund our operations and generate net interest income.

Our ability to fund our business depends primarily on our ongoing access to the debt capital markets. Our

level of net interest income depends on how much lower our cost of funds is compared to what we earn on

our mortgage assets. Market concerns about matters such as the extent of government support for our business

and the future of our business (including future profitability, future structure, regulatory actions and GSE

status) could cause a severe negative effect on our access to the unsecured debt markets, particularly for longterm debt. We believe that our ability in 2010 to issue debt of varying maturities at attractive pricing resulted

from federal government support of us and the financial markets, including the Federal Reserve’s purchases of

our debt and MBS. As a result, we believe that our status as a GSE and continued federal government support

of our business is essential to maintaining our access to debt funding. Changes or perceived changes in the

government’s support of us or the markets could have a material adverse effect on our ability to fund our

operations. On February 11, 2011, Treasury and HUD released a report to Congress on reforming America’s

housing finance market. The report provides that the Administration will work with FHFA to determine the

best way to responsibly wind down both Fannie Mae and Freddie Mac. The report emphasizes the importance

of proceeding with a careful transition plan and providing the necessary financial support to Fannie Mae and

Freddie Mac during the transition period. Please see “MD&A—Liquidity and Capital Management—Liquidity

Management—Debt Funding—Fannie Mae Debt Funding Activity” for a more complete discussion of actions

taken by the federal government to support us and the financial markets. However, there can be no assurance

that the government will continue to support us or that our current level of access to debt funding will

continue.

In addition, future changes or disruptions in the financial markets could significantly change the amount, mix

and cost of funds we obtain, as well as our liquidity position. If we are unable to issue both short- and longterm debt securities at attractive rates and in amounts sufficient to operate our business and meet our

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obligations, it likely would interfere with the operation of our business and have a material adverse effect on

our liquidity, results of operations, financial condition and net worth.

Our liquidity contingency plans may be difficult or impossible to execute during a liquidity crisis.

We believe that our liquidity contingency plans may be difficult or impossible to execute during a liquidity

crisis. As a result if we cannot access the unsecured debt markets, our ability to repay maturing indebtedness

and fund our operations could be significantly impaired. If adverse market conditions resulted in our being

unable to access the unsecured debt markets, our alternative sources of liquidity consist of our cash and other

investments portfolio and the unencumbered mortgage assets in our mortgage portfolio.

We believe that the amount of mortgage-related assets that we could successfully borrow against or sell in the

event of a liquidity crisis or significant market disruption is substantially lower than the amount of mortgagerelated assets we hold. Due to the large size of our portfolio of mortgage assets, current market conditions and

the significant amount of distressed assets in our mortgage portfolio, it is unlikely that there would be

sufficient market demand for large amounts of these assets over a prolonged period of time, particularly

during a liquidity crisis, which could limit our ability to borrow against or sell these assets.

To the extent that we would be able to obtain funding by pledging or selling mortgage-related securities as

collateral, we anticipate that a discount would be applied that would reduce the value assigned to those

securities. Depending on market conditions at the time, this discount would result in proceeds significantly

lower than the current market value of these securities and would thereby reduce the amount of financing we

would obtain. In addition, our primary source of collateral is Fannie Mae MBS that we own. In the event of a

liquidity crisis in which the future of our company is uncertain, counterparties may be unwilling to accept

Fannie Mae MBS as collateral. As a result, we may not be able to sell or borrow against these securities in

sufficient amounts to meet our liquidity needs.

A decrease in the credit ratings on our senior unsecured debt would likely have an adverse effect on our

ability to issue debt on reasonable terms and trigger additional collateral requirements.

Our borrowing costs and our access to the debt capital markets depend in large part on the high credit ratings

on our senior unsecured debt. Credit ratings on our debt are subject to revision or withdrawal at any time by

the rating agencies. Actions by governmental entities impacting the support we receive from Treasury could

adversely affect the credit ratings on our senior unsecured debt. The reduction in our credit ratings would

likely increase our borrowing costs, limit our access to the capital markets and trigger additional collateral

requirements under our derivatives contracts and other borrowing arrangements. It may also reduce our

earnings and materially adversely affect our liquidity, our ability to conduct our normal business operations,

our financial condition and results of operations. Our credit ratings and ratings outlook are included in

“MD&A—Liquidity and Capital Management—Liquidity Management—Credit Ratings.”

Deterioration in the credit quality of, or defaults by, one or more of our institutional counterparties could

result in financial losses, business disruption and decreased ability to manage risk.

We face the risk that one or more of our institutional counterparties may fail to fulfill their contractual

obligations to us. Unfavorable market conditions since 2008 have adversely affected the liquidity and financial

condition of our institutional counterparties. Our primary exposures to institutional counterparty risk are with

mortgage seller/servicers that service the loans we hold in our mortgage portfolio or that back our Fannie Mae

MBS; seller/servicers that are obligated to repurchase loans from us or reimburse us for losses in certain

circumstances; third-party providers of credit enhancement on the mortgage assets that we hold in our

mortgage portfolio or that back our Fannie Mae MBS, including mortgage insurers, lenders with risk sharing

arrangements and financial guarantors; issuers of securities held in our cash and other investments portfolio;

and derivatives counterparties.

We may have multiple exposures to one counterparty as many of our counterparties provide several types of

services to us. For example, our lender customers or their affiliates also act as derivatives counterparties,

mortgage servicers, custodial depository institutions or document custodians. Accordingly, if one of these

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counterparties were to become insolvent or otherwise default on its obligations to us, it could harm our

business and financial results in a variety of ways.

An institutional counterparty may default in its obligations to us for a number of reasons, such as changes in

financial condition that affect its credit rating, a reduction in liquidity, operational failures or insolvency. A

number of our institutional counterparties are currently experiencing financial difficulties that may negatively

affect the ability of these counterparties to meet their obligations to us and the amount or quality of the

products or services they provide to us. Counterparty defaults or limitations on their ability to do business with

us could result in significant financial losses or hamper our ability to do business, which would adversely

affect our business, results of operations, financial condition, liquidity and net worth.

We routinely execute a high volume of transactions with counterparties in the financial services industry.

Many of the transactions we engage in with these counterparties expose us to credit risk relating to the

possibility of a default by our counterparties. In addition, to the extent these transactions are secured, our

credit risk may be exacerbated to the extent that the collateral we hold cannot be realized or can be liquidated

only at prices too low to recover the full amount of the loan or derivative exposure. We have exposure to these

financial institutions in the form of unsecured debt instruments and derivatives transactions. As a result, we

could incur losses relating to defaults under these instruments or relating to impairments to the carrying value

of our assets represented by these instruments. These losses could materially and adversely affect our business,

results of operations, financial condition, liquidity and net worth.

We depend on our ability to enter into derivatives transactions in order to manage the duration and

prepayment risk of our mortgage portfolio. If we lose access to our derivatives counterparties, it could

adversely affect our ability to manage these risks, which could have a material adverse effect on our business,

results of operations, financial condition, liquidity and net worth.

Deterioration in the credit quality of, or defaults by, one or more of our mortgage insurer counterparties

could result in nonpayment of claims under mortgage insurance policies, business disruptions and

increased concentration risk.

We rely heavily on mortgage insurers to provide insurance against borrower defaults on conventional singlefamily mortgage loans with LTV ratios over 80% at the time of acquisition. The current weakened financial

condition of our mortgage insurer counterparties creates a significant risk that these counterparties will fail to

fulfill their obligations to reimburse us for claims under insurance policies. Since January 1, 2009, the insurer

financial strength ratings of all of our major mortgage insurer counterparties have been downgraded to reflect

their weakened financial condition, in some cases more than once. One of our mortgage insurer counterparties

ceased issuing commitments for new mortgage insurance in 2008, and, under an order received from its

regulator, is now paying all valid claims 60% in cash and 40% by the creation of a deferred payment

obligation, which may be paid in the future.

A number of our mortgage insurers publicly disclosed that they have exceeded or might exceed the stateimposed risk-to-capital limits under which they operate and they might not have access to sufficient capital to

continue to write new business in accordance with state regulatory requirements. In addition, a number of our

mortgage insurers have received waivers from their regulators regarding state-imposed risk-to-capital limits.

However, these waivers are temporary. Some mortgage insurers have been exploring corporate restructurings,

intended to provide relief from risk-to-capital limits in certain states. A restructuring plan that would involve

contributing capital to a subsidiary would result in less liquidity available to its parent company to pay claims

on its existing book of business and an increased risk that its parent company will not pay its claims in full in

the future.

If mortgage insurers are not able to raise capital and exceed their risk-to-capital limits, they will likely be

forced into run-off or receivership unless they can secure a waiver from their state regulator. This would

increase the risk that they will fail to pay our claims under insurance policies, and could also cause the quality

and speed of their claims processing to deteriorate. If our assessment of one or more of our mortgage insurer

counterparty’s ability to fulfill its obligations to us worsens and our internal credit rating for the insurer is

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further downgraded, it could result in a significant increase in our loss reserves and a significant increase in

the fair value of our guaranty obligations.

Many mortgage insurers stopped insuring new mortgages with higher loan-to-value ratios or with lower

borrower credit scores or on select property types, which has contributed to the reduction in our business

volumes for high loan-to-value ratio loans. As our charter generally requires us to obtain credit enhancement

on conventional single-family mortgage loans with loan-to-value ratios over 80% at the time of purchase, an

inability to find suitable credit enhancement may inhibit our ability to pursue new business opportunities, meet

our housing goals and otherwise support the housing and mortgage markets. For example, where mortgage

insurance or other credit enhancement is not available, we may be hindered in our ability to refinance loans

into more affordable loans. In addition, access to fewer mortgage insurer counterparties will increase our

concentration risk with the remaining mortgage insurers in the industry.

The loss of business volume from any one of our key lender customers could adversely affect our business

and result in a decrease in our revenues.

Our ability to generate revenue from the purchase and securitization of mortgage loans depends on our ability

to acquire a steady flow of mortgage loans from the originators of those loans. We acquire most of our

mortgage loans through mortgage purchase volume commitments that are negotiated annually or semiannually

with lender customers and that establish a minimum level of mortgage volume that these customers will

deliver to us. We acquire a significant portion of our mortgage loans from several large mortgage lenders.

During 2010, our top five lender customers, in the aggregate, accounted for approximately 62% of our singlefamily business volume, with three of our customers accounting for greater than 52% of our single-family

business volume. Accordingly, maintaining our current business relationships and business volumes with our

top lender customers is critical to our business.

The mortgage industry has been consolidating and a decreasing number of large lenders originate most singlefamily mortgages. The loss of business from any one of our major lender customers could adversely affect our

revenues and the liquidity of Fannie Mae MBS, which in turn could have an adverse effect on their market

value. In addition, as we become more reliant on a smaller number of lender customers, our negotiating

leverage with these customers decreases, which could diminish our ability to price our products optimally.

In addition, many of our lender customers are experiencing, or may experience in the future, financial and

liquidity problems that may affect the volume of business they are able to generate. Many of our lender

customers also strengthened their lending criteria, which reduced their loan volume. If any of our key lender

customers significantly reduces the volume or quality of mortgage loans that the lender delivers to us or that

we are willing to buy from them, we could lose significant business volume that we might be unable to

replace, which could adversely affect our business and result in a decrease in our revenues. Our demands that

our lender customers repurchase or compensate us for losses on loans that do not meet our underwriting and

eligibility standards may strain our relationships with our lender customers and may also result in our

customers reducing the volume of loans they provide us. A significant reduction in the volume of mortgage

loans that we securitize could reduce the liquidity of Fannie Mae MBS, which in turn could have an adverse

effect on their market value.

Our reliance on third parties to service our mortgage loans may impede our efforts to keep people in their

homes, as well as the re-performance rate of loans we modify.

Mortgage servicers, or their agents and contractors, typically are the primary point of contact for borrowers as

we delegate servicing responsibilities to them. We rely on these mortgage servicers to identify and contact

troubled borrowers as early as possible, to assess the situation and offer appropriate options for resolving the

problem and to successfully implement a solution. The demands placed on experienced mortgage loan

servicers to service delinquent loans have increased significantly across the industry, straining servicer

capacity. The Making Home Affordable Program is also impacting servicer resources. To the extent that

mortgage servicers are hampered by limited resources or other factors, they may not be successful in

conducting their servicing activities in a manner that fully accomplishes our objectives within the timeframe

we desire. Further, our servicers have advised us that they have not been able to reach many of the borrowers

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who may need help with their mortgage loans even when repeated efforts have been made to contact the

borrower.

For these reasons, our ability to actively manage the troubled loans that we own or guarantee, and to

implement our homeownership assistance and foreclosure prevention efforts quickly and effectively, may be

limited by our reliance on our mortgage servicers. Our inability to effectively manage these loans and

implement these efforts could have a material adverse effect on our business, results of operations and

financial condition.

Deficiencies in servicer and law firm foreclosure processes and the resulting foreclosure pause may cause

higher credit losses and credit-related expenses.

A number of our single-family mortgage servicers temporarily halted foreclosures in the fall of 2010 in some

or all states after discovering deficiencies in their processes and the processes of their lawyers and other

service providers relating to the execution of affidavits in connection with the foreclosure process. This

foreclosure pause could expand to additional servicers and states, and possibly to all or substantially all of our

loans in the foreclosure process. Some servicers have lifted the foreclosure pause in some jurisdictions, while

continuing the pause in others.

Although we cannot predict the ultimate impact of this foreclosure pause on our business at this time, we

expect the pause will likely result in higher serious delinquency rates, longer foreclosure timelines and higher

foreclosed property expenses. This foreclosure pause could also negatively affect the value of our REO

inventory and the severity of our losses on foreclosed properties. In addition, this foreclosure pause could

negatively affect housing market conditions and delay the recovery of the housing market. As a result, we

expect this foreclosure pause will likely result in higher credit losses and credit-related expenses. This

foreclosure pause may also negatively affect the value of the private-label securities we hold and result in

additional impairments on these securities.

The foreclosure process deficiencies have generated significant concern and are currently being investigated by

various government agencies and the attorneys general of all fifty states. These foreclosure process

deficiencies could lead to expensive or time-consuming new regulation, such as new rules applicable to the

foreclosure process recently issued by courts in some states. In addition, the failure of our servicers or a law

firm to apply prudent and effective process controls and to comply with legal and other requirements in the

foreclosure process poses operational, reputational and legal risks for us. As a result, depending on the

duration and extent of the foreclosure pause and the foreclosure process deficiencies, these matters could have

a material adverse effect on our business.

Challenges to the MERS» System could pose counterparty, operational, reputational and legal risks for us.

MERSCORP, Inc. is a privately held company that maintains an electronic registry (the “MERS System”) that

tracks servicing rights and ownership of loans in the United States. Mortgage Electronic Registration Systems,

Inc. (“MERS”), a wholly owned subsidiary of MERSCORP, Inc., can serve as a nominee for the owner of a

mortgage loan and, in that role, become the mortgagee of record for the loan in local land records. Fannie

Mae seller/servicers may choose to use MERS as a nominee; however, we have prohibited servicers from

initiating foreclosures on Fannie Mae loans in MERS’s name. Approximately half of the loans we own or

guarantee are registered in MERS’s name and the related servicing rights are tracked in the MERS System.

The MERS System is widely used by participants in the mortgage finance industry. Along with a number of

other organizations in the mortgage finance industry, we are a shareholder of MERSCORP, Inc.

Several legal challenges have been made disputing MERS’s legal standing to initiate foreclosures and/or act as

nominee in local land records. These challenges have focused public attention on MERS and on how loans are

recorded in local land records. As a result, these challenges could negatively affect MERS’s ability to serve as

the mortgagee of record in some jurisdictions. In addition, where MERS is the mortgagee of record, it must

execute assignments of mortgages, affidavits and other legal documents in connection with foreclosure

proceedings. As a result, investigations by governmental authorities and others into the servicer foreclosure

process deficiencies discussed above may impact MERS. Failures by MERS to apply prudent and effective

process controls and to comply with legal and other requirements could pose counterparty, operational,

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reputational and legal risks for us. If investigations or new regulation or legislation restricts servicers’ use of

MERS, our counterparties may be required to record all mortgage transfers in land records, incurring

additional costs and time in the recordation process. At this time, we cannot predict the ultimate outcome of

these legal challenges to MERS or the impact on our business, results of operations and financial condition.

Changes in accounting standards can be difficult to predict and can materially impact how we record and

report our financial results.

Our accounting policies and methods are fundamental to how we record and report our financial condition and

results of operations. From time to time, FASB changes the financial accounting and reporting standards that

govern the preparation of our financial statements. In addition, those who set or interpret accounting standards

may amend or even reverse their previous interpretations or positions on how these standards should be

applied. These changes can be difficult to predict and expensive to implement, can divert management’s

attention from other matters, and can materially impact how we record and report our financial condition and

results of operations.

Material weaknesses in our internal control over financial reporting could result in errors in our reported

results or disclosures that are not complete or accurate.

Management has determined that, as of the date of this filing, we have ineffective disclosure controls and

procedures and a material weakness in our internal control over financial reporting. In addition, our

independent registered public accounting firm, Deloitte & Touche LLP, has expressed an adverse opinion on

our internal control over financial reporting because of the material weakness. Our ineffective disclosure

controls and procedures and material weakness could result in errors in our reported results or disclosures that

are not complete or accurate, which could have a material adverse effect on our business and operations.

Our material weakness relates specifically to the impact of the conservatorship on our disclosure controls and

procedures. Because we are under the control of FHFA, some of the information that we may need to meet

our disclosure obligations may be solely within the knowledge of FHFA. As our conservator, FHFA has the

power to take actions without our knowledge that could be material to our shareholders and other

stakeholders, and could significantly affect our financial performance or our continued existence as an ongoing

business. Because FHFA currently functions as both our regulator and our conservator, there are inherent

structural limitations on our ability to design, implement, test or operate effective disclosure controls and

procedures relating to information within FHFA’s knowledge. As a result, we have not been able to update our

disclosure controls and procedures in a manner that adequately ensures the accumulation and communication

to management of information known to FHFA that is needed to meet our disclosure obligations under the

federal securities laws, including disclosures affecting our financial statements. Given the structural nature of

this material weakness, it is likely that we will not remediate this weakness while we are under

conservatorship. See “Controls and Procedures” for further discussion of management’s conclusions on our

disclosure controls and procedures and internal control over financial reporting.

Operational control weaknesses could materially adversely affect our business, cause financial losses and

harm our reputation.

Shortcomings or failures in our internal processes, people or systems could have a material adverse effect on

our risk management, liquidity, financial statement reliability, financial condition and results of operations;

disrupt our business; and result in legislative or regulatory intervention, liability to customers and financial

losses or damage to our reputation, including as a result of our inadvertent dissemination of confidential or

inaccurate information. For example, our business is dependent on our ability to manage and process, on a

daily basis, an extremely large number of transactions across numerous and diverse markets and in an

environment in which we must make frequent changes to our core processes in response to changing external

conditions. These transactions are subject to various legal and regulatory standards.

We rely upon business processes that are highly dependent on people, legacy technology and the use of

numerous complex systems and models to manage our business and produce books and records upon which

our financial statements are prepared. This reliance increases the risk that we may be exposed to financial,

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reputational or other losses as a result of inadequately designed internal processes or systems, or failed

execution of our systems. Our operational risk management efforts are aimed at reducing this risk.

We continue to implement our operational risk management framework, which consists of a set of integrated

processes, tools and strategies designed to support the identification, assessment, mitigation and control, and

reporting and monitoring of operational risk. We also have made a number of changes in our structure,

business focus and operations during the past two years, as well as changes to our risk management processes,

to keep pace with changing external conditions. These changes, in turn, have necessitated modifications to or

development of new business models, processes, systems, policies, standards and controls. While we believe

that the steps we have taken and are taking to enhance our technology and operational controls and

organizational structure will help identify, assess, mitigate, control and monitor operational risk, our

implementation of our operational risk management framework may not be effective to manage these risks and

may create additional operational risk as we execute these enhancements.

In addition, we have experienced, and expect we may continue to experience, substantial changes in

management, employees and our business structure and practices since the conservatorship began. These

changes could increase our operational risk and result in business interruptions and financial losses. In

addition, due to events that are wholly or partially beyond our control, employees or third parties could engage

in improper or unauthorized actions, or our systems could fail to operate properly, which could lead to

financial losses, business disruptions, legal and regulatory sanctions and reputational damage.

In many cases, our accounting policies and methods, which are fundamental to how we report our financial

condition and results of operations, require management to make judgments and estimates about matters

that are inherently uncertain. Management also relies on models in making these estimates.

Our accounting policies and methods are fundamental to how we record and report our financial condition and

results of operations. Our management must exercise judgment in applying many of these accounting policies

and methods so that these policies and methods comply with GAAP and reflect management’s judgment of the

most appropriate manner to report our financial condition and results of operations. In some cases,

management must select the appropriate accounting policy or method from two or more alternatives, any of

which might be reasonable under the circumstances but might affect the amounts of assets, liabilities, revenues

and expenses that we report. See “Note 1, Summary of Significant Accounting Policies” for a description of

our significant accounting policies.

We have identified three accounting policies as critical to the presentation of our financial condition and

results of operations. These accounting policies are described in “MD&A—Critical Accounting Policies and

Estimates.” We believe these policies are critical because they require management to make particularly

subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that

materially different amounts would be reported under different conditions or using different assumptions. Due

to the complexity of these critical accounting policies, our accounting methods relating to these policies

involve substantial use of models. Models are inherently imperfect predictors of actual results because they are

based on assumptions, including assumptions about future events. Our models may not include assumptions

that reflect very positive or very negative market conditions and, accordingly, our actual results could differ

significantly from those generated by our models. As a result of the above factors, the estimates that we use to

prepare our financial statements, as well as our estimates of our future results of operations, may be

inaccurate, potentially significantly.

Failure of our models to produce reliable results may adversely affect our ability to manage risk and make

effective business decisions.

We make significant use of business and financial models to measure and monitor our risk exposures and to

manage our business. For example, we use models to measure and monitor our exposures to interest rate,

credit and market risks, and to forecast credit losses. The information provided by these models is used in

making business decisions relating to strategies, initiatives, transactions, pricing and products.

Models are inherently imperfect predictors of actual results because they are based on historical data available

to us and our assumptions about factors such as future loan demand, borrower behavior, creditworthiness,

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home price trends and other factors that may overstate or understate future experience. Models can produce

unreliable results for a number of reasons, including invalid or incorrect assumptions, incorrect computer

coding, flaws in data or data use, inappropriate application of a model to products or events outside the

model’s intended use and, fundamentally, the inherent limitations of relying on historical data to predict future

results, especially in the face of unprecedented events. Adjustments to models or model results are sometimes

required to align the results with management’s best judgment.

We continually receive new economic and mortgage market data, such as housing starts and sales and home

price changes. Our critical accounting estimates, such as our loss reserves and other-than-temporary

impairments, are subject to change, sometimes significantly, due to the nature and magnitude of changes in

market conditions. However, there is generally a lag between the availability of this market information and

the preparation of our financial statements. When market conditions change quickly and in unforeseen ways,

there is an increased risk that the assumptions and inputs reflected in our models are not representative of the

most recent market conditions.

In addition, we may take actions that require us to rely on management judgment and adjustments to our

models if circumstances preclude effective execution of our standard control processes required for a formal

model update. These control processes include model research, testing, independent validation and

implementation. In a rapidly changing environment, it may not be possible to update existing models quickly

enough to ensure they properly account for the most recently available data and events. Model adjustments are

a means of mitigating circumstances where models cannot be updated quickly enough, but the resulting model

output is only as reliable as the underlying management judgment.

If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk

management decisions, including decisions affecting loan purchases, management of credit losses, guaranty fee

pricing, asset and liability management and the management of our net worth. Any of these decisions could

adversely affect our businesses, results of operations, liquidity, net worth and financial condition. Furthermore,

strategies we employ to manage the risks associated with our use of models may not be effective or fully

reliable.

Changes in interest rates or our loss of the ability to manage interest rate risk successfully, could adversely

affect our net interest income and increase interest rate risk.

We fund our operations primarily through the issuance of debt and invest our funds primarily in mortgagerelated assets that permit mortgage borrowers to prepay their mortgages at any time. These business activities

expose us to market risk, which is the risk of adverse changes in the fair value of financial instruments

resulting from changes in market conditions. Our most significant market risks are interest rate risk and

prepayment risk. We describe these risks in more detail in “MD&A—Risk Management—Market Risk

Management, Including Interest Rate Risk Management.” Changes in interest rates affect both the value of our

mortgage assets and prepayment rates on our mortgage loans.

Changes in interest rates could have a material adverse effect on our business, results of operations, financial

condition, liquidity and net worth. Our ability to manage interest rate risk depends on our ability to issue debt

instruments with a range of maturities and other features, including call provisions, at attractive rates and to

engage in derivatives transactions. We must exercise judgment in selecting the amount, type and mix of debt

and derivatives instruments that will most effectively manage our interest rate risk. The amount, type and mix

of financial instruments that are available to us may not offset possible future changes in the spread between

our borrowing costs and the interest we earn on our mortgage assets.

Our business is subject to laws and regulations that restrict our activities and operations, which may

prohibit us from undertaking activities that management believes would benefit our business and limit our

ability to diversify our business.

As a federally chartered corporation, we are subject to the limitations imposed by the Charter Act, extensive

regulation, supervision and examination by FHFA and regulation by other federal agencies, including Treasury,

HUD and the SEC. As a company under conservatorship, our primary regulator has management authority

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over us in its role as our conservator. We are also subject to other laws and regulations that affect our

business, including those regarding taxation and privacy.

The Charter Act defines our permissible business activities. For example, we may not originate mortgage loans

or purchase single-family loans in excess of the conforming loan limits, and our business is limited to the

U.S. housing finance sector. In addition, our conservator has determined that, while in conservatorship, we will

not be permitted to engage in new products and will be limited to continuing our existing business activities

and taking actions necessary to advance the goals of the conservatorship. As a result of these limitations on

our ability to diversify our operations, our financial condition and earnings depend almost entirely on

conditions in a single sector of the U.S. economy, specifically, the U.S. housing market. The weak and

unstable condition of the U.S. housing market over the past approximately three to four years has therefore

had a significant adverse effect on our results of operations, financial condition and net worth, which is likely

to continue.

We could be required to pay substantial judgments, settlements or other penalties as a result of pending

government investigations and civil litigation.

We are subject to investigations by the Department of Justice and the SEC, and are a party to a number of

lawsuits. We are unable at this time to estimate our potential liability in these matters, but may be required to

pay substantial judgments, settlements or other penalties and incur significant expenses in connection with

these investigations and lawsuits, which could have a material adverse effect on our business, results of

operations, financial condition, liquidity and net worth. In addition, responding to requests for information in

these investigations and lawsuits may divert significant internal resources away from managing our business.

More information regarding these investigations and lawsuits is included in “Legal Proceedings” and

“Note 20, Commitments and Contingencies.”

Our common and preferred stock have been delisted from the NYSE and the Chicago Stock Exchange,

which could adversely affect the market price and liquidity of our delisted securities.

Our common stock and previously-listed series of our preferred stock were delisted from the New York Stock

Exchange and the Chicago Stock Exchange on July 8, 2010 and are now traded exclusively in the

over-the-counter market. The market price of our common stock has declined significantly since June 16,

2010, the date we announced our intention to delist these securities, and may decline further.

There can be no assurance that an active trading market in our equity securities will continue to exist. Our

quoted securities are likely to experience price and volume fluctuations which may be more significant than

when our securities were listed on a national securities exchange, which could adversely affect the market

price of these securities. We cannot predict the actions of market makers, investors or other market

participants, and can offer no assurances that the market for our securities will be stable.

Mortgage fraud could result in significant financial losses and harm to our reputation.

We use a process of delegated underwriting in which lenders make specific representations and warranties

about the characteristics of the single-family mortgage loans we purchase and securitize. As a result, we do

not independently verify most borrower information that is provided to us. This exposes us to the risk that one

or more of the parties involved in a transaction (the borrower, seller, broker, appraiser, title agent, lender or

servicer) will engage in fraud by misrepresenting facts about a mortgage loan. We have experienced financial

losses resulting from mortgage fraud, including institutional fraud perpetrated by counterparties. In the future,

we may experience additional financial losses or reputational damage as a result of mortgage fraud.

RISKS RELATING TO OUR INDUSTRY

A further decline in U.S. home prices or activity in the U.S. housing market would likely cause higher

credit losses and credit-related expenses, and lower business volumes.

We expect weakness in the real estate financial markets to continue in 2011. The deterioration in the credit

condition of outstanding mortgages will result in the foreclosure of some troubled loans, which is likely to add

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to excess inventory of unsold homes. We also expect heightened default and severity rates to continue during

this period, and home prices, particularly in some geographic areas, may decline further. Any resulting

increase in delinquencies or defaults, or in severity, will likely result in a higher level of credit losses and

credit-related expenses, which in turn will reduce our earnings and adversely affect our net worth and financial

condition.

Our business volume is affected by the rate of growth in total U.S. residential mortgage debt outstanding and

the size of the U.S. residential mortgage market. The rate of growth in total U.S. residential mortgage debt

outstanding has declined substantially in response to the reduced activity in the housing market and declines in

home prices, and we expect single-family mortgage debt outstanding to decrease by approximately 2% in

2011. A decline in the rate of growth in mortgage debt outstanding reduces the unpaid principal balance of

mortgage loans available for us to purchase or securitize, which in turn could reduce our net interest income

and guaranty fee income. Even if we are able to increase our share of the secondary mortgage market, it may

not be sufficient to make up for the decline in the rate of growth in mortgage originations, which could

adversely affect our results of operations and financial condition.

The Dodd-Frank Act and regulatory changes in the financial services industry may negatively impact our

business.

The Dodd-Frank Act will significantly change the regulation of the financial services industry, including by

the creation of new standards related to regulatory oversight of systemically important financial companies,

derivatives transactions, asset-backed securitization, mortgage underwriting and consumer financial protection.

This legislation will directly and indirectly affect many aspects of our business and could have a material

adverse effect on our business, results of operations, financial condition, liquidity and net worth. The DoddFrank Act and related future regulatory changes could require us to change certain business practices, cause us

to incur significant additional costs, limit the products we offer, require us to increase our regulatory capital or

otherwise adversely affect our business. Additionally, implementation of this legislation will result in increased

supervision and more comprehensive regulation of our customers and counterparties in the financial services

industry, which may have a significant impact on the business practices of our customers and counterparties,

as well as on our counterparty credit risk.

Examples of aspects of the Dodd-Frank Act and related future regulatory changes that, if applicable, may

significantly affect us include mandatory clearing of certain derivatives transactions, which could impose

significant additional costs on us; minimum standards for residential mortgage loans, which could subject us

to increased legal risk for loans we purchase or guarantee; and the development of credit risk retention

regulations applicable to residential mortgage loan securitizations, which could impact the types and volume

of loans sold to us. We could also be designated as a systemically important nonbank financial company

subject to supervision and regulation by the Federal Reserve. If this were to occur, the Federal Reserve would

have the authority to examine us and could impose stricter prudential standards on us, including risk-based

capital requirements, leverage limits, liquidity requirements, credit concentration limits, resolution plan and

credit exposure reporting requirements, overall risk management requirements, contingent capital requirements,

enhanced public disclosures and short-term debt limits. Regulators have been seeking public comment

regarding the criteria for designating nonbank financial companies for heightened supervision.

Because federal agencies have not completed the extensive rulemaking processes needed to implement and

clarify many of the provisions of the Dodd-Frank Act, it is difficult to assess fully the impact of this

legislation on our business and industry at this time, nor can we predict what similar changes to statutes or

regulations will occur in the future.

Recent revisions by the Basel Committee on Banking Supervision to international capital requirements,

referred to as Basel III, may also have a significant impact on us or on the business practices of our customers

and counterparties. Depending on how they are implemented by regulators, the Basel III rules could be the

basis for a revised framework for GSE capital standards that could increase our capital requirements. The

Basel III rules could also affect investor demand for our debt and MBS securities, and could limit some

lenders’ ability to count their rights to service mortgage loans toward meeting their regulatory capital

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requirements, which may reduce the economic value of mortgage servicing rights. As a result, a number of

our customers and counterparties may change their business practices.

In addition, the actions of Treasury, the CFTC, the SEC, the Federal Deposit Insurance Corporation, the

Federal Reserve and international central banking authorities directly or indirectly impact financial

institutions’ cost of funds for lending, capital raising and investment activities, which could increase our

borrowing costs or make borrowing more difficult for us. Changes in monetary policy are beyond our control

and difficult to anticipate.

Legislative and regulatory changes could affect us in substantial and unforeseeable ways and could have a

material adverse effect on our business, results of operations, financial condition, liquidity and net worth. In

particular, these changes could affect our ability to issue debt and may reduce our customer base.

Structural changes in the financial services industry may negatively impact our business.

The financial market crisis has resulted in mergers of some of our most significant institutional counterparties.

Consolidation of the financial services industry has increased and may continue to increase our concentration

risk to counterparties in this industry, and we are and may become more reliant on a smaller number of

institutional counterparties. This both increases our risk exposure to any individual counterparty and decreases

our negotiating leverage with these counterparties. The structural changes in the financial services industry

could affect us in substantial and unforeseeable ways and could have a material adverse effect on our business,

results of operations, financial condition, liquidity and net worth.

The occurrence of a major natural or other disaster in the United States could negatively impact our credit

losses and credit-related expenses or disrupt our business operations in the affected geographic area.

We conduct our business in the residential mortgage market and own or guarantee the performance of

mortgage loans throughout the United States. The occurrence of a major natural or environmental disaster,

terrorist attack, pandemic, or similar event (a “major disruptive event”) in a regional geographic area of the

United States could negatively impact our credit losses and credit-related expenses in the affected area.

The occurrence of a major disruptive event could negatively impact a geographic area in a number of different

ways, depending on the nature of the event. A major disruptive event that either damaged or destroyed

residential real estate underlying mortgage loans in our book of business or negatively impacted the ability of

homeowners to continue to make principal and interest payments on mortgage loans in our book of business

could increase our delinquency rates, default rates and average loan loss severity of our book of business in

the affected region or regions, which could have a material adverse effect on our business, results of

operations, financial condition, liquidity and net worth. While we attempt to create a geographically diverse

mortgage credit book of business, there can be no assurance that a major disruptive event, depending on its

magnitude, scope and nature, will not generate significant credit losses and credit-related expenses.

Additionally, the contingency plans and facilities that we have in place may be insufficient to prevent an

adverse effect on our ability to conduct business, which could lead to financial losses. Substantially all of our

senior management and investment personnel work out of our offices in the Washington, DC metropolitan

area. If a disruption occurs and our senior management or other employees are unable to occupy our offices,

communicate with other personnel or travel to other locations, our ability to interact with each other and with

our customers may suffer, and we may not be successful in implementing contingency plans that depend on

communication or travel.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We own our principal office, which is located at 3900 Wisconsin Avenue, NW, Washington, DC, as well as

additional Washington, DC facilities at 3939 Wisconsin Avenue, NW and 4250 Connecticut Avenue, NW. We

also own two office facilities in Herndon, Virginia, as well as two additional facilities located in Reston,

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Virginia; and Urbana, Maryland. These owned facilities contain a total of approximately 1,459,000 square feet

of space. We lease the land underlying the 4250 Connecticut Avenue building pursuant to a ground lease that

automatically renews on July 1, 2029 for an additional 49 years unless we elect to terminate the lease by

providing notice to the landlord of our decision to terminate at least one year prior to the automatic renewal

date. In addition, we lease approximately 429,000 square feet of office space, including a conference center, at

4000 Wisconsin Avenue, NW, which is adjacent to our principal office. The present lease term for the office

space at 4000 Wisconsin Avenue expires in April 2013 and we have one additional 5-year renewal option

remaining under the original lease. The lease term for the conference center at 4000 Wisconsin Avenue

expires in April 2018. We also lease an additional approximately 317,000 square feet of office space at three

other locations in Washington, DC and Virginia. We maintain approximately 723,000 square feet of office

space in leased premises in Pasadena, California; Irvine, California; Atlanta, Georgia; Chicago, Illinois;

Philadelphia, Pennsylvania; and three facilities in Dallas, Texas.

Item 3. Legal Proceedings

This item describes our material legal proceedings. We describe additional material legal proceedings in

“Note 20, Commitments and Contingencies” in the section titled “Litigation and Regulatory Matters,” which is

incorporated herein by reference. In addition to the matters specifically described or incorporated by reference

in this item, we are involved in a number of legal and regulatory proceedings that arise in the ordinary course

of business that do not have a material impact on our business. Litigation claims and proceedings of all types

are subject to many factors that generally cannot be predicted accurately.

We record reserves for legal claims when losses associated with the claims become probable and the amounts

can reasonably be estimated. The actual costs of resolving legal claims may be substantially higher or lower

than the amounts reserved for those claims. For matters where the likelihood or extent of a loss is not

probable or cannot be reasonably estimated, we have not recognized in our consolidated financial statements

the potential liability that may result from these matters. We presently cannot determine the ultimate

resolution of the matters described or incorporated by reference below. We have recorded a reserve for legal

claims related to those matters for which we were able to determine a loss was both probable and reasonably

estimable. If certain of these matters are determined against us, it could have a material adverse effect on our

results of operations, liquidity and financial condition, including our net worth.

Shareholder Derivative Litigation

Four shareholder derivative cases, filed at various times between June 2007 and June 2008, naming certain of

our current and former directors and officers as defendants, and Fannie Mae as a nominal defendant, are

currently pending in the U.S. District Court for the District of Columbia: Kellmer v. Raines, et al. (filed

June 29, 2007); Middleton v. Raines, et al. (filed July 6, 2007); Arthur v. Mudd, et al. (filed November 26,

2007); and Agnes v. Raines, et al. (filed June 25, 2008). Three of the cases (Kellmer, Middleton, and Agnes)

rely on factual allegations that Fannie Mae’s accounting statements were inconsistent with the GAAP

requirements relating to hedge accounting and the amortization of premiums and discounts. Two of the cases

(Arthur and Agnes) rely on factual allegations that defendants wrongfully failed to disclose our exposure to the

subprime mortgage crisis and that the Board improperly authorized the company to buy back $100 million in

shares while the stock price was artificially inflated. Plaintiffs seek, on behalf of Fannie Mae, various forms of

monetary and non-monetary relief, including unspecified money damages (including restitution, legal fees and

expenses, disgorgement and punitive damages); corporate governance changes; an accounting; and attaching,

impounding or imposing a constructive trust on the individual defendants’ assets. Pursuant to a June 25, 2009

order, FHFA, as our conservator, substituted itself for shareholder plaintiffs in all of these actions. On July 27,

2010, the U.S. District Court for the District of Columbia dismissed Kellmer and Middleton with prejudice and

Arthur and Agnes without prejudice. FHFA filed motions to reconsider the decisions dismissing Kellmer and

Middleton with prejudice, and those motions were denied on October 22, 2010. FHFA appealed that denial on

November 22, 2010. Plaintiffs Kellmer and Agnes also appealed the substitution and the dismissal orders. On

January 20, 2011, the Court of Appeals for the District of Columbia issued an order in the Kellmer appeal

granting FHFA’s motions for the voluntary dismissal of defendants Kenneth M. Duberstein, Frederic Malek

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and Patrick Swygert. On that same day, in the Middleton appeal, the Court of Appeals for the District of

Columbia issued an order granting FHFA’s motions for the voluntary dismissal of defendants Stephen Ashley,

Kenneth Duberstein, Thomas Gerrity, Ann Korologos, Frederic Malek, Donald Marron, Anne Mulcahy, Joe

Pickett, Leslie Rahl, Patrick Swygert, and John Wulff.

Inquiry by the Financial Crisis Inquiry Commission

Over the course of 2010, we received numerous requests for documents and information from the Financial

Crisis Inquiry Commission (the “FCIC”) in connection with its statutory mandate to examine the causes of the

financial crisis. The FCIC released its final report on January 27, 2011. The report is described in “Business—

Legislation and GSE Reform—GSE Reform.”

Item 4. [Removed and Reserved]

PART II

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

Equity Securities

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

ticker symbol “FNMA.” The transfer agent and registrar for our common stock is Computershare,

P.O. Box 43078, Providence, Rhode Island 02940.

Common Stock Data

The following table shows, for the periods indicated, the high and low prices per share of our common stock

as reported in the Bloomberg Financial Markets service. For periods prior to our stock’s delisting from the

NYSE on July 8, 2010, these are high and low sales prices reported in the consolidated transaction reporting

system. For periods on or after July 8, 2010, these prices represent high and low trade prices. No dividends

were declared on shares of our common stock during the periods indicated.

Quarter High Low

2009

First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.43 $0.35

Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.05 0.51

Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.13 0.51

Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.55 0.88

2010

First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.23 $0.91

Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.36 0.34

Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.42 0.19

Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.47 0.27

Dividends

Our payment of dividends is subject to the following restrictions:

Restrictions Relating to Conservatorship. Our conservator announced on September 7, 2008 that we would

not pay any dividends on the common stock or on any series of preferred stock, other than the senior preferred

stock.

Restrictions Under Senior Preferred Stock Purchase Agreement. The senior preferred stock purchase

agreement prohibits us from declaring or paying any dividends on Fannie Mae equity securities without the

prior written consent of Treasury.

Statutory Restrictions. Under the GSE Act, FHFA has authority to prohibit capital distributions, including

payment of dividends, if we fail to meet our capital requirements. If FHFA classifies us as significantly

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undercapitalized, approval of the Director of FHFA is required for any dividend payment. Under the GSE Act,

we are not permitted to make a capital distribution if, after making the distribution, we would be

undercapitalized, except the Director of FHFA may permit us to repurchase shares if the repurchase is made in

connection with the issuance of additional shares or obligations in at least an equivalent amount and will

reduce our financial obligations or otherwise improve our financial condition.

Restrictions Relating to Subordinated Debt. During any period in which we defer payment of interest on

qualifying subordinated debt, we may not declare or pay dividends on, or redeem, purchase or acquire, our

common stock or preferred stock.

Restrictions Relating to Preferred Stock. Payment of dividends on our common stock is also subject to the

prior payment of dividends on our preferred stock and our senior preferred stock. Payment of dividends on all

outstanding preferred stock, other than the senior preferred stock, is also subject to the prior payment of

dividends on the senior preferred stock.

See “MD&A—Liquidity and Capital Management” for information on dividends declared and paid to

Treasury on the senior preferred stock.

Holders

As of January 31, 2011, we had approximately 18,000 registered holders of record of our common stock,

including holders of our restricted stock. In addition, as of January 31, 2011, Treasury held a warrant giving it

the right to purchase shares of our common stock equal to 79.9% of the total number of shares of our

common stock outstanding on a fully diluted basis on the date of exercise.

Recent Sales of Unregistered Securities

Under the terms of our senior preferred stock purchase agreement with Treasury, we are prohibited from

selling or issuing our equity interests, other than as required by (and pursuant to) the terms of a binding

agreement in effect on September 7, 2008, without the prior written consent of Treasury.

We previously provided stock compensation to employees and members of the Board of Directors under the

Fannie Mae Stock Compensation Plan of 1993 and the Fannie Mae Stock Compensation Plan of 2003 (the

“Stock Compensation Plans”). Information about sales and issuances of our unregistered securities during the

first three quarters of 2010, some of which were made pursuant to these Stock Compensation Plans, was

provided in our quarterly reports on Form 10-Q for the quarters ended March 31, 2010, June 30, 2010 and

September 30, 2010 filed with the SEC on May 10, 2010, August 5, 2010 and November 5, 2010,

respectively.

During the quarter ended December 31, 2010, 520,589 shares of common stock were issued upon conversion

of 337,871 shares of 8.75% Non-Cumulative Mandatory Convertible Preferred Stock, Series 2008-1, at the

option of the holders pursuant to the terms of the preferred stock. All series of preferred stock, other than the

senior preferred stock, were issued prior to September 7, 2008.

The securities we issue are “exempted securities” under laws administered by the SEC to the same extent as

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

that, under the GSE Act, our equity securities are not treated as exempted securities for purposes of

Section 12, 13, 14 or 16 of the Exchange Act. As a result, our securities offerings are exempt from SEC

registration requirements and we do not file registration statements or prospectuses with the SEC under the

Securities Act with respect to our securities offerings.

Information about Certain Securities Issuances by Fannie Mae

Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a

material direct financial obligation or become directly or contingently liable for a material obligation under an

off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03

71
or, if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for that

offering that are filed with the SEC.

Because the securities we issue are exempted securities, we do not file registration statements or prospectuses

with the SEC with respect to our securities offerings. To comply with the disclosure requirements of Form 8-K

relating to the incurrence of material financial obligations, we report our incurrence of these types of

obligations either in offering circulars or prospectuses (or supplements thereto) that we post on our Web site

or in a current report on Form 8-K that we file with the SEC, in accordance with a “no-action” letter we

received from the SEC staff in 2004. In cases where the information is disclosed in a prospectus or offering

circular posted on our Web site, the document will be posted on our Web site within the same time period that

a prospectus for a non-exempt securities offering would be required to be filed with the SEC.

The Web site address for disclosure about our debt securities is www.fanniemae.com/debtsearch. From this

address, investors can access the offering circular and related supplements for debt securities offerings under

Fannie Mae’s universal debt facility, including pricing supplements for individual issuances of debt securities.

Disclosure about our obligations pursuant to some of the MBS we issue, some of which may be off-balance

sheet obligations, can be found at www.fanniemae.com/mbsdisclosure. From this address, investors can access

information and documents about our MBS, including prospectuses and related prospectus supplements.

We are providing our Web site address solely for your information. Information appearing on our Web site is

not incorporated into this annual report on Form 10-K.

Purchases of Equity Securities by the Issuer

The following table shows shares of our common stock we repurchased during the fourth quarter of 2010.

Total

Number of

Shares

Purchased(1)

Average

Price Paid

per Share

Total Number of

Shares Purchased as

Part of Publicly

Announced

Program(2)

Maximum Number of

Shares that

May Yet be

Purchased Under

the Program(2)

(Shares in thousands)

2010

October 1-31 . . . . . . . . . . . . . . . . . . . . . . . . . 1 $0.37 — —

November 1-30 . . . . . . . . . . . . . . . . . . . . . . . 1 0.38 — —

December 1-31 . . . . . . . . . . . . . . . . . . . . . . . . 1 0.32 — —

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

(1) Consists of shares of common stock reacquired from employees to pay an aggregate of approximately $930 in

withholding taxes due upon the vesting of previously issued restricted stock. Does not include 337,871 shares of 8.75%

Non-Cumulative Mandatory Convertible Series 2008-1 Preferred Stock received from holders upon conversion of those

shares into 520,589 shares of common stock.

(2) On January 21, 2003, we publicly announced that the Board of Directors had approved an open market share

repurchase program under which we could purchase in open market transactions the sum of (a) up to 5% of the shares

of common stock outstanding as of December 31, 2002 (49.4 million shares) and (b) additional shares to offset stock

issued or expected to be issued under our employee benefit plans. Since August 2004, no shares have been

repurchased pursuant to this program. The Board of Directors terminated this share repurchase program on October 14,

2010.

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Item 6. Selected Financial Data

The selected consolidated financial data presented below is summarized from our results of operations for the

five-year period ended December 31, 2010, as well as selected consolidated balance sheet data as of the end

of each year within this five-year period. Certain prior period amounts have been reclassified to conform to

the current period presentation. This data should be reviewed in conjunction with the audited consolidated

financial statements and related notes and with the MD&A included in this annual report on Form 10-K.

2010(1) 2009 2008 2007 2006

For the Year Ended December 31,

(Dollars and shares in millions, except per share amounts)

Statement of operations data:(2)

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,409 $ 14,510 $ 8,782 $ 4,581 $ 6,752

Guaranty fee income . . . . . . . . . . . . . . . . . . . . . . . . . . 202 7,211 7,621 5,071 4,250

Net other-than-temporary impairments . . . . . . . . . . . . . . (722) (9,861) (6,974) (814) (853)

Investment gains (losses), net . . . . . . . . . . . . . . . . . . . . 346 1,458 (246) (53) 162

Fair value losses, net(3) . . . . . . . . . . . . . . . . . . . . . . . . . (511) (2,811) (20,129) (4,668) (1,744)

Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . (2,597) (2,207) (1,979) (2,669) (3,076)

Credit-related expenses(4) . . . . . . . . . . . . . . . . . . . . . . . (26,614) (73,536) (29,809) (5,012) (783)

Other income (expenses), net(5) . . . . . . . . . . . . . . . . . . . 240 (6,287) (743) (923) (84)

(Provision) benefit for federal income taxes . . . . . . . . . . 82 985 (13,749) 3,091 (166)

Net (loss) income attributable to Fannie Mae . . . . . . (14,014) (71,969) (58,707) (2,050) 4,059

Preferred stock dividends and issuance costs at

redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,704) (2,474) (1,069) (513) (511)

Net (loss) income attributable to common

stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,718) (74,443) (59,776) (2,563) 3,548

Per common share data:

Earnings (loss) per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3.81) $ (13.11) $ (24.04) $ (2.63) $ 3.65

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.81) (13.11) (24.04) (2.63) 3.65

Weighted-average common shares outstanding:(6)

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,694 5,680 2,487 973 971

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,694 5,680 2,487 973 972

Cash dividends declared per share . . . . . . . . . . . . . . . . . $ — $ — $ 0.75 $ 1.90 $ 1.18

New business acquisition data:

Fannie Mae MBS issues acquired by third parties(7) . . . . . $497,975 $496,067 $434,711 $563,648 $417,471

Mortgage portfolio purchases(8) . . . . . . . . . . . . . . . . . . . 357,573 327,578 196,645 182,471 185,507

New business acquisitions . . . . . . . . . . . . . . . . . . . . . $855,548 $823,645 $631,356 $746,119 $602,978

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2010(1) 2009 2008 2007 2006

As of December 31,

(Dollars in millions)

Balance sheet data:(2)

Investments in securities:

Fannie Mae MBS ........................... $ 30,226 $ 229,169 $ 234,250 $ 179,401 $ 196,678

Other agency MBS .......................... 19,951 43,905 35,440 32,957 31,484

Mortgage revenue bonds . . ..................... 11,650 13,446 13,183 16,213 17,221

Other mortgage-related securities ................. 56,668 54,265 56,781 90,827 97,156

Non-mortgage-related securities .................. 32,753 8,882 17,640 38,115 47,573

Mortgage loans:(9)

Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . 915 18,462 13,270 7,008 4,868

Loans held for investment, net of allowance .......... 2,922,805 376,099 412,142 396,516 378,687

Total assets ................................. 3,221,972 869,141 912,404 879,389 841,469

Short-term debt .............................. 157,243 200,437 330,991 234,160 165,810

Long-term debt .............................. 3,039,757 574,117 539,402 562,139 601,236

Total liabilities ............................... 3,224,489 884,422 927,561 835,271 799,827

Senior preferred stock .......................... 88,600 60,900 1,000 — —

Preferred stock ............................... 20,204 20,348 21,222 16,913 9,108

Total Fannie Mae stockholders’ equity (deficit) ......... (2,599) (15,372) (15,314) 44,011 41,506

Net worth surplus (deficit)(10) ..................... $ (2,517) $ (15,281) $ (15,157) $ 44,118 $ 41,642

Book of business data:

Total mortgage assets(11) ........................ $3,099,250 $ 769,252 $ 792,196 $ 727,903 $ 728,932

Unconsolidated Fannie Mae MBS, held by third parties(12) . . 21,323 2,432,789 2,289,459 2,118,909 1,777,550

Other guarantees(13)............................ 35,619 27,624 27,809 41,588 19,747

Mortgage credit book of business ................. $3,156,192 $3,229,665 $3,109,464 $2,888,400 $2,526,229

Guaranty book of business(14) ................... $3,054,488 $3,097,201 $2,975,710 $2,744,237 $2,379,986

Credit quality:

Nonperforming loans(15) ......................... $ 214,752 $ 216,455 $ 119,232 $ 27,156 $ 13,846

Total loss reserves............................. 66,251 64,891 24,753 3,391 859

Total loss reserves as a percentage of total guaranty book of

business . ................................. 2.17% 2.10% 0.83% 0.12% 0.04%

Total loss reserves as a percentage of total nonperforming

loans . . . ................................. 30.85 29.98 20.76 12.49 6.20

2010(1) 2009 2008 2007 2006

For the Year Ended December 31,

Performance ratios:

Net interest yield(16) . . . . . . . . . . . . . . . . . . . . 0.51% 1.65% 1.03% 0.57% 0.85%

Average effective guaranty fee rate (in basis

points)(17) . . . . . . . . . . . . . . . . . . . . . . . . . . N/A 27.6 bp 31.0 bp 23.7 bp 22.2 bp

Credit loss ratio (in basis points)(18) . . . . . . . . . 77.4 bp 44.6 bp 22.7 bp 5.3 bp 2.2 bp

Return on assets(19)* . . . . . . . . . . . . . . . . . . . . (0.67)% (8.27)% (6.77)% (0.30)% 0.42%

(1) As discussed in “Business—Executive Summary,” prospectively adopting the new accounting standards had a

significant impact on the presentation and comparability of our consolidated financial statements due to the

consolidation of the substantial majority of our single-class securitization trusts and the elimination of previously

recorded deferred revenue from our guaranty arrangements. While some line items in our consolidated statements of

operations and balance sheet were not impacted, others were impacted significantly, which reduces the comparability

of our results for 2010 with the results for prior years. See “Note 2, Adoption of the New Accounting Standards on

the Transfers of Financial Assets and Consolidation of Variable Interest Entities” for a further discussion of the

impact of the new accounting standards on our consolidated financial statements.

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

74
(3) Consists of the following: (a) derivatives fair value gains (losses), net; (b) trading securities gains (losses), net;

(c) hedged mortgage assets gains (losses), net; (d) debt foreign exchange gains (losses), net; (e) debt fair value gains

(losses), net; and (f) mortgage loans fair value losses, net.

(4) Consists of provision for loan losses, provision for guaranty losses and foreclosed property expense.

(5) Consists of the following: (a) debt extinguishment gains (losses), net; (b) losses from partnership investments;

(c) losses on certain guaranty contracts; and (d) fee and other income.

(6) Includes the weighted-average shares of common stock that would be issuable upon the full exercise of the warrant

issued to Treasury from the date of conservatorship through the end of the period for 2008 and for the full year for

2009 and 2010. Because the warrant’s exercise price of $0.00001 per share is considered non-substantive (compared

to the market price of our common stock), the warrant was evaluated based on its substance over form. It was

determined to have characteristics of non-voting common stock, and thus included in the computation of basic

earnings (loss) per share.

(7) Reflects unpaid principal balance of Fannie Mae MBS issued and guaranteed by us during the reporting period less:

(a) securitizations of mortgage loans held in our mortgage portfolio during the reporting period and (b) Fannie Mae

MBS purchased for our mortgage portfolio during the reporting period.

(8) Reflects unpaid principal balance of mortgage loans and mortgage-related securities we purchased for our mortgage

portfolio during the reporting period. Includes acquisition of mortgage-related securities accounted for as the

extinguishment of debt because the entity underlying the mortgage-related securities has been consolidated in our

consolidated balance sheet. For 2010, includes unpaid principal balance of approximately $217 billion of delinquent

loans purchased from our single-family MBS trusts. Under our MBS trust documents, we have the option to purchase

from MBS trusts loans that are delinquent as to four or more consecutive monthly payments.

(9) Mortgage loans consist solely of domestic residential real-estate mortgages.

(10) Total assets less total liabilities.

(11) Reflects unpaid principal balance of mortgage loans and mortgage-related securities reported in our consolidated

balance sheets. The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.

As a result of our adoption of the new accounting standards as of January 1, 2010, we reflect a substantial majority

of our Fannie Mae MBS as mortgage assets and the balance as unconsolidated Fannie Mae MBS.

(12) Reflects unpaid principal balance of unconsolidated Fannie Mae MBS, held by third-party investors. The principal

balance of resecuritized Fannie Mae MBS is included only once in the reported amount.

(13) Primarily includes long-term standby commitments we have issued and single-family and multifamily credit

enhancements we have provided and that are not otherwise reflected in the table.

(14) Reflects mortgage credit book of business less non-Fannie Mae mortgage-related securities held in our investment

portfolio for which we do not provide a guaranty.

(15) Consists of on-balance sheet nonperforming loans held in our mortgage assets and off-balance sheet nonperforming

loans in unconsolidated Fannie Mae MBS trusts held by third parties. Includes all nonaccrual loans, as well as

troubled debt restructurings (“TDRs”) and HomeSaver Advance first-lien loans on accrual status. We generally

classify single-family and multifamily loans as nonperforming when the payment of principal or interest on the loan

is equal to or greater than two and three months past due, respectively. A troubled debt restructuring is a restructuring

of a mortgage loan in which a concession is granted to a borrower experiencing financial difficulty. Prior to 2008, the

nonperforming loans that we reported consisted of on-balance sheet nonperforming loans held in our mortgage

portfolio and did not include off-balance sheet nonperforming loans in Fannie Mae MBS held by third parties.

(16) Calculated based on net interest income for the reporting period divided by the average balance of total interestearning assets during the period, expressed as a percentage.

(17) Calculated based on guaranty fee income for the reporting period divided by average outstanding Fannie Mae MBS

and other guarantees during the period, expressed in basis points.

(18) Consists of (a) charge-offs, net of recoveries and (b) foreclosed property expense for the reporting period (adjusted to

exclude the impact of fair value losses resulting from credit-impaired loans acquired from MBS trusts and

HomeSaver Advance loans) divided by the average guaranty book of business during the period, expressed in basis

points.

(19) Calculated based on net income (loss) available to common stockholders for the reporting period divided by average

total assets during the period, expressed as a percentage.

Note:

* Average balances for purposes of ratio calculations are based on balances at the beginning of the year and at the end of

each respective quarter for 2010, 2009, 2008 and 2007. Average balances for purposes of ratio calculations for 2006 are

based on beginning and end of year balances. Beginning of the year balance for 2010 is as of January 1, 2010, post

transition adjustment. See “Note 2, Adoption of the New Accounting Standards on the Transfers of Financial Assets and

Consolidation of Variable Interest Entities” for a further discussion of the impacts of the new accounting standards on

our consolidated financial statements.

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

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

(“MD&A”) in conjunction with our consolidated financial statements as of December 31, 2010 and related

notes, and with “Business—Executive Summary.”

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

are subject to significant uncertainties and changes in circumstances. Please review “Business—ForwardLooking Statements” for more information on the forward-looking statements in this report and “Risk

Factors” for a discussion of factors that could cause our actual results to differ, perhaps materially, from our

forward-looking statements. Please also see “MD&A—Glossary of Terms Used in This Report.”

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

the consolidated financial statements. Understanding our accounting policies and the extent to which we use

management judgment and estimates in applying these policies is integral to understanding our financial statements.

We describe our most significant accounting policies in “Note 1, Summary of Significant Accounting Policies.”

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

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

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

Board of Directors. See “Risk Factors” for a discussion of the risk associated with the use of models. We have

identified three of our accounting policies as critical because they involve significant judgments and

assumptions about highly complex and inherently uncertain matters, and the use of reasonably different

estimates and assumptions could have a material impact on our reported results of operations or financial

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

• Fair Value Measurement

• Total Loss Reserves

• Other-Than-Temporary Impairment of Investment Securities

Effective January 1, 2010, we adopted the new accounting standards on the transfers of financial assets and

the consolidation of variable interest entities. Refer to “Note 1, Summary of Significant Accounting Policies”

and “Note 2, Adoption of the New Accounting Standards on the Transfers of Financial Assets and

Consolidation of Variable Interest Entities” for additional information.

In this section, we discuss significant changes in the judgments and assumptions we made during 2010 in

applying our critical accounting policies, significant changes to critical estimates and the impact of the new

accounting standards on our total loss reserves.

Fair Value Measurement

The use of fair value to measure our assets and liabilities is fundamental to our financial statements and is a

critical accounting estimate because we account for and record a portion of our assets and liabilities at fair

value. In determining fair value, we use various valuation techniques. We describe the valuation techniques

and inputs used to determine the fair value of our assets and liabilities and disclose their carrying value and

fair value in “Note 19, Fair Value.”

The fair value accounting rules provide a three-level fair value hierarchy for classifying financial instruments.

This hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are

observable or unobservable. Each asset or liability is assigned to a level based on the lowest level of any input

that is significant to the fair value measurement. The three levels of the fair value hierarchy are described below:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

76
Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets

or liabilities.

Level 3: Unobservable inputs.

The majority of the financial instruments that we report at fair value in our consolidated financial statements fall

within the Level 2 category and are valued primarily utilizing inputs and assumptions that are observable in the

marketplace, that can be derived from observable market data or that can be corroborated by recent trading

activity of similar instruments with similar characteristics. For example, we generally request non-binding prices

from at least four independent pricing services to estimate the fair value of our trading and available-for-sale

securities at an individual security level. We use the average of these prices to determine the fair value.

In the absence of such information or if we are not able to corroborate these prices by other available, relevant

market information, we estimate their fair values based on single source quotations from brokers or dealers or

by using internal calculations or discounted cash flow techniques that incorporate inputs, such as prepayment

rates, discount rates and delinquency, default and cumulative loss expectations, that are implied by market

prices for similar securities and collateral structure types. Because this valuation technique relies on significant

unobservable inputs, the fair value estimation is classified as Level 3. The process for determining fair value

using unobservable inputs is generally more subjective and involves a high degree of management judgment

and assumptions. These assumptions may have a significant effect on our estimates of fair value, and the use

of different assumptions as well as changes in market conditions could have a material effect on our results of

operations or financial condition.

Fair Value Hierarchy—Level 3 Assets and Liabilities

The assets and liabilities that we have classified as Level 3 consist primarily of financial instruments for

which there is limited market activity and therefore little or no price transparency. As a result, the valuation

techniques that we use to estimate the fair value of Level 3 instruments involve significant unobservable

inputs, which generally are more subjective and involve a high degree of management judgment and

assumptions. Our Level 3 assets and liabilities consist of certain mortgage- and asset-backed securities and

residual interests, certain mortgage loans, acquired property, partnership investments, our guaranty assets and

buy-ups, our master servicing assets, certain long-term debt arrangements and certain highly structured,

complex derivative instruments.

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

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

Level 3 as of December 31, 2010 and 2009. The availability of observable market inputs to measure fair value

varies based on changes in market conditions, such as liquidity. As a result, we expect the amount of financial

instruments carried at fair value on a recurring basis and classified as Level 3 to vary each period.

Table 5: Level 3 Recurring Financial Assets at Fair Value

Balance Sheet Category 2010 2009

As of December 31,

(Dollars in millions)

Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,576 $ 8,861

Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,934 36,154

Mortgage loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,207 —

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 2,727

Level 3 recurring assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,964 $ 47,742

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,221,972 $869,141

Total recurring assets measured at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 161,696 $353,718

Level 3 recurring assets as a percentage of total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1% 5%

Level 3 recurring assets as a percentage of total recurring assets measured at fair value . . . . . . . 24% 13%

Total recurring assets measured at fair value as a percentage of total assets . . . . . . . . . . . . . . . . 5% 41%

77
The decrease in assets classified as Level 3 during 2010 includes a $2.6 billion decrease due to derecognition

of guaranty assets and buy-ups at the transition date as well as net transfers of approximately $6.0 billion in

assets to Level 2 from Level 3. The assets transferred from Level 3 consist primarily of Fannie Mae

guaranteed mortgage-related securities and private-label mortgage-related securities.

Assets measured at fair value on a nonrecurring basis and classified as Level 3, which are not presented in the

table above, primarily include held-for-sale loans, held-for-investment loans, acquired property and partnership

investments. The fair value of Level 3 nonrecurring assets totaled $63.0 billion during the year ended

December 31, 2010, and $21.2 billion during the year ended December 31, 2009.

Financial liabilities measured at fair value on a recurring basis and classified as Level 3 consisted of long-term

debt with a fair value of $1.0 billion as of December 31, 2010 and $601 million as of December 31, 2009, and

derivatives liabilities with a fair value of $143 million as of December 31, 2010 and $27 million as of

December 31, 2009.

Fair Value Control Processes

We have control processes that are designed to ensure that our fair value measurements are appropriate and

reliable, that they are based on observable inputs wherever possible and that our valuation approaches are

consistently applied and the assumptions used are reasonable. Our control processes consist of a framework

that provides for a segregation of duties and oversight of our fair value methodologies and valuations and

validation procedures.

Our Valuation Oversight Committee, which includes senior representation from our three business segments,

our Enterprise Risk Office and our Finance Division, is responsible for reviewing the valuation methodologies

used in our fair value measurements and any significant valuation adjustments, judgments, controls and results.

Actual valuations are performed by personnel independent of our business units. Our Price Verification Group,

which is an independent control group separate from the group responsible for obtaining prices, is responsible

for performing monthly independent price verification. The Price Verification Group also performs

independent reviews of the assumptions used in determining the fair value of products we hold that have

material estimation risk because observable market-based inputs do not exist.

Our validation procedures are intended to ensure that the individual prices we receive are consistent with our

observations of the marketplace and prices that are provided to us by pricing services or dealers. We verify

selected prices using a variety of methods, including comparing the prices to secondary pricing services,

corroborating the prices by reference to other independent market data, such as non-binding broker or dealer

quotations, relevant benchmark indices, and prices of similar instruments. We review prices for reasonableness

based on variations from prices provided in previous periods, comparing prices to internally calculated

expected prices and conducting relative value comparisons based on specific characteristics of securities. In

addition, we compare our derivatives valuations to counterparty valuations as part of the collateral exchange

process. We have formal discussions with the pricing services as part of our due diligence process in order to

maintain a current understanding of the models and related assumptions and inputs that these vendors use in

developing prices. The prices provided to us by independent pricing services reflect the existence of credit

enhancements, including monoline insurance coverage, and the current lack of liquidity in the marketplace. If

we determine that a price provided to us is outside established parameters, we will further examine the price,

including having follow-up discussions with the pricing service or dealer. If we conclude that a price is not

valid, we will adjust the price for various factors, such as liquidity, bid-ask spreads and credit considerations.

These adjustments are generally based on available market evidence. In the absence of such evidence,

management’s best estimate is used. All of these processes are executed before we use the prices in preparing

our financial statements.

We continually refine our valuation methodologies as markets and products develop and the pricing for certain

products becomes more or less transparent. While we believe our valuation methods are appropriate and

consistent with those of other market participants, using different methodologies or assumptions to determine

fair value could result in a materially different estimate of the fair value of some of our financial instruments.

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The dislocation of historical pricing relationships between certain financial instruments persisted during 2010

due to the housing and financial market crisis. These conditions, which have resulted in greater market

volatility, wider credit spreads and a lack of price transparency, made the measurement of fair value more

difficult and complex for some financial instruments, particularly for financial instruments for which there is

no active market, such as our guaranty contracts and loans purchased with evidence of credit deterioration.

Other-Than-Temporary Impairment of Investment Securities

We evaluate available-for-sale securities in an unrealized loss position as of the end of each quarter for

other-than-temporary impairment. A debt security is evaluated for other-than-temporary impairment if its fair

value is less than its amortized cost basis. We recognize other-than-temporary impairment in earnings if one of

the following conditions exists: (1) our intent is to sell the security; (2) it is more likely than not that we will

be required to sell the security before the impairment is recovered; or (3) we do not expect to recover our

amortized cost basis. If, by contrast, we do not intend to sell the security and will not be required to sell prior

to recovery of the amortized cost basis, we recognize only the credit component of other-than-temporary

impairment in earnings. We record the noncredit component in other comprehensive income. The credit

component is the difference between the security’s amortized cost basis and the present value of its expected

future cash flows, while the noncredit component is the remaining difference between the security’s fair value

and the present value of expected future cash flows. If, subsequent to recognizing other-than-temporary

impairment, our estimates of future cash flows improve, we recognize the change in estimate prospectively

over the remaining life of securities as a component of interest income.

Our evaluation requires significant management judgment and consideration of various factors to determine if we

will receive the amortized cost basis of our investment securities. We evaluate a debt security for

other-than-temporary impairment using an econometric model that estimates the present value of cash flows

given multiple factors. These factors include: the severity and duration of the impairment; recent events specific

to the issuer and/or industry to which the issuer belongs; the payment structure of the security; external credit

ratings and the failure of the issuer to make scheduled interest or principal payments. We rely on expected future

cash flow projections to determine if we will recover the amortized cost basis of our available-for-sale securities.

To reduce costs associated with maintaining our internal model and decrease the operational risk, in the fourth

quarter of 2010, we ceased to use our internally developed model and began using a third-party model to project

cash flow estimates on our private-label securities. This model change resulted in more favorable cash flow

estimates that, based on estimates as of December 31, 2010, increased the amount that we will recognize

prospectively as interest income over the remaining life of the securities by $2.5 billion.

We provide more detailed information on our accounting for other-than-temporary impairment in “Note 1,

Summary of Significant Accounting Policies” and “Note 6, Investments in Securities.” Also refer to

“Consolidated Balance Sheet Analysis—Investments in Mortgage-Related Securities—Investments in PrivateLabel Mortgage-Related Securities” for a discussion of other-than-temporary impairment recognized on our

investments in Alt-A and subprime private-label securities. See “Risk Factors” for a discussion of the risks

associated with possible future write-downs of our investment securities.

Total Loss Reserves

Our total loss reserves consist of the following components:

• Allowance for loan losses;

• Allowance for accrued interest receivable;

• Reserve for guaranty losses; and

• Allowance for preforeclosure property tax and insurance receivable.

These components can be further divided into single-family portions, which collectively make up our singlefamily loss reserves, and multifamily portions, which collectively make up our multifamily loss reserves.

We maintain an allowance for loan losses and an allowance for accrued interest receivable for loans classified

as held for investment, including both loans we hold in our portfolio and loans held in consolidated Fannie

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Mae MBS trusts. We maintain a reserve for guaranty losses for loans held in unconsolidated Fannie Mae MBS

trusts we guarantee and loans we have guaranteed under long-term standby commitments and other credit

enhancements we have provided. We also maintain an allowance for preforeclosure property tax and insurance

receivable on delinquent loans that is included in “Other assets” in our consolidated balance sheets. These

amounts, which we collectively refer to as our total loss reserves, represent probable losses related to loans in

our guaranty book of business as of the balance sheet date.

The allowance for loan losses, allowance for accrued interest receivable and allowance for preforeclosure

property tax and insurance receivable are valuation allowances that reflect an estimate of incurred credit losses

related to our recorded investment in loans held for investment. The reserve for guaranty losses is a liability

account in our consolidated balance sheets that reflects an estimate of incurred credit losses related to our

guaranty to each unconsolidated Fannie Mae MBS trust that we will supplement amounts received by the

Fannie Mae MBS trust as required to permit timely payments of principal and interest on the related Fannie

Mae MBS. As a result, the guaranty reserve considers not only the principal and interest due on the loan at

the current balance sheet date, but also an estimate of any additional interest payments due to the trust from

the current balance sheet date until the point of loan acquisition or foreclosure. Our loss reserves consist of a

specific loss reserve for individually impaired loans and a collective loss reserve for all other loans.

We have an established process, using analytical tools, benchmarks and management judgment, to determine

our loss reserves. Although our loss reserve process benefits from extensive historical loan performance data,

this process is subject to risks and uncertainties, including a reliance on historical loss information that may

not be representative of current conditions. We continually monitor delinquency and default trends and make

changes in our historically developed assumptions and estimates as necessary to better reflect present

conditions, including current trends in borrower risk and/or general economic trends, changes in risk

management practices, and changes in public policy and the regulatory environment. We also consider the

recoveries that we expect to receive on mortgage insurance and other loan-specific credit enhancements

entered into contemporaneously with and in contemplation of a guaranty or loan purchase transaction, as such

recoveries reduce the severity of the loss associated with defaulted loans. Due to the stress in the housing and

credit markets, and the speed and extent of deterioration in these markets, our process for determining our loss

reserves has become significantly more complex and involves a greater degree of management judgment than

prior to this period of housing and mortgage market stress.

Single-Family Loss Reserves

We establish a specific single-family loss reserve for individually impaired loans, which includes loans we

restructure in troubled debt restructurings, certain nonperforming loans in MBS trusts and acquired creditimpaired loans that have been further impaired subsequent to acquisition. The single-family loss reserve for

individually impaired loans has grown as a proportion of the total single-family loss reserves in recent periods

due to increases in the population of restructured loans. We typically measure impairment based on the

difference between our recorded investment in the loan and the present value of the estimated cash flows we

expect to receive, which we calculate using the effective interest rate of the original loan or the effective

interest rate at acquisition for an acquired credit-impaired loan. However, when foreclosure is probable on an

individually impaired loan, we measure impairment based on the difference between our recorded investment

in the loan and the fair value of the underlying property, adjusted for the estimated discounted costs to sell the

property and estimated insurance or other proceeds we expect to receive. We then allocate a portion of the

reserve to interest accrued on the loans as of the balance sheet date.

We establish a collective single-family loss reserve for all other single-family loans in our single-family guaranty

book of business using a model that estimates the probability of default of loans to derive an overall loss reserve

estimate given multiple factors such as: origination year, mark-to-market LTV ratio, delinquency status and loan

product type. We believe that the loss severity estimates we use in determining our loss reserves reflect current

available information on actual events and conditions as of each balance sheet date, including current home

prices. Our loss severity estimates do not incorporate assumptions about future changes in home prices. We do,

however, use a look back period to develop our loss severity estimates for all loan categories. We then allocate a

portion of the reserve to interest accrued on the loans as of the balance sheet date.

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Our allowance for loan losses includes an estimate for the benefit of payments from lenders and servicers to

make us whole for losses on loans due to a breach of selling or servicing representations and warranties.

Historically, this estimate was based significantly on historical cash collections. In the fourth quarter of 2010,

the following factors impacted this estimate:

• we revised our methodology to take into account trends in management actions taken before cash

collections, which resulted in our allowance for loan losses being $1.1 billion higher than it would have

been under the previous methodology; and

• agreements with seller/servicers that addressed their loan repurchase and other obligations to us impacted

our expectation of future make-whole payments, resulting in a decrease in our allowance for loan losses

of approximately $700 million.

In the fourth quarter of 2010, we updated our allowance for loan loss models to incorporate more recent data

on prepayments and modified loan performance which reduced the allowance on individually impaired loans

by $670 million, driven primarily by more favorable default expectations for modified loans that withstood

successful trial periods. In the second quarter of 2010, we updated our allowance for loan loss model to reflect

a change in our severity calculations to use mark-to-market LTV ratios rather than LTV ratios at origination,

which we believe better reflects the current values of the loans. This model change resulted in a change in

estimate and a decrease to our allowance for loan losses of approximately $1.6 billion.

Multifamily Loss Reserves

We establish a specific multifamily loss reserve for multifamily loans that we determine are individually

impaired. We use an internal credit-risk rating system, delinquency status and management judgment to

evaluate the credit quality of our multifamily loans and to determine which loans we believe are impaired. Our

risk-rating system assigns an internal rating through an assessment of the credit risk profile and repayment

prospects of each loan, taking into consideration available operating statements and expected cash flows from

the underlying property, the estimated value of the property, the historical loan payment experience and

current relevant market conditions that may impact credit quality. If we conclude that a multifamily loan is

impaired, we measure the impairment based on the difference between our recorded investment in the loan

and the fair value of the underlying property less the estimated discounted costs to sell the property. When a

modified loan is deemed individually impaired, we measure the impairment based on the difference between

our recorded investment in the loan and the present value of expected cash flows discounted at the loan’s

original interest rate. However, when foreclosure is probable on an individually impaired loan, we measure

impairment based on the difference between our recorded investment in the loan and the fair value of the

underlying property, adjusted for the estimated discounted costs to sell the property and estimated insurance or

other proceeds we expect to receive. We generally obtain property appraisals from independent third-parties to

determine the fair value of multifamily loans that we consider to be individually impaired. We also obtain

property appraisals when we foreclose on a multifamily property. We then allocate a portion of the reserve to

interest accrued on the loans as of the balance sheet date.

The collective multifamily loss reserve for all other loans in our multifamily guaranty book of business is

established using an internal model that applies loss factors to loans with similar risk ratings. Our loss factors

are developed based on our historical default and loss severity experience. Management may also apply

judgment to adjust the loss factors derived from our models, taking into consideration model imprecision and

specifically known events, such as current credit conditions, that may affect the credit quality of our

multifamily loan portfolio but are not yet reflected in our model-generated loss factors. We then allocate a

portion of the reserve to interest accrued on the loans as of the balance sheet date.

Transition Impact

Upon recognition of the mortgage loans held by newly consolidated trusts and the associated accrued interest

receivable at the transition date of our adoption of the new accounting standards, we increased our “Allowance

for loan losses” by $43.6 billion, increased our “Allowance for accrued interest receivable” by $7.0 billion and

decreased our “Reserve for guaranty losses” by $54.1 billion. The net decrease of $3.5 billion reflects the

81
difference in the methodology used to estimate incurred losses for our allowances for loans losses and accrued

interest receivable versus our reserve for guaranty losses.

Upon adoption of the new accounting standards, we derecognized the substantial majority of the “Reserve for

guaranty losses” relating to loans in previously unconsolidated trusts that were consolidated in our consolidated

balance sheet. We continue to record a reserve for guaranty losses related to loans in unconsolidated trusts and to

loans that we have guaranteed under long-term standby commitments.

CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a discussion of our consolidated results of operations for the periods indicated. You

should read this section together with our consolidated financial statements including the accompanying notes.

As discussed in “Business—Executive Summary,” on January 1, 2010 we prospectively adopted new

accounting standards, which had a significant impact on the presentation and comparability of our

consolidated financial statements. The new standards resulted in the consolidation of the substantial majority

of our single-class securitization trusts and the elimination of previously recorded deferred revenue from our

guaranty arrangements. While some line items in our consolidated statements of operations were not impacted,

others were impacted significantly, which reduces the comparability of our results for 2010 with the results for

prior years. The following table describes the impact to our 2010 results for those line items that were

impacted significantly as a result of our adoption of the new accounting standards.

Item Consolidation Impact

Net interest

income

• We now recognize the underlying assets and liabilities of the substantial majority of our MBS trusts

in our consolidated balance sheets, which increases both our interest-earning assets and interestbearing liabilities and related interest income and interest expense.

• Contractual guaranty fees and the amortization of deferred cash fees received after December 31,

2009 are recognized into interest income.

• We now include nonaccrual loans from the majority of our MBS trusts in our consolidated financial

statements, which decreases our net interest income as we do not recognize interest income on these

loans while we continue to recognize interest expense for amounts owed to MBS certificateholders.

• Trust management income and certain fee income from consolidated trusts are now recognized as

interest income.

Guaranty fee

income

• Upon adoption of the new accounting standards, we eliminated substantially all of our guarantyrelated assets and liabilities in our consolidated balance sheets. As a result, consolidated trusts’

deferred cash fees and non-cash fees through December 31, 2009 were recognized into our total

deficit through the transition adjustment effective January 1, 2010, and we no longer recognize

income or loss from amortizing these assets and liabilities nor do we recognize changes in their fair

value. As noted above, we now recognize both contractual guaranty fees and the amortization of

deferred cash fees received after December 31, 2009 through interest income, thereby reducing

guaranty fee income to only those amounts related to unconsolidated trusts and other credit

enhancement arrangements, such as our long-term standby commitments.

Credit-related

expenses

• As the majority of our trusts are consolidated, we no longer record fair value losses on creditimpaired loans acquired from the substantial majority of our trusts.

• The substantial majority of our combined loss reserves are now recognized in our allowance for loan

losses to reflect the loss allowance against the consolidated mortgage loans. We use a different

methodology to estimate incurred losses for our allowance for loan losses as compared with our

reserve for guaranty losses, which reduces our credit-related expenses.

Investment

gains (losses),

net

• Our portfolio securitization transactions that reflect transfers of assets to consolidated trusts do not

qualify as sales, thereby reducing the amount we recognize as portfolio securitization gains and

losses.

• We no longer designate the substantial majority of our loans held for securitization as held-for-sale

because the substantial majority of related MBS trusts will be consolidated, thereby reducing lower

of cost or fair value adjustments.

• We no longer record gains or losses on the sale from our portfolio of the substantial majority of our

available-for-sale MBS because these securities were eliminated in consolidation.

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Item Consolidation Impact

Fair value

gains (losses),

net

• We no longer record fair value gains or losses on the majority of our trading MBS, thereby reducing

the amount of securities subject to recognition of changes in fair value in our consolidated statement

of operations.

Other noninterest

expenses

• Upon purchase of MBS securities issued by consolidated trusts where the purchase price of the MBS

does not equal the carrying value of the related consolidated debt, we recognize a gain or loss on

debt extinguishment.

See “Note 2, Adoption of the New Accounting Standards on the Transfers of Financial Assets and

Consolidation of Variable Interest Entities” for a further discussion of the impacts of the new accounting

standards on our consolidated financial statements.

Additionally, we expect high levels of period-to-period volatility in our results of operations and financial

condition, principally due to changes in market conditions that result in periodic fluctuations in the estimated

fair value of financial instruments that we mark to market through our earnings. These instruments include

trading securities and derivatives. The estimated fair value of our trading securities and derivatives may

fluctuate substantially from period to period because of changes in interest rates, credit spreads and interest

rate volatility, as well as activity related to these financial instruments.

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

Table 6: Summary of Consolidated Results of Operations

2010 2009 2008 2010 vs. 2009 2009 vs. 2008

For the Year Ended December 31, Variance

(Dollars in millions)

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,409 $ 14,510 $ 8,782 $ 1,899 $ 5,728

Guaranty fee income . . . . . . . . . . . . . . . . . . . . . . . . 202 7,211 7,621 (7,009) (410)

Fee and other income(1) . . . . . . . . . . . . . . . . . . . . . . 882 773 1,033 109 (260)

Net revenues ............................. $ 17,493 $ 22,494 $ 17,436 $ (5,001) $ 5,058

Investment gains (losses), net(2) . . . . . . . . . . . . . . . . . 346 1,458 (246) (1,112) 1,704

Net other-than-temporary impairments(2) . . . . . . . . . . (722) (9,861) (6,974) 9,139 (2,887)

Fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . (511) (2,811) (20,129) 2,300 17,318

Losses from partnership investments . . . . . . . . . . . . . (74) (6,735) (1,554) 6,661 (5,181)

Administrative expenses . . . . . . . . . . . . . . . . . . . . . . (2,597) (2,207) (1,979) (390) (228)

Credit-related expenses(3) . . . . . . . . . . . . . . . . . . . . . (26,614) (73,536) (29,809) 46,922 (43,727)

Other non-interest expenses(4) . . . . . . . . . . . . . . . . . . (1,421) (1,809) (1,315) 388 (494)

Loss before federal income taxes and extraordinary

losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,100) (73,007) (44,570) 58,907 (28,437)

Benefit (provision) for federal income taxes . . . . . . . . 82 985 (13,749) (903) 14,734

Extraordinary losses, net of tax effect . . . . . . . . . . . . — — (409) — 409

Net loss ................................. (14,018) (72,022) (58,728) 58,004 (13,294)

Less: Net loss attributable to the noncontrolling

interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 53 21 (49) 32

Net loss attributable to Fannie Mae ............ $(14,014) $(71,969) $(58,707) $57,955 $(13,262)

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

income is included in fee and other income.

(2) Prior to an April 2009 change in accounting for impairments, net other-than-temporary impairments also included the

non-credit portion, which in subsequent periods is recorded in other comprehensive income.

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

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

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Net Interest Income

Net interest income represents the difference between interest income and interest expense and is a primary

source of our revenue. The amount of interest income and interest expense we recognize in the consolidated

statements of operations is affected by our investment activity, our debt activity, asset yields and our funding

costs.

Table 7 presents an analysis of our net interest income, average balances, and related yields earned on assets

and incurred on liabilities for the periods indicated. For most components of the average balances, we used a

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

for mortgage loans, we used monthly averages. Table 8 presents the change in our net interest income between

periods and the extent to which that variance is attributable to: (1) changes in the volume of our interestearning assets and interest-bearing liabilities; or (2) changes in the interest rates of these assets and liabilities.

In 2010, we changed the presentation to distinguish the change in net interest income of Fannie Mae from the

change in net interest income of consolidated trusts. Prior period results have been revised to conform to the

current period presentation.

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Table 7: Analysis of Net Interest Income and Yield

Average

Balance

Interest

Income/

Expense

Average

Rates

Earned/Paid

Average

Balance

Interest

Income/

Expense

Average

Rates

Earned/Paid

Average

Balance

Interest

Income/

Expense

Average

Rates

Earned/Paid

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Interest-earning assets:

Mortgage loans of Fannie Mae(1) . . . $ 362,785 $ 14,992 4.13% $321,394 $15,378 4.78% $344,922 $18,547 5.38%

Mortgage loans of consolidated

trusts(1) .................. 2,619,258 132,591 5.06 104,385 6,143 5.88 71,694 4,145 5.78

Total mortgage loans ......... 2,982,043 147,583 4.95 425,779 21,521 5.05 416,616 22,692 5.45

Mortgage-related securities ....... 387,798 19,552 5.04

Elimination of Fannie Mae MBS held

in portfolio ............... (250,748) (13,232) 5.28

Total mortgage-related securities,

net . . . . . . . . . . . . . . . . . . . 137,050 6,320 4.61 347,467 17,230 4.96 332,442 17,344 5.22

Non-mortgage securities(2) ....... 91,613 221 0.24 53,724 247 0.46 60,230 1,748 2.90

Federal funds sold and securities

purchased under agreements to

resell or similar arrangements .... 28,685 62 0.22 46,073 260 0.56 41,991 1,158 2.76

Advances to lenders ........... 3,523 84 2.38 4,580 97 2.12 3,521 181 5.14

Total interest-earning assets ........ $3,242,914 $154,270 4.76% $877,623 $39,355 4.48% $854,800 $43,123 5.04%

Interest-bearing liabilities:

Short-term debt .............. $ 212,741 $ 619 0.29% $280,215 $ 2,305 0.82% $277,503 $ 7,806 2.81%

Long-term debt .............. 583,369 18,857 3.23 561,907 22,195 3.95 543,358 26,145 4.81

Total short-term and long-term

funding debt ............. 796,110 19,476 2.45 842,122 24,500 2.91 820,861 33,951 4.14

Federal funds purchased and

securities sold under

agreements to repurchase . . . . . . . 43 — 0.14 45 1 1.44 428 9 2.10

Debt securities of consolidated

trusts ................... 2,682,434 131,617 4.91

Elimination of Fannie Mae MBS held

in portfolio ............... (250,748) (13,232) 5.28

Total debt securities of

consolidated trusts held by third

parties ................. 2,431,686 118,385 4.87 6,033 344 5.70 6,475 381 5.88

Total interest-bearing liabilities ...... $3,227,839 $137,861 4.27% $848,200 $24,845 2.93% $827,764 $34,341 4.15%

Impact of net non-interest bearing

funding ................... $ 15,075 0.02% $ 29,423 0.10% $ 27,036 0.14%

Net interest income/net interest yield . . $ 16,409 0.51% $14,510 1.65% $ 8,782 1.03%

Net interest income/net interest yield of

consolidated trusts . . . . . . . . . . . . $ 974 0.04%

Selected benchmark interest rates at

end of period:(3)

3-month LIBOR .............. 0.30% 0.25% 1.43%

2-year swap interest rate......... 0.80 1.42 1.47

5-year swap interest rate......... 2.17 2.98 2.13

30-year Fannie Mae MBS par coupon

rate .................... 4.13 4.56 3.89

(1) Interest income includes interest income on acquired credit-impaired loans of $2.2 billion, $619 million and

$634 million for 2010, 2009 and 2008, respectively. These amounts include accretion income of $1.0 billion,

$405 million and $158 million for 2010, 2009 and 2008, respectively, relating to a portion of the fair value losses

recorded upon the acquisition of the loans. Average balance includes loans on nonaccrual status, for which interest

income is recognized when collected.

(2) Includes cash equivalents.

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

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

Total

Variance Volume Rate

Total

Variance Volume Rate

Variance Due to:(1) Variance Due to:(1)

2010 vs. 2009 2009 vs. 2008

(Dollars in millions)

Interest income:

Mortgage loans of Fannie Mae . . . . . . . . . . . . . . $ (386) $ 1,849 $(2,235) $(3,169) $(1,212) $ (1,957)

Mortgage loans of consolidated trusts . . . . . . . . . 126,448 127,426 (978) 1,998 1,923 75

Total mortgage loans . . . . . . . . . . . . . . . . . . . 126,062 129,275 (3,213) (1,171) 711 (1,882)

Total mortgage-related securities, net . . . . . . . . . . (10,910) (9,779) (1,131) (114) 765 (879)

Non-mortgage securities(2) . . . . . . . . . . . . . . . . . (26) 125 (151) (1,501) (171) (1,330)

Federal funds sold and securities purchased under

agreements to resell or similar arrangements . . . (198) (75) (123) (898) 103 (1,001)

Advances to lenders. . . . . . . . . . . . . . . . . . . . . . (13) (24) 11 (84) 44 (128)

Total interest income . . . . . . . . . . . . . . . . . . . . . . . 114,915 119,522 (4,607) (3,768) 1,452 (5,220)

Interest expense:

Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . (1,686) (458) (1,228) (5,501) 76 (5,577)

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . (3,338) 821 (4,159) (3,950) 867 (4,817)

Total short-term and long-term funding debt . . . . . (5,024) 363 (5,387) (9,451) 943 (10,394)

Federal funds purchased and securities sold under

agreements to repurchase . . . . . . . . . . . . . . . . (1) — (1) (8) (6) (2)

Total debt securities of consolidated trusts held by

third parties. . . . . . . . . . . . . . . . . . . . . . . . . . 118,041 118,099 (58) (37) (25) (12)

Total interest expense . . . . . . . . . . . . . . . . . . . . . . 113,016 118,462 (5,446) (9,496) 912 (10,408)

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . $ 1,899 $ 1,060 $ 839 $ 5,728 $ 540 $ 5,188

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

(2) Includes cash equivalents.

Net interest income increased during 2010 compared with 2009 primarily as a result of an increase in interest

income due to the recognition of contractual guaranty fees in interest income upon adoption of the new

accounting standards and a reduction in the interest expense on debt that we have issued as lower borrowing

rates allowed us to replace higher-cost debt with lower-cost debt. Partially offsetting these positive effects for

2010 was lower interest income from the interest earning assets that we own due to lower yields on our

mortgage and non-mortgage assets. The increase in net interest income was further offset by a significant

increase in the number of loans on nonaccrual status in our consolidated balance sheets, because we do not

recognize interest income on loans that have been placed on nonaccrual status, except when cash payments are

received. The increase in loans on nonaccrual status in 2010 was due to our adoption of the new accounting

standards.

For 2010, interest income that we did not recognize for nonaccrual mortgage loans, net of recoveries, was

$8.4 billion, which resulted in a 26 basis point reduction in net interest yield, compared with $1.2 billion for

2009, which resulted in a 14 basis point reduction in net interest yield and $381 million for 2008, which

resulted in a 4 basis point reduction in net interest yield. Of the $8.4 billion of interest income that we did not

recognize for nonaccrual mortgage loans for 2010, $4.7 billion was related to the unsecuritized mortgage loans

that we own.

Net interest yield significantly decreased for 2010 compared with 2009. We recognize the contractual guaranty

fee and the amortization of deferred cash fees received after December 31, 2009 on the underlying mortgage

loans of consolidated trusts as interest income, which represents the spread between the net interest yield on

the underlying mortgage assets and the rate on the debt of the consolidated trusts. Upon adoption of the new

accounting standards, our interest-earning assets and interest-bearing liabilities both increased by

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approximately $2.4 trillion. The lower spread on these interest-earning assets and liabilities reduced our net

interest yield for 2010 as compared with 2009.

Net interest income and net interest yield increased during 2009 compared with 2008, driven by lower funding

costs and by growth in the average size of our mortgage portfolio. The significant reduction in the average

cost of our debt was primarily attributable to a decline in borrowing rates as we replaced higher cost debt with

lower cost debt.

During 2008, we increased our portfolio balance as mortgage-to-debt spreads reached historic highs, and

liquidations were reduced due to the disruption of the housing and credit markets. As a result, we began 2009

with a substantially higher balance of interest-earning assets compared with the beginning of 2008. Although

portfolio actions and high liquidation levels reduced our balance of interest-earning assets during the course of

2009, the higher beginning balance resulted in a higher average balance of interest-earning assets for the full

year of 2009 compared with 2008.

The net interest income for our Capital Markets group reflects interest income from the assets we have

purchased and the interest expense from the debt we have issued. See “Business Segment Results” for a

detailed discussion of our Capital Markets group’s net interest income.

Guaranty Fee Income

Guaranty fee income primarily consists of contractual guaranty fees related to unconsolidated Fannie Mae

MBS trusts and other credit enhancement arrangements. Guaranty fee income also includes adjustments for the

amortization of deferred cash and non-cash fees and fair value adjustments related to our guaranty to the

trusts. Beginning January 1, 2010, the vast majority of guaranty fees related to Fannie Mae trusts are reflected

in interest income on a consolidated basis due to our adoption of new accounting standards that require us to

consolidate the substantial majority of our MBS trusts. At adoption of the new accounting standards, our

guaranty-related assets and liabilities pertaining to previously unconsolidated trusts were eliminated; therefore,

we no longer recognize amortization of previously recorded deferred cash and non-cash fees or fair value

adjustments related to our guaranty to these trusts.

Guaranty fee income decreased in 2010 compared with 2009 because, as noted above, we now recognize both

contractual guaranty fees and the amortization of deferred cash fees received after December 31, 2009 through

interest income, thereby reducing guaranty fee income to only those amounts related to unconsolidated trusts

and other credit enhancement arrangements, such as our long-term standby commitments.

The decrease in guaranty fee income in 2009 compared with 2008 resulted primarily from a decrease in the

average effective guaranty fee rate as a sharp decline in interest rates generated an acceleration of deferred

amounts into income during 2008. In addition, the effective guaranty fee rate declined due to a lower average

charged fee on new acquisitions due to a reduction in our acquisition of loans with higher risk characteristics.

This decline was partially offset by higher fair value adjustments on buy-ups and certain guaranty assets

recorded in 2009 and an increase in average outstanding Fannie Mae MBS and other guarantees.

Fee and Other Income

Fee and other income includes transaction fees, technology fees and multifamily fees. Beginning in 2010, fee

and other income also includes trust management income we earn as master servicer, issuer, and trustee for

Fannie Mae MBS relating only to unconsolidated trusts. Upon adoption of the new accounting standards, we

report trust management income earned by consolidated trusts as a component of net interest income in our

consolidated statement of operations. We derive trust management income from the interest earned on cash

flows between the date of remittance of mortgage and other payments to us by servicers and the date of the

distribution of these payments to MBS certificateholders.

The increase in fee and other income in 2010 compared with 2009 was primarily attributable to an increase in

transaction fees due to a higher volume of structured Fannie Mae MBS created for third parties.

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The decrease in fee and other income in 2009 as compared with 2008 was primarily attributable to lower trust

management income due to a significant decline in short-term interest rates.

Investment Gains (Losses), Net

Investment gains and losses, net consist of: gains and losses recognized on the securitization of loans and

securities from our portfolio; gains and losses recognized from the sale of available-for-sale securities; gains

and losses on the consolidation and deconsolidation of securities; lower of cost or fair value adjustments on

held-for-sale loans; and other investment gains and losses. Investment gains and losses may fluctuate

significantly from period to period depending upon our portfolio investment and securitization activities.

Investment gains declined in 2010 compared with 2009 due to a decline in gains from securitizations and in

gains from sales of available-for-sale securities as a result of adopting the new accounting standards. Under

these standards, our portfolio securitization transactions that reflect transfers of assets to consolidated trusts no

longer qualify for sale treatment, which reduced our portfolio securitization gains and losses. We no longer

record gains and losses on the sale from our portfolio of the substantial majority of available-for-sale Fannie

Mae MBS because these securities were eliminated in consolidation. The decline in investment gains in 2010

was partially offset by a decrease in lower of cost or fair value adjustments on held-for-sale loans due to the

reclassification of most of our held-for-sale loans to held for investment upon adoption of the new accounting

standards.

The shift to gains in 2009 compared with losses in 2008 was primarily attributable to increased securitization

gains due to MBS issuances and sales related to whole loan conduit activity and increased gains on

available-for-sale securities due to tightening of investment spreads on agency MBS, which led to higher sale

prices. These gains were partially offset by an increase in lower of cost or fair value adjustments on loans

primarily driven by a decline in the credit quality of these loans and an increase in interest rates.

Net Other-Than-Temporary Impairment

The net other-than-temporary impairment charges recorded in 2010 were primarily driven by a net decline in

forecasted home prices for certain geographic regions, which resulted in a decrease in the present value of our

cash flow projections on Alt-A and subprime securities. Net other-than-temporary impairment decreased in

2010 compared with 2009 due to slower deterioration of the estimated credit component of the fair value

losses of these securities. In addition, net other-than-temporary impairment decreased in 2010 compared with

2009 because, effective beginning in the second quarter of 2009, we recognize only the credit portion of

other-than-temporary impairment in our consolidated statements of operations due to the adoption of a new

other-than-temporary impairment accounting standard. The net other-than-temporary impairment charge

recorded prior to April 1, 2009 included both the credit and non-credit components of the loss in fair value.

Approximately 57% of the impairment recorded in 2009 was recorded in the first quarter of 2009 prior to the

change in accounting standards. See “Note 6, Investments in Securities” for additional information regarding

the net other-than-temporary impairment recognized in 2010. The increase in net other-than-temporary

impairment in 2009 compared with 2008 was principally related to an increase in the expected losses on our

private-label securities.

Fair Value Losses, Net

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

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Table 9: Fair Value Losses, Net

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Risk management derivatives fair value losses attributable to:

Net contractual interest expense accruals on interest rate swaps . . . . . . . . . . . . . . $(2,895) $(3,359) $ (1,576)

Net change in fair value during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,088 (1,337) (13,387)

Total risk management derivatives fair value losses, net . . . . . . . . . . . . . . . . . . (1,807) (4,696) (14,963)

Mortgage commitment derivatives fair value losses, net . . . . . . . . . . . . . . . . . . . . . . (1,193) (1,654) (453)

Total derivatives fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,000) (6,350) (15,416)

Trading securities gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,692 3,744 (7,040)

Hedged mortgage assets gains, net(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 2,154

Debt foreign exchange gains (losses), net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77) (173) 230

Debt fair value gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (32) (57)

Mortgage loans fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (131) — —

Fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (511) $(2,811) $(20,129)

2010 2009 2008

5-year swap interest rate:

As of March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.73% 2.22% 3.31%

As of June 30. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.06 2.97 4.26

As of September 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.51 2.65 4.11

As of December 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.18 2.98 2.13

(1) Represents adjustments to the carrying value of mortgage assets designated for hedge accounting that are attributable

to changes in interest rates.

Risk Management Derivatives Fair Value Losses, Net

Risk management derivative instruments are an integral part of our management of interest rate risk. We

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

prepayment risks. We generally are the purchaser of risk management derivatives. In cases where options

obtained through callable debt issuances are not needed for risk management derivative purposes, we may sell

options in the over-the-counter derivatives market in order to offset the options obtained in the callable debt.

Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within

prescribed risk parameters. We generally use only derivatives that are relatively liquid and straightforward to

value. We consider the cost of derivatives used in our management of interest rate risk to be an inherent part

of the cost of funding and hedging our mortgage investments and economically similar to the interest expense

that we recognize on the debt we issue to fund our mortgage investments.

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

ended December 31, 2010, 2009 and 2008 in “Note 10, Derivative Instruments and Hedging Activities.”

The primary factors affecting the fair value of our risk management derivatives include the following.

• Changes in interest rates: Our derivatives, in combination with our issuances of debt securities, are

intended to offset changes in the fair value of our mortgage assets, which tend to increase in value when

interest rates decrease and, conversely, decrease in value when interest rates rise. Pay-fixed swaps

decrease in value and receive-fixed swaps increase in value as swap interest rates decrease (with the

opposite being true when swap interest rates increase). Because the composition of our pay-fixed and

receive-fixed derivatives varies across the yield curve, the overall fair value gains and losses of our

derivatives are sensitive to flattening and steepening of the yield curve.

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• Implied interest rate volatility: Our derivatives portfolio includes option-based derivatives, which we use

to economically hedge the prepayment option embedded in our mortgage investments. A key variable in

estimating the fair value of option-based derivatives is implied volatility, which reflects the market’s

expectation of the magnitude of future changes in interest rates. Assuming all other factors are held equal,

including interest rates, a decrease in implied volatility would reduce the fair value of our purchased

options and an increase in implied volatility would increase the fair value of our purchased options.

• Changes in our derivative activity: As interest rates change, we are likely to take actions to rebalance

our portfolio to manage our interest rate exposure. As interest rates decrease, expected mortgage

prepayments are likely to increase, which reduces the duration of our mortgage investments. In this

scenario, we generally will rebalance our existing portfolio to manage this risk by terminating pay-fixed

swaps or adding receive-fixed swaps, which shortens the duration of our liabilities. Conversely, when

interest rates increase and the duration of our mortgage assets increases, we are likely to rebalance our

existing portfolio by adding pay-fixed swaps that have the effect of extending the duration of our

liabilities. We use foreign-currency swaps to manage the foreign exchange impact of our foreign currency

denominated debt issuances. We also use derivatives in various interest rate environments to hedge the

risk of incremental mortgage purchases that we are not able to accomplish solely through our issuance of

debt securities.

• Time value of purchased options: Intrinsic value and time value are the two primary components of an

option’s price. The intrinsic value is the amount that can be immediately realized by exercising the

option—the amount by which the market rate exceeds or is below the exercise, or strike rate, such that

the option is in-the-money. The time value of an option is the amount by which the price of an option

exceeds its intrinsic value. Time decay refers to the diminishing value of an option over time as less time

remains to exercise the option. We have a significant amount of purchased options where the time value

of the upfront premium we pay decreases due to the passage of time.

We recorded risk management derivative fair value losses in 2010 primarily as a result of: (1) time decay on

our purchased options; (2) a decrease in the fair value of our pay-fixed derivatives due to a decline in swap

interest rates during the first quarter of 2010; and (3) a decrease in implied interest rate volatility, which

reduced the fair value of our purchased options.

Risk management derivative losses in 2009 were driven by losses on our receive-fixed swaps and receive-fixed

option-based derivatives due to an increase in swap interest rates and by time decay on our purchased options,

partially offset by gains on our net-pay fixed book due to higher swap interest rates.

We recorded risk management derivative losses in 2008 primarily attributable to the decline in swap interest

rates, which resulted in substantial fair value losses on our pay-fixed swaps that exceeded our fair value gains

on our receive-fixed swaps.

Because risk management derivatives are an important part of our interest rate risk management strategy, it is

important to evaluate the impact of our derivatives in the context of our overall interest rate risk profile and in

conjunction with the other offsetting mark-to-market gains and losses presented in Table 9. For additional

information on our use of derivatives to manage interest rate risk, including the economic objective of our use

of various types of derivative instruments, changes in our derivatives activity and the outstanding notional

amounts, see “Risk Management—Market Risk Management, Including Interest Rate Risk Management—

Interest Rate Risk Management.” See “Consolidated Balance Sheet Analysis—Derivative Instruments” for a

discussion of the effect of derivatives on our consolidated balance sheets.

Mortgage Commitment Derivatives Fair Value Losses, Net

Commitments to purchase or sell some mortgage-related securities and to purchase single-family mortgage

loans are generally accounted for as derivatives. For open mortgage commitment derivatives, we include

changes in their fair value in our consolidated statements of operations. When derivative purchase

commitments settle, we include the fair value of the commitment on the settlement date in the cost basis of

the loan or security we purchase. When derivative commitments to sell securities settle, we include the fair

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value of the commitment on the settlement date in the cost basis of the security we sell. Purchases and sales

of securities issued by our consolidated MBS trusts are treated as extinguishment or issuance of debt,

respectively. For commitments to purchase and sell securities issued by our consolidated MBS trusts, we

recognize the fair value of the commitment on the settlement date as a component of debt extinguishment

gains and losses or in the cost basis of the debt issued, respectively. In 2010 and 2009, the majority of our

mortgage commitments were commitments to sell mortgage-related securities and we recognized losses due to

their increased prices during the commitment period. Additionally, mortgage commitment losses in 2009 were

associated with a large volume of dollar roll transactions. Mortgage commitment derivative losses in 2008

were primarily driven by losses on our securities purchase commitments as mortgage-related securities prices

decreased during the commitment period.

Trading Securities Gains (Losses), Net

Gains from trading securities in 2010 were primarily driven by a decrease in interest rates and narrowing of

credit spreads, primarily on CMBS. The decline in gains from trading securities in 2010 compared with 2009

was primarily due to lower gains on non-mortgage securities because credit spreads were relatively flat in

2010 compared with significant narrowing of credit spreads in 2009. Gains from trading securities in 2009

were primarily attributable to the narrowing of spreads on CMBS, agency MBS and non-mortgage related

securities, partially offset by an increase in interest rates. The losses from trading securities in 2008 were

primarily attributable to widening of spreads, particularly on private-label mortgage-related securities backed

by Alt-A and subprime loans and CMBS, as well as losses on non-mortgage securities in our cash and other

investments portfolio.

We provide additional information on our trading and available-for-sale securities in “Consolidated Balance

Sheet Analysis—Trading and Available-for-Sale Investment Securities” and disclose the sensitivity of changes

in the fair value of our trading securities to changes in interest rates in “Risk Management—Market Risk

Management, Including Interest Rate Risk Management—Measurement of Interest Rate Risk.”

Hedged Mortgage Assets Gains, Net

We applied hedge accounting during a period of time in 2008. We did not have any derivatives designated as

hedges during 2010 or 2009.

Our hedge accounting relationships during 2008 consisted of pay-fixed interest rate swaps designated as fair

value hedges of changes in the fair value, attributable to changes in the LIBOR benchmark interest rate, of

specified mortgage assets. These fair value accounting hedges resulted in gains on the hedged mortgage assets

of $2.2 billion for 2008, which were offset by losses of $2.2 billion on the pay-fixed swaps designated as

hedging instruments. The losses on these pay-fixed swaps are included as a component of derivatives fair

value losses, net.

Losses from Partnership Investments

We are a limited liability investor in LIHTC and non-LIHTC investments formed for the purpose of providing

equity funding for affordable multifamily rental properties. Historically, we generally received tax benefits (tax

credits and tax deductions for net operating losses) on our LIHTC investments that we used to reduce our

income tax expense. Given our current tax position, it is unlikely that we will be able to use the tax benefits

that we expect to receive this year and in the future from these LIHTC investments.

Losses from partnership investments declined significantly during 2010 because we no longer recognize net

operating losses or impairment on our LIHTC investments. During 2009, we explored options to sell or

otherwise transfer our LIHTC investments for value consistent with our mission. On February 18, 2010, FHFA

informed us by letter that, after consultation with Treasury, we may not sell or transfer our LIHTC partnership

interests and that FHFA sees no disposition options. Therefore, we no longer have the intent and ability to sell

or otherwise transfer our LIHTC investments for value. As a result, we recognized a loss of $5.0 billion during

the fourth quarter of 2009 to reduce the carrying value of our LIHTC partnership investments to zero in our

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consolidated financial statements, and we no longer recognize net operating losses or impairment on our

LIHTC investments.

As of December 31, 2010, we had an obligation to fund $280 million in capital contributions on our LIHTC

investments, which has been recorded as a component of “Other liabilities” in our consolidated balance sheet.

Losses from partnership investments increased in 2009 compared with 2008 due to the recognition of the

$5.0 billion loss during the fourth quarter of 2009, as discussed above.

Administrative Expenses

Administrative expenses increased in 2010 compared with 2009 due to an increase in employees and thirdparty services primarily related to our foreclosure prevention and credit loss mitigation efforts. The increase in

administrative expenses was partially offset by a $167 million reduction in expenses in the fourth quarter of

2010 for the accrual and receipt of reimbursements from Treasury and Freddie Mac for expenses incurred as

program administrator for HAMP and other initiatives under the Making Home Affordable Program.

Administrative expenses increased in 2009 compared with 2008 due to an increase in employees and thirdparty services primarily related to our foreclosure prevention and credit loss mitigation efforts. The increase in

these costs was partially offset by lower staffing levels throughout the year in other areas of the company.

Credit-Related Expenses

Credit-related expenses consist of the provision for loan losses, provision for guaranty losses and foreclosed

property expense. We detail the components of our credit-related expenses in Table 10.

Table 10: Credit-Related Expenses

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,702 $ 9,569 $ 4,022

Provision for guaranty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 63,057 23,929

Total provision for credit losses(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,896 72,626 27,951

Foreclosed property expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,718 910 1,858

Credit-related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,614 $73,536 $29,809

(1) Includes charge-offs attributable to acquired credit-impaired loans and HomeSaver Advance fair value losses of

$180 million, $20.6 billion and $2.4 billion for the years ended December 31, 2010, 2009 and 2008, respectively.

Provision for Credit Losses

Our total loss reserves provide for probable credit losses inherent in our guaranty book of business as of each

balance sheet date. We establish our loss reserves through the provision for credit losses for losses that we

believe have been incurred and will eventually be reflected over time in our charge-offs. When we determine

that a loan is uncollectible, typically upon foreclosure, we record the charge-off against our loss reserves. We

record recoveries of previously charged-off amounts as a credit to our loss reserves.

Table 11 displays the components of our total loss reserves and our total fair value losses previously

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

fair value losses lowered our recorded loan balances, we have fewer inherent losses in our guaranty book of

business and consequently require lower “total loss reserves.” For these reasons, we consider these fair value

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

as credit losses in the future. We estimate that approximately two-thirds of this amount, as of December 31,

2010, represents credit losses we expect to realize in the future and approximately one-third will eventually be

recovered through our consolidated statements of operations, primarily as net interest income if the loan cures

or as foreclosed property income if the sale of the collateral exceeds the recorded investment in the credit92
impaired loan. We exclude these fair value losses from our credit loss calculation as described in “Credit Loss

Performance Metrics.”

Table 11: Total Loss Reserves

2010 2009

As of December 31,

(Dollars in millions)

Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $61,556 $ 9,925

Reserve for guaranty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 54,430

Combined loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,879 64,355

Allowance for accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,414 536

Allowance for preforeclosure property taxes and insurance receivable(1) . . . . . . . . . . . . . . . . . . . . . 958 —

Total loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,251 64,891

Fair value losses previously recognized on acquired credit impaired loans(2) . . . . . . . . . . . . . . . . . . 19,171 22,295

Total loss reserves and fair value losses previously recognized on acquired credit impaired loans . . $85,422 $87,186

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

(2) Represents the fair value losses on loans purchased out of MBS trusts reflected in our consolidated balance sheets.

We summarize the changes in our combined loss reserves in Table 12. Upon recognition of the mortgage loans

held by newly consolidated trusts on January 1, 2010, we increased our “Allowance for loan losses” and

decreased our “Reserve for guaranty losses.” The impact at transition is reported as “Adoption of new

accounting standards” in Table 12. The decrease in the combined loss reserves from transition represents a

difference in the methodology used to estimate incurred losses for our allowance for loan losses as compared

with our reserve for guaranty losses and our separate presentation of the portion of the allowance related to

accrued interest as our “Allowance for accrued interest receivable.” These changes are discussed in “Note 2,

Adoption of the New Accounting Standards on the Transfers of Financial Assets and Consolidation of Variable

Interest Entities.”

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Table 12: Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)

Of

Fannie

Mae

Of

Consolidated

Trusts Total 2009 2008 2007 2006

2010

(Dollars in millions)

As of December 31,

Changes in combined loss reserves:

Allowance for loan losses:

Beginning balance(1) ..................... $ 8,078 $ 1,847 $ 9,925 $ 2,772 $ 629 $ 284 $ 246

Adoption of new accounting standards ........ — 43,576 43,576 — — — —

Provision for loan losses ................. 13,067 11,635 24,702 9,569 4,022 658 174

Charge-offs(2) ........................ (15,852) (7,026) (22,878) (2,245) (1,987) (407) (206)

Recoveries . . . ....................... 1,913 1,164 3,077 214 190 107 70

Transfers(3) .......................... 44,714 (44,714) — — — — —

Net reclassifications(1)(4) ................. (3,390) 6,544 3,154 (385) (82) (13) —

Ending balance(1)(5) ...................... $ 48,530 $ 13,026 $ 61,556 $ 9,925 $ 2,772 $ 629 $ 284

Reserve for guaranty losses:

Beginning balance ....................... $ 54,430 $ — $ 54,430 $ 21,830 $ 2,693 $ 519 $ 422

Adoption of new accounting standards ........ (54,103) — (54,103) — — — —

Provision for guaranty losses . . . . . . . . . . . . . . 194 — 194 63,057 23,929 3,906 415

Charge-offs . . ....................... (203) — (203) (31,142) (4,986) (1,782) (336)

Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . 5 — 5 685 194 50 18

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . $ 323 $ — $ 323 $ 54,430 $21,830 $ 2,693 $ 519

Combined loss reserves:

Beginning balance(1) ..................... $ 62,508 $ 1,847 $ 64,355 $ 24,602 $ 3,322 $ 803 $ 668

Adoption of new accounting standards ........ (54,103) 43,576 (10,527) — — — —

Total provision for credit losses ............ 13,261 11,635 24,896 72,626 27,951 4,564 589

Charge-offs(2) ........................ (16,055) (7,026) (23,081) (33,387) (6,973) (2,189) (542)

Recoveries . . . ....................... 1,918 1,164 3,082 899 384 157 88

Transfers(3) .......................... 44,714 (44,714) — — — — —

Net reclassifications(1)(4) ................. (3,390) 6,544 3,154 (385) (82) (13) —

Ending balance(1)(5) ...................... $ 48,853 $ 13,026 $ 61,879 $ 64,355 $24,602 $ 3,322 $ 803

Attribution of charge-offs:

Charge-offs attributable to guaranty book of

business............................ $(22,901) $(12,832) $ (4,544) $ (825) $(338)

Charge-offs attributable to fair value losses on:

Acquired credit-impaired loans ............. (180) (20,327) (2,096) (1,364) (204)

HomeSaver Advance loans . . ............. — (228) (333) — —

Total charge-offs . ....................... $(23,081) $(33,387) $ (6,973) $(2,189) $(542)

Allocation of combined loss reserves:

Balance at end of each period attributable to:

Single-family(1) ........................ $ 60,163 $ 62,312 $24,498 $ 3,249 $ 729

Multifamily ........................... 1,716 2,043 104 73 74

Total . . . ............................ $ 61,879 $ 64,355 $24,602 $ 3,322 $ 803

Single-family and multifamily combined loss

reserves as a percentage of applicable guaranty

book of business:

Single-family(1) ........................ 2.10% 2.14% 0.87% 0.13% 0.03%

Multifamily ........................... 0.91 1.10 0.06 0.05 0.06

Combined loss reserves as a percentage of:

Total guaranty book of business(1) ............ 2.03% 2.08% 0.83% 0.12% 0.03%

Total nonperforming loans(1) ................ 28.81 29.73 20.63 12.23 5.80

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(1) Prior period amounts have been reclassified and respective percentages have been recalculated to conform to the

current period presentation.

(2) Includes accrued interest of $2.4 billion, $1.5 billion, $642 million, $128 million and $39 million for the years ended

December 31, 2010, 2009, 2008, 2007 and 2006, respectively.

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

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

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

(5) Includes $385 million, $726 million, $150 million, $39 million and $28 million as of December 31, 2010, 2009, 2008,

2007 and 2006, respectively, for acquired credit-impaired loans.

Our provision for credit losses decreased in 2010 compared with 2009, primarily due to the moderate change

in our total loss reserves during 2010 compared with the substantial increase in our total loss reserves during

2009. The substantial increase in our total loss reserves during 2009 reflected the significant growth in the

number of loans that were seriously delinquent during that period, which was partly the result of the economic

deterioration during 2009. Another impact of economic deterioration during 2009 was sharply falling home

prices, which resulted in higher losses on defaulted loans, further increasing the loss reserves. Our provision

for credit losses was substantially lower in 2010 because there was neither an increase in the number of

seriously delinquent loans, nor a sharp decline in home prices; therefore we did not need to substantially

increase our reserves in 2010. Although lower for 2010 than in 2009, our provision for credit losses, level of

delinquencies and defaults, and our total loss reserves remained high and were primarily affected by the

following factors:

• Continued stress on a broader segment of borrowers due to continued high levels of unemployment and

underemployment and the prolonged decline in home prices has resulted in elevated delinquency rates on

loans in our single-family guaranty book of business that do not have characteristics typically associated

with higher-risk loans.

• Certain loan categories continued to contribute disproportionately to the increase in our nonperforming

loans and credit losses. These categories include: loans on properties in California, Florida, Arizona and

Nevada and certain Midwest states; loans originated in 2006 and 2007; and loans related to higher-risk

product types, such as Alt-A loans. Although we have identified each year of our 2005 through 2008

vintages as unprofitable, the largest and most disproportionate contributors to credit losses have been the

2006 and 2007 vintages. Accordingly, our concentration statistics throughout the MD&A focus on only

these two vintages.

• The prolonged decline in home prices has also resulted in negative home equity for some borrowers,

especially when the impact of existing second mortgage liens is taken into account, which has affected

their ability to refinance or willingness to make their mortgage payments, and caused loans to remain

delinquent for an extended period of time as shown in “Table 41: Delinquency Status of Single-Family

Conventional Loans.”

• The number of loans that are seriously delinquent remained high due to delays in foreclosures because:

(1) legislation or judicial changes in the foreclosure process in a number of states have lengthened the

foreclosure timeline; (2) some jurisdictions are experiencing foreclosure processing backlogs due to high

foreclosure case volumes; and (3) as discussed in “Executive Summary—Servicer Foreclosure Process

Deficiencies and Foreclosure Pause,” a number of our single-family mortgage servicers temporarily halted

foreclosures in some or all states after discovering deficiencies in their processes and the processes of

their lawyers and other service providers relating to the execution of affidavits in connection with the

foreclosure process, which has lengthened the time to foreclose. However, during 2010, the number of

loans that transitioned out of seriously delinquent status exceeded the number of loans that became

seriously delinquent, primarily due to an increase in loan modifications and foreclosure alternatives and a

higher volume of foreclosures.

• A greater proportion of our total loss reserves is attributable to individual impairment rather than the

collective reserve for loan losses. We consider a loan to be individually impaired when, based on current

information, it is probable that we will not receive all amounts due, including interest, in accordance with

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the contractual terms of the loan agreement. Individually impaired loans currently include, among others,

those restructured in a TDR, which is a form of restructuring a mortgage loan in which a concession is

granted to a borrower experiencing financial difficulty. Any impairment recognized on these loans is part

of our provision for loan losses and allowance for loan losses. The higher level of workouts initiated as a

result of our home retention and foreclosure prevention efforts during 2010, increased our total number of

individually impaired loans, especially those considered to be TDRs, compared with 2009. Individual

impairment for TDRs is based on the restructured loan’s expected cash flows over the life of the loan,

taking into account the effect of any concessions granted to the borrower, discounted at the loan’s original

effective interest rate. The model includes forward-looking assumptions using multiple scenarios of the

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

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

2010 combined with the forward looking assumptions used in our model, the allowance calculated for an

individually impaired loan has generally been greater than the allowance that would be calculated under

the collective reserve.

• We recorded an out-of-period adjustment of $1.1 billion to our provision for loan losses in the second

quarter of 2010, related to an additional provision for losses on preforeclosure property taxes and

insurance receivables. For additional information about this adjustment, see “Note 5, Allowance for Loan

Losses and Reserve for Guaranty Losses.”

• On December 31, 2010, we entered into an agreement with Bank of America, N.A., and its affiliates, to

address outstanding repurchase requests for residential mortgage loans. Bank of America agreed, among

other things, to a cash payment of $1.3 billion, $930 million of which was recognized as a recovery of

charge-offs resulting in a reduction to our provision for loan losses and allowance for loan losses.

• Additionally, as discussed in “Critical Account Policies and Estimates—Total Loss Reserves—SingleFamily Loss Reserves,” the impact on our expectations of future payments from servicers due to this

collection resulted in a decrease of approximately $700 million in our allowance for loan losses and we

revised our methodology for estimating the benefit of payments from servicers, which resulted in our

allowance for loan losses being $1.1 billion higher than it would have been under the previous

methodology. For additional information on the terms of this agreement, see “Risk Management—Credit

Risk Management—Institutional Counterparty Credit Risk Management.”

The decline in our fair value losses on acquired credit-impaired loans was another significant factor

contributing to the decline in our provision for credit losses in 2010 compared with 2009. In our capacity as

guarantor of our MBS trusts, we have the option under the trust agreements to purchase mortgage loans that

meet specific criteria from our MBS trusts. We generally are not permitted to complete a modification of a

loan while the loan is held in the MBS trust. As a result, we generally exercise our option to purchase any

delinquent loan that we intend to modify from an MBS trust prior to the time that the modification becomes

effective. See “Mortgage Securitizations—Purchases of Loans from our MBS Trusts” for additional

information on the provisions in our MBS trust agreements that govern the purchase of loans from our MBS

trusts and the factors that we consider in determining whether to purchase delinquent loans from our MBS

trusts. While we acquired significantly more credit-impaired loans from MBS trusts in 2010, we experienced a

significant decline in fair value losses on acquired credit-impaired loans because of our adoption of the new

accounting standards. Only purchases of credit-deteriorated loans from unconsolidated MBS trusts or as a

result of other credit guarantees generate fair value losses upon acquisition. In 2010, we acquired

approximately 1,118,000 loans from MBS trusts.

In 2009, we generally recorded our net investment in acquired credit-impaired loans at the lower of the

acquisition cost of the loan or the estimated fair value at the date of purchase or consolidation. To the extent

that the acquisition cost of these loans exceeded the estimated fair value, we recorded a fair value loss chargeoff against the “Reserve for guaranty losses” at the time we acquired the loan. We expect to realize a portion

of these fair value losses as credit losses in the future (for loans that eventually involve charge-offs or

foreclosure), yet these fair value losses have already reduced the mortgage loan balances reflected in our

consolidated balance sheets and have effectively been recognized in our consolidated statements of operations

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through our provision for guaranty losses. Because these fair value losses lowered our recorded loan balances,

we have fewer inherent losses in our guaranty book of business and consequently require lower “total loss

reserves.” However, any incremental impairment recognized on these loans after the date of acquisition

becomes a component of our total loss reserves.

Loans in certain states, certain higher-risk categories and our 2006 and 2007 vintages continue to contribute

disproportionately to our credit losses, as displayed in Table 15. Our combined single-family loss reserves are

also disproportionately higher for certain states, Alt-A loans and our 2006 and 2007 vintages. The Midwest

accounted for approximately 14% of our combined single-family loss reserves as of December 31, 2010,

compared with approximately 13% as of December 31, 2009. Our mortgage loans in California, Florida,

Arizona and Nevada together accounted for approximately 52% of our combined single-family loss reserves as

of December 31, 2010, compared with approximately 53% as of December 31, 2009. Our Alt-A loans

represented approximately 30% of our combined single-family loss reserves as of December 31, 2010,

compared with approximately 35% as of December 31, 2009, and our 2006 and 2007 loan vintages together

accounted for approximately 67% of our combined single-family loss reserves as of December 31, 2010,

compared with approximately 69% as of December 31, 2009.

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

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

Management.” For a discussion of our charge-offs, see “Consolidated Results of Operations—Credit-Related

Expenses—Credit Loss Performance Metrics.” We provide additional information on credit-impaired loans

acquired from MBS trusts in “Note 4, Mortgage Loans.”

Our balance of nonperforming single-family loans remained high as of December 31, 2010 due to both high

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

but the loan will continue to be classified as a nonperforming loan as the loan is not performing per the

original terms. The composition of our nonperforming loans is shown in Table 13. For information on the

impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 4,

Mortgage Loans.”

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Table 13: Nonperforming Single-Family and Multifamily Loans

2010 2009 2008 2007 2006

As of December 31,

(Dollars in millions)

On-balance sheet nonperforming loans including loans in consolidated

Fannie Mae MBS trusts:

Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $152,756 $ 34,079 $ 17,634 $ 8,343 $ 5,961

Troubled debt restructurings on accrual status . . . . . . . . . . . . . . . . . . . 58,078 6,922 1,931 1,765 1,086

HomeSaver Advance first-lien loans on accrual status . . . . . . . . . . . . . . 3,829 866 1,121 — —

Total on-balance sheet nonperforming loans . . . . . . . . . . . . . . . . . . . 214,663 41,867 20,686 10,108 7,047

Off-balance sheet nonperforming loans in unconsolidated

Fannie Mae MBS trusts:

Nonperforming loans, excluding HomeSaver Advance first-lien loans(1) . . 89 161,406 89,617 17,048 6,799

HomeSaver Advance first-lien loans(2) . . . . . . . . . . . . . . . . . . . . . . . . — 13,182 8,929 — —

Total off-balance sheet nonperforming loans . . . . . . . . . . . . . . . . . . 89 174,588 98,546 17,048 6,799

Total nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $214,752 $216,455 $119,232 $27,156 $13,846

Accruing on-balance sheet loans past due 90 days or more(3) . . . . . . . . . . . $ 896 $ 612 $ 317 $ 204 $ 147

2010 2009 2008 2007 2006

For the Year Ended December 31,

(Dollars in millions)

Interest related to on-balance sheet nonperforming loans:

Interest income forgone(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,185 $ 1,341 $ 401 $ 215 $ 163

Interest income recognized for the period(5). . . . . . . . . . . . . . . . . . . . . 7,995 1,206 771 328 295

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

(2) Represents all off-balance sheet first-lien loans associated with unsecured HomeSaver Advance loans, including firstlien loans that are not seriously delinquent.

(3) Recorded investment in loans as of the end of each period that are 90 days or more past due and continuing to accrue

interest, the majority includes loans insured or guaranteed by the U.S. government and loans where we have recourse

against the seller in the event of a default.

(4) Represents the amount of interest income that would have been recorded during the period for on-balance sheet

nonperforming loans as of the end of each period had the loans performed according to their original contractual

terms.

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

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

performing and cash payments received on nonaccrual loans.

Foreclosed Property Expense

Foreclosed property expense increased during 2010 compared with 2009 primarily due to the substantial

increase in our REO inventory and an increase in valuation adjustments that reduced the value of our REO

inventory. The increase in foreclosed property expense was partially offset by the recognition of $796 million

in 2010 from the cancellation and restructuring of some of our mortgage insurance coverage compared with a

recognition of $668 million from restructurings in 2009. These fees represented an acceleration of, and

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

insurers. Further, under our December 31, 2010 agreement with Bank of America, N.A., and its affiliates,

Bank of America agreed, among other things, to a cash payment of $1.3 billion, $266 million of which was

recognized as a reduction to foreclosed property expense. For additional information on the terms of this

agreement, see “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk

Management.” In addition, during the second quarter of 2010, we began recording expenses related to

preforeclosure property taxes and insurance to the provision for loan losses.

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While we experienced an increase in foreclosure activity in 2009 compared with 2008 due to higher foreclosed

property acquisitions, foreclosed property expense decreased in 2009 compared with 2008 primarily driven by

$668 million in cash fees received from the cancellation and restructuring of some of our mortgage insurance

coverage.

As described in “Business—Executive Summary,” although the current servicer foreclosure pause has

negatively affected our serious delinquency rates, credit-related expenses and foreclosure timelines, we cannot

yet predict the full extent of its impact.

Credit Loss Performance Metrics

Our credit-related expenses should be considered in conjunction with our credit loss performance metrics.

These credit loss performance metrics are not defined terms within GAAP and may not be calculated in the

same manner as similarly titled measures reported by other companies. Because management does not view

changes in the fair value of our mortgage loans as credit losses, we adjust our credit loss performance metrics

for the impact associated with HomeSaver Advance loans and the acquisition of credit-impaired loans as

follows:

• We include the impact of any credit losses that ultimately result from foreclosure.

• We exclude the impact of fair value losses recorded upon acquisition.

• We add back to our credit losses the amount of charge-offs and foreclosed property expense that we

would have recorded if we had calculated these amounts based on the acquisition cost. Because the fair

value amount at acquisition was lower than the acquisition cost, any loss recorded at foreclosure is less

than it would have been if we had recorded the loan at its acquisition cost.

Interest forgone on nonperforming loans in our mortgage portfolio reduces our net interest income but is not

reflected in our credit losses total. In addition, other-than-temporary impairment losses resulting from

deterioration in the credit quality of our mortgage-related securities and accretion of interest income on

acquired credit-impaired loans are excluded from credit losses.

Historically, management viewed our credit loss performance metrics, which include our historical credit

losses and our credit loss ratio, as indicators of the effectiveness of our credit risk management strategies. As

our credit losses are now at such high levels, management has shifted focus to our loss mitigation strategies

and the reduction of our total credit losses and away from the credit loss ratio to measure performance.

However, we believe that credit loss performance metrics may be useful to investors as the losses are

presented as a percentage of our book of business and have historically been used by analysts, investors and

other companies within the financial services industry. They also provide a consistent treatment of credit

losses for on- and off-balance sheet loans. Moreover, by presenting credit losses with and without the effect of

fair value losses associated with the acquisition of credit-impaired loans and HomeSaver Advance loans,

investors are able to evaluate our credit performance on a more consistent basis among periods. Table 14

details the components of our credit loss performance metrics as well as our average single-family default rate

and average single-family loss severity rate.

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Table 14: Credit Loss Performance Metrics

Amount Ratio(1) Amount Ratio(1) Amount Ratio(1)

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Charge-offs, net of recoveries (2)(3) . . . . . . . . . . . . . . . $19,999 65.6 bp $ 32,488 106.7 bp $ 6,589 22.9 bp

Foreclosed property expense(2)(3) . . . . . . . . . . . . . . . . . 1,718 5.6 910 3.0 1,858 6.5

Credit losses including the effect of fair value losses on

acquired credit-impaired loans and HomeSaver

Advance loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,717 71.2 33,398 109.7 8,447 29.4

Less: Fair value losses resulting from acquired creditimpaired loans and HomeSaver Advance loans . . . . . (180) (0.6) (20,555) (67.5) (2,429) (8.4)

Plus: Impact of acquired credit-impaired loans on

charge-offs and foreclosed property expense . . . . . . . 2,094 6.8 739 2.4 501 1.7

Credit losses and credit loss ratio . . . . . . . . . . . . . . . . $23,631 77.4 bp $ 13,582 44.6 bp $ 6,519 22.7 bp

Credit losses attributable to:

Single-family. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,133 $ 13,362 $ 6,467

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498 220 52

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,631 $ 13,582 $ 6,519

Average single-family default rate . . . . . . . . . . . . . . . . 1.99% 1.07% 0.59%

Average single-family initial charge-off severity

rate(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.07% 37.21% 25.65%

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

during the period.

(2) Beginning in the second quarter of 2010, expenses relating to preforeclosure taxes and insurance, previously recorded

as foreclosed property expense, were recorded as charge-offs. The impact of including these costs was 4.7 basis points

for the year ended December 31, 2010.

(3) Includes cash received pursuant to our December 31, 2010 agreement with Bank of America. The impact of this cash

receipt was a reduction in charge-offs, net of recoveries, of $930 million or 3.0 basis points and a reduction in

foreclosed property expense of $266 million or 0.9 basis points for the year ended December 31, 2010.

(4) Excludes fair value losses on credit-impaired loans acquired from MBS trusts and HomeSaver Advance loans and

charge-offs from preforeclosure sales and any costs, gains or losses associated with REO after initial acquisition

through final disposition.

The increase in our credit losses in 2010 reflects the increase in the number of defaults, particularly due to our

acquisition of loans in 2005 through 2008 with higher-risk attributes compared with current underwriting

standards, the prolonged period of high unemployment and the decline in home prices. In addition, defaults in

2009 were lower than they could have been due to the foreclosure moratoria during the end of 2008 and first

quarter of 2009. The increase in defaults during 2010 was partially offset by a slight reduction in average loss

severity as home prices improved in some geographic regions.

Table 15 provides an analysis of our credit losses in certain higher-risk loan categories, loan vintages and

loans within certain states that continue to account for a disproportionate share of our credit losses as

compared with our other loans.

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Table 15: Credit Loss Concentration Analysis

2010 2009 2008 2010 2009 2008

As of December 31,

Percentage of

Single-Family

Conventional

Guaranty Book

of Business

Outstanding(1)

For the Year Ended

December 31,

Percentage of SingleFamily Credit Losses

Geographical distribution:

Arizona, California, Florida and Nevada . . . . . . . . . . . . . . . . . . . . . . . . 28% 28% 27% 56% 57% 49%

Illinois, Indiana, Michigan and Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 11 11 14 15 21

All other states. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 61 62 30 28 30

Select higher-risk product features(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 24 28 61 69 75

Vintages:

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 11 14 29 31 35

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 15 20 36 36 28

All other vintages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 74 66 35 33 37

(1) Calculated based on the unpaid principal balance of loans, where we have detailed loan-level information, for each

category divided by the unpaid principal balance of our single-family conventional guaranty book of business.

(2) Includes Alt-A loans, subprime loans, interest-only loans, loans with original LTV ratios greater than 90% and loans

with FICO credit scores less than 620.

Our 2009 and 2010 vintages accounted for less than 1% of our single-family credit losses for 2010. Typically,

credit losses on mortgage loans do not peak until the third through fifth years following origination. We

provide more detailed credit performance information, including serious delinquency rates by geographic

region, statistics on nonperforming loans and foreclosure activity in “Risk Management—Credit Risk

Management—Mortgage Credit Risk Management.”

Regulatory Hypothetical Stress Test Scenario

Under a September 2005 agreement with OFHEO, we are required to disclose on a quarterly basis the present

value of the change in future expected credit losses from our existing single-family guaranty book of business

from an immediate 5% decline in single-family home prices for the entire United States. Although other

provisions of the September 2005 agreement were suspended in March 2009 by FHFA until further notice, this

disclosure requirement was not suspended. For purposes of this calculation, we assume that, after the initial

5% shock, home price growth rates return to the average of the possible growth rate paths used in our internal

credit pricing models. The sensitivity results represent the difference between future expected credit losses

under our base case scenario, which is derived from our internal home price path forecast, and a scenario that

assumes an instantaneous nationwide 5% decline in home prices.

Table 16 compares the credit loss sensitivities for the periods indicated for first lien single-family whole loans

we own or that back Fannie Mae MBS, before and after consideration of projected credit risk sharing

proceeds, such as private mortgage insurance claims and other credit enhancement.

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Table 16: Single-Family Credit Loss Sensitivity(1)

2010 2009

As of December 31,

(Dollars in millions)

Gross single-family credit loss sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,937 $ 18,311

Less: Projected credit risk sharing proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,771) (2,533)

Net single-family credit loss sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,166 $ 15,778

Outstanding single-family whole loans and Fannie Mae MBS(2). . . . . . . . . . . . . . . . . . . . . . . $2,782,512 $2,830,004

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

loans and Fannie Mae MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.83% 0.56%

(1) Represents total economic credit losses, which consist of credit losses and forgone interest. Calculations are based on

97% of our total single-family guaranty book of business as of both December 31, 2010 and 2009. The mortgage loans

and mortgage-related securities that are included in these estimates consist of: (a) single-family Fannie Mae MBS

(whether held in our mortgage portfolio or held by third parties), excluding certain whole loan REMICs and privatelabel wraps; (b) single-family mortgage loans, excluding mortgages secured only by second liens, subprime mortgages,

manufactured housing chattel loans and reverse mortgages; and (c) long-term standby commitments. We expect the

inclusion in our estimates of the excluded products may impact the estimated sensitivities set forth in this table.

(2) As a result of our adoption of the new accounting standards, the balance reflects a reduction as of December 31, 2010

from 2009 due to unscheduled principal payments.

Because these sensitivities represent hypothetical scenarios, they should be used with caution. Our regulatory

stress test scenario is limited in that it assumes an instantaneous uniform 5% nationwide decline in home

prices, which is not representative of the historical pattern of changes in home prices. Changes in home prices

generally vary on a regional, as well as a local, basis. In addition, these stress test scenarios are calculated

independently without considering changes in other interrelated assumptions, such as unemployment rates or

other economic factors, which are likely to have a significant impact on our future expected credit losses.

Other Non-Interest Expenses

Other non-interest expenses consist of credit enhancement expenses, which reflect the amortization of the

credit enhancement asset we record at the inception of guaranty contracts; costs associated with the purchase

of additional mortgage insurance to protect against credit losses; net gains and losses on the extinguishment of

debt; servicer incentive fees in connection with loans modified under HAMP; and other miscellaneous

expenses. Other non-interest expenses decreased in 2010 compared with 2009 due primarily to a decrease in

master servicing costs related to our master servicing assets and liabilities as a result of derecognizing the

portion of our master servicing asset and liability relating to consolidated trusts upon adoption of the new

accounting standards; lower expenses for legal claim reserves; and lower interest expense associated with

unrecognized tax benefits related to certain unresolved tax positions. The decrease in 2010 was partially offset

by an increase in HAMP incentive payments and net losses recorded on the extinguishment of debt, because

our borrowing costs declined and it became advantageous for us to redeem higher cost debt and replace it with

lower cost debt.

Other non-interest expenses increased in 2009 compared with 2008 primarily due to an increase in our master

servicing costs, recording reserves for legal claims, and an increase in net losses recorded on the

extinguishment of debt. The increased expenses were partially offset by a reduction in interest expense

associated with unrecognized tax benefits related to certain unresolved tax positions.

Federal Income Taxes

We recorded a tax benefit for federal income taxes of $82 million for 2010 primarily due to the reversal of a

portion of the valuation allowance for deferred tax assets resulting from a settlement agreement reached with

the IRS for our unrecognized tax benefits for the tax years 1999 through 2004. We were not able to recognize

an income tax benefit for our pre-tax loss in 2010 as there has been no change to our conclusion that it is

more likely than not that we will not generate sufficient taxable income in the foreseeable future to realize our

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net deferred tax assets. As a result, we recorded an increase in our valuation allowance in 2010 that resulted in

the recognition of $5.9 billion in our provision for income taxes. This amount represented the tax effect

associated with a portion of the pre-tax loss. The change in our 2010 valuation allowance also includes a

$2.4 billion reduction primarily due to our adoption of the new accounting standards for amounts originally

recognized in “Accumulated deficit.” The valuation allowance recorded against our deferred tax assets totaled

$56.3 billion as of December 31, 2010, resulting in a net deferred tax asset of $754 million. Our tax benefit

for the year resulted in an effective income tax rate of less than 1%. Our effective tax rate was different from

the statutory rate of 35% primarily due to an increase in our valuation allowance. The difference in rates was

also the result of the settlement agreement with the IRS.

We recorded a tax benefit for federal income taxes of $985 million for 2009, due primarily to the benefit of

carrying back a portion of our 2009 loss, net of the reversal of the use of certain tax credits, to prior years. In

comparison, we recorded a provision for federal income taxes of $13.7 billion in 2008, due primarily to the

valuation allowance recorded against our deferred tax assets that totaled $30.8 billion as of December 31,

2008, resulting in a net deferred tax asset of $3.9 billion.

We discuss the factors that led us to record a partial valuation allowance against our net deferred tax assets in

“Note 11, Income Taxes.” The amount of deferred tax assets considered realizable is subject to adjustment in

future periods. We will continue to monitor all available evidence related to our ability to utilize our

remaining deferred tax assets. If we determine that recovery is not likely, we will record an additional

valuation allowance against the deferred tax assets that we estimate may not be recoverable. Our income tax

expense in future periods will be reduced or increased to the extent of offsetting decreases or increases to our

valuation allowance.

Financial Impact of the Making Home Affordable Program on Fannie Mae

Home Affordable Refinance Program

Because we already own or guarantee the original mortgages that we refinance under HARP, our expenses

under that program consist mostly of limited administrative costs.

Home Affordable Modification Program

Modifying loans we own or guarantee under HAMP, pursuant to our mission, directly affects our financial

results in the following ways:

Key elements affecting our financial results

Loans in trial modification plans are treated as individually impaired. Under HAMP, a borrower must satisfy

the terms of a trial modification plan, typically for a period of at least three months, before the modification

of the loan can become effective. A trial modification period begins when the borrower and Fannie Mae agree

to the terms of the trial modification plan. If the loan is recorded on our consolidated balance sheet, we

account for the loan as a TDR, because it is a restructuring of a mortgage loan in which a concession is

granted to a borrower experiencing financial hardship. As a result, we consider the loan to be individually

impaired when it enters a trial modification period, and we calculate our allowance for loan losses for the

restructured loan on an individual basis. Once a permanent loan modification becomes effective, the loan will

continue to be considered individually impaired.

We continually reassess our loss reserves to determine if the amount of impairment recorded is appropriate

and make adjustments as required. Consequently, after a loan has entered into a trial modification under

HAMP, we continue to adjust the amount of impairment.

When we begin to individually assess a loan for impairment, we exclude the loan from the population of loans

on which we calculate our collective loss reserves. Amounts in the table below do not reflect the impact of

removing these individually impaired loans from this population. The collective loss reserves are reduced by

the fact that these loans are no longer included in the population for which the collective reserves are

calculated.

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The following table provides information about the impairments and fair value losses associated with these

activities for Fannie Mae loans entering trial modifications under HAMP. These amounts have been included

in the calculation of our provision for credit losses in our consolidated results of operations for the years

ended December 31, 2010 and 2009.

Table 17: Impairments and Fair Value Losses on Loans in HAMP(1)

2010 2009

For the Year

Ended December 31,

(Dollars in millions)

Impairments(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,120 $ 15,777

Fair value losses on credit-impaired loans acquired from MBS trusts(3) . . . . . . . . . . . . . . . . . . . . 6 10,637

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,126 $ 26,414

Loans entered into a trial modification under the program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,000 333,300

Credit-impaired loans acquired from MBS trusts in trial modifications under the program(4). . . . . . 65 83,700

(1) Includes amounts for loans that entered into a trial modification under the program but that have not yet received, or

that have been determined to be ineligible for, a permanent modification under the program. Some of these ineligible

loans have since been modified outside of the program.

(2) Impairments consist of (a) impairments recognized on loans accounted for as loans restructured in a troubled debt

restructuring and (b) credit losses on loans in MBS trusts that have entered into a trial modification and been

individually assessed for incurred credit losses. Amount includes impairments recognized subsequent to the date of

loan acquisition.

(3) These fair value losses are recorded as charge-offs against the “Reserve for guaranty losses” and have the effect of

increasing the provision for guaranty losses in our consolidated statements of operations.

(4) Excludes loans purchased from consolidated trusts for the year ended December 31, 2010, for which no fair value

losses were recognized.

The decline in fair value losses on credit-impaired loans in trial modifications under the program acquired

from MBS trusts in 2010 compared with 2009 was due to the adoption of the new accounting standards.

Under the new standards, only purchases of credit-deteriorated loans from unconsolidated MBS trusts or as a

result of other credit guarantees generate fair value losses upon acquisition.

Servicer and Borrower Incentives

We incurred $339 million during 2010 and $17 million during 2009 in paid and accrued incentive fees for

servicers in connection with loans modified under HAMP, which we recorded as part of “Other expenses.”

Borrower incentive payments are included in the calculation of our allowance for loan losses for individually

impaired loans.

Overall Impact of the Making Home Affordable Program

Because of the unprecedented nature of the circumstances that led to the Making Home Affordable Program,

we cannot quantify what the impact would have been on Fannie Mae if the Making Home Affordable Program

had not been introduced. We do not know how many loans we would have modified under alternative

programs, what the terms or costs of those modifications would have been, how many foreclosures would have

resulted nationwide, and at what pace, or the impact on housing prices if the program had not been put in

place. As a result, the amounts we discuss above are not intended to measure how much the program is

costing us in comparison to what it would have cost us if we did not have the program at all.

BUSINESS SEGMENT RESULTS

We provide a more complete description of our business segments in “Business—Business Segments.” Results

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

describe the management reporting and allocation process used to generate our segment results in “Note 15,

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Segment Reporting.” In this section, we discuss changes to our presentation for reporting results for our three

business segments, Single-Family, Multifamily and Capital Markets, which have been revised due to our

prospective adoption of the new accounting standards. We then discuss our business segment results. This

section should be read together with our consolidated results of operations in “Consolidated Results of

Operations.”

Changes to Segment Reporting

Our prospective adoption of the new accounting standards had a significant impact on the presentation and

comparability of our consolidated financial statements because we consolidated the substantial majority of our

single-class securitization trusts and eliminated previously recorded deferred revenue from our guaranty

arrangements. We continue to manage Fannie Mae based on the same three business segments; however,

effective in 2010 we changed the presentation of segment financial information that is currently evaluated by

management.

While some line items in our segment results were not impacted by either the change from the new accounting

standards or changes to our segment presentation, others were impacted materially, which reduces the

comparability of our segment results with prior years. We have not restated prior years’ results nor have we

presented current year results under the old presentation because we determined that it was impracticable to do

so; therefore, our segment results reported in the current period are not comparable with prior years. In the

table below, we compare our current segment reporting for our three business segments with our segment

reporting in prior years.

Segment Reporting in Current Periods Compared with Prior Years

Line Item Current Segment Reporting Prior Year Segment Reporting

Single-Family and Multifamily

Guaranty fee income • At adoption of the new

accounting standards, we

eliminated a substantial majority

of our guaranty-related assets and

liabilities in our consolidated

balance sheet. We re-established

an asset and a liability related to

the deferred cash fees on SingleFamily’s balance sheet and we

amortize these fees as guaranty

fee income with our contractual

guaranty fees.

• At the inception of a guaranty to

an unconsolidated entity, we

established a guaranty asset and

guaranty obligation, which

included deferred cash fees.

These guaranty-related assets and

liabilities were then amortized

and recognized in guaranty fee

income with our contractual

guaranty fees over the life of the

guaranty.

• We use a static yield method to

amortize deferred cash fees to

better align with the recognition

of contractual guaranty fee

income.

• We used a prospective level yield

method to amortize our guarantyrelated assets and liabilities,

which created significant

fluctuations in our guaranty fee

income as the interest rate

environment shifted.

• We eliminated substantially all of

our guaranty assets that were

previously recorded at fair value

upon adoption of the new

accounting standards. As such,

the recognition of fair value

adjustments as a component of

Single-Family guaranty fee

income has been essentially

eliminated.

• We recorded fair value

adjustments on our buy-up assets

and certain guaranty assets as a

component of Single-Family

guaranty fee income.

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Line Item Current Segment Reporting Prior Year Segment Reporting

Single-Family and Multifamily

Net interest income (expense) • Because we now recognize loans

underlying the substantial

majority of our MBS trusts in our

consolidated balance sheets, the

amount of interest expense

Single-Family and Multifamily

recognize related to interest not

recorded on nonperforming loans

underlying MBS trusts has

significantly increased.

• Interest payments expected to be

delinquent on off-balance sheet

nonperforming loans were

considered in the reserve for

guaranty losses.

Credit-related expenses • Because we now recognize loans

underlying the substantial

majority of our MBS trusts in our

consolidated balance sheets, we

no longer recognize fair value

losses upon acquiring creditimpaired loans from these trusts.

• We recorded a fair value loss on

credit-impaired loans acquired

from MBS trusts.

• Upon recognition of mortgage

loans held by newly consolidated

trusts, we increased our

allowance for loan losses and

decreased our reserve for

guaranty losses. We use a

different methodology in

estimating incurred losses under

our allowance for loan losses

versus under our reserve for

guaranty losses which will result

in lower credit-related expenses.

• The majority of our combined

loss reserves were recorded in the

reserve for guaranty losses, which

used a different methodology for

estimating incurred losses versus

the methodology used for the

allowance for loan losses.

Line Item Current Segment Reporting Prior Year Segment Reporting

Multifamily only

Income (losses) from partnership

investments

• We report income or losses from

partnership investments on an

equity basis in the Multifamily

balance sheet. As a result, net

income or loss attributable to

noncontrolling interests is not

included in income (losses) from

partnership investments.

• Income (losses) from partnership

investments included net income

or loss attributable to

noncontrolling interests for the

Multifamily segment.

Line Item Current Segment Reporting Prior Year Segment Reporting

Capital Markets

Net interest income • We recognize interest income on

interest-earning assets that we

own and interest expense on debt

that we have issued.

• In addition to the assets we own

and the debt we issue, we also

included interest income on

mortgage-related assets

underlying MBS trusts that we

consolidated under the prior

consolidation accounting

standards and the interest expense

on the corresponding debt of such

trusts.

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Line Item Current Segment Reporting Prior Year Segment Reporting

Capital Markets

Investment gains (losses), net • We no longer designate the

substantial majority of our loans

held for securitization as held for

sale as the substantial majority of

related MBS trusts will be

consolidated, thereby reducing

lower of cost or fair value

adjustments.

• We designated loans held for

securitization as held for sale

resulting in recognition of lower

of cost or fair value adjustments

on our held-for-sale loans.

• We include the securities that we

own, regardless of whether the

trust has been consolidated, in

reporting gains and losses on

securitizations and sales of

available-for-sale securities.

• We excluded the securities of

consolidated trusts that we owned

in reporting of gains and losses

on securitizations and sales of

available-for-sale securities.

Fair value gains (losses), net • We include the trading securities

that we own, regardless of

whether the trust has been

consolidated, in recognizing fair

value gains and losses on trading

securities.

• MBS trusts that were

consolidated were reported as

loans and thus any securities we

owned issued by these trusts did

not have fair value adjustments.

Under the current segment reporting structure, the sum of the results for our three business segments does not equal

our consolidated results of operations as we separate the activity related to our consolidated trusts from the results

generated by our three segments. In addition, because we apply accounting methods that differ from our consolidated

results for segment reporting purposes, we include an eliminations/adjustments category to reconcile our business

segment results and the activity related to our consolidated trusts to our consolidated results of operations.

Summary

Table 18 displays a summary of our segment results under our current segment reporting presentation for 2010

and our prior segment presentation for 2009 and 2008.

Table 18: Business Segment Summary

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Net revenues:(1)

Single-Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,126 $ 8,784 $ 9,434

Multifamily. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 940 582 476

Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,400 13,128 7,526

Consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460 — —

Eliminations/adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 567 — —

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,493 $ 22,494 $ 17,436

Net income (loss) attributable to Fannie Mae:

Single-Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(26,680) $(63,798) $(27,101)

Multifamily. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 (9,028) (2,189)

Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,074 857 (29,417)

Consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (224) — —

Eliminations/adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,400) — —

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(14,014) $(71,969) $(58,707)

107
2010 2009 2008

As of December 31,

(Dollars in millions)

Total assets:

Single-Family(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,843 $ 19,991 $ 24,115

Multifamily(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,881 5,698 10,994

Capital Markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 873,052 843,452 877,295

Consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,673,937 — —

Eliminations/adjustments(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (344,741) — —

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,221,972 $869,141 $912,404

(1) Includes net interest income, guaranty fee income, and fee and other income (expense).

(2) Beginning in 2010, the allowance for loan losses, allowance for accrued interest receivable and fair value losses

previously recognized on acquired credit impaired loans are not treated as assets for Single-Family and Multifamily

segment reporting purposes because these allowances and losses relate to loan assets that are held by the Capital

Markets segment and consolidated trusts.

Segment Results

Table 19 displays our segment results under our current segment reporting presentation for 2010.

Table 19: Business Segment Results

SingleFamily MultifamilyCapital

Markets

Consolidated

Trusts(1)

Eliminations/

Adjustments(2)

Total

Results

Business Segments

Other Activity/Reconciling

Items

For the Year Ended December 31, 2010

(Dollars in millions)

Net interest income (expense). . . . . . . . $ (5,386) $ 3 $14,321 $ 5,073 $ 2,398(3) $ 16,409

Provision for loan losses . . . . . . . . . . . (24,503) (199) — — — (24,702)

Net interest income (expense) after

provision for loan losses. . . . . . . . . . (29,889) (196) 14,321 5,073 2,398 (8,293)

Guaranty fee income (expense). . . . . . . 7,206 791 (1,440) (4,525)(4) (1,830)(4) 202

Investment gains (losses), net . . . . . . . . 9 6 4,047 (418) (3,298)(5) 346

Net other-than-temporary impairments. . — — (720) (2) — (722)

Fair value gains (losses), net . . . . . . . . — — 239 (155) (595)(6) (511)

Debt extinguishment losses, net . . . . . . — — (459) (109) — (568)

Losses from partnership investments . . . — (70) — — (4) (74)

Fee and other income (expense) . . . . . . 306 146 519 (88) (1) 882

Administrative expenses . . . . . . . . . . . (1,628) (384) (585) — — (2,597)

Benefit (provision) for guaranty losses. . (237) 43 — — — (194)

Foreclosed property expense . . . . . . . . (1,680) (38) — — — (1,718)

Other income (expenses) . . . . . . . . . . . (836) (68) 125 — (74)(7) (853)

Income (loss) before federal income

taxes . . . . . . . . . . . . . . . . . . . . . . . (26,749) 230 16,047 (224) (3,404) (14,100)

Benefit (provision) for federal income

taxes . . . . . . . . . . . . . . . . . . . . . . . 69 (14) 27 — — 82

Net income (loss) . . . . . . . . . . . . . . (26,680) 216 16,074 (224) (3,404) (14,018)

Less: Net income attributable to

noncontrolling interests . . . . . . . . . — — — — 4(8) 4

Net income (loss) attributable to

Fannie Mae . . . . . . . . . . . . . . . . . $(26,680) $ 216 $16,074 $ (224) $(3,400) $(14,014)

(1) Represents activity related to the assets and liabilities of consolidated trusts in our balance sheet under the new

accounting standards.

108
(2) Represents the elimination of intercompany transactions occurring between the three business segments and our

consolidated trusts, as well as other adjustments to reconcile to our consolidated results.

(3) Represents the amortization expense of cost basis adjustments on securities that we own in our portfolio that on a

GAAP basis are eliminated.

(4) Represents the guaranty fees paid from consolidated trusts to the Single-Family and Multifamily segments. The

adjustment to guaranty fee income in the Eliminations/Adjustments column represents the elimination of the

amortization of deferred cash fees related to consolidated trusts that were re-established for segment reporting.

(5) Primarily represents the removal of realized gains and losses on sales of Fannie Mae MBS classified as

available-for-sale securities that are issued by consolidated trusts and retained in the Capital Markets portfolio. The

adjustment also includes the removal of securitization gains (losses) recognized in the Capital Markets segment

relating to portfolio securitization transactions that do not qualify for sale accounting under GAAP.

(6) Represents the removal of fair value adjustments on consolidated Fannie Mae MBS classified as trading that are

retained in the Capital Markets portfolio.

(7) Represents the removal of amortization of deferred revenue on certain credit enhancements from the Single-Family

and Multifamily segment balance sheets that are eliminated upon reconciliation to our consolidated balance sheets.

(8) Represents the adjustment from equity method accounting to consolidation accounting for partnership investments that

are consolidated in our consolidated balance sheets.

Single-Family Business Results

Table 20 summarizes the financial results of our Single-Family business for 2010 under the current segment

reporting presentation and for 2009 and 2008 under the prior segment reporting presentation. The primary

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

Expenses primarily include credit-related expenses and administrative expenses.

Table 20: Single-Family Business Results

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Statement of operations data:(1)

Net interest income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,386) $ 428 $ 461

Guaranty fee income(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,206 8,002 8,390

Credit-related expenses(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,420) (71,320) (29,725)

Other expenses(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,149) (2,283) (1,439)

Loss before federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,749) (65,173) (22,313)

Benefit (provision) for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 69 1,375 (4,788)

Net loss attributable to Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (26,680) $ (63,798) $ (27,101)

Other key performance data:

Single-family effective guaranty fee rate (in basis points)(1)(5) . . . . . . . . . . . . . . 25.1 27.9 30.9

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

points)(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.7 23.8 28.0

Average single-family guaranty book of business(7) . . . . . . . . . . . . . . . . . . . . . $2,873,779 $2,864,759 $2,715,606

Single-family Fannie Mae MBS issues(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 603,247 $ 791,418 $ 536,951

(1) Segment statement of operations data reported under the current segment reporting basis is not comparable to the

segment statement of operations data reported in prior periods.

(2) In 2010, guaranty fee income related to consolidated MBS trusts consisted of contractual guaranty fees and the

amortization of deferred cash fees using a static yield method. In 2009 and 2008, guaranty fee income consisted of

contractual guaranty fees and amortization of our guaranty-related assets and liabilities using a prospective level yield

method and fair value adjustments of buys-ups and certain guaranty assets.

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

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

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

of business, expressed in basis points.

109
(6) Calculated based on the average contractual fee rate for our single-family guaranty arrangements entered into during

the period plus the recognition of any upfront cash payments ratably over an estimated average life, expressed in basis

points.

(7) Consists of single-family mortgage loans held in our mortgage portfolio, single-family mortgage loans held by

consolidated trusts, single-family Fannie Mae MBS issued from unconsolidated trusts held by either third parties or

within our retained portfolio, and other credit enhancements that we provide on single-family mortgage assets.

Excludes non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a

guaranty.

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

period. In 2009, we entered into a memorandum of understanding with Treasury, FHFA and Freddie Mac in which we

agreed to provide assistance to state and local housing finance agencies (“HFAs”) through three separate assistance

programs: a temporary credit and liquidity facilities program, a new issue bond program and a multifamily credit

enhancement program. Includes HFA new issue bond program issuances of $3.1 billion for the year ended

December 31, 2010.

2010 compared with 2009

Key factors affecting the results of our Single-Family business for 2010 compared with 2009 included the

following:

Net Interest Income (Expense)

Net interest income (expense) for the Single-Family business segment includes the fee paid to the Capital

Markets group for the contractual interest due on the nonaccrual loans held in our portfolio under the terms of

our intracompany guarantee arrangement and in consolidated trusts. It also includes an allocated cost of capital

charge among our three business segments. The shift from net interest income in 2009 to net interest expense

in 2010 was primarily driven by an increase in interest not recorded on nonaccrual loans, which increased to

$8.4 billion in 2010 from $1.2 billion in 2009. The number of nonaccrual loans in our consolidated balance

sheets increased as a result of our adoption of the new accounting standards.

Guaranty Fee Income

Guaranty fee income decreased in 2010, compared with 2009, primarily because: (1) we now amortize our

single-family deferred cash fees under the static yield method, which resulted in lower amortization income

compared with 2009 when we amortized these fees under the prospective level yield method; (2) guaranty fee

income in 2009 included the amortization of certain non-cash deferred items, the balance of which was

eliminated upon adoption of the new accounting standards and was not re-established on Single-Family’s

balance sheet at the transition date; and (3) guaranty fee income in 2009 reflected an increase in the fair value

of buy-ups and certain guaranty assets which are no longer adjusted to fair value under the new segment

reporting.

Our average single-family guaranty book of business was relatively flat period over period despite our

continued high market share because of the decline in U.S. residential mortgage debt outstanding. There were

fewer new mortgage originations due to weakness in the housing market and an increase in liquidations due to

the high level of foreclosures. Our estimated market share of new single-family mortgage-related securities

issuances, which is based on publicly available data and excludes previously securitized mortgages, remained

high at 44.0% for 2010.

The single-family average charged guaranty fee on new acquisitions increased in 2010 compared with 2009

primarily due to an increase in acquisitions of loans with characteristics that receive risk-based pricing

adjustments.

Credit-Related Expenses

Single-family credit-related expenses decreased in 2010 compared with 2009 primarily due to the moderate

change in our total single-family loss reserves during 2010 compared with the substantial increase in our total

single-family loss reserves during 2009. The substantial increase in our single-family total loss reserves during

2009 reflected the significant growth in the number of loans that were seriously delinquent during that period,

110
which was partly the result of the economic deterioration during 2009. Another impact of the economic

deterioration during 2009 was sharply falling home prices, which resulted in higher losses on defaulted loans,

further increasing the loss reserves. Our single-family provision for credit losses was substantially lower in

2010 because there has not been an increase in seriously delinquent loans, nor a sharp decline in house prices.

Therefore, we did not need to substantially increase our reserves in 2010. Additionally, because we now

recognize loans underlying the substantial majority of our MBS trusts in our consolidated balance sheets, we

no longer recognize fair value losses upon acquiring credit-impaired loans from these trusts. Although our

credit-related expenses declined in 2010, our credit losses were higher in 2010 compared with 2009 due to an

increase in the number of defaults.

Credit-related expenses and credit losses in the Single-Family business represent the substantial majority of

our consolidated totals. We provide additional information on our credit-related expenses in “Consolidated

Results of Operations — Credit-Related Expenses.”

Federal Income Taxes

We recognized an income tax benefit in 2010 due to the reversal of a portion of the valuation allowance for

deferred tax assets primarily due to a settlement agreement reached with the IRS in 2010 for our unrecognized

tax benefits for the tax years 1999 through 2004. The tax benefit recognized for 2009 was primarily due to the

benefit of carrying back to prior years a portion of our 2009 tax loss, net of the reversal of the use of certain

tax credits.

2009 compared with 2008

Key factors affecting the results of our Single-Family business for 2009 compared with 2008 included the

following:

Guaranty Fee Income

Our guaranty fee income decreased due to a decrease in our average effective guaranty fee rate partially offset

by growth in the average single-family guaranty book of business. The decrease in our average effective

guaranty fee rate was primarily attributable to lower amortization of deferred revenue in 2009 as the sharp

decline in interest rates in 2008 generated an acceleration of deferred amounts. This decline was partially

offset by a higher fair value adjustment on our buy-ups and certain guaranty assets recorded during 2009 due

to increased market prices on interest only-strips.

Our average single-family guaranty book of business increased by 5.5% in 2009 over 2008. We experienced

an increase in our average outstanding Fannie Mae MBS and other guarantees as our market share of new

single-family mortgage-related securities issuances remained high and new MBS issuances outpaced

liquidations. Our estimated market share of new single-family mortgage-related securities issuances, which is

based on publicly available data and excludes previously securitized mortgages, increased to 46.3% for 2009

from 45.4% for 2008.

The average charged guaranty fee on our new single-family business decreased in 2009 compared with 2008.

The decrease in the average charged fee was primarily the result of a reduction in our acquisition of loans

with higher risk, higher fee categories such as higher LTV and lower FICO scores due to (1) changes in our

underwriting and eligibility standards; (2) changes in the eligibility standards of the mortgage insurance

companies; and (3) the increased presence of FHA in the higher-LTV market.

Credit-Related Expenses

The increase in credit-related expenses was due to worsening credit performance trends, including significant

increases in delinquencies, defaults and loss severities, throughout our guaranty book of business, reflecting

the adverse impact of the decline in home prices, the weak economy and high unemployment. Certain higher

risk loan categories, loan vintages and loans within certain states that have had the greatest home price

depreciation from their peaks continue to account for a disproportionate share of our credit losses, but we are

also experiencing deterioration in the credit performance of loans with fewer risk layers. In addition, the

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increased level of troubled debt restructurings, particularly through workouts initiated as part of our

foreclosure prevention efforts, increased the number of loans that were individually impaired, contributing to

the increase in the provision for credit losses.

We also experienced a significant increase in fair value losses on credit-impaired loans acquired from MBS

trusts for the purpose of modifying them during 2009, reflecting the increase in the number of delinquent

loans acquired from MBS trusts, and the decrease in the estimated fair value of these loans compared with

2008.

Credit-related expenses in the Single-Family business represent the substantial majority of the company’s total

credit-related expenses. We provide additional information on total credit-related expenses in “Consolidated

Results of Operations — Credit-Related Expenses.”

Federal Income Taxes

The net tax benefit recognized in 2009 was attributable to our ability to carry back current year tax losses to

previous tax years. We recorded a valuation allowance for the majority of the tax benefits associated with the

pre-tax losses recognized in 2009 that we were unable to carry back to previous tax years as there has been no

change in the conclusion we reached in 2008 that it was more likely than not that we would not generate

sufficient taxable income in the foreseeable future to realize all of the tax benefits generated from these losses.

We recorded a non-cash charge in 2008 to establish a partial deferred tax asset valuation allowance against our

net deferred tax assets.

Multifamily Business Results

Table 21 summarizes the financial results of our Multifamily business for 2010 under the current segment

reporting presentation and for 2009 and 2008 under the prior segment reporting presentation. The primary

sources of revenue for our Multifamily business are guaranty fee income and fee and other income. Expenses

primarily include credit-related expenses, net operating losses associated with our partnership investments, and

administrative expenses.

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Table 21: Multifamily Business Results

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Statement of operations data:(1)

Guaranty fee income(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 791 $ 675 $ 633

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 100 186

Losses from partnership investments(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (70) (6,735) (1,554)

Credit-related expenses(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (194) (2,216) (84)

Other expenses(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (443) (594) (880)

Income (loss) before federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 (8,770) (1,699)

Provision for federal income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14) (311) (511)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 (9,081) (2,210)

Less: Net loss attributable to the noncontrolling interests(3) . . . . . . . . . . . . . . . . . . . — 53 21

Net income (loss) attributable to Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 216 $ (9,028) $ (2,189)

Other key performance data:

Multifamily effective guaranty fee rate (in basis

points)(1)(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.3 37.6 39.1

Credit loss performance ratio (in basis points)(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.6 12.3 3.2

Average Multifamily guaranty book of business(8) . . . . . . . . . . . . . . . . . . . . . . . . . . $186,867 $179,315 $161,722

Multifamily new business volumes(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,919 $ 20,183 $ 35,025

Multifamily units financed from new business volumes(10) . . . . . . . . . . . . . . . . . . . . 306,000 372,000 577,000

Fannie Mae Multifamily MBS issuances(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,499 $ 16,435 $ 5,862

Fannie Mae Multifamily structured securities issuances (issued by Capital Markets

group)(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,808 $ 1,648 $ —

Additional net interest income earned on Fannie Mae

Multifamily mortgage loans and MBS (included in Capital Markets Group’s

results)(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 865 $ 785 $ 565

Average Fannie Mae Multifamily mortgage loans and MBS in Capital Markets

Group’s portfolio(14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $115,839 $117,417 $102,422

2010 2009

As of December 31,

(Dollars in millions)

Multifamily serious delinquency rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.71% 0.63%

Percentage of guaranty book of business with credit enhancement . . . . . . . . . . . . . . . . . . . . . . . . . 89% 89%

Fannie Mae percentage of total multifamily mortgage debt outstanding(15). . . . . . . . . . . . . . . . . . . . 20.1% 19.8%

Fannie Mae Multifamily MBS outstanding(16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $77,251 $59,852

(1) Segment statement of operations data reported under the current segment reporting basis is not comparable to the

segment statement of operations data reported in prior periods.

(2) In 2010, guaranty fee income related to consolidated MBS trusts consisted of contractual guaranty fees. In 2009 and

2008, guaranty fee income also consisted of contractual guaranty fees and amortization of our guaranty-related assets

and liabilities using a prospective level yield method.

(3) In 2010, income or losses from partnership investments is reported using the equity method of accounting. As a result,

net income or losses attributable to noncontrolling interests from partnership investments is not included in income or

losses for the Multifamily segment. In 2009 and 2008, income or losses from partnership investments is reported using

either the equity method or consolidation, in accordance with GAAP, with net income or losses attributable to

noncontrolling interests included in partnership investments income or losses.

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

(5) Consists of net interest income or expense, investment gains, other expenses, and administrative expenses.

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(6) Calculated based on Multifamily segment guaranty fee income divided by the average multifamily guaranty book of

business, expressed in basis points.

(7) Calculated based on credit losses divided by the average multifamily guaranty book of business, expressed in basis

points.

(8) Consists of multifamily mortgage loans held in our mortgage portfolio, multifamily mortgage loans held by

consolidated trusts, multifamily Fannie Mae MBS issued from unconsolidated trusts held by either third parties or

within our retained portfolio, and other credit enhancements that we provide on multifamily mortgage assets. Excludes

non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a guaranty.

(9) Reflects unpaid principal balance of Fannie Mae MBS issued (excluding portfolio securitizations) and loans purchased

during the period. Includes $1.0 billion and $391 million from the HFA new issue bond program for the years ended

December 31, 2010 and December 31, 2009, respectively.

(10) Excludes HFA new issue bond program.

(11) Reflects unpaid principal balance of Fannie Mae MBS issued during the period. Includes: (a) issuances of new MBS

volumes, (b) $8.7 billion of Fannie Mae portfolio securitization transactions for the year ended December 31, 2010

and (c) $389 million of conversion of adjustable rate loans to fixed rate loans and DMBS securities to MBS securities

for the year ended December 31, 2010.

(12) Reflects original face value of out-of-portfolio structured securities issuances by our Capital Markets Group.

(13) Interest expense estimate based on allocated duration matched funding costs. Net interest income was reduced by

guaranty fees allocated to Multifamily from the Capital Markets Group on multifamily loans in Fannie Mae’s

portfolio.

(14) Based on unpaid principal balance.

(15) Includes mortgage loans and Fannie Mae MBS issued and guaranteed by the Multifamily segment. Information for

2010 is through September 30, 2010 and has been obtained from the Federal Reserve’s September 2010 mortgage

debt outstanding release, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for

multifamily residences.

(16) Includes $19.9 billion of Fannie Mae multifamily MBS held in the mortgage portfolio, the vast majority of which

have been consolidated to loans in our consolidated balance sheet, and $1.4 billion of bonds issued by HFAs as of

December 31, 2010.

2010 compared with 2009

Key factors affecting the results of our Multifamily business for 2010 compared with 2009 included the

following:

Guaranty Fee Income

Multifamily guaranty fee income increased in 2010 compared with 2009 primarily due to higher fees charged

on new acquisitions in recent years. New acquisitions with higher guaranty fees have become an increasingly

large part of our book of business.

Losses from Partnership Investments

In 2009, we reduced the carrying value of our LIHTC investments to zero. As a result, we no longer recognize

net operating losses or other-than-temporary impairment on our LIHTC investments, which resulted in a

decrease in losses from partnership investments in 2010 compared with 2009.

Credit-Related Expenses

Multifamily credit-related expenses decreased in 2010 compared with 2009 primarily due to a modest decrease

in the allowance for loan losses in 2010, as multifamily credit trends stabilized, compared with the increase in

the allowance for 2009. The provision for credit losses for 2010 was $156 million compared with $2.2 billion

for 2009.

Although our allowance and provision for multifamily credit losses decreased, our multifamily charge-offs and

foreclosed property expense remained elevated. Our multifamily net charge-offs and foreclosed property

expense increased from $220 million in 2009 to $498 million in 2010. The increase in net charge-offs and

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foreclosed property expense was driven by increased volumes of multifamily REO acquisitions in 2010. Our

expectation is that multifamily charge-offs will remain commensurate with 2010 levels throughout 2011 as we

continue through the current economic cycle.

Federal Income Taxes

We recognized a provision for income taxes in 2010 resulting from a settlement agreement reached with the

IRS with respect to our unrecognized tax benefits for tax years 1999 through 2004. The tax provision

recognized in 2009 was attributable to the reversal of previously utilized tax credits because of our ability to

carry back net operating losses to recover taxes from prior years.

2009 compared with 2008

Key factors affecting the results of our Multifamily business for 2009 compared with 2008 included the

following:

Guaranty Fee Income

The increase in guaranty fee income in 2009 compared with 2008 was primarily attributable to growth in the

average multifamily guaranty book of business. The increase in the average multifamily guaranty book of

business reflected the investment and liquidity we have been providing to the multifamily mortgage market.

Compared with 2008, during 2009 there was also an increase in the average charged guaranty fee rate, which

was offset by lower guaranty-related amortization income.

Losses from Partnership Investments

We recorded $5.0 billion of other-than-temporary impairment on our LIHTC investments during the fourth

quarter of 2009. We provide further discussion of losses from partnership investments, including details

regarding other-than-temporary impairments of these assets, in “Consolidated Results of Operations—Losses

from Partnership Investments.”

Credit-Related Income (Expenses)

The increase in credit-related expenses in 2009 compared with 2008 largely reflected the increase in our

multifamily combined loss reserves to $2.0 billion, or 1.10% of our multifamily guaranty book of business, as

of December 31, 2009 from $104 million, or 0.06% of our multifamily guaranty book of business as of

December 31, 2008. The increase in the multifamily reserve was driven by several factors including higher

severity, deterioration in some large loans, lower property values, and weaker financial results from borrowers,

all of which are a reflection of the weak economy. Net charge-offs and foreclosed property expenses totaled

$220 million in 2009 compared with $52 million in 2008.

Federal Income Taxes

The net tax provision recognized in 2009 was attributable to the reversal of the use of certain tax credits, net

of our ability to carryback current tax losses. In addition, we recorded a valuation allowance for all of the tax

benefits associated with the tax credits generated by our partnership investments in 2009. We recorded a noncash charge in 2008 to establish a partial deferred tax asset valuation allowance against our net deferred tax

assets.

Capital Markets Group Results

Table 22 summarizes the financial results of our Capital Markets group for 2010 under the current segment

reporting presentation and for 2009 and 2008 under the prior segment reporting presentation. Following the

table we discuss the Capital Markets group’s financial results and describe the Capital Markets group’s

mortgage portfolio. For a discussion on the debt issued by the Capital Markets group to fund its investment

activities, see “Liquidity and Capital Management.” For a discussion on the derivative instruments that Capital

Markets uses to manage interest rate risk, see “Consolidated Balance Sheet Analysis—Derivative Instruments,”

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“Risk Management—Market Risk Management, Including Interest Rate Risk Management—Derivative

Instruments,” and “Note 10, Derivative Instruments and Hedging Activities.” The primary sources of revenue

for our Capital Markets group are net interest income and fee and other income. Expenses and other items that

impact income or loss primarily include fair value gains and losses, investment gains and losses,

other-than-temporary impairment, and administrative expenses.

Table 22: Capital Markets Group Results

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Statement of operations data:(1)

Net interest income(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,321 $14,275 $ 8,664

Investment gains (losses), net(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,047 1,460 (174)

Net other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (720) (9,861) (6,974)

Fair value gains (losses), net(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 (2,811) (20,129)

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519 319 264

Other expenses(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,359) (2,446) (2,209)

Income (loss) before federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,047 936 (20,558)

Benefit (provision) for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (79) (8,450)

Extraordinary losses, net of tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (409)

Net income (loss) attributable to Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,074 $ 857 $(29,417)

(1) Segment statement of operations data reported under the current segment reporting basis is not comparable to the

segment statement of operations data reported in prior periods.

(2) Includes contractual interest on nonaccrual loans received from Single-Family and Multifamily segments. In 2010,

Capital Markets net interest income is reported based on the mortgage-related assets held in the segment’s portfolio

and excludes interest income on mortgage-related assets held by consolidated MBS trusts that are owned by third

parties and the interest expense on the corresponding debt of such trusts. In 2009 and 2008, the Capital Markets

group’s net interest income included interest income on mortgage-related assets underlying MBS trusts that we

consolidated under the prior consolidation accounting standards and the interest expense on the corresponding debt of

such trusts.

(3) In 2010, we include the securities that we own regardless of whether the trust has been consolidated in reporting of

gains and losses on securitizations and sales of available-for-sale securities. In 2009 and 2008, we excluded the

securities of consolidated trusts that we own in reporting of gains and losses on securitizations and sales of

available-for-sale securities.

(4) In 2010, fair value gains or losses on trading securities include the trading securities that we own, regardless of

whether the trust has been consolidated. In 2009 and 2008, MBS trusts that were consolidated were reported as loans

and thus any securities we owned issued by these trusts did not have fair value adjustments.

(5) Includes allocated guaranty fee expense, debt extinguishment losses, net, administrative expenses, and other expenses.

In 2010, gains or losses related to the extinguishment of debt issued by consolidated trusts are excluded from the

Capital Markets group because purchases of securities are recognized as such. In 2009 and 2008, gains or losses

related to the extinguishment of debt issued by consolidated trusts were included in the Capital Markets group’s results

as debt extinguishment gain or loss.

2010 compared with 2009

Key factors affecting the results of our Capital Markets group for 2010 compared with 2009 included the

following:

Net Interest Income

The Capital Markets group’s interest income consists of interest on the segment’s interest-earning assets,

which differs from interest-earning assets in our consolidated balance sheets. We exclude loans and securities

that underlie the consolidated trusts from our Capital Markets group’s balance sheets. The net interest income

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reported by the Capital Markets group excludes the interest income earned on assets held by consolidated

trusts. As a result, the Capital Markets group reports interest income and amortization of cost basis

adjustments only on securities and loans that are held in our portfolio. For mortgage loans held in our

portfolio, when interest income is no longer recognized in accordance with our nonaccrual accounting policy,

the Capital Markets group recognizes as interest income reimbursements the group receives primarily from

Single-Family for the contractual interest due.

Capital Markets group’s interest expense consists of contractual interest on the Capital Markets group’s

interest-bearing liabilities, including the accretion and amortization of any cost basis adjustments. It excludes

interest expense on debt issued by consolidated trusts. Therefore, the interest expense recognized on the

Capital Markets group’s statement of operations is limited to our funding debt, which is reported as “Debt of

Fannie Mae” in our consolidated balance sheets. Net interest expense also includes an allocated cost of capital

charge among the three business segments.

The Capital Markets group’s net interest income increased in 2010 compared with 2009 primarily due to a

decline in funding costs as we replaced higher cost debt with lower cost debt. Also, Capital Markets’ net

interest income and net interest yield benefited from funds we received from Treasury under the senior

preferred stock purchase agreement as the cash received was used to reduce our debt and the cost of these

funds is included in dividends rather than interest expense.

We supplement our issuance of debt with interest rate-related derivatives to manage the prepayment and

duration risk inherent in our mortgage investments. The effect of these derivatives, in particular the periodic

net interest expense accruals on interest rate swaps, is not reflected in Capital Markets’ net interest income but

is included in our results as a component of “Fair value losses, net” and is shown in “Table 9: Fair Value

Losses, Net.” If we had included the economic impact of adding the net contractual interest accruals on our

interest rate swaps in our Capital Markets’ interest expense, Capital Markets’ net interest income would have

decreased by $2.9 billion in 2010 compared with a $3.4 billion decrease in 2009.

Investment Gains (Losses), Net

The increase in investment gains in 2010 compared with 2009 was primarily driven by an increase in gains on

securitizations as well as a significant decline in lower of cost or fair value adjustments on held-for-sale loans.

Net Other-Than-Temporary Impairment

The net other-than-temporary impairment recognized by the Capital Markets group is generally consistent with

the net other-than-temporary impairment reported in our consolidated results of operations. We discuss details

on net other-than-temporary impairment in “Consolidated Results of Operations—Net Other-Than-Temporary

Impairment.”

Fair Value Gains (Losses), Net

The derivative gains and losses and foreign exchange gains and losses that are reported for the Capital

Markets group are consistent with these same losses reported in our consolidated results of operations. We

discuss details of these components of fair value gains and losses in “Consolidated Results of Operations—

Fair Value Gains (Losses), Net.”

The gains on our trading securities for the segment during 2010 were driven by a decrease in interest rates and

narrowing of credit spreads on CMBS.

The gains on our trading securities during 2009 were primarily attributable to the narrowing of credit spreads

on CMBS, asset-backed securities, corporate debt securities and agency MBS, partially offset by an increase in

interest rates in 2009.

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Federal Income Taxes

We recognized an income tax benefit in 2010 primarily due to the reversal of a portion of the valuation

allowance for deferred tax assets resulting from a settlement agreement reached with the IRS in the first

quarter of 2010 for our unrecognized tax benefits for the tax years 1999 through 2004. We recorded a

valuation allowance for the majority of the tax benefits associated with the pre-tax losses recognized in 2009.

2009 compared with 2008

Key factors affecting the results of our Capital Markets group for 2009 compared with 2008 included the

following:

Net Interest Income

The increase in net interest income in 2009 compared with 2008 was primarily attributable to an expansion of

our net interest yield driven by a reduction in the average cost of our debt that more than offset a decline in

the average yield on our interest-earning assets. The significant reduction in the average cost of our debt

during 2009 compared with 2008 was primarily attributable to a decline in borrowing rates as we replaced

higher cost debt with lower cost debt. Our net interest income does not include the effect of the periodic net

contractual interest accruals on our interest rate swaps which totaled $3.4 billion in 2009, compared with

$1.6 billion in 2008.

Investment Gains (Losses), Net

The shift to investment gains in 2009 compared with investment losses in 2008 was primarily attributable to:

(1) an increase in gains on portfolio securitizations as we increased our MBS issuance volumes and sales

related to whole loan conduit activity and (2) an increase in realized gains on sales of available-for-sale

securities as tightening of investment spreads on agency MBS led to higher sale prices. These gains were

partially offset by an increase in lower of cost or fair value adjustments on loans, primarily driven by a decline

in the credit quality of these loans and an increase in interest rates.

Net Other-Than-Temporary Impairment

Net other-than-temporary impairment increased during 2009. We discuss net-other-than-temporary impairment

in “Consolidated Results of Operations—Net Other-Than-Temporary Impairment.”

Fair Value Gains (Losses), Net

Fair value losses substantially decreased in 2009. We discuss our fair value losses in “Consolidated Results of

Operations—Fair Value Gains (Losses), Net.”

Federal Income Taxes

Federal income tax provision substantially declined in 2009 compared with 2008 as we recorded a non-cash

charge in 2008 to establish a partial deferred tax asset valuation allowance against our net deferred tax assets.

The Capital Markets Group’s Mortgage Portfolio

The Capital Markets group’s mortgage portfolio consists of mortgage-related securities and mortgage loans

that we own. Mortgage-related securities held by Capital Markets include Fannie Mae MBS and non-Fannie

Mae mortgage-related securities. The Fannie Mae MBS that we own are maintained as securities on the

Capital Markets group’s balance sheets. Mortgage-related assets held by consolidated MBS trusts are not

included in the Capital Markets group’s mortgage portfolio.

We are restricted in the amount of mortgage assets that we may own. Please see “Conservatorship and

Treasury Agreements—Treasury Agreements—Covenants under Treasury Agreement.”

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Table 23 summarizes our Capital Markets group’s mortgage portfolio activity based on unpaid principal

balance for 2010.

Table 23: Capital Markets Group’s Mortgage Portfolio Activity

2010

(Dollars in millions)

Total Capital Markets mortgage portfolio, beginning balance as of January 1, 2010 . . . . . . . . . . $ 772,728

Mortgage loans:

Beginning balance as of January 1, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281,162

Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313,075

Securitizations(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (95,783)

Liquidations(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (71,380)

Mortgage loans, ending balance as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427,074

Mortgage securities:

Beginning balance as of January 1, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 491,566

Purchases(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,495

Securitizations(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,783

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (179,620)

Liquidations(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (90,527)

Mortgage securities, ending balance as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . 361,697

Total Capital Markets mortgage portfolio, ending balance as of December 31, 2010 . . . . . . . . . . $ 788,771

(1) Includes portfolio securitization transactions that do not qualify for sale treatment under the new accounting standards

on the transfers of financial assets.

(2) Includes scheduled repayments, prepayments, foreclosures and lender repurchases.

(3) Includes purchases of Fannie Mae MBS issued by consolidated trusts.

The Capital Markets group’s mortgage portfolio activity for 2010 has been impacted by an increase in

purchases of delinquent loans from single-family MBS trusts. We purchased approximately 1,118,000

delinquent loans with an unpaid principal balance of approximately $217 billion from our single-family MBS

trusts in 2010. The substantial majority of these delinquent loan purchases were completed in the first half of

2010.

Table 24 shows the composition of the Capital Markets group’s mortgage portfolio based on unpaid principal

balance as of December 31, 2010 and as of January 1, 2010, immediately after we adopted the new

accounting standards.

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Table 24: Capital Markets Group’s Mortgage Portfolio Composition

December 31,

2010

January 1,

2010

As of

(Dollars in millions)

Capital Markets Group’s mortgage loans:

Single-family loans

Government insured or guaranteed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,783 $ 51,395

Conventional:

Long-term, fixed-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,096 94,236

Intermediate-term, fixed-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,446 8,418

Adjustable-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,526 18,493

Total single-family conventional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280,068 121,147

Total single-family loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331,851 172,542

Multifamily loans

Government insured or guaranteed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431 521

Conventional:

Long-term, fixed-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,413 4,941

Intermediate-term, fixed-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,010 81,610

Adjustable-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,369 21,548

Total multifamily conventional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,792 108,099

Total multifamily loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,223 108,620

Total Capital Markets Group’s mortgage loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427,074 281,162

Capital Markets Group’s mortgage-related securities:

Fannie Mae. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,429 358,495

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,332 41,390

Ginnie Mae. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,425 1,255

Alt-A private-label securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,283 25,133

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,038 20,001

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,052 25,703

Mortgage revenue bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,525 14,448

Other mortgage-related securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,613 5,141

Total Capital Markets Group’s mortgage-related securities(1) . . . . . . . . . . . . . . . . . . . . . 361,697 491,566

Total Capital Markets Group’s mortgage portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $788,771 $772,728

(1) The fair value of these mortgage-related securities was $365.8 billion as of December 31, 2010.

The increase in our portfolio balance from January 1, 2010 to December 31, 2010 was driven by the increase

in purchases of delinquent loans from single-family MBS trusts. The total unpaid principal balance of

nonperforming loans in the Capital Markets Group’s mortgage portfolio was $228.0 billion as of December 31,

2010. This population includes loans that have been modified and have been classified as TDRs as well as

unmodified delinquent loans that are on nonaccrual status in our consolidated financial statements.

We expect to continue to purchase loans from MBS trusts as they become four or more consecutive monthly

payments delinquent subject to market conditions, economic benefit, servicer capacity, and other constraints

including the limit on the mortgage assets that we may own pursuant to the senior preferred stock purchase

agreement. As of December 31, 2010, the total unpaid principal balance of all loans in single-family MBS

trusts that were delinquent as to four or more consecutive monthly payments was approximately $8 billion. In

January 2011, we purchased approximately 39,000 delinquent loans with an unpaid principal balance of

$6.9 billion from our single-family MBS trusts.

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CONSOLIDATED BALANCE SHEET ANALYSIS

We seek to structure the composition of our balance sheet and manage its size to comply with our regulatory

requirements, to provide adequate liquidity to meet our needs, and to mitigate our interest rate risk and credit

risk exposure. The major asset components of our consolidated balance sheet include our mortgage

investments and our cash and other investments portfolio. We fund and manage the interest rate risk on these

investments through the issuance of debt securities and the use of derivatives. Our debt securities and

derivatives represent the major liability components of our consolidated balance sheet.

As discussed in “Business—Executive Summary,” on January 1, 2010 we prospectively adopted new

accounting standards, which had a significant impact on the presentation and comparability of our

consolidated financial statements. The new standards resulted in the consolidation of the substantial majority

of our single-class securitization trusts and the elimination of previously recorded deferred revenue from our

guaranty arrangements. In the table below, we summarize the primary impacts of the new accounting

standards to our consolidated balance sheet for 2010.

Item Consolidation Impact

Restricted cash We recognize unscheduled cash payments that have been either received by the servicer or that are

held by consolidated trusts and have not yet been remitted to MBS certificateholders.

Investments in

securities

Fannie Mae MBS that we own were consolidated resulting in a decrease in our investments in

securities.

Mortgage loans

Accrued interest

receivable

We now record the underlying assets of the majority of our MBS trusts in our consolidated balance

sheets, which significantly increases mortgage loans and related accrued interest receivable.

Allowance for loan

losses

Reserve for

guaranty losses

The substantial majority of our combined loss reserves are now recognized in our allowance for

loan losses to reflect the loss allowance against the consolidated mortgage loans. We use a different

methodology to estimate incurred losses for our allowance for loan losses as compared with our

reserve for guaranty losses.

Guaranty assets

Guaranty

obligations

We eliminated our guaranty accounting for the newly consolidated trusts, which resulted in

derecognizing previously recorded guaranty-related assets and liabilities associated with the newly

consolidated trusts from our consolidated balance sheets. We continue to have guaranty assets and

obligations on unconsolidated trusts and other credit enhancements arrangements, such as our longterm standby commitments.

Debt

Accrued interest

payable

We recognize the MBS certificates issued by the consolidated trusts and that are held by third-party

certificateholders as debt, which significantly increases our debt outstanding and related accrued

interest payable.

We recognized a decrease of $3.3 billion in our stockholders’ deficit to reflect the cumulative effect of

adopting the new accounting standards. See “Note 2, Adoption of the New Accounting Standards on the

Transfers of Financial Assets and Consolidation of Variable Interest Entities” for a further discussion of the

impacts of the new accounting standards on our consolidated financial statements.

Table 25 presents a summary of our consolidated balance sheets as of December 31, 2010 and 2009, as well

as the impact of the transition to the new accounting standards on January 1, 2010. Following the table is a

discussion of material changes in the major components of our assets, liabilities and deficit from January 1,

2010 to December 31, 2010.

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Table 25: Summary of Consolidated Balance Sheets

December 31,

2010

January 1,

2010

December 31,

2009

January 1 to

December 31, 2010

December 31, 2009 to

January 1, 2010

As of Variance

(Dollars in millions)

Assets

Cash and cash equivalents and federal

funds sold and securities purchased

under agreements to resell or similar

arrangements .................. $ 29,048 $ 60,161 $ 60,496 $(31,113) $ (335)

Restricted cash ................... 63,678 48,653 3,070 15,025 45,583

Investments in securities(1) ........... 151,248 161,088 349,667 (9,840) (188,579)

Mortgage loans................... 2,985,276 2,985,445 404,486 (169) 2,580,959

Allowance for loan losses . . . ......... (61,556) (53,501) (9,925) (8,055) (43,576)

Mortgage loans, net of allowance for

loan losses .................. 2,923,720 2,931,944 394,561 (8,224) 2,537,383

Other assets(2) ................... 54,278 44,389 61,347 9,889 (16,958)

Total assets. ................... $3,221,972 $3,246,235 $869,141 $(24,263) $2,377,094

Liabilities and equity (deficit)

Debt(3) ........................ $3,197,052 $3,223,054 $774,554 $(26,002) $2,448,500

Other liabilities(4) ................. 27,437 35,164 109,868 (7,727) (74,704)

Total liabilities . . . .............. 3,224,489 3,258,218 884,422 (33,729) 2,373,796

Senior preferred stock .............. 88,600 60,900 60,900 27,700 —

Other equity (deficit)(5) ............. (91,117) (72,883) (76,181) (18,234) 3,298

Total stockholders’ equity (deficit) .... (2,517) (11,983) (15,281) 9,466 3,298

Total liabilities and stockholders’

deficit ....................... $3,221,972 $3,246,235 $869,141 $(24,263) $2,377,094

(1) Includes $32.8 billion as of December 31, 2010 and $8.9 billion as of both January 1, 2010 and December 31, 2009 of

non-mortgage-related securities that are included in our other investments portfolio in “Table 37: Cash and Other

Investments Portfolio.”

(2) Consists of: accrued interest receivable, net; acquired property, net; servicer and MBS trust receivable and other assets.

(3) Consists of: federal funds purchased and securities sold under agreements to repurchase; short-term debt; and longterm debt.

(4) Consists of: accrued interest payable; reserve for guaranty losses; servicer and MBS trust payable; and other liabilities.

(5) Consists of: preferred stock; common stock; additional paid-in capital; retained earnings (accumulated deficit);

accumulated other comprehensive loss; treasury stock; and noncontrolling interest.

Cash and Cash Equivalents and Federal Funds Sold and Securities Purchased under Agreements to

Resell or Similar Arrangements

Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or

similar arrangements are included in our cash and other investments portfolio. See “Liquidity and Capital

Management—Liquidity Management— Liquidity Risk Management Practices and Contingency Planning—

Cash and Other Investments Portfolio” for additional information on our cash and other investments portfolio.

Investments in Mortgage-Related Securities

Our investments in mortgage-related securities are classified in our consolidated balance sheets as either

trading or available-for-sale and are reported at fair value. Gains and losses on trading securities are

recognized in earnings, while unrealized gains and losses on available-for-sale securities are recorded in

stockholders’ equity (deficit) as a component of “Accumulated other comprehensive loss” (“AOCI”). See

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“Note 6, Investments in Securities” for additional information on our investments in mortgage-related

securities, including the composition of our trading and available-for-sale securities at amortized cost and fair

value and the gross unrealized gains and losses related to our available-for-sale securities as of December 31,

2010.

Investments in Agency Mortgage-Related Securities

Our investments in agency mortgage-related securities consist of securities issued by Fannie Mae, Freddie Mac

and Ginnie Mae. Investments in agency mortgage securities declined to $50.2 billion as of December 31, 2010

compared with $83.7 billion as of January 1, 2010. The decline was primarily due to settlement of sales

commitments related to dollar roll transactions.

Investments in Private-Label Mortgage-Related Securities

We classify private-label securities as Alt-A, subprime, multifamily or manufactured housing if the securities

were labeled as such when issued. We have also invested in private-label subprime mortgage-related securities

that we have resecuritized to include our guaranty (“wraps”).

The continued negative impact of the current economic environment, including sustained weakness in the

housing market and high unemployment, has adversely affected the performance of our Alt-A and subprime

private-label securities. The unpaid principal balance of our investments in Alt-A and subprime securities was

$40.7 billion as of December 31, 2010, of which $30.8 billion was rated below investment grade. Table 26

presents the fair value of our investments in Alt-A and subprime private-label securities and an analysis of the

cumulative losses on these investments as of December 31, 2010. As of December 31, 2010, we had realized

actual cumulative principal shortfalls of approximately 2% of the total cumulative credit losses reported in this

table and reflected in our consolidated financial statements.

Table 26: Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities

Unpaid

Principal

Balance

Fair

Value

Total

Cumulative

Losses(1)

Noncredit

Component(2)

Credit

Component (3)

As of December 31, 2010

(Dollars in millions)

Trading securities:(4)

Alt-A private-label securities. . . . . . . . . . . . . . $ 3,082 $ 1,683 $ (1,351) $ (188) $(1,163)

Subprime private-label securities . . . . . . . . . . . 2,767 1,581 (1,186) (278) (908)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,849 $ 3,264 $ (2,537) $ (466) $(2,071)

Available-for-sale securities:

Alt-A private-label securities. . . . . . . . . . . . . . $19,201 $13,890 $ (5,410) $(1,899) $(3,511)

Subprime private-label securities(5) . . . . . . . . . 15,643 9,932 (5,751) (1,391) (4,360)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,844 $23,822 $(11,161) $(3,290) $(7,871)

Grand Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,693 $27,086 $(13,698) $(3,756) $(9,942)

(1) Amounts reflect the difference between the fair value and unpaid principal balance net of unamortized premiums,

discounts and certain other cost basis adjustments.

(2) Represents the estimated portion of the total cumulative losses that is noncredit-related. We have calculated the credit

component based on the difference between the amortized cost basis of the securities and the present value of expected

future cash flows. The remaining difference between the fair value and the present value of expected future cash flows

is classified as noncredit-related.

(3) For securities classified as trading, amounts reflect the estimated portion of the total cumulative losses that is creditrelated. For securities classified as available-for-sale, amounts reflect the portion of other-than-temporary impairment

losses net of accretion that are recognized in earnings in accordance with the accounting standards for

other-than-temporary impairments.

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(4) Excludes resecuritizations, or wraps, of private-label securities backed by subprime loans that we have guaranteed and

hold in our mortgage portfolio as Fannie Mae securities.

(5) Includes a wrap transaction that has been partially consolidated on our balance sheet, which effectively resulted in a

portion of the underlying structure of the transaction being accounted for and reported as available-for-sale securities.

Table 27 presents the 60 days or more delinquency rates and average loss severities for the loans underlying

our Alt-A and subprime private-label mortgage-related securities for the most recent remittance period of the

current reporting quarter. The delinquency rates and average loss severities are based on available data

provided by Intex Solutions, Inc. (“Intex”) and First American CoreLogic, LoanPerformance (“First American

CoreLogic”). We also present the average credit enhancement and monoline financial guaranteed amount for

these securities as of December 31, 2010. Based on the stressed condition of some of our financial guarantors,

we believe some of these counterparties will not fully meet their obligation to us in the future. See “Risk

Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Financial

Guarantors” for additional information on our financial guarantor exposure and the counterparty risk

associated with our financial guarantors.

Table 27: Credit Statistics of Loans Underlying Alt-A and Subprime Private-Label Mortgage-Related Securities

(Including Wraps)

Trading

AvailableforSale Wraps(1) 60 Days

Delinquent(2)(3)

Average

Loss

Severity(3)(4)

Average

Credit

Enhancement(3)(5)

Monoline

Financial

Guaranteed

Amount(6)

Unpaid Principal Balance

As of December 31, 2010

(Dollars in millions)

Private-label mortgage-related securities backed by:(7)

Alt-A mortgage loans:

Option ARM Alt-A

mortgage loans:

2004 and prior . . . . . . . . $ — $ 521 $ — 33.5% 48.8% 19.5% $ —

2005 . . . . . . . . . . . . . . . — 1,401 — 44.3 54.1 43.8 272

2006 . . . . . . . . . . . . . . . — 1,379 — 46.6 58.9 33.9 155

2007 . . . . . . . . . . . . . . . 2,145 — — 45.8 60.0 60.2 781

Other Alt-A mortgage

loans:

2004 and prior . . . . . . . . — 6,927 — 10.1 56.8 12.3 14

2005 . . . . . . . . . . . . . . . 93 4,460 136 24.6 54.8 7.2 —

2006 . . . . . . . . . . . . . . . 68 4,384 — 30.6 56.0 2.3 —

2007 . . . . . . . . . . . . . . . 776 — 200 44.8 65.2 33.3 322

2008(8) . . . . . . . . . . . . . — 129 — — — — —

Total Alt-A mortgage

loans: . . . . . . . . . . . . . . 3,082 19,201 336 1,544

Subprime mortgage loans:

2004 and prior(9) . . . . . . — 2,216 679 24.6 87.2 60.0 688

2005(8) . . . . . . . . . . . . . — 206 1,504 45.0 78.4 58.1 229

2006 . . . . . . . . . . . . . . . — 12,565 — 50.2 76.7 20.7 52

2007 . . . . . . . . . . . . . . . 2,767 656 5,833 49.5 73.2 24.2 183

Total subprime mortgage

loans: . . . . . . . . . . . . . . 2,767 15,643 8,016 1,152

Total Alt-A and subprime

mortgage loans: . . . . . . . $5,849 $34,844 $8,352 $2,696

(1) Represents our exposure to private-label Alt-A and subprime mortgage-related securities that have been resecuritized

(or wrapped) to include our guarantee.

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(2) Delinquency data provided by Intex, where available, for loans backing Alt-A and subprime private-label mortgagerelated securities that we own or guarantee. The reported Intex delinquency data reflects information from December

2010 remittances for November 2010 payments. For consistency purposes, we have adjusted the Intex delinquency

data, where appropriate, to include all bankruptcies, foreclosures and REO in the delinquency rates.

(3) The average delinquency, severity and credit enhancement metrics are calculated for each loan pool associated with

securities where Fannie Mae has exposure and are weighted based on the unpaid principal balance of those securities.

(4) Severity data obtained from First American CoreLogic, where available, for loans backing Alt-A and subprime privatelabel mortgage-related securities that we own or guarantee. The First American CoreLogic severity data reflects

information from December 2010 remittances for November 2010 payments. For consistency purposes, we have

adjusted the severity data, where appropriate.

(5) Average credit enhancement percentage reflects both subordination and financial guarantees. Reflects the ratio of the

current amount of the securities that will incur losses in the securitization structure before any losses are allocated to

securities that we own or guarantee. Percentage generally calculated based on the quotient of the total unpaid principal

balance of all credit enhancements in the form of subordination or financial guarantee of the security divided by the

total unpaid principal balance of all of the tranches of collateral pools from which credit support is drawn for the

security that we own or guarantee.

(6) Reflects amount of unpaid principal balance supported by financial guarantees from monoline financial guarantors.

(7) Vintages are based on series date and not loan origination date.

(8) The unpaid principal balance includes private-label REMIC securities that have been resecuritized totaling

$129 million for the 2008 vintage of other Alt-A loans and $23 million for the 2005 vintage of subprime loans. These

securities are excluded from the delinquency, severity and credit enhancement statistics reported in this table.

(9) Includes a wrap transaction that has been partially consolidated on our balance sheet, which effectively resulted in a

portion of the underlying structure of the transaction being accounted for and reported as available-for-sale securities.

Mortgage Loans

The mortgage loans reported in our consolidated balance sheets include loans owned by Fannie Mae and loans

held in consolidated trusts and are classified as either held for sale or held for investment. Mortgage loans

remained relatively flat from January 1, 2010 to December 31, 2010 as the principal balance of the loans

securitized through our lender swap and portfolio securitization programs was offset by scheduled principal

paydowns and prepayments. For additional information on our mortgage loans, see “Note 4, Mortgage Loans.”

For additional information on the mortgage loan purchase and sale activities reported by our Capital Markets

group, see “Business Segment Results—Segment Results—Capital Markets Group Results.”

Debt Instruments

The debt reported in our consolidated balance sheets consists of two categories of debt, which we refer to as

“debt of Fannie Mae” and “debt of consolidated trusts.” Debt of Fannie Mae, which consists of short-term

debt, long-term debt and federal funds purchased and securities sold under agreements to repurchase, is the

primary means of funding our mortgage investments. Debt of consolidated trusts represents our liability to

third-party beneficial interest holders when we have included the assets of a corresponding trust in our

consolidated balance sheets. We provide a summary of the activity of the debt of Fannie Mae and a

comparison of the mix between our outstanding short-term and long-term debt as of December 31, 2010 and

2009 in “Liquidity and Capital Management—Liquidity Management—Debt Funding.” Also see “Note 9,

Short-Term Borrowings and Long-Term Debt” for additional information on our outstanding debt.

The decrease in debt of consolidated trusts from January 1, 2010 to December 31, 2010 was primarily driven

by the purchase of delinquent loans from MBS trusts as purchasing these loans from MBS trusts for our

portfolio results in the extinguishment of the associated consolidated trust debt.

Derivative Instruments

We supplement our issuance of debt with interest rate-related derivatives to manage the prepayment and

duration risk inherent in our mortgage investments. We aggregate, by derivative counterparty, the net fair value

125
gain or loss, less any cash collateral paid or received, and report these amounts in our consolidated balance

sheets as either assets or liabilities.

Our derivative assets and liabilities consist of these risk management derivatives and our mortgage

commitments. We refer to the difference between the derivative assets and derivative liabilities recorded in our

consolidated balance sheets as our net derivative asset or liability. We present, by derivative instrument type,

the estimated fair value of derivatives recorded in our consolidated balance sheets and the related outstanding

notional amounts as of December 31, 2010 and 2009 in “Note 10, Derivative Instruments and Hedging

Activities.” Table 28 provides an analysis of the factors driving the change during 2010 in the estimated fair

value of our net derivative liability related to our risk management derivatives recorded in our consolidated

balance sheets.

Table 28: Changes in Risk Management Derivative Assets (Liabilities) at Fair Value, Net

2010

(Dollars in millions)

Net risk management derivative liability as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . $ (340)

Effect of cash payments:

Fair value at inception of contracts entered into during the period(1) . . . . . . . . . . . . . . . . . . . (2,107)

Fair value at date of termination of contracts settled during the period(2) . . . . . . . . . . . . . . . . 2,451

Net collateral received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,595)

Periodic net cash contractual interest payments(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,609

Total cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,358

Statement of operations impact of recognized amounts:

Net contractual interest expense accruals on interest rate swaps . . . . . . . . . . . . . . . . . . . . . . (2,895)

Net change in fair value during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,088

Risk management derivatives fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,807)

Net risk management derivative liability as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . $ (789)

(1) Cash receipts from sale of derivative option contracts increase the derivative liability recorded in our consolidated

balance sheets. Cash payments made to purchase derivative option contracts (purchased option premiums) increase the

derivative asset recorded in our consolidated balance sheets.

(2) Cash payments made to terminate derivative contracts reduce the derivative liability recorded in our consolidated

balance sheets. Primarily represents cash paid (received) upon termination of derivative contracts.

(3) Interest is accrued on interest rate swap contracts based on the contractual terms. Accrued interest income increases

our derivative asset and accrued interest expense increases our derivative liability. The offsetting interest income and

expense are included as components of derivatives fair value gains (losses), net in our consolidated statements of

operations. Net periodic interest receipts reduce the derivative asset and net periodic interest payments reduce the

derivative liability.

For additional information on our derivative instruments, see “Consolidated Results of Operations—Fair Value

Losses, Net,” “Risk Management—Market Risk Management, Including Interest Rate Risk Management” and

“Note 10, Derivative Instruments and Hedging Activities.”

SUPPLEMENTAL NON-GAAP INFORMATION—FAIR VALUE BALANCE SHEETS

As part of our disclosure requirements with FHFA, we disclose on a quarterly basis supplemental non-GAAP

consolidated fair value balance sheets, which reflect our assets and liabilities at estimated fair value.

Table 29 summarizes changes in our stockholders’ deficit reported in our GAAP consolidated balance sheets

and in the fair value of our net assets in our non-GAAP consolidated fair value balance sheets for the year

ended December 31, 2010. The estimated fair value of our net assets is calculated based on the difference

between the fair value of our assets and the fair value of our liabilities, adjusted for noncontrolling interests.

126
We use various valuation techniques to estimate fair value, some of which incorporate internal assumptions

that are subjective and involve a high degree of management judgment. We describe the specific valuation

techniques used to determine fair value and disclose the carrying value and fair value of our financial assets

and liabilities in “Note 19, Fair Value.”

Table 29: Comparative Measures—GAAP Change in Stockholders’ Deficit and Non-GAAP Change in Fair Value

of Net Assets (Net of Tax Effect)

2010

(Dollars in millions)

GAAP consolidated balance sheets:

Fannie Mae stockholders’ deficit as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (15,372)

Impact of new accounting standards on Fannie Mae stockholders’ deficit as of January 1, 2010(1) . . . . 3,312

Fannie Mae stockholders’ deficit as of January 1, 2010(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,060)

Net loss attributable to Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,014)

Changes in net unrealized losses on available-for-sale securities, net of tax. . . . . . . . . . . . . . . . . . . . 3,054

Reclassification adjustment for other-than-temporary impairments recognized in net loss, net of tax . . 469

Capital transactions:(3)

Funds received from Treasury under the senior preferred stock purchase agreement . . . . . . . . . . . . 27,700

Senior preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,706)

Capital transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,994

Other equity transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (42)

Fannie Mae stockholders’ deficit as of December 31, 2010(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,599)

Non-GAAP consolidated fair value balance sheets:

Estimated fair value of net assets as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (98,792)

Impact of new accounting standards on Fannie Mae estimated fair value of net assets as of January 1,

2010(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (52,302)

Estimated fair value of net assets as of January 1, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (151,094)

Capital transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,994

Change in estimated fair value of net assets(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,806

Increase in estimated fair value of net assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,800

Estimated fair value of net assets as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(120,294)

(1) Reflects our adoption of the new accounting standards for transfers of financial assets and consolidation of variable

interest entities.

(2) Our net worth, as defined under the senior preferred stock purchase agreement, is equivalent to the “Total deficit”

amount reported in our consolidated balance sheets. Our net worth, or total deficit, is comprised of “Total Fannie

Mae’s stockholders’ equity (deficit)” and “Noncontrolling interests” reported in our consolidated balance sheets.

(3) Represents capital transactions, which are reflected in our consolidated statements of changes in equity (deficit).

(4) Excludes cumulative effect of our adoption of the new accounting standards and capital transactions.

The $10.8 billion increase in the fair value of our net assets during 2010, excluding the cumulative effect of

our January 1, 2010 adoption of the new accounting standards and capital transactions, was attributable to:

• An increase in the fair value of the net portfolio attributable to the positive impact of changes in the

spread between mortgage assets and associated debt and derivatives partially offset by,

• A net decrease in the fair value due to credit-related items principally related to declining actual and

expected home prices as well as an increase in estimated severity rates based on recent experience,

particularly for loans with a high mark-to-market LTV ratio.

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The decline in the fair value of net assets due to the new accounting standards was primarily associated with

recording delinquent loans underlying consolidated MBS trusts and eliminating our net guaranty obligations

related to MBS trusts that were consolidated on January 1, 2010. The fair value of our guaranty obligations is

a measure of the credit risk related to mortgage loans underlying Fannie Mae MBS that we assume through

our guaranty. With consolidation of MBS trusts and the elimination of our guaranty obligation, we ceased

valuing our credit risk associated with delinquent loans in consolidated MBS trusts using our guaranty

obligation models and began valuing those delinquent loans based on nonperforming loan prices.

Since market participants’ assumptions inherent in the pricing for nonperforming loans differ from

assumptions we use in estimating the fair value of our guaranty obligations, most significantly expected

returns and liquidity discounts, consolidation of MBS trusts directly impacted the fair value of our net assets.

Market prices for nonperforming loans are reflective of highly negotiated transactions in a

principal-to-principal market that often involve loan-level due diligence prior to completion of a transaction.

Many of these transactions involve sellers who previously acquired the loans in distressed transactions and

buyers who demand significant return opportunities.

We intend to maximize the value of nonperforming loans over time, utilizing loan modifications, foreclosures,

repurchases and other preferable loss mitigation actions (for example, preforeclosure sales) that to date have

resulted in per loan net recoveries materially higher than those that would have been available had they been

sold in the nonperforming loan market. By following our loss mitigation strategies, rather than selling our

nonperforming loans at the current estimated market price, we estimate, based on our proprietary credit

valuation models, that we could realize approximately $45 billion more than the fair value of our

nonperforming loans reported in our non-GAAP consolidated fair value balance sheet as of December 31,

2010. Nonperforming loans in this fair value balance sheet disclosure include loans that are delinquent by one

or more payments. Key inputs and assumptions used in our credit valuation models included the amount of

estimated default costs, including estimated unrecoverable principal and interest that we expected to incur over

the life of the underlying mortgage loans backing our Fannie Mae MBS, estimated foreclosure-related costs

and estimated administrative and other costs related to our guaranty.

Cautionary Language Relating to Supplemental Non-GAAP Financial Measures

In reviewing our non-GAAP consolidated fair value balance sheets, there are a number of important factors

and limitations to consider. The estimated fair value of our net assets is calculated as of a particular point in

time based on our existing assets and liabilities. It does not incorporate other factors that may have a

significant impact on our long-term fair value, including revenues generated from future business activities in

which we expect to engage, the value from our foreclosure and loss mitigation efforts or the impact that

legislation or potential regulatory actions may have on us. As a result, the estimated fair value of our net

assets presented in our non-GAAP consolidated fair value balance sheets does not represent an estimate of our

net realizable value, liquidation value or our market value as a whole. Amounts we ultimately realize from the

disposition of assets or settlement of liabilities may vary materially from the estimated fair values presented in

our non-GAAP consolidated fair value balance sheets.

In addition, the fair value of our net assets attributable to common stockholders presented in our fair value

balance sheet does not represent an estimate of the value we expect to realize from operating the company or

what we expect to draw from Treasury under the terms of our senior preferred stock purchase agreement,

primarily because:

• The estimated fair value of our credit exposures significantly exceeds our projected credit losses as fair

value takes into account certain assumptions about liquidity and required rates of return that a market

participant may demand in assuming a credit obligation. Because we do not intend to have another party

assume the credit risk inherent in our book of business, and therefore would not be obligated to pay a

market premium for its assumption, we do not expect the current market premium portion of our current

estimate of fair value to impact future Treasury draws;

• The fair value balance sheet does not reflect amounts we expect to draw in the future to pay dividends on

the senior preferred stock; and

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• The fair value of our net assets reflects a point in time estimate of the fair value of our existing assets and

liabilities, and does not incorporate the value associated with new business that may be added in the

future.

The fair value of our net assets is not a measure defined within GAAP and may not be comparable to

similarly titled measures reported by other companies.

Supplemental Non-GAAP Consolidated Fair Value Balance Sheets

We present our non-GAAP fair value balance sheets in Table 30. Credit risk is managed by our guaranty

business and is computed for intracompany allocation purposes. By computing this intracompany allocation,

we reflect the value associated with credit risk, which is managed by our guaranty business, versus the interest

rate risk, which is measured by our Capital Markets group. As a result of our adoption of the new accounting

standards, we shifted from presenting the fair value of mortgage loans separately from the fair value of net

guaranty obligations of MBS trusts as of December 31, 2009 to presenting consolidated mortgage loans, net of

the fair value of guaranty assets and obligations as of December 31, 2010. We have not changed our fair value

methodologies or our methodology of computing our credit risk for intracompany allocation purposes.

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Table 30: Supplemental Non-GAAP Consolidated Fair Value Balance Sheets

GAAP

Carrying

Value

Fair Value

Adjustment(2)

Estimated

Fair Value

GAAP

Carrying

Value

Fair Value

Adjustment(2)

Estimated

Fair Value

As of December 31, 2010 As of December 31, 2009(1)

(Dollars in millions)

Assets:

Cash and cash equivalents . . ............. $ 80,975 $ — $ 80,975 $ 9,882 $ — $ 9,882

Federal funds sold and securities purchased

under agreements to resell or similar

arrangements ...................... 11,751 — 11,751 53,684 (28) 53,656

Trading securities. . . .................. 56,856 — 56,856 111,939 — 111,939

Available-for-sale securities . ............. 94,392 — 94,392 237,728 — 237,728

Mortgage loans:

Mortgage loans held for sale . . . . . . . . . . . . 915 — 915 18,462 153 18,615

Mortgage loans held for investment, net of

allowance for loan losses:

Of Fannie Mae . .................. 358,698 (39,331) 319,367 246,509 (5,209) 241,300

Of consolidated trusts . . ............. 2,564,107 46,038(3) 2,610,145(4) 129,590 (45) 129,545(4)

Total mortgage loans ................. 2,923,720 6,707 2,930,427(5) 394,561 (5,101) 389,460(5)

Advances to lenders . .................. 7,215 (225) 6,990(6)(7) 5,449 (305) 5,144(6)(7)

Derivative assets at fair value ............. 1,137 — 1,137(6)(7) 1,474 — 1,474(6)(7)

Guaranty assets and buy-ups, net. . . . . . . . . . . 458 356 814(6)(7) 9,520 5,104 14,624(6)(7)

Total financial assets ................. 3,176,504 6,838 3,183,342(8) 824,237 (330) 823,907(8)

Master servicing assets and credit

enhancements . . . . . . . . . . . . . . . . . . . . . 479 3,286 3,765(6)(7) 651 5,917 6,568(6)(7)

Other assets . ....................... 44,989 (261) 44,728(6)(7) 44,253 373 44,626(6)(7)

Total assets ....................... $3,221,972 $ 9,863 $3,231,835 $869,141 $ 5,960 $ 875,101

Liabilities:

Federal funds purchased and securities sold

under agreements to repurchase . . . . . . . . . . $ 52 $ (1) $ 51 $ — $ — $ —

Short-term debt:

Of Fannie Mae . . . .................. 151,884 90 151,974 200,437 56 200,493

Of consolidated trusts . . . ............. 5,359 — 5,359 — — —

Long-term debt:

Of Fannie Mae . . . .................. 628,160(9) 21,524 649,684 567,950(9) 19,473 587,423

Of consolidated trusts . . . ............. 2,411,597(9) 103,332(3) 2,514,929 6,167(9) 143 6,310

Derivative liabilities at fair value . . . ........ 1,715 — 1,715(10)(11) 1,029 — 1,029(10)(11)

Guaranty obligations. . . . . . . . . . . . . . . . . . . 769 3,085 3,854(10)(11) 13,996 124,586 138,582(10)(11)

Total financial liabilities . . ............. 3,199,536 128,030 3,327,566(8) 789,579 144,258 933,837(8)

Other liabilities ...................... 24,953 (472) 24,481(10)(11) 94,843 (54,878) 39,965(10)(11)

Total liabilities . . . .................. 3,224,489 127,558 3,352,047 884,422 89,380 973,802

Equity (deficit):

Fannie Mae stockholders’ equity (deficit):

Senior preferred(12).................... 88,600 — 88,600 60,900 — 60,900

Preferred . . . ....................... 20,204 (19,829) 375 20,348 (19,629) 719

Common . . . . . . . . . . . . . . . . . . . . . . . . . . (111,403) (97,866) (209,269) (96,620) (63,791) (160,411)

Total Fannie Mae stockholders’ deficit/nonGAAP fair value of net assets ........ $ (2,599) $(117,695) $ (120,294) $ (15,372) $ (83,420) $ (98,792)

Noncontrolling interests . . . . . . . . . . . . . . . 82 — 82 91 — 91

Total deficit ....................... (2,517) (117,695) (120,212) (15,281) (83,420) (98,701)

Total liabilities and equity (deficit) ........ $3,221,972 $ 9,863 $3,231,835 $869,141 $ 5,960 $ 875,101

Explanation and Reconciliation of Non-GAAP Measures to GAAP Measures

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

(2) Each of the amounts listed as a “fair value adjustment” represents the difference between the carrying value included in our GAAP

consolidated balance sheets and our best judgment of the estimated fair value of the listed item.

(3) Fair value exceeds the carrying value of consolidated loans and debt of consolidated trusts due to the fact that the loans and debt

were consolidated in our GAAP consolidated balance sheet at unpaid principal balance at transition. Also impacting the difference

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between fair value and carrying value of the consolidated loans is the credit component of the loan. This credit component is

reflected in the net guaranty obligation, which is included in the consolidated loan fair value, but was presented as a separate line

item in our fair value balance sheet in prior periods.

(4) Includes certain mortgage loans that we elected to report at fair value in our GAAP consolidated balance sheet of $3.0 billion as of

December 31, 2010. We did not elect to report any mortgage loans at fair value in our consolidated balance sheet as of

December 31, 2009.

(5) Performing loans had a fair value of $2.8 trillion and an unpaid principal balance of $2.7 trillion as of December 31, 2010 compared

to a fair value of $345.5 billion and an unpaid principal balance of $348.2 billion as of December 31, 2009. Nonperforming loans,

which include loans that are delinquent by one or more payments, had a fair value of $168.5 billion and an unpaid principal balance

of $287.4 billion as of December 31, 2010 compared to a fair value of $43.9 billion and an unpaid principal balance of $79.8 billion

as of December 31, 2009. See “Note 19, Fair Value” for additional information on valuation techniques for performing and

nonperforming loans.

(6) The following line items: (a) Advances to lenders; (b) Derivative assets at fair value; (c) Guaranty assets and buy-ups, net;

(d) Master servicing assets and credit enhancements and (e) Other assets, together consist of the following assets presented in our

GAAP consolidated balance sheets: (a) Total accrued interest receivable, net of allowance; (b) Acquired property, net; (c) Servicer

and MBS trust receivable; and (d) Other assets.

(7) “Other assets” include the following GAAP consolidated balance sheets line items: (a) Total accrued interest receivable, net of

allowance; (b) Acquired property, net; and (c) Servicer and MBS trust receivable. The carrying value of these items in our GAAP

consolidated balance sheets totaled $28.4 billion and $31.2 billion as of December 31, 2010 and 2009, respectively. “Other assets” in

our GAAP consolidated balance sheets includes the following: (a) Advances to Lenders; (b) Derivative assets at fair value;

(c) Guaranty assets and buy-ups, net; and (d) Master servicing assets and credit enhancements. The carrying value of these items

totaled $9.3 billion and $17.1 billion as of December 31, 2010 and 2009, respectively.

(8) We determined the estimated fair value of these financial instruments in accordance with the fair value accounting standard as

described in “Note 19, Fair Value.”

(9) Includes certain long-term debt instruments that we elected to report at fair value in our GAAP consolidated balance sheets of

$3.2 billion and $3.3 billion as of December 31, 2010 and 2009, respectively.

(10) The following line items: (a) Derivative liabilities at fair value; (b) Guaranty obligations; and (c) Other liabilities, consist of the

following liabilities presented in our GAAP consolidated balance sheets: (a) Accrued interest payable of Fannie Mae; (b) Accrued

interest payable of consolidated trusts; (c) Reserve for guaranty losses; (d) Servicer and MBS trust payable; and (e) Other liabilities.

(11) “Other liabilities” include the following GAAP consolidated balance sheets line items: (a) Accrued interest payable of Fannie Mae;

(b) Accrued interest payable of consolidated trusts; (c) Reserve for guaranty losses; and (d) Servicer and MBS trust payable. The

carrying value of these items in our GAAP consolidated balance sheets totaled $17.0 billion and $85.3 billion as of December 31, 2010

and 2009, respectively. We assume that certain other liabilities, such as deferred revenues, have no fair value. Although we report the

“Reserve for guaranty losses” as a separate line item in our consolidated balance sheets, it is incorporated into and reported as part of

the fair value of our guaranty obligations in our non-GAAP supplemental consolidated fair value balance sheets. “Other liabilities” in

our GAAP consolidated balance sheets include the following: (a) Derivative liabilities at fair value and (b) Guaranty obligations. The

carrying value of these items totaled $2.5 billion and $15.0 billion as of December 31, 2010 and 2009, respectively.

(12) The amount included in “estimated fair value” of the senior preferred stock is the liquidation preference, which is the same as the

GAAP carrying value, and does not reflect fair value.

LIQUIDITY AND CAPITAL MANAGEMENT

Liquidity Management

Our business activities require that we maintain adequate liquidity to fund our operations. Our liquidity policy

is designed to address our liquidity risk. Liquidity risk is the risk that we will not be able to meet our funding

obligations in a timely manner. Liquidity management involves forecasting funding requirements and

maintaining sufficient capacity to meet these needs. Our Treasury group is responsible for our liquidity and

contingency planning strategies.

Primary Sources and Uses of Funds

Our primary source of funds is proceeds from the issuance of short-term and long-term debt securities.

Accordingly, our liquidity depends largely on our ability to issue unsecured debt in the capital markets. Our

status as a GSE and federal government support of our business continue to be essential to maintaining our

access to the unsecured debt markets. Our senior unsecured debt obligations are rated AAA, or its equivalent,

by the major rating agencies.

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In addition to funding we obtain from the issuance of debt securities, our other sources of cash include:

• principal and interest payments received on mortgage loans, mortgage-related securities and non-mortgage

investments we own;

• proceeds from the sale of mortgage-related securities, mortgage loans and non-mortgage assets, including

proceeds from the sales of foreclosed real estate assets;

• funds from Treasury pursuant to the senior preferred stock purchase agreement;

• borrowings under secured and unsecured intraday funding lines of credit we have established with several

large financial institutions;

• guaranty fees received on Fannie Mae MBS;

• borrowings against mortgage-related securities and other investment securities we hold pursuant to

repurchase agreements and loan agreements;

• payments received from mortgage insurance counterparties; and

• net receipts on derivative instruments.

Our primary funding needs include:

• the repayment of matured, redeemed and repurchased debt;

• the purchase of mortgage loans (including delinquent loans from MBS trusts), mortgage-related securities

and other investments;

• interest payments on outstanding debt;

• dividend payments made to Treasury pursuant to the senior preferred stock purchase agreement;

• net payments on derivative instruments;

• the pledging of collateral under derivative instruments;

• administrative expenses; and

• losses incurred in connection with our Fannie Mae MBS guaranty obligations.

An increased proportion of our funding needs during 2010, compared with 2009, came from: (1) purchasing

delinquent loans from MBS trusts; (2) an increase in the redemption of callable debt; and (3) increased

dividend payments to Treasury under the senior preferred stock purchase agreement. As we draw more funds

pursuant to the senior preferred stock purchase agreement, we expect our cash dividend payments to Treasury

will continue to increase in future periods if we continue to pay the dividend on a quarterly basis, rather than

allowing the dividend to accrue at an increased rate of 12% and be added to the liquidation preference of the

senior preferred stock.

Debt Funding

Effective January 1, 2010, we adopted new accounting standards that resulted in the consolidation of the

substantial majority of our MBS trusts and recognized the underlying assets and debt of these trusts in our

consolidated balance sheet. Debt from consolidations represents our liability to third-party beneficial interest

holders of MBS that we guarantee when we have included the assets of a corresponding trust in our

consolidated balance sheets. Despite the increase in debt recognized in our consolidated balance sheets due to

consolidations, the adoption of the new accounting standards did not change our exposure to liquidity risk. We

separately present the debt from consolidations (“debt of consolidated trusts”) and the debt issued by us (“debt

of Fannie Mae”) in our consolidated balance sheets and in the debt tables below. Our discussion regarding

debt funding in this section focuses on the debt of Fannie Mae.

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We fund our business primarily through the issuance of short-term and long-term debt securities in the

domestic and international capital markets. Because debt issuance is our primary funding source, we are

subject to “roll-over,” or refinancing, risk on our outstanding debt.

We have a diversified funding base of domestic and international investors. Purchasers of our debt securities

include fund managers, commercial banks, pension funds, insurance companies, foreign central banks,

corporations, state and local governments, and other municipal authorities. Purchasers of our debt securities

are also geographically diversified, with a significant portion of our investors located in North America, South

America, Europe and Asia.

Although our funding needs may vary from quarter to quarter depending on market conditions, we currently

expect our debt funding needs will decline in future periods as we reduce the size of our mortgage portfolio in

compliance with the requirement of the senior preferred stock purchase agreement that we reduce our

mortgage portfolio 10% per year until it reaches $250 billion.

Fannie Mae Debt Funding Activity

Table 31 summarizes the activity in the debt of Fannie Mae for the periods indicated. This activity includes

federal funds purchased and securities sold under agreements to repurchase but excludes the debt of

consolidated trusts as well as intraday loans. The reported amounts of debt issued and paid off during the

period represent the face amount of the debt at issuance and redemption, respectively. Activity for short-term

debt of Fannie Mae relates to borrowings with an original contractual maturity of one year or less while

activity for long-term debt of Fannie Mae relates to borrowings with an original contractual maturity of

greater than one year.

Table 31: Activity in Debt of Fannie Mae

2010 2009(3) 2008

For the Year Ended December 31,

(Dollars in millions)

Issued during the period:

Short-term: (1)

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $451,289 $1,381,640 $1,624,868

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.25% 0.18% 2.11%

Long-term:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $463,157 $ 295,147 $ 248,168

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.88% 2.52% 3.76%

Total issued:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $914,446 $1,676,787 $1,873,036

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.08% 0.59% 2.33%

Paid off during the period: (2)

Short-term:(1)

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $499,828 $1,513,683 $1,529,368

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.23% 0.51% 2.54%

Long-term:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $406,267 $ 260,578 $ 266,764

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.16% 4.09% 4.89%

Total paid off:

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $906,095 $1,774,261 $1,796,132

Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.54% 1.04% 2.89%

(1) The amount of short-term debt issued and paid off included $766.8 billion and $482.5 billion for the years ended

December 31, 2009 and 2008, respectively, of debt issued and repaid to Fannie Mae MBS trusts.

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(2) Consists of all payments on debt, including regularly scheduled principal payments, payments at maturity, payments

resulting from calls and payments for any other repurchases.

(3) For the year ended December 31, 2009, we revised the weighted-average interest rate on short-term issued, total

issued, short-term paid-off and total paid-off debt primarily to reflect weighting based on transaction level data.

Due to the adoption of the new accounting standards, we no longer include debt issued and repaid to Fannie

Mae MBS trusts in our short-term debt activity, as the substantial majority of our MBS trusts were

consolidated and the underlying assets and debt of these trusts were recognized in our consolidated balance

sheets. In 2009, short-term debt activity of Fannie Mae, excluding debt issued and repaid to Fannie Mae MBS

trusts, consisted of issuances of $614.6 billion with a weighted-average interest rate of 0.27% and repayments

of $746.6 billion with a weighted-average interest rate of 0.93%. In 2008, short-term debt activity of Fannie

Mae, excluding debt issued and repaid to Fannie Mae MBS trusts, consisted of issuances of $1.1 trillion with

a weighted-average interest rate of 2.20% and repayments of $1.0 trillion with a weighted-average interest rate

of 2.84%.

Excluding debt issued and repaid to Fannie Mae MBS trusts, debt funding activity in 2010 was relatively flat

compared with 2009 because the increase in our issuances of long-term debt offset a decrease in our issuances

of short-term debt. Our issuances of long-term debt increased primarily because we: (1) increased our

redemption of debt with higher interest rates and replaced it with issuances of debt with lower interest rates;

(2) issued additional debt to fund purchases of delinquent loans from MBS trusts; and (3) issued additional

long-term debt in lieu of short-term debt to meet our liquidity risk management requirements.

During 2010, we purchased from MBS trusts the substantial majority of delinquent loans that were four or

more consecutive monthly payments delinquent. We purchased approximately $217 billion of delinquent loans

from single-family MBS trusts during 2010. The substantial majority of these delinquent loan purchases were

completed in the first half of 2010. We expect to continue to purchase loans from MBS trusts as they become

four or more consecutive monthly payments delinquent subject to market conditions, economic benefit,

servicer capacity, and other constraints including the limit on the mortgage assets that we may own pursuant

to the senior preferred stock purchase agreement.

Our ability to issue long-term debt has been strong in recent quarters primarily due to actions taken by the

federal government to support us and the financial markets. Many of these programs initiated by the federal

government have expired. The Treasury credit facility and Treasury MBS purchase program terminated on

December 31, 2009 and the Federal Reserve’s agency debt and MBS purchase programs expired on March 31,

2010. Despite the expiration of these programs, demand for our long-term debt securities continues to be

strong as of the date of this filing.

We believe that continued federal government support of our business and the financial markets, as well as our

status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in the

government’s support could materially adversely affect our ability to refinance our debt as it becomes due,

which could have a material adverse impact on our liquidity, financial condition and results of operations. On

February 11, 2011, Treasury and HUD released a report to Congress on reforming America’s housing finance

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

responsibly wind down both Fannie Mae and Freddie Mac. The report emphasizes the importance of

proceeding with a careful transition plan and providing the necessary financial support to Fannie Mae and

Freddie Mac during the transition period.

In addition, future changes or disruptions in the financial markets could significantly change the amount, mix

and cost of funds we obtain, which also could increase our liquidity and roll-over risk and have a material

adverse impact on our liquidity, financial condition and results of operations. See “Risk Factors” for a

discussion of the risks to our business related to our ability to obtain funds for our operations through the

issuance of debt securities, the relative cost at which we are able to obtain these funds and our liquidity

contingency plans. Also see “Risk Factors” in this report for discussions of the risks to our business relating to

the uncertain future of our company and to our reliance on access to the debt capital markets, as well as the

possibility that legislative proposals regarding our business could have a material impact on our ability to issue

debt or refinance existing debt as it becomes due.

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Outstanding Debt

Table 32 provides information as of December 31, 2010 and 2009 on our outstanding short-term and longterm debt based on its original contractual terms. Our total outstanding debt of Fannie Mae, which consists of

federal funds purchased and securities sold under agreements to repurchase and short-term and long-term debt,

excluding debt of consolidated trusts, increased to $780.1 billion as of December 31, 2010, from

$768.4 billion as of December 31, 2009.

As of December 31, 2010, our outstanding short-term debt, based on its original contractual maturity,

decreased as a percentage of our total outstanding debt to 19% from 26% as of December 31, 2009. For

information on our outstanding debt maturing within one year, including the current portion of our long-term

debt, as a percentage of our total debt, see “Maturity Profile of Outstanding Debt of Fannie Mae.” In addition,

the weighted-average interest rate on our long-term debt, based on its original contractual maturity, decreased

to 2.77% as of December 31, 2010 from 3.71% as of December 31, 2009.

Pursuant to the terms of the senior preferred stock purchase agreement, we are prohibited from issuing debt

without the prior consent of Treasury if it would result in our aggregate indebtedness exceeding 120% of the

amount of mortgage assets we are allowed to own on December 31 of the immediately preceding calendar

year. Our debt cap under the senior preferred stock purchase agreement was $1,080 billion in 2010 and is

$972 billion in 2011. As of December 31, 2010, our aggregate indebtedness totaled $793.9 billion, which was

$286.1 billion below our debt limit. The calculation of our indebtedness for purposes of complying with our

debt cap reflects the unpaid principal balance and excludes debt basis adjustments and debt of consolidated

trusts. Because of our debt limit, we may be restricted in the amount of debt we issue to fund our operations.

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Table 32: Outstanding Short-Term Borrowings and Long-Term Debt(1)

Maturities Outstanding

WeightedAverage

Interest

Rate Maturities Outstanding

WeightedAverage

Interest

Rate

2010 2009

As of December 31,

(Dollars in millions)

Federal funds purchased and securities sold

under agreements to repurchase . . . . . . . . — $ 52 2.20% — $ — —%

Short-term debt:

Fixed-rate:

Discount notes .................. — $ 151,500 0.32% — $199,987 0.27%

Foreign exchange discount notes . . . . . . — 384 2.43 — 300 1.50

Other short-term debt . . . . . . . . . . . . . — — — — 100 0.53

Total fixed-rate . . .............. 151,884 0.32 200,387 0.27

Floating-rate(2) . . . . . . . . . . . . . . . . . . . — — — — 50 0.02

Total short-term debt of Fannie Mae(3) ..... 151,884 0.32 200,437 0.27

Debt of consolidated trusts . . ......... — 5,359 0.23 — — —

Total short-term debt . . . .............. $ 157,243 0.32% $200,437 0.27%

Long-term debt:

Senior fixed:

Benchmark notes and bonds ......... 2011 - 2030 $ 300,344 3.20% 2010 - 2030 $279,945 4.10%

Medium-term notes . .............. 2011 - 2020 199,266 2.13 2010 - 2019 171,207 2.97

Foreign exchange notes and bonds . .... 2017 - 2028 1,177 6.21 2010 - 2028 1,239 5.64

Other long-term debt(2) ............ 2011 - 2040 44,893 5.64 2010 - 2039 62,783 5.80

Total senior fixed .............. 545,680 3.02 515,174 3.94

Senior floating:

Medium-term notes . .............. 2011 - 2015 72,039 0.31 2010 - 2014 41,911 0.26

Other long-term debt(2) ............ 2020 - 2037 386 4.92 2020 - 2037 1,041 4.12

Total senior floating ............. 72,425 0.34 42,952 0.34

Subordinated fixed-rate:

Qualifying subordinated(4) .......... 2011 - 2014 7,392 5.47 2011 - 2014 7,391 5.47

Subordinated debentures . . ......... 2019 2,663 9.91 2019 2,433 9.89

Total subordinated fixed-rate . . . .... 10,055 6.65 9,824 6.57

Total long-term debt of Fannie Mae(5) ...... 628,160 2.77 567,950 3.71

Debt of consolidated trusts(2) .......... 2011 - 2051 2,411,597 4.59 2010 - 2039 6,167 5.63

Total long-term debt . . . .............. $3,039,757 4.22% $574,117 3.73%

Outstanding callable debt of Fannie Mae(6). . . $ 219,804 2.53% $210,181 3.48%

(1) Outstanding debt amounts and weighted-average interest rates reported in this table include the effect of unamortized

discounts, premiums and other cost basis adjustments. Reported amounts include fair value gains and losses associated

with debt that we elected to carry at fair value. The unpaid principal balance of outstanding debt, which excludes

unamortized discounts, premiums and other cost basis adjustments and debt of consolidated trusts, totaled

$792.6 billion and $784.0 billion as of December 31, 2010 and 2009, respectively.

(2) Includes a portion of structured debt instruments that is reported at fair value.

(3) Short-term debt of Fannie Mae consists of borrowings with an original contractual maturity of one year or less and,

therefore, does not include the current portion of long-term debt. Reported amounts include a net discount and other

cost basis adjustments of $128 million and $129 million as of December 31, 2010 and 2009, respectively.

(4) Consists of subordinated debt with an interest deferral feature.

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(5) Long-term debt of Fannie Mae consists of borrowings with an original contractual maturity of greater than one year.

Reported amounts include the current portion of long-term debt that is due within one year, which totaled $95.4 billion

and $106.5 billion as of December 31, 2010 and 2009, respectively. Reported amounts also include unamortized

discounts, premiums and other cost basis adjustments of $12.4 billion and $15.6 billion as of December 31, 2010 and

2009, respectively. The unpaid principal balance of long-term debt of Fannie Mae, which excludes unamortized

discounts, premiums, fair value adjustments and other cost basis adjustments and amounts related to debt of

consolidated trusts, totaled $640.5 billion and $583.4 billion as of December 31, 2010 and 2009, respectively.

(6) Consists of long-term callable debt of Fannie Mae that can be paid off in whole or in part at our option at any time on

or after a specified date. Includes the unpaid principal balance, and excludes unamortized discounts, premiums and

other cost basis adjustments.

Table 33 below presents additional information for each category of our short-term borrowings.

Table 33: Outstanding Short-Term Borrowings(1)

Outstanding

Weighted

Average

Interest

Rate Outstanding(2)

Weighted

Average

Interest

Rate

Maximum

Outstanding(3)

As of December 31 Average During the Year

2010

(Dollars in millions)

Federal funds purchased and securities sold under

agreements to repurchase . . . . . . . . . . . . . . . . $ 52 2.20% $ 72 0.16% $ 200

Fixed-rate short-term debt:

Discount notes . . . . . . . . . . . . . . . . . . . . . . . $151,500 0.32% $210,986 0.29% $260,377

Foreign exchange discount notes . . . . . . . . . . . 384 2.43 299 1.86 384

Other fixed-rate short-term debt . . . . . . . . . . . — — 15 0.53 100

Floating-rate short-term debt . . . . . . . . . . . . . . . — — 8 0.02 50

Total short-term debt . . . . . . . . . . . . . . . . . . . $151,884 0.32%

Outstanding

Weighted

Average

Interest

Rate Outstanding(2)

Weighted

Average

Interest

Rate

Maximum

Outstanding(3)

As of December 31 Average During the Year

2009

(Dollars in millions)

Federal funds purchased and securities sold under

agreements to repurchase . . . . . . . . . . . . . . . . $ — —% $ 42 1.55% $ 189

Fixed-rate short-term debt:

Discount notes . . . . . . . . . . . . . . . . . . . . . . . $199,987 0.27% $253,884 0.92% $325,239

Foreign exchange discount notes . . . . . . . . . . . 300 1.50 222 1.41 300

Other fixed-rate short-term debt . . . . . . . . . . . 100 0.53 199 1.30 334

Floating-rate short-term debt . . . . . . . . . . . . . . . 50 0.02 2,744 1.20 3,136

Total short-term debt . . . . . . . . . . . . . . . . . . . $200,437 0.27%

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Outstanding

Weighted

Average

Interest

Rate Outstanding(2)

Weighted

Average

Interest

Rate

Maximum

Outstanding(3)

As of December 31 Average During the Year

2008

(Dollars in millions)

Federal funds purchased and securities sold under

agreements to repurchase . . . . . . . . . . . . . . . . $ 77 0.01% $ 294 1.93% $ 725

Fixed-rate short-term debt:

Discount notes . . . . . . . . . . . . . . . . . . . . . . . $322,932 1.75% $257,845 2.51% $326,374

Foreign exchange discount notes . . . . . . . . . . . 141 2.50 276 3.73 363

Other fixed-rate short-term debt . . . . . . . . . . . 333 2.80 714 2.83 1,886

Floating-rate short-term debt(4) . . . . . . . . . . . . . . 7,585 1.66 4,858 2.26 7,586

Total short-term debt . . . . . . . . . . . . . . . . . . . $330,991 1.75%

(1) Includes unamortized discounts, premiums and other cost basis adjustments.

(2) Average amount outstanding during the year has been calculated using month-end balances.

(3) Maximum outstanding represents the highest month-end outstanding balance during the year.

(4) Includes a portion of structured debt instruments that is reported at fair value.

Subordinated Debt

We had $7.4 billion in outstanding qualifying subordinated debt as of December 31, 2010. Of this amount,

$2.5 billion will mature during 2011. The terms of these securities state that, if our core capital is below 125%

of our critical capital requirement (which it was as of December 31, 2010), we will defer interest payments on

these securities. FHFA has directed us, however, to continue paying principal and interest on our outstanding

qualifying subordinated debt during the conservatorship and thereafter until directed otherwise, regardless of

our existing capital levels.

Under the senior preferred stock purchase agreement, we are prohibited from issuing additional subordinated

debt without the written consent of Treasury. We did not issue any subordinated debt in 2010.

Maturity Profile of Outstanding Debt of Fannie Mae

Table 34 presents the maturity profile, as of December 31, 2010, of our outstanding debt maturing within one

year, by month, including amounts we have announced that we are calling for redemption. Our outstanding

debt maturing within one year, including the current portion of our long-term debt, decreased as a percentage

of our total outstanding debt, excluding debt of consolidated trusts and federal funds purchased and securities

sold under agreements to repurchase, to 32% as of December 31, 2010, compared with 41% as of

December 31, 2009. The weighted-average maturity of our outstanding debt that is maturing within one year

was 116 days as of December 31, 2010, compared with 103 days as of December 31, 2009.

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Table 34: Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year(1)

Long-Term

Short-Term

(Dollars in billions)

$33.2 $27.8 $23.7 $20.9 $16.9 $12.1 $10.2 $4.6 $1.9

$2.8 $5.9

$19.5

$13.2 $17.6

$1.1 $5.2

$14.6

$3.0 $3.0

$11.2

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11

$0.1 $0.1 $0.4 $0.1

(1) Includes unamortized discounts, premiums and other cost basis adjustments of $176 million as of December 31, 2010.

Excludes debt of consolidated trusts maturing within one year of $9.8 billion and federal funds purchased and

securities sold under agreements to repurchase of $52 million as of December 31, 2010.

Table 35 presents the maturity profile, as of December 31, 2010, of the portion of our long-term debt that

matures in more than one year, on a quarterly basis for one year and on an annual basis thereafter, excluding

amounts we have announced that we are calling for redemption within one year. The weighted-average

maturity of our outstanding debt maturing in more than one year was approximately 58 months as of

December 31, 2010, compared with approximately 72 months as of December 31, 2009.

Table 35: Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year(1) (Dollars in billions)

$19.5 $21.3

$50.6

$59.5

$122.3

$71.7 $66.7

$119.3

$0

$50

$100

$150

Q1 2012 Q2 2012 Q3 2012 Q4 2012 2013 2014 2015 2016 &

thereafter

(1) Includes unamortized discounts, premiums and other cost basis adjustments of $12.4 billion as of December 31, 2010.

Excludes debt of consolidated trusts of $2.4 trillion as of December 31, 2010.

We intend to repay our short-term and long-term debt obligations as they become due primarily through

proceeds from the issuance of additional debt securities. We also intend to use funds we receive from Treasury

under the senior preferred stock purchase agreement to pay our debt obligations and to pay dividends on the

senior preferred stock.

Contractual Obligations

Table 36 summarizes, by remaining maturity, our future cash obligations related to our long-term debt,

announced calls, operating leases, purchase obligations and other material noncancelable contractual

obligations as of December 31, 2010.

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Table 36: Contractual Obligations

Total

Less than

1 Year

1 to G 3

Years

3 to 5

Years

More than

5 Years

Payment Due by Period as of December 31, 2010

(Dollars in millions)

Long-term debt obligations(1). . . . . . . . . . . . . . . . . . . . . . $628,160 $ 97,245 $273,191 $138,446 $119,278

Contractual interest on long-term debt obligations(2) . . . . . . 95,358 14,718 23,769 15,622 41,249

Operating lease obligations(3). . . . . . . . . . . . . . . . . . . . . . 158 40 61 31 26

Purchase obligations:

Mortgage commitments(4) . . . . . . . . . . . . . . . . . . . . . . 54,858 54,837 21 — —

Other purchase obligations(5) . . . . . . . . . . . . . . . . . . . . 274 106 163 5 —

Other long-term liabilities reflected in the consolidated

balance sheet(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,087 862 156 37 32

Total contractual obligations . . . . . . . . . . . . . . . . . . . . . . $779,895 $167,808 $297,361 $154,141 $160,585

(1) Represents the carrying amount of our long-term debt assuming payments are made in full at maturity. Amounts

exclude $2.4 trillion in long-term debt from consolidations. Amounts include unamortized net discount and other cost

basis adjustments of $12.4 billion.

(2) Excludes contractual interest on long-term debt from consolidations.

(3) Includes certain premises and equipment leases.

(4) Includes on- and off-balance sheet commitments to purchase mortgage loans and mortgage-related securities.

(5) Includes only unconditional purchase obligations that are subject to a cancellation penalty for certain telecom services,

software and computer services, and other agreements. Excludes arrangements that may be cancelled without penalty.

Amounts also include off-balance sheet commitments for the unutilized portion of lending agreements entered into

with multifamily borrowers.

(6) Excludes risk management derivative transactions that may require cash settlement in future periods and our

obligations to stand ready to perform under our guarantees relating to Fannie Mae MBS and other financial guarantees,

because the amount and timing of payments under these arrangements are generally contingent upon the occurrence of

future events. For a description of the amount of our on- and off-balance sheet Fannie Mae MBS and other financial

guarantees as of December 31, 2010, see “Off-Balance Sheet Arrangements.” Includes future cash payments due under

our contractual obligations to fund LIHTC and other partnerships that are unconditional and legally binding and cash

received as collateral from derivative counterparties, which are included in our consolidated balance sheets under

“Other liabilities.”

Equity Funding

As a result of the covenants under the senior preferred stock purchase agreement and Treasury’s ownership of

the warrant to purchase up to 79.9% of the total shares of our common stock outstanding, we no longer have

access to equity funding except through draws under the senior preferred stock purchase agreement. For a

description of the covenants under the senior preferred stock purchase agreement, see “Business—

Conservatorship and Treasury Agreements—Treasury Agreements—Covenants Under Treasury Agreements.”

We discuss our funding under the senior preferred stock purchase agreement below in “Liquidity and Capital

Management—Capital Management—Capital Activity—Senior Preferred Stock Purchase Agreement.”

Liquidity Risk Management Practices and Contingency Planning

Our liquidity position could be adversely affected by many causes, both internal and external to our business,

including: actions taken by the conservator, the Federal Reserve, Treasury or other government agencies;

legislation relating to us or our business; an unexpected systemic event leading to the withdrawal of liquidity

from the market; an extreme market-wide widening of credit spreads; public statements by key policy makers;

a downgrade of our or the U.S. government’s credit ratings from the major ratings organizations; a significant

further decline in our net worth; loss of demand for our debt, or certain types of our debt, from a major group

of investors; a significant credit event involving one of our major institutional counterparties; a sudden

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catastrophic operational failure in the financial sector due to a terrorist attack or other event; or elimination of

our GSE status. See “Risk Factors” for a description of factors that could adversely affect our liquidity.

We conduct liquidity contingency planning to prepare for an event in which our access to the unsecured debt

markets becomes limited. We plan for alternative sources of liquidity that are designed to allow us to meet our

cash obligations without relying upon the issuance of unsecured debt.

In 2010, under direction from FHFA, we revised our liquidity management policies and practices. FHFA

requires that we:

• maintain a portfolio of highly liquid securities to cover 30 calendar days of net cash needs, assuming no

access to the short- and long-term unsecured debt markets and other assumptions required by FHFA;

• maintain within our cash and other investments portfolio a daily balance of U.S. Treasury securities that

has a redemption amount greater than or equal to 50% of the average of the previous three month-end

balances of our cash and other investments portfolio (as adjusted in agreement with FHFA); and

• maintain a portfolio of unencumbered agency mortgage securities and U.S. Treasury securities with more

than one year remaining to maturity with a market value (less a discount and expected prepayments

during the year) that meets or exceeds our projected 365-day net cash needs.

As of December 31, 2010, we were in compliance with each of the liquidity risk management policies and

practices set forth above.

In addition to these FHFA requirements, we run routine operational testing of our ability to rely upon

identified sources of liquidity, such as mortgage repurchase arrangements with counterparties. One method we

use to conduct these tests involves entering into a relatively small mortgage repurchase agreement

(approximately $100 million) with a counterparty in order to confirm that we have the operational and systems

capability to enter into repurchase arrangements. In addition, we have provided collateral in advance to a

number of clearing banks in the event we seek to enter into mortgage repurchase arrangements in the future.

We do not, however, have committed repurchase arrangements with specific counterparties, as historically we

have not relied on this form of funding. As a result, our use of such facilities and our ability to enter into

them in significant dollar amounts may be challenging in a stressed market environment.

Below we describe in detail our alternative sources of liquidity if our access to the debt markets became

limited.

Cash and Other Investments Portfolio

Table 37 provides information on the composition of our cash and other investments portfolio for the periods

indicated.

Table 37: Cash and Other Investments Portfolio

2010 2009 2008

As of December 31,

(Dollars in millions)

Cash and cash equivalents(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,297 $ 6,812 $17,933

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

arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,751 53,684 57,418

Non-mortgage-related securities:

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,432 — —

Asset-backed securities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,321 8,515 10,598

Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 364 6,037

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 3 1,005

Total non-mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,753 8,882 17,640

Total cash and other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $61,801 $69,378 $92,991

141
(1) Includes $4.0 billion of U.S. Treasury securities and $2.3 billion of money market fund as of December 31, 2010, with

a maturity at the date of acquisition of three months or less.

(2) Includes securities primarily backed by credit cards loans, student loans and automobile loans.

Our total cash and other investments portfolio consists of cash and cash equivalents, federal funds sold and

securities purchased under agreements to resell or similar arrangements and non-mortgage investment

securities. Our cash and other investments portfolio decreased in 2010 compared with 2009 primarily due to

the reduction in our short-term debt balances, which reduced the amount of cash we needed on hand as of

December 31, 2010.

See “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—

Issuers of Investments Held in our Cash and Other Investments Portfolio” for additional information on the

risks associated with the assets in our cash and other investments portfolio.

Unencumbered Mortgage Portfolio

Another source of liquidity in the event our access to the unsecured debt market becomes impaired is the

unencumbered mortgage assets in our mortgage portfolio, which could be sold or used as collateral for secured

borrowing.

We continue to make enhancements to our systems to facilitate the securitization of a significant portion of the

performing whole loans in our mortgage portfolio into Fannie Mae MBS. We have securitized the majority of

the performing single-family whole loans in our retained portfolio and, in October 2010, we developed the

capability to securitize the multifamily loans in our mortgage portfolio. These mortgage-related securities

could be used as collateral in repurchase agreements or other lending arrangements to the extent they have not

been sold or encumbered. Despite these enhancements to our systems, we do not have the capability to

securitize all of the whole loans in our unencumbered mortgage portfolio.

We believe that the amount of mortgage-related securities that we could successfully sell or borrow against in

the event of a liquidity crisis or significant market disruption is substantially lower than the amount of

mortgage-related securities we hold. Due to the large size of our portfolio of mortgage-related assets, current

market conditions, and the significant amount of distressed assets in our mortgage portfolio, it is unlikely that

there would be sufficient market demand for large amounts of these assets over a prolonged period of time,

particularly during a liquidity crisis, which could limit our ability to sell or borrow against these assets. To the

extent that we would be able to obtain funding by selling or pledging mortgage-related securities as collateral,

we anticipate that a discount would be applied that would reduce the value assigned to those securities.

Depending on market conditions at the time, this discount would result in proceeds significantly lower than

the current market value of these assets and would thereby reduce the amount of financing we could obtain. In

addition, our primary source of collateral is Fannie Mae MBS that we own. In the event of a liquidity crisis in

which the future of our company is uncertain, counterparties may be unwilling to accept Fannie Mae MBS as

collateral. As a result, we may not be able to sell or borrow against these securities in sufficient amounts to

meet our liquidity needs.

While our liquidity contingency planning attempts to address stressed market conditions and our status under

conservatorship and Treasury arrangements, we believe that our liquidity contingency plans may be difficult or

impossible to execute for a company of our size in our circumstances. See “Risk Factors” for a description of

the risks associated with our liquidity contingency planning.

Credit Ratings

Our ability to access the capital markets and other sources of funding, as well as our cost of funds, are highly

dependent on our credit ratings from the major ratings organizations. In addition, our credit ratings are

important when we seek to engage in certain long-term transactions, such as derivative transactions. Factors

that may influence our credit ratings include our status as a GSE, Treasury’s funding commitment under the

senior preferred stock purchase agreement, the rating agencies’ assessment of the general operating and

regulatory environment, the credit ratings of the U.S. government, our relative position in the market, our

142
financial condition, our reputation, our liquidity position, the level and volatility of our earnings, and our

corporate governance and risk management policies. Our senior unsecured debt (both long-term and shortterm), qualifying subordinated debt and preferred stock are rated and monitored by Standard & Poor’s,

Moody’s and Fitch. There have been no changes in our credit ratings from December 31, 2009 to February 21,

2011. Table 38 presents the credit ratings issued by each of these rating agencies as of February 21, 2011.

Table 38: Fannie Mae Credit Ratings

Standard & Poor’s Moody’s Fitch

As of February 21, 2011

Long-term senior debt . . . . . . . . . . AAA Aaa AAA

Short-term senior debt . . . . . . . . . . A-1+ P-1 F1+

Qualifying subordinated debt . . . . . A Aa2 AAPreferred stock . . . . . . . . . . . . . . . C Ca C/RR6

Bank financial strength rating . . . . . — E+ —

Outlook . . . . . . . . . . . . . . . . . . . . Stable Stable Stable

(for Long Term Senior Debt (for all ratings) (for AAA rated Long Term

and Qualifying Subordinated Debt) Issuer Default Rating)

We have no covenants in our existing debt agreements that would be violated by a downgrade in our credit

ratings. However, in connection with certain derivatives counterparties, we could be required to provide

additional collateral to or terminate transactions with certain counterparties in the event that our senior

unsecured debt ratings are downgraded. The amount of additional collateral required depends on the contract

and is usually a fixed incremental amount, the market value of the exposure, or both. See “Note 10, Derivative

Instruments and Hedging Activities” for additional information on collateral we are required to provide to our

derivatives counterparties in the event of downgrades in our credit ratings.

Cash Flows

Year Ended December 31, 2010. Cash and cash equivalents of $17.3 billion as of December 31, 2010

increased by $10.5 billion from December 31, 2009. Net cash generated from investing activities totaled

$540.2 billion, resulting primarily from proceeds received from repayments of loans held for investment.

These net cash inflows were partially offset by net cash outflows used in operating activities of $27.4 billion

resulting primarily from purchases of trading securities. The net cash used in financing activities of

$502.3 billion was primarily attributable to a significant amount of short-term and long-term debt redemptions

in excess of proceeds received from the issuance of short-term and long-term debt.

Year Ended December 31, 2009. Cash and cash equivalents of $6.8 billion as of December 31, 2009

decreased by $11.1 billion from December 31, 2008. Net cash generated from investing activities totaled

$117.7 billion, resulting primarily from proceeds received from the sale of available-for-sale securities. These

net cash inflows were partially offset by net cash outflows used in operating activities of $85.9 billion, largely

attributable to our purchases of loans held-for-sale due to a significant increase in whole loan conduit activity,

and net cash outflows used in financing activities of $42.9 billion. The net cash used in financing activities

was attributable to the redemption of a significant amount of short-term debt, which was partially offset by the

issuance of long-term debt in excess of amounts redeemed and the funds received from Treasury under the

senior preferred stock purchase agreement.

Capital Management

Regulatory Capital

FHFA has announced that, during the conservatorship, our existing statutory and FHFA-directed regulatory

capital requirements will not be binding and FHFA will not issue quarterly capital classifications. We submit

minimum capital reports to FHFA during the conservatorship and FHFA monitors our capital levels. We report

our minimum capital requirement, core capital and GAAP net worth in our periodic reports on Form 10-Q and

Form 10-K, and FHFA also reports them on its website. FHFA is not reporting on our critical capital, risk143
based capital or subordinated debt levels during the conservatorship. For information on our minimum capital

requirements see “Note 17, Regulatory Capital Requirements.”

Capital Activity

Following our entry into conservatorship, FHFA advised us to manage to a positive net worth, which is

represented as the “total deficit” line item in our consolidated balance sheet. Our ability to manage our net

worth continues to be very limited. We are effectively unable to raise equity capital from private sources at

this time and, therefore, are reliant on the senior preferred stock purchase agreement to address any net worth

deficit.

Senior Preferred Stock Purchase Agreement

We have received a total of $87.6 billion from Treasury pursuant to the senior preferred stock purchase

agreement as of December 31, 2010. These funds allowed us to eliminate our net worth deficits as of the end

of each of the eight prior quarters. In February 2011, the Acting Director of FHFA submitted a request for

$2.6 billion from Treasury under the senior preferred stock purchase agreement to eliminate our net worth

deficit as of December 31, 2010, and requested receipt of those funds on or prior to March 31, 2011. Upon

receipt of the requested funds, the aggregate liquidation preference of the senior preferred stock, including the

initial aggregate liquidation preference of $1.0 billion, will equal $91.2 billion. We continue to expect to have

a net worth deficit in future periods and therefore will be required to obtain additional funding from Treasury

pursuant to the senior preferred stock purchase agreement. Treasury’s maximum funding commitment to us

prior to a December 2009 amendment of the senior preferred stock purchase agreement was $200 billion. The

amendment to the agreement stipulates that the cap on Treasury’s funding commitment to us under the senior

preferred stock purchase agreement will increase as necessary to accommodate any net worth deficits for

calendar quarters in 2010 through 2012. For any net worth deficits as of December 31, 2012, Treasury’s

remaining funding commitment will be $124.8 billion ($200 billion less $75.2 billion cumulatively drawn

through March 31, 2010) less the smaller of either (a) our positive net worth as of December 31, 2012 or

(b) our cumulative draws from Treasury for the calendar quarters in 2010 through 2012.

Dividends

The conservator announced in September, 2008 that we would not pay any dividends on the common stock or

on any series of outstanding preferred stock. In addition, the senior preferred stock purchase agreement

prohibits us from declaring or paying any dividends on Fannie Mae equity securities (other than the senior

preferred stock) without the prior written consent of Treasury. Dividends on our outstanding preferred stock

(other than the senior preferred stock) are non-cumulative; therefore, holders of this preferred stock are not

entitled to receive any forgone dividends in the future.

Holders of the senior preferred stock are entitled to receive, when, as and if declared by our Board of

Directors, cumulative quarterly cash dividends at the annual rate of 10% per year on the then-current

liquidation preference of the senior preferred stock. Treasury is the current holder of our senior preferred

stock. As conservator and under our charter, FHFA has authority to declare and approve dividends on the

senior preferred stock. If at any time we do not pay cash dividends on the senior preferred stock when they

are due, then immediately following the period we did not pay dividends and for all dividend periods

thereafter until the dividend period following the date on which we have paid in cash full cumulative

dividends (including any unpaid dividends added to the liquidation preference), the dividend rate will be 12%

per year. Dividends on the senior preferred stock that are not paid in cash for any dividend period will accrue

and be added to the liquidation preference of the senior preferred stock.

Our fourth quarter dividend of $2.2 billion was declared by the conservator and paid by us on December 31,

2010. Upon receipt of additional funds from Treasury in March 2011, which FHFA requested on our behalf in

February 2011, the annualized dividend on the senior preferred stock will be $9.1 billion based on the 10%

dividend rate. The level of dividends on the senior preferred stock will increase in future periods if, as we

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expect, the conservator requests additional funds on our behalf from Treasury under the senior preferred stock

purchase agreement.

OFF-BALANCE SHEET ARRANGEMENTS

We enter into certain business arrangements to facilitate our statutory purpose of providing liquidity to the

secondary mortgage market and to reduce our exposure to interest rate fluctuations. Some of these

arrangements are not recorded in our consolidated balance sheets or may be recorded in amounts different

from the full contract or notional amount of the transaction, depending on the nature or structure of, and

accounting required to be applied to, the arrangement. These arrangements are commonly referred to as “offbalance sheet arrangements” and expose us to potential losses in excess of the amounts recorded in our

consolidated balance sheets.

Our off-balance sheet arrangements result primarily from the following:

• our guaranty of mortgage loan securitization and resecuritization transactions over which we do not have

control;

• other guaranty transactions;

• liquidity support transactions; and

• partnership interests.

In 2009 and prior, most MBS trusts created as part of our guaranteed securitizations were not consolidated by

the company for financial reporting purposes because the trusts were considered to be qualifying special

purpose entities under the accounting rules governing the transfer and servicing of financial assets and the

extinguishment of liabilities. Effective January 1, 2010, we prospectively adopted the new accounting

standards, which resulted in the majority of our single-class securitization trusts being consolidated by us upon

adoption.

Our Fannie Mae MBS and other credit guarantees outstanding totaled $2.7 trillion as of December 31, 2010

and $2.8 trillion as of December 31, 2009. These totals include $2.6 trillion of consolidated Fannie Mae MBS

and $7.5 billion of Fannie Mae MBS held in portfolio as of December 31, 2010 and $147.9 billion of

consolidated Fannie Mae MBS and $220.2 billion of Fannie Mae MBS held in portfolio as of December 31,

2009.

Our maximum potential exposure to credit losses relating to our outstanding and unconsolidated Fannie Mae

MBS and other financial guarantees is primarily represented by the unpaid principal balance of the mortgage

loans underlying outstanding and unconsolidated Fannie Mae MBS and other financial guarantees of

$56.9 billion as of December 31, 2010 and $2.5 trillion as of December 31, 2009.

For information on the mortgage loans underlying both our on- and off-balance sheet Fannie Mae MBS, as

well as whole mortgage loans that we own, see “Risk Management—Credit Risk Management.”

Partnership Investment Interests

For partnership investments where we have determined that we are the primary beneficiary, we have

consolidated these investments and recorded all of the partnership assets and liabilities in our consolidated

balance sheets. The carrying value of our partnership investments, which primarily include investments in

affordable rental and for-sale housing partnerships, totaled $1.8 billion as of December 31, 2010, compared

with $2.4 billion as of December 31, 2009.

LIHTC Partnership Interests

In most instances, we are not the primary beneficiary of our LIHTC partnership investments, and therefore our

consolidated balance sheets reflect only our investment in the LIHTC partnership, rather than the full amount

of the LIHTC partnership’s assets and liabilities. During 2009, we explored options to sell or otherwise

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transfer our LIHTC investments for value consistent with our mission. On February 18, 2010, FHFA informed

us that after consultation with Treasury, we were not authorized to sell or transfer our LIHTC partnership

interests.

In the fourth quarter of 2009, we reduced the carrying value of our LIHTC partnership investments to zero,

recognizing a loss of $5.0 billion, as we no longer had both the intent and ability to sell or otherwise transfer

our LIHTC investments for value. As a result, we no longer recognize net operating losses or

other-than-temporary impairment on our LIHTC investments. However, we still have an obligation to fund our

LIHTC partnership investments and have recorded such obligation as a liability in our financial statements.

Our obligation to fund consolidated LIHTC partnerships was $139 million as of December 31, 2010 and

$282 million as of December 31, 2009. Our obligation to fund unconsolidated LIHTC partnerships was

$141 million as of December 31, 2010 and $259 million as of December 31, 2009. Our contributions to

consolidated LIHTC partnerships were $114 million for the year ended December 31, 2010 and $341 million

for the year ended December 31, 2009. Our contribution to unconsolidated LIHTC partnerships was

$158 million for the year ended December 31, 2010 and $293 million for the year ended December 31, 2009.

As a result of our current tax position, we currently are not making any new LIHTC investments, other than

pursuant to commitments existing prior to 2008, and are not recognizing any tax benefits in our consolidated

statements of operations associated with the tax credits and net operating losses. For additional information

regarding our holdings in off-balance sheet limited partnerships and other off-balance sheet transactions, refer

to “Note 3, Consolidations and Transfers of Financial Assets” and “Note 18, Concentrations of Credit Risk.”

Treasury Housing Finance Agency Initiative

During the fourth quarter of 2009, we entered into agreements with Treasury, FHFA and Freddie Mac under

which we provided assistance to state and local housing finance agencies (“HFAs”) through two primary

programs, which together comprise what we refer to as the HFA initiative. See “Certain Relationships and

Related Transactions, and Director Independence—Transactions with Related Persons—Transactions with

Treasury—Treasury Housing Finance Agency Initiative” for a discussion of the HFA initiative.

Through assistance to state and local HFAs and pursuant to the temporary credit and liquidity facilities

programs that we describe in “Related Parties” in “Note 1, Summary of Significant Accounting Policies,”

Treasury has purchased participation interests in temporary credit and liquidity facilities provided by us and

Freddie Mac to the HFAs. These facilities create a credit and liquidity backstop for the HFAs. Our outstanding

commitments under the temporary credit and liquidity facilities program totaled $3.7 billion as of

December 31, 2010 and $870 million as of December 31, 2009.

Our total outstanding liquidity commitments to advance funds for securities backed by multifamily housing

revenue bonds totaled $17.8 billion as of December 31, 2010 and $15.5 billion as of December 31, 2009.

These commitments require us to advance funds to third parties that enable them to repurchase tendered bonds

or securities that are unable to be remarketed. Any repurchased securities are pledged to us to secure funding

until the securities are remarketed. We hold cash and cash equivalents in our cash and other investments

portfolio in excess of these commitments to advance funds (exclusive of $3.7 billion as of December 31, 2010

and $870 million as of December 31, 2009, of our outstanding commitments under the HFA temporary credit

and liquidity facilities program, for which we are not required to hold excess cash).

As of both December 31, 2010 and 2009, there were no liquidity guarantee advances outstanding.

RISK MANAGEMENT

Our business activities expose us to the following three major categories of financial risk: credit risk, market

risk (including interest rate and liquidity risk) and operational risk. We seek to manage these risks and

mitigate our losses by using an established risk management framework. Our risk management framework is

intended to provide the basis for the principles that govern our risk management activities.

• Credit Risk. Credit risk is the potential for financial loss resulting from the failure of a borrower or

institutional counterparty to honor its financial or contractual obligations, resulting in a potential loss of

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earnings or cash flows. In regards to financial securities or instruments, credit risk is the risk of not

receiving principal, interest or any other financial obligation on a timely basis, for any reason. Credit risk

exists primarily in our mortgage credit book of business and derivatives portfolio.

• Market Risk. Market risk is the exposure generated by adverse changes in the value of financial

instruments caused by a change in market prices or interest rates. Two significant market risks we face

and actively manage are interest rate risk and liquidity risk. Interest rate risk is the risk of changes in our

long-term earnings or in the value of our net assets due to fluctuations in interest rates. Liquidity risk is

our potential inability to meet our funding obligations in a timely manner.

• Operational Risk. Operational risk is the loss resulting from inadequate or failed internal processes,

people, systems, or from external events.

We are also subject to a number of other risks that could adversely impact our business, financial condition,

earnings and cash flow, including legal and reputational risks that may arise due to a failure to comply with

laws, regulations or ethical standards and codes of conduct applicable to our business activities and functions.

Another risk that can impact our financial condition, earnings and cash flow is model risk, which is defined as

the potential for model errors to adversely affect the company. See “Risk Factors” for a discussion of the risks

associated with our reliance on models.

Our risk management framework and governance structure are intended to provide comprehensive controls and

ongoing management of the major risks inherent in our business activities. Our ability to identify, assess,

mitigate and control, and report and monitor risk is crucial to our safety and soundness.

• Risk Identification. Risk identification is the process of finding, recognizing and describing risk. The

identification of risk facilitates effective risk management by achieving awareness of the sources, impact

and magnitude of risk.

• Risk Assessment. We assess risk using a variety of methodologies, such as calculation of potential losses

from loans and stress tests relating to interest rate sensitivity. When we assess risk we look at metrics

such as frequency, severity, concentration, correlation, volatility and loss. Information obtained from these

assessments is reviewed on a regular basis to ensure that our risk assumptions are reasonable and reflect

our current positions.

• Risk Mitigation & Control. We proactively develop appropriate mitigation strategies to prevent

excessive risk exposure, address risks that exceed established tolerances, and address risks that create

unanticipated business impact. Mitigation strategies and controls can be in the form of reduction,

transference, acceptance or avoidance of the identified risk. We also manage risk through four control

elements that are designed to work in conjunction with each other: (1) risk policies; (2) risk limits;

(3) delegations of authority; and (4) risk committees.

• Risk Reporting & Monitoring. Our business units actively monitor emerging and identified risks that

are taken when executing our strategies. Risks and concerns are reported to the appropriate level of

management to ensure that the necessary action is taken to mitigate the risk.

Enterprise Risk Governance

Our enterprise risk management structure is designed to balance a strong corporate risk management

philosophy, appetite and culture with a well-defined independent risk management function. Our objective is to

ensure that people and processes are organized in a way to promote a cross-functional approach to risk

management and that controls are in place to better manage our risks and comply with legal and regulatory

requirements.

Our enterprise risk governance structure consists of the Board of Directors, executive leadership, including the

Chief Risk Officer, the Enterprise Risk Management division, designated officers responsible for managing our

financial risks, business unit chief risk officers, and risk management committees. This structure is designed to

encourage a culture of accountability within the divisions and promote effective risk management throughout

the company.

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Our organizational structure and risk management framework work in conjunction with each other to identify

risk-related trends with respect to customers, products or portfolios and external events to develop appropriate

strategies to mitigate emerging and identified risks.

Board of Directors

The Board of Directors is responsible for the oversight of risk management primarily through the Board’s Risk

Policy and Capital Committee. This board committee oversees risk-related policies, including: review of the

corporate-level risk policies and limits; performance against these policies and limits; and the sufficiency of

risk management capabilities. In addition, the Audit Committee reviews the system of internal controls that we

rely upon to provide reasonable assurance of compliance with our enterprise risk management processes.

Enterprise Risk Management Division

Our Enterprise Risk Management division is headed by the Chief Risk Officer. The Chief Risk Officer reports

directly to the Chief Executive Officer and independently to the Board of Directors, primarily through the

Board’s Risk Policy and Capital Committee. Enterprise Risk Management is responsible for providing our risk

management directives and functions as well as for establishing effective controls, including policy

development, risk management methodologies and risk reporting.

Our Enterprise Risk Management division has designated chief risk officers for each of our business segments

in addition to risk officers who are responsible for the management of our financial risks. These chief risk

officers are responsible for oversight and approval of key risks within their respective business unit and for

developing the appropriate risk policies and reporting requirements for their business unit.

Risk Committees

We use our risk committees as a forum for discussing emerging risks, risk mitigation strategies, and

communication across business lines. Risk committees enhance the risk management framework by reinforcing

our risk management culture and providing accountability for the resolution of key risk issues and decisions.

Each business risk committee is co-chaired by the business unit chief risk officer and the business unit

executive vice president and includes key business and risk leaders.

Our current committee structure includes four Business Risk Committees (Capital Markets Risk, Credit

Portfolio Management Risk, Multifamily Risk and Single-Family Risk) and five Enterprise Risk Committees

(Asset and Liability, Credit Risk, Credit Expense Forecast and Allowance, Model Risk Oversight and Change

Management, and Operational Risk).

Internal Audit

Our Internal Audit group, under the direction of the Chief Audit Executive, provides an objective assessment

of the design and execution of our internal control system, including our management systems, risk

governance, and policies and procedures. The Chief Audit Executive reports directly and independently to the

Audit Committee of the Board of Directors, and audit personnel are compensated on objectives set for the

group by the Audit Committee rather than corporate financial results or goals. The Chief Audit Executive

reports administratively to the Chief Executive Officer and may be removed only upon approval by the

Board’s Audit Committee. Internal audit activities are designed to provide reasonable assurance that resources

are safeguarded; that significant financial, managerial and operating information is complete, accurate and

reliable; and that employee actions comply with our policies and applicable laws and regulations.

Compliance and Ethics

The Compliance and Ethics division, under the direction of the Chief Compliance Officer, is dedicated to

developing policies and procedures to help ensure that Fannie Mae and its employees comply with the law,

our Code of Conduct, and all regulatory obligations. The Chief Compliance Officer reports directly to our

Chief Executive Officer and independently to the Audit Committee of the Board of Directors, and Compliance

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and Ethics personnel are compensated on objectives set for the group by the Audit Committee of the Board of

Directors rather than corporate financial results or goals. The Chief Compliance Officer may be removed only

upon Board approval. The Chief Compliance Officer is responsible for overseeing our compliance activities;

developing and promoting a code of ethical conduct; evaluating and investigating any allegations of

misconduct; and overseeing and coordinating regulatory reporting and examinations.

Credit Risk Management

We are generally subject to two types of credit risk: mortgage credit risk and institutional counterparty credit

risk. Continuing adverse market conditions have resulted in significant exposure to mortgage and institutional

counterparty credit risk. The metrics used to measure credit risk are generated using internal models. Our

internal models require numerous assumptions and there are inherent limitations in any methodology used to

estimate macro-economic factors such as home prices, unemployment and interest rates and their impact on

borrower behavior. When market conditions change rapidly and dramatically the assumptions of our models

may no longer accurately capture or reflect the changing conditions. On a continuous basis, management

makes judgments about the appropriateness of the risk assessments indicated by the models. See “Risk

Factors” for a discussion of the risks associated with our use of models.

Mortgage Credit Risk Management

Mortgage credit risk is the risk that a borrower will fail to make required mortgage payments. We are exposed

to credit risk on our mortgage credit book of business because we either hold mortgage assets, have issued a

guaranty in connection with the creation of Fannie Mae MBS backed by mortgage assets or provided other

credit enhancements on mortgage assets. While our mortgage credit book of business includes all of our

mortgage-related assets, both on- and off-balance sheet, our guaranty book of business excludes non-Fannie

Mae mortgage-related securities held in our portfolio for which we do not provide a guaranty.

Mortgage Credit Book of Business

Table 39 displays the composition of our entire mortgage credit book of business as of the periods indicated.

Our total single-family mortgage credit book of business accounted for 93% of our total mortgage credit book

of business as of both December 31, 2010 and 2009. As a result of our adoption of the new accounting

standards, we reflect a substantial majority of our Fannie Mae MBS as mortgage loans, which are reported on

an actual unpaid principal balance basis and include the recognition of unscheduled payments made by

borrowers in the month received. Previously, we recorded these Fannie Mae MBS in our mortgage credit book

of business on a scheduled basis and recognized these payments when we remitted payment to the MBS trusts

one month after the unscheduled payments were received. As a result of this timing difference, our mortgage

credit book of business decreased upon adoption of the new accounting standards.

The total mortgage credit book of business is not impacted by our repurchase of delinquent loans as this

activity is a reclassification from loans of consolidated trusts to loans of Fannie Mae.

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Table 39: Composition of Mortgage Credit Book of Business(1)

Conventional(2) Government(3) Conventional(2) Government(3) Conventional(2) Government(3)

Single-Family Multifamily Total

As of December 31, 2010

(Dollars in millions)

Mortgage assets:

Mortgage loans(4) . . . . . . $2,766,870 $52,577 $170,074 $ 476 $2,936,944 $53,053

Fannie Mae MBS(5)(7) . . . 5,961 1,586 — 2 5,961 1,588

Agency mortgage-related

securities(5)(6). . . . . . . . 17,291 1,506 — 24 17,291 1,530

Mortgage revenue

bonds(5) . . . . . . . . . . . 2,197 1,190 7,449 1,689 9,646 2,879

Other mortgage-related

securities(5) . . . . . . . . . 43,634 1,657 25,052 15 68,686 1,672

Total mortgage assets . . . . . 2,835,953 58,516 202,575 2,206 3,038,528 60,722

Unconsolidated Fannie Mae

MBS(5)(7) . . . . . . . . . . . . 2,230 17,238 37 1,818 2,267 19,056

Other credit guarantees(8) . . . 15,529 3,096 16,601 393 32,130 3,489

Mortgage credit book of

business . . . . . . . . . . . $2,853,712 $78,850 $219,213 $4,417 $3,072,925 $83,267

Guaranty book of

business . . . . . . . . . . . $2,790,590 $74,497 $186,712 $2,689 $2,977,302 $77,186

Conventional(2) Government(3) Conventional(2) Government(3) Conventional(2) Government(3)

Single-Family Multifamily Total

As of December 31, 2009

(Dollars in millions)

Mortgage portfolio:

Mortgage loans(4) . . . . . . $ 243,730 $52,399 $119,829 $ 585 $ 363,559 $52,984

Fannie Mae MBS(5) . . . . . 218,033 1,816 314 82 218,347 1,898

Agency mortgage-related

securities(5)(6). . . . . . . . 41,337 1,309 — 21 41,337 1,330

Mortgage revenue

bonds(5) . . . . . . . . . . . 2,709 2,056 7,734 1,954 10,443 4,010

Other mortgage-related

securities(5) . . . . . . . . . 47,825 1,796 25,703 20 73,528 1,816

Total mortgage portfolio . . . 553,634 59,376 153,580 2,662 707,214 62,038

Fannie Mae MBS held by

third parties(5)(7) . . . . . . . 2,370,037 15,197 46,628 927 2,416,665 16,124

Other credit guarantees(8) . . . 9,873 802 16,909 40 26,782 842

Mortgage credit book of

business . . . . . . . . . . . $2,933,544 $75,375 $217,117 $3,629 $3,150,661 $79,004

Guaranty book of

business . . . . . . . . . . . $2,841,673 $70,214 $183,680 $1,634 $3,025,353 $71,848

(1) Based on unpaid principal balance.

(2) Refers to mortgage loans and mortgage-related securities that are not guaranteed or insured by the U.S. government or

any of its agencies.

(3) Refers to mortgage loans and mortgage-related securities guaranteed or insured, in whole or in part, by the U.S.

government or one of its agencies.

(4) Includes unscheduled borrower principal payments.

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(5) Excludes unscheduled borrower principal payments.

(6) Consists of mortgage-related securities issued by Freddie Mac and Ginnie Mae.

(7) The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.

(8) Includes single-family and multifamily credit enhancements that we have provided and that are not otherwise reflected

in the table.

Single-Family Mortgage Credit Risk Management

Our strategy in managing single-family mortgage credit risk consists of four primary components: (1) our

acquisition and servicing policies and underwriting standards, including the use of credit enhancements;

(2) portfolio diversification and monitoring; (3) management of problem loans; and (4) REO management.

These strategies, which we discuss in detail below, may increase our expenses and may not be effective in

reducing our credit-related expenses or credit losses. We provide information on our credit-related expenses

and credit losses in “Consolidated Results of Operations—Credit-Related Expenses.”

In evaluating our single-family mortgage credit risk, we closely monitor changes in housing and economic

conditions and the impact of those changes on the credit risk profile of our single-family mortgage credit book

of business. We regularly review and provide updates to our underwriting standards and eligibility guidelines

that take into consideration changing market conditions. The credit risk profile of our single-family mortgage

credit book of business is influenced by, among other things, the credit profile of the borrower, features of the

loan, loan product type, the type of property securing the loan and the housing market and general economy.

We focus our efforts more on loans that we believe pose a higher risk of default, which typically have been

loans associated with higher mark-to-market LTV ratios, loans to borrowers with lower FICO credit scores and

certain higher risk loan product categories, including Alt-A loans. These and other factors affect both the

amount of expected credit loss on a given loan and the sensitivity of that loss to changes in the economic

environment.

The credit statistics reported below, unless otherwise noted, pertain generally to the portion of our singlefamily guaranty book of business for which we have access to detailed loan-level information, which

constituted over 99% of our single-family conventional guaranty book of business as of December 31, 2010

and 98% as of December 31, 2009. We typically obtain this data from the sellers or servicers of the mortgage

loans in our guaranty book of business and receive representations and warranties from them as to the

accuracy of the information. While we perform various quality assurance checks by sampling loans to assess

compliance with our underwriting and eligibility criteria, we do not independently verify all reported

information. See “Risk Factors” for a discussion of the risk that we could experience mortgage fraud as a

result of this reliance on lender representations.

Because we believe we have limited credit exposure on our government loans, the single-family credit

statistics we focus on and report in the sections below generally relate to our single-family conventional

guaranty book of business, which represents the substantial majority of our total single-family guaranty book

of business.

We provide information on the performance of non-Fannie Mae mortgage-related securities held in our

portfolio, including the impairment that we have recognized on these securities, in “Consolidated Balance

Sheet Analysis—Investments in Mortgage-Related Securities—Investments in Private-Label Mortgage-Related

Securities.”

Single-Family Acquisition and Servicing Policies and Underwriting Standards

Our Single-Family business, in conjunction with our Enterprise Risk Management division, is responsible for

pricing and managing credit risk relating to the portion of our single-family mortgage credit book of business

consisting of single-family mortgage loans and Fannie Mae MBS backed by single-family mortgage loans

(whether held in our portfolio or held by third parties). Desktop UnderwriterTM, our proprietary automated

underwriting system which measures default risk by assessing the primary risk factors of a mortgage, is used

to evaluate the majority of the loans we purchase or securitize. As part of our regular evaluation of Desktop

Underwriter, we conduct periodic examinations of the underlying risk assessment models to improve Desktop

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Underwriter’s ability to effectively analyze risk by recalibrating the models based on actual loan performance

and market assumptions. Subject to our prior approval, we also may purchase and securitize mortgage loans

that have been underwritten using other automated underwriting systems, as well as mortgage loans

underwritten to agreed-upon standards that differ from our standard underwriting and eligibility criteria.

Additionally, as the number of our delinquent and defaulted loans has increased, so has the corresponding

number of these loans reviewed for compliance with our requirements. We use the information obtained from

these loan quality reviews to provide more timely feedback to lenders on possible areas for correction in their

origination practices.

We initiated underwriting and eligibility changes that became effective in 2009 such as establishing a

minimum FICO credit score and a maximum debt-to-income cap, updating Desktop Underwriter’s credit risk

assessment model by implementing Desktop Underwriter 8.0, and we provided updates to our property-related

policies. All of the changes focused on strengthening the underwriting and eligibility standards to promote

sustainable homeownership. The result of many of these changes is reflected in the substantially improved risk

profile of the single-family acquisitions in 2010 and 2009.

Our charter requires that single-family conventional mortgage loans with LTV ratios above 80% at acquisition

that we purchase or that back Fannie Mae MBS generally be covered by one or more of the following:

(1) insurance or a guaranty by a qualified insurer; (2) a seller’s agreement to repurchase or replace any

mortgage loan in default (for such period and under such circumstances as we may require); or (3) retention

by the seller of at least a 10% participation interest in the mortgage loans. However, under our Refi Plus

initiative, which includes HARP, we allow our borrowers who have mortgage loans with current LTV ratios up

to 125% to refinance their mortgages without obtaining new mortgage insurance in excess of what was already

in place. We have worked with FHFA to provide us with the flexibility to implement this element of RefiPlus.

FHFA granted our request for an extension of this flexibility for loans originated through June 2011. We have

submitted a request to FHFA for an additional extension.

Borrower-paid primary mortgage insurance is the most common type of credit enhancement in our singlefamily mortgage credit book of business. Primary mortgage insurance transfers varying portions of the credit

risk associated with a mortgage loan to a third-party insurer. In order for us to receive a payment in settlement

of a claim under a primary mortgage insurance policy, the insured loan must be in default and the borrower’s

interest in the property that secured the loan must have been extinguished, generally in a foreclosure action.

The claims process for primary mortgage insurance typically takes three to six months after title to the

property has been transferred.

Mortgage insurers may also provide pool mortgage insurance, which is insurance that applies to a defined

group of loans. Pool mortgage insurance benefits typically are based on actual loss incurred and are subject to

an aggregate loss limit. Under some of our pool mortgage insurance policies, we are required to meet

specified loss deductibles before we can recover under the policy. We typically collect claims under pool

mortgage insurance three to six months after disposition of the property that secured the loan.

For a discussion of our aggregate mortgage insurance coverage as of December 31, 2010 and 2009, see “Risk

Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Mortgage

Insurers.”

We monitor both housing and economic market conditions as well as loan performance, to manage and

evaluate our credit risks. During 2010, we announced several changes to our single-family acquisition and

servicing policies and underwriting standards that were intended to improve the credit quality of mortgage

loans delivered to us, strengthen our servicing policies, continue our corporate focus on sustainable

homeownership and further reduce our acquisition of higher-risk conventional loan categories. Some of these

changes include:

• Implementation of a Loan Quality Initiative (“LQI”) which is a longer-term strategy that will help

mortgage loans meet our credit, eligibility, and pricing standards by capturing critical loan data earlier in

the loan delivery process. This initiative is intended to reduce lender repurchase requests in the future

through improved data integrity and early feedback on some aspects of policy compliance, thereby

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reducing investor and lender risks. As part of the LQI, we have implemented or announced certain

initiatives designed to validate certain borrower and property information and collect additional property

and appraisal data prior to or at the time of delivery of the mortgage loan:

• Implementation of FHFA’s Uniform Mortgage Data Program that provides a common approach to

collection of the appraisal and loan delivery data required on the loans that lenders sell to Fannie Mae;

• Development of the Uniform Loan Delivery Dataset definition of single-family loan delivery data

requirements for all mortgages delivered to either GSE on or after March 19, 2012;

• Launch of EarlyCheckTM, a new service that provides lenders access to loan delivery data checks that

are designed to help them identify potential data problems at any point prior to loan delivery;

• Adjustments to pricing of flow business for mortgage loans with certain risk characteristics to ensure that

Fannie Mae is positioned to provide a stable source of liquidity to its lender partners;

• On October 18, 2010, the Federal Reserve Board released an interim final rule on appraiser independence.

Under the Dodd-Frank Act, promulgation of the interim final rule resulted in the termination of the Home

Valuation Code of Conduct (“HVCC”). In October 2010, we announced the Appraiser Independence

Requirements that we, FHFA and key industry participants developed to replace the HVCC. The

Appraiser Independence Requirements maintain the spirit and intent of the HVCC and continue to provide

important protections for mortgage investors, home buyers, and the housing market;

• Updating of our existing quality control standards to require that lenders follow our revised requirements

for their quality control plans, reviews and processes, as well as updated requirements for the approval

and management of third-party originators. We have also increased our enforcement and monitoring

resources to increase lender compliance with these revised standards;

• Changes to interest-only mortgage loans, including minimum reserve and FICO credit score requirements,

lower LTV ratios, and the elimination of interest-only eligibility for certain products, including cash-out

refinances, 2- to 4- unit properties and investment properties;

• Adjustments to the qualifying interest rate requirements for adjustable-rate mortgage loans with an initial

term of five years or less to help increase the probability that borrowers are able to absorb future payment

increases;

• Elimination of balloon mortgage loans as an eligible product under our standard business;

• Continuation of our providing guidance to assist servicers in implementing the eligibility, underwriting

and servicing requirements of HAMP. For example, we implemented changes to require full verification

of borrower eligibility prior to offering a trial period plan and issued guidance around income verification

options;

• Enhancements to loss mitigation options to provide payment relief for homeowners who have lost their

jobs by offering eligible unemployed borrowers a forbearance plan to temporarily reduce or suspend their

mortgage payments;

• Introduction of the Home Affordable Foreclosure Alternatives program which is designed to mitigate the

impact of foreclosures on borrowers who were eligible for a loan modification under HAMP but

ultimately were unsuccessful in obtaining one;

• Introduction of servicer requirements for staffing, training and performance monitoring of default-related

activities as well as enhanced guidance for call coverage and borrower contact;

• Adjustment to the minimum waiting period that must elapse after a foreclosure before a borrower without

extenuating circumstances is eligible for a new mortgage loan. The adjustment is designed to increase

disincentives for borrowers to walk away from their mortgages without working with servicers to pursue

alternatives to foreclosure. Borrowers with extenuating circumstances or those who agree to foreclosure

alternatives may qualify for new mortgage loans eligible for sale to Fannie Mae in as little as two to three

years;

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• Addition of new requirements for financial information verification before borrowers can be offered a

loan modification outside of HAMP;

• Introduction of a Unique Hardship policy to allow servicers to grant forbearance, and a provision for

credit bureau reporting relief, to borrowers who face difficulty maintaining timely payments due to an

event or temporary financial hardship that has been classified by us as a unique hardship;

• Adjustments to foreclosure time frames and notice of compensatory fees for breach of servicing

obligations, which are designed to hold servicers accountable for their servicing requirements and aim to

improve servicer performance and costly delays in foreclosure proceedings; and

• Introduction of the Second Lien Modification Program (2MP), which is designed to work in tandem with

HAMP for first liens to create a comprehensive solution to help borrowers achieve greater affordability by

lowering payments on both first and second lien mortgage loans for borrowers whose second lien loan is

owned by Fannie Mae.

On September 29, 2010, Congress passed a continuing resolution that, among other things, extended the

current GSE loan limits for high cost areas through September 30, 2011. See “Business—Our Charter and

Regulation of Our Activities—Charter Act—Loan Standards” for additional information on our loan limits.

Single-Family Portfolio Diversification and Monitoring

Diversification within our single-family mortgage credit book of business by product type, loan characteristics

and geography is an important factor that influences credit quality and performance and may reduce our credit

risk. We also review the payment performance of loans in order to help identify potential problem loans early

in the delinquency cycle and to guide the development of our loss mitigation strategies.

The profile of our guaranty book of business is comprised of the following key loan attributes:

— LTV ratio. LTV ratio is a strong predictor of credit performance. The likelihood of default and the

gross severity of a loss in the event of default are typically lower as the LTV ratio decreases. This also

applies to the estimated mark-to-market LTV ratios, particularly those over 100%, as this indicates that

the borrower’s mortgage balance exceeds the property value.

— Product type. Certain loan product types have features that may result in increased risk. Generally,

intermediate-term, fixed-rate mortgages exhibit the lowest default rates, followed by long-term, fixedrate mortgages. ARMs and balloon/reset mortgages typically exhibit higher default rates than fixed-rate

mortgages, partly because the borrower’s future payments may rise, within limits, as interest rates

change. Negative-amortizing and interest-only loans also default more often than traditional fixed-rate

mortgage loans.

— Number of units. Mortgages on one-unit properties tend to have lower credit risk than mortgages on

two-, three- or four-unit properties.

— Property type. Certain property types have a higher risk of default. For example, condominiums

generally are considered to have higher credit risk than single-family detached properties.

— Occupancy type. Mortgages on properties occupied by the borrower as a primary or secondary

residence tend to have lower credit risk than mortgages on investment properties.

— Credit score. Credit score is a measure often used by the financial services industry, including our

company, to assess borrower credit quality and the likelihood that a borrower will repay future

obligations as expected. A higher credit score typically indicates lower credit risk.

— Loan purpose. Loan purpose indicates how the borrower intends to use the funds from a mortgage

loan. Cash-out refinancings have a higher risk of default than either mortgage loans used for the

purchase of a property or other refinancings that restrict the amount of cash returned to the borrower.

— Geographic concentration. Local economic conditions affect borrowers’ ability to repay loans and the

value of collateral underlying loans. Geographic diversification reduces mortgage credit risk.

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— Loan age. We monitor year of origination and loan age, which is defined as the number of years since

origination. Statistically, the peak ages for default are currently from two to six years after origination.

However, we have seen higher early default rates for loans originated in 2006 and 2007, due to a higher

number of loans originated during these years with risk layering. Risk layering means permitting a loan

to have several features that compound risk, such as loans with reduced documentation and higher risk

loan product types.

Table 40 presents our single-family conventional business volumes and our single-family conventional

guaranty book of business for the periods indicated, based on certain key risk characteristics that we use to

evaluate the risk profile and credit quality of our single-family loans.

Table 40: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1)

2010 2009 2008 2010 2009 2008

Percent of Single-Family

Conventional Business Volume(2)

For the Year Ended December 31,

Percent of Single-Family

Conventional Guaranty

Book of Business(3)(4)

As of December 31,

(Dollars in millions)

Original LTV ratio:(5)

G= 60% . . . . . . . . . . . . . . . . . . . . . 30% 33% 23% 24% 24% 22%

60.01% to 70% . . . . . . . . . . . . . . . . . 16 17 16 16 16 16

70.01% to 80% . . . . . . . . . . . . . . . . . 38 40 39 41 42 43

80.01% to 90%(6) . . . . . . . . . . . . . . . 9 7 12 9 9 9

90.01% to 100%(6) . . . . . . . . . . . . . . 5 3 10 9 9 10

Greater than 100%(6) ............. 2 * * 1 * *

Total . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

Weighted average. . . . . . . . . . . . . . 68% 67% 72% 71% 71% 72%

Average loan amount . . . . . . . . . . . . . . $219,431 $219,118 $208,652 $155,531 $153,302 $148,824

Estimated mark-to-market LTV ratio:(7)

G= 60% . . . . . . . . . . . . . . . . . . . . . 28% 31% 36%

60.01% to 70% . . . . . . . . . . . . . . . . . 13 13 13

70.01% to 80% . . . . . . . . . . . . . . . . . 19 19 17

80.01% to 90% . . . . . . . . . . . . . . . . . 15 14 14

90.01% to 100% . . . . . . . . . . . . . . . . 9 9 8

Greater than 100% . . . . . . . . . . . . . . 16 14 12

Total . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100%

Weighted average. . . . . . . . . . . . . . 77% 75% 70%

Product type:

Fixed-rate:(8)

Long-term . . . . . . . . . . . . . . . . . . . 72% 82% 78% 74% 75% 74%

Intermediate-term. . . . . . . . . . . . . . 22 15 12 14 13 13

Interest-only . . . . . . . . . . . . . . . . . * * 2 2 3 3

Total fixed-rate. . . . . . . . . . . . . . 94 97 92 90 91 90

Adjustable-rate:

Interest-only . . . . . . . . . . . . . . . . . 1 1 4 4 4 5

Negative-amortizing . . . . . . . . . . . . — * — * 1 1

Other ARMs . . . . . . . . . . . . . . . . . 5 2 4 6 4 4

Total adjustable-rate . . . . . . . . . 6 3 8 10 9 10

Total . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

Number of property units:

1 unit. . . . . . . . . . . . . . . . . . . . . . . . 98% 98% 97% 97% 96% 96%

2-4 units. . . . . . . . . . . . . . . . . . . . . . 2 2 3 3 4 4

Total . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

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2010 2009 2008 2010 2009 2008

Percent of Single-Family

Conventional Business Volume(2)

For the Year Ended December 31,

Percent of Single-Family

Conventional Guaranty

Book of Business(3)(4)

As of December 31,

(Dollars in millions)

Property type:

Single-family homes . . . . . . . . . . . . . 91% 92% 89% 91% 91% 91%

Condo/Co-op . . . . . . . . . . . . . . . . . . 9 8 11 9 9 9

Total . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

Occupancy type:

Primary residence . . . . . . . . . . . . . . . 91% 93% 89% 90% 90% 90%

Second/vacation home . . . . . . . . . . . . 4 5 5 4 4 4

Investor . . . . . . . . . . . . . . . . . . . . . . 5 2 6 6 6 6

Total . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

FICO credit score:

G 620 . . . . . . . . . . . . . . . . . . . . . . . *% * % 3% 4% 4% 5%

620 to G 660 . . . . . . . . . . . . . . . . . . 2 2 6 7 8 9

660 to G 700 . . . . . . . . . . . . . . . . . . 7 7 14 15 16 17

700 to G 740 . . . . . . . . . . . . . . . . . . 16 17 22 21 22 23

H= 740 . . . . . . . . . . . . . . . . . . . . . . 75 74 55 53 50 45

Not available . . . . . . . . . . . . . . . . . . * * — — * 1

Total . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

Weighted average. . . . . . . . . . . . . . 762 761 738 735 730 724

Loan purpose:

Purchase . . . . . . . . . . . . . . . . . . . . . 22% 20% 41% 33% 36% 41%

Cash-out refinance. . . . . . . . . . . . . . . 20 27 31 29 31 32

Other refinance . . . . . . . . . . . . . . . . . 58 53 28 38 33 27

Total . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

Geographic concentration:(9)

Midwest . . . . . . . . . . . . . . . . . . . . . . 16% 16% 15% 15% 16% 16%

Northeast . . . . . . . . . . . . . . . . . . . . . 20 19 18 19 19 19

Southeast . . . . . . . . . . . . . . . . . . . . . 18 20 23 24 24 25

Southwest. . . . . . . . . . . . . . . . . . . . . 15 15 16 15 15 16

West . . . . . . . . . . . . . . . . . . . . . . . . 31 30 28 27 26 24

Total . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

Origination year:

G=2000. . . . . . . . . . . . . . . . . . . . . . 1% 2% 2%

2001 . . . . . . . . . . . . . . . . . . . . . . . . 1 1 2

2002 . . . . . . . . . . . . . . . . . . . . . . . . 3 4 5

2003 . . . . . . . . . . . . . . . . . . . . . . . . 11 14 18

2004 . . . . . . . . . . . . . . . . . . . . . . . . 7 7 10

2005 . . . . . . . . . . . . . . . . . . . . . . . . 9 10 13

2006 . . . . . . . . . . . . . . . . . . . . . . . . 8 11 14

2007 . . . . . . . . . . . . . . . . . . . . . . . . 12 15 20

2008 . . . . . . . . . . . . . . . . . . . . . . . . 9 13 16

2009 . . . . . . . . . . . . . . . . . . . . . . . . 21 23 —

2010 . . . . . . . . . . . . . . . . . . . . . . . . 18 — —

Total . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100%

* Represents less than 0.5% of single-family conventional business volume or book of business.

(1) We reflect second lien mortgage loans in the original LTV ratio calculation only when we own both the first and second lien

mortgage loans or we own only the second lien mortgage loan. Second lien mortgage loans represented less than 0.6% of our single156
family conventional guaranty book of business as of December 31, 2010, 2009 and 2008. Second lien mortgage loans held by third

parties are not reflected in the original LTV or mark-to-market LTV ratios in this table.

(2) Percentages calculated based on unpaid principal balance of loans at time of acquisition. Single-family business volume refers to both

single-family mortgage loans we purchase for our mortgage portfolio and single-family mortgage loans we securitize into Fannie Mae

MBS.

(3) Percentages calculated based on unpaid principal balance of loans as of the end of each period.

(4) Our single-family conventional guaranty book of business includes jumbo-conforming and high-balance loans that represented

approximately 3.9% of our single-family conventional guaranty book of business as of December 31, 2010 and 2.4% as of

December 31, 2009. See “Business—Our Charter and Regulation of Our Activities—Charter Act-Loan Standards” for additional

information on loan limits.

(5) The original LTV ratio generally is based on the original unpaid principal balance of the loan divided by the appraised property value

reported to us at the time of acquisition of the loan. Excludes loans for which this information is not readily available.

(6) We purchase loans with original LTV ratios above 80% to fulfill our mission to serve the primary mortgage market and provide

liquidity to the housing system. Except as permitted under Refi Plus, our charter generally requires primary mortgage insurance or

other credit enhancement for loans that we acquire that have a LTV ratio over 80%.

(7) The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of each reported

period divided by the estimated current value of the property, which we calculate using an internal valuation model that estimates

periodic changes in home value. Excludes loans for which this information is not readily available.

(8) Long-term fixed-rate consists of mortgage loans with maturities greater than 15 years, while intermediate-term fixed-rate has

maturities equal to or less than 15 years. Loans with interest-only terms are included in the interest-only category regardless of their

maturities.

(9) Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD and WI. Northeast includes CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI,

VT and VI. Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA and WV. Southwest consists of AZ, AR, CO, KS,

LA, MO, NM, OK, TX and UT. West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.

Credit Profile Summary

In 2009, we began to see the positive effects of actions we took, beginning in 2008, to significantly restrict

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

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

acquisition of loans with higher-risk loan attributes. The single-family loans we purchased or guaranteed in

2010 have had a strong credit profile with a weighted average original LTV ratio of 68%, a weighted average

FICO credit score of 762, and a product mix with a significant percentage of fully amortizing fixed-rate

mortgage loans. Due to the relatively high volume of Refi Plus loans (including HARP), the LTV ratios at

origination for our 2010 acquisitions to date are higher than for our 2009 acquisitions.

Improvements in the credit profile of our acquisitions since January 1, 2009 reflect changes we made in our

pricing and eligibility standards, as well as changes our mortgage insurers made in their eligibility standards.

Whether our acquisitions in 2011 will exhibit the same credit profile as our recent acquisitions depends on

many factors, including our future pricing and eligibility standards, our future objectives, mortgage insurers’

eligibility standards, our future volume of Refi Plus acquisitions, which typically include higher LTV ratios

and lower FICO credit scores, and future market conditions. In addition, FHA’s role as the lower-cost option

for some consumers, or in some cases the only option, for loans with higher LTV ratios further reduced our

acquisition of these types of loans. However, in October 2010, changes to FHA’s pricing structure became

effective, which may reduce its cost advantage to some consumers. We expect the ultimate performance of all

our loans will be affected by macroeconomic trends, including unemployment, the economy, and home prices.

The credit profile of our acquisitions in 2010 was further influenced by a significant percentage of our

acquisitions representing refinanced loans, which generally have a strong credit profile because refinancing

indicates the borrower’s ability to make their mortgage payment and desire to maintain homeownership.

Refinancings represented 78% of our single-family acquisitions in 2010. While refinanced loans have

historically tended to perform better than loans used for initial home purchase, Refi Plus loans may not

ultimately perform as strongly as traditional refinanced loans because these loans, which relate to nondelinquent Fannie Mae mortgages that were refinanced, may have original LTV ratios as high as 125% and

lower FICO credit scores than traditional refinanced loans. Our regulator granted our request for an extension

of these flexibilities for loans originated through June 2011. Approximately 10% of our single-family

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conventional business volume for 2009 consisted of loans with a LTV ratio higher than 80% at the time of

purchase. For the year ended December 31, 2010, these loans accounted for 16% of our single-family business

volume.

The prolonged and severe decline in home prices has resulted in the overall estimated weighted average

mark-to-market LTV ratio of our single-family conventional guaranty book of business to remain high at 77%

as of December 31, 2010, and 75% as of 2009. The portion of our single-family conventional guaranty book

of business with an estimated mark-to-market LTV ratio greater than 100% was 16% as of December 31,

2010, and 14% as of December 31, 2009. If home prices decline further, more loans may have mark-to-market

LTV ratios greater than 100%, which increases the risk of delinquency and default.

Our exposure, as discussed in this paragraph, to Alt-A and subprime loans included in our single-family

conventional guaranty book of business does not include (1) our investments in private-label mortgage-related

securities backed by Alt-A and subprime loans or (2) resecuritizations, or wraps, of private-label mortgagerelated securities backed by Alt-A mortgage loans that we have guaranteed. See “Consolidated Balance Sheet

Analysis—Investments in Mortgage-Related Securities—Investments in Private-Label Mortgage-Related

Securities” for a discussion of our exposure to private-label mortgage-related securities backed by Alt-A and

subprime loans. As a result of our decision to discontinue the purchase of newly originated Alt-A loans,

except for those that represent the refinancing of an existing Fannie Mae Alt-A loan, we expect our

acquisitions of Alt-A mortgage loans to continue to be minimal in future periods and the percentage of the

book of business attributable to Alt-A to decrease over time. We are also not currently acquiring newly

originated subprime loans. We have classified a mortgage loan as Alt-A if the lender that delivered the loan to

us classified the loan as Alt-A based on documentation or other features. We have classified a mortgage loan

as subprime if the loan was originated by a lender specializing in subprime business or by a subprime division

of a large lender. We exclude from the subprime classification loans originated by these lenders if we acquired

the loans in accordance with our standard underwriting criteria, which typically require compliance by the

seller with our Selling Guide (including standard representations and warranties) and/or evaluation of the loans

through our Desktop Underwriter system. We apply our classification criteria in order to determine our Alt-A

and subprime loan exposures; however, we have other loans with some features that are similar to Alt-A and

subprime loans that we have not classified as Alt-A or subprime because they do not meet our classification

criteria. The unpaid principal balance of Alt-A and subprime loans included in our single-family conventional

guaranty book of business of $218.3 billion as of December 31, 2010, represented approximately 7.8% of our

single-family conventional guaranty book of business. See “Note 18, Concentration of Credit Risk” for

additional information on our total exposure to Alt-A and subprime loans and mortgage-related securities and

“Table 40: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of

Business” for information on our single-family book of business.

We also provide information on our jumbo-conforming, high-balance loans and reverse mortgages. The

outstanding unpaid principal balance of our jumbo-conforming and high-balance loans was $109.7 billion, or

3.9% of our single-family conventional guaranty book of business, as of December 31, 2010 and $66.6 billion,

or 2.4% of our single-family conventional guaranty book of business, as of December 31, 2009. Jumboconforming and high-balance loans refer to high-balance loans we acquired pursuant to the Economic

Stimulus Act of 2008, the 2008 Reform Act and the American Recovery and Reinvestment Act of 2009,

which increased our conforming loan limits in certain high-cost areas above our standard conforming loan

limit. The standard conforming loan limit for a one-unit property was $417,000 in 2010 and 2009. See

“Business—Our Charter and Regulation of Our Activities—Charter Act—Loan Standards” for additional

information on our loan limits.

The outstanding unpaid principal balance of reverse mortgage whole loans included in our mortgage portfolio

was $50.8 billion as of December 31, 2010 and $50.2 billion as of December 31, 2009. The majority of these

loans are home equity conversion mortgages insured by the federal government through the FHA. Because

home equity conversion mortgages are insured by the federal government, we believe that we have limited

exposure to losses on these loans. Our market share of new reverse mortgage acquisitions was 2% in 2010 and

50% in 2009. The decrease in our market share was a result of changes in our pricing strategy and market

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conditions. In December 2010 we communicated to our lenders that we are exiting the reverse mortgage

business and will no longer acquire newly originated home equity conversion mortgages.

Problem Loan Management

Our problem loan management strategies are primarily focused on reducing defaults to avoid losses that would

otherwise occur and pursuing foreclosure alternatives to reduce the severity of the losses we incur. If a

borrower does not make required payments, we work with the servicers of our loans to offer workout solutions

to minimize the likelihood of foreclosure as well as the severity of loss. We refer to actions taken by servicers

with borrowers to resolve the problem of existing or potential delinquent loan payments as “workouts.” Our

loan workouts reflect our various types of home retention strategies and foreclosure alternatives.

Our home retention solutions are intended to help borrowers stay in their homes and include loan

modifications, repayment plans and forbearances. Because we believe that reducing delays and implementing

solutions that can be executed in a timely manner and early in the delinquency increases the likelihood that

our problem loan management strategies will be successful in avoiding a default or minimizing severity, it is

important for our servicers to work with borrowers to complete these solutions as early in their delinquency as

feasible. If the servicer cannot provide a viable home retention solution for a problem loan, the servicer will

seek to offer foreclosure alternatives, primarily preforeclosure sales and deeds-in-lieu of foreclosure. These

alternatives reduce the severity of our loss resulting from a borrower’s default while permitting the borrower to

avoid going through a foreclosure. However, the existence of a second lien may limit our ability to provide

borrowers with loan workout options, including those that are part of our foreclosure prevention efforts. We

occasionally execute third-party sales, where we sell the property to a third party immediately prior to entering

the foreclosure process. When appropriate, we seek to move to foreclosure expeditiously.

Our mortgage servicers are the primary point of contact for borrowers and perform a vital role in our efforts to

reduce defaults and pursue foreclosure alternatives. We seek to improve the servicing of our delinquent loans

through a variety of means, including improving our communications with and training of our servicers,

increasing the number of our personnel who manage our servicers, directing servicers to contact borrowers at

an earlier stage of delinquency and improve their telephone communications with borrowers, and holding our

servicers accountable for following our requirements. We continue to work with some of our servicers to test

and implement “high-touch” servicing protocols designed for managing higher-risk loans, which include lower

ratios of loans per servicer employee, beginning borrower outreach strategies earlier in the delinquency cycle

and establishing a single point of resolution for distressed borrowers. Additionally, partnering with our

servicers, civic and community leaders and housing industry partners, we have launched a series of nationwide

Mortgage Help Centers that will accelerate the response time for struggling borrowers with loans owned by us.

During 2010, we established six Mortgage Help Centers and completed approximately 900 home retention

plans that kept borrowers in their homes. We plan to open additional Mortgage Help Centers in 2011.

In the following section, we present statistics on our problem loans, describe specific efforts undertaken to

manage these loans and prevent foreclosures and provide metrics regarding the performance of our loan

workout activities. We generally define single-family problem loans as loans that have been identified as being

at imminent risk of payment default; early stage delinquent loans that are either 30 days or 60 days past due;

and seriously delinquent loans, which are loans that are three or more monthly payments past due or in the

foreclosure process. Unless otherwise noted, single-family delinquency data is calculated based on number of

loans. We include single-family conventional loans that we own and that back Fannie Mae MBS in the

calculation of the single-family delinquency rate. Percentage of book outstanding calculations are based on the

unpaid principal balance of loans for each category divided by the unpaid principal balance of our total singlefamily guaranty book of business for which we have detailed loan-level information.

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Problem Loan Statistics

The following table displays the delinquency status of loans in our single-family conventional guaranty book

of business (based on number of loans) as of the periods indicated.

Table 41: Delinquency Status of Single-Family Conventional Loans

2010 2009 2008

As of December 31,

As of period end:

Delinquency status:

30 to 59 days delinquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.32% 2.46% 2.52%

60 to 89 days delinquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.87 1.07 1.00

Seriously delinquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.48 5.38 2.42

Percentage of seriously delinquent loans that have been delinquent for more than

180 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67.30% 57.22% 40.00%

Early Stage Delinquency

The prolonged and severe decline in home prices, coupled with continued high unemployment, caused an

overall increase in the number of early stage delinquencies—loans that are less than three monthly payments

past due—over the past several years. The number of early stage delinquencies has decreased as of

December 31, 2010 compared with 2009; however, the potential number of loans at imminent risk of payment

default remains elevated.

Serious Delinquency

The potential number of loans at risk of becoming seriously delinquent has diminished in 2010. As of

December 31, 2010, the percentage and number of our single-family conventional loans that were seriously

delinquent decreased, as compared to December 31, 2009 and has decreased every month since February

2010. The decrease in our serious delinquency rate in 2010 is primarily the result of:

• Home retention workouts and foreclosure alternatives we completed.

• Higher volume of foreclosures during 2010.

• Higher percentage of our single-family guaranty book of business from 2009 and later vintages, which

have strong credit characteristics.

We expect serious delinquency rates will continue to be affected in the future by home price changes, changes

in other macroeconomic conditions, and the extent to which borrowers with modified loans again become

delinquent in their payments.

We continue to work with our servicers to reduce delays in determining and executing the appropriate workout

solution. However, the continued negative trends in the current economic environment, such as the sustained

weakness in the housing market and high unemployment, have continued to adversely affect the serious

delinquency rates across our single-family conventional guaranty book of business and the serious delinquency

rate remains elevated. Additionally, the period of time that loans are seriously delinquent continues to remain

extended as the factors present during 2009 were relatively unchanged during 2010. During 2009, the number

of loans that transitioned to seriously delinquent and the aging of our seriously delinquent loans increased

substantially from 2008 due to the following factors:

• Declines in home prices lengthen the period of time that loans are seriously delinquent because a

delinquent borrower may not have sufficient equity in the home to refinance or sell the property and

recover enough proceeds to pay off the loan and avoid foreclosure.

• High levels of unemployment are hampering the ability of many delinquent borrowers to cure

delinquencies and return their loans to current status.

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• Loans in a trial-payment period under HAMP typically remain delinquent until the trial period is

successfully completed and a final loan modification has been executed.

• Loan servicers are operating under our directive to delay foreclosure sales until they verify that borrowers

are not eligible for HAMP modifications and other home retention and foreclosure-prevention alternatives

have been exhausted.

• A number of states have enacted laws to lengthen or impose other requirements that result in slowdowns

in the legal processes for completing foreclosures.

Further, as described in “Business—Executive Summary,” we believe the current servicer foreclosure pause

has negatively affected our serious delinquency rates.

Table 42 provides a comparison, by geographic region and by loans with and without credit enhancement, of

the serious delinquency rates as of the periods indicated for single-family conventional loans in our singlefamily guaranty book of business.

Table 42: Serious Delinquency Rates

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

2010 2009 2008

As of December 31,

Single-family conventional

delinquency rates by geographic

region:(1)

Midwest. . . . . . . . . . . . . . . . . . 15% 4.16% 16% 4.97% 16% 2.44%

Northeast . . . . . . . . . . . . . . . . . 19 4.38 19 4.53 19 1.97

Southeast . . . . . . . . . . . . . . . . . 24 6.15 24 7.06 25 3.27

Southwest . . . . . . . . . . . . . . . . 15 3.05 15 4.19 16 1.98

West . . . . . . . . . . . . . . . . . . . . 27 4.06 26 5.45 24 2.10

Total single-family conventional

loans . . . . . . . . . . . . . . . . . . 100% 4.48% 100% 5.38% 100% 2.42%

Single-family conventional loans:

Credit enhanced . . . . . . . . . . . . 15% 10.60% 18% 13.51% 21% 6.42%

Non-credit enhanced . . . . . . . . . 85 3.40 82 3.67 79 1.40

Total single-family

conventional loans . . . . . . . 100% 4.48% 100% 5.38% 100% 2.42%

(1) See footnote 9 to “Table 40: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book

of Business” for states included in each geographic region.

While loans across our single-family guaranty book of business have been affected by the weak market

conditions, loans in certain states, certain higher-risk loan categories, such as Alt-A loans and loans with

higher mark-to-market LTVs, and our 2006 and 2007 loan vintages continue to exhibit higher than average

delinquency rates and/or account for a disproportionate share of our credit losses. States in the Midwest have

experienced prolonged economic weakness and California, Florida, Arizona and Nevada have experienced the

most significant declines in home prices coupled with unemployment rates that remain high.

Table 43 presents the conventional serious delinquency rates and other financial information for our singlefamily loans with some of these higher-risk characteristics as of the periods indicated. The reported categories

are not mutually exclusive. See “Consolidated Results of Operations—Credit-Related Expenses—Credit Loss

Performance Metrics” for information on the portion of our credit losses attributable to Alt-A loans and

certain other higher-risk loan categories.

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Table 43: Single-Family Conventional Serious Delinquency Rate Concentration Analysis

Unpaid

Principal

Balance

Percentage

of Book

Outstanding

Serious

Delinquency

Rate

Estimated

Mark-toMarket

LTV

Ratio(1)

Unpaid

Principal

Balance

Percentage

of Book

Outstanding

Serious

Delinquency

Rate

Estimated

Mark-toMarket

LTV

Ratio(1)

Unpaid

Principal

Balance

Percentage

of Book

Outstanding

Serious

Delinquency

Rate

Estimated

Mark-toMarket

LTV

Ratio(1)

December 31, 2010 December 31, 2009 December 31, 2008

As of

(Dollars in millions)

States:

Arizona . . . . . .$ 71,052 2% 6.23% 105% $ 76,073 3% 8.80% 100% $ 77,728 3% 3.41% 86%

California ..... 507,598 18 3.89 76 484,923 17 5.73 77 436,117 16 2.30 71

Florida ....... 184,101 7 12.31 107 195,309 7 12.82 100 199,871 7 6.14 87

Nevada . . . . . . . 31,661 1 10.66 128 34,657 1 13.00 123 35,787 1 4.74 98

Select Midwest

states(2) ..... 292,734 11 4.80 80 304,147 11 5.62 77 308,463 11 2.70 72

All other states . . 1,695,615 61 3.46 71 1,701,379 61 4.11 69 1,653,426 62 1.86 66

Product type:

Alt-A(3) ...... 211,770 8 13.87 96 248,311 9 15.63 92 290,778 11 7.03 81

Subprime ..... 6,499 * 28.20 103 7,364 * 30.68 97 8,417 * 14.29 87

Vintages:

2006 ........ 232,009 8 12.19 104 292,184 11 12.87 97 372,254 14 5.11 85

2007 ........ 334,110 12 13.24 104 422,956 15 14.06 96 536,459 20 4.70 87

All other

vintages..... 2,216,642 80 2.62 70 2,081,348 74 3.08 67 1,802,679 66 1.51 62

Estimated

mark-to-market

LTV ratio:

Greater than

100%(1) ..... 435,991 16 17.70 130 403,443 14 22.09 128 314,674 12 10.98 119

Select combined

risk

characteristics:

Original LTV

ratio H 90%

and FICO

score G 620 . . 21,205 1 21.41 109 23,966 1 27.96 104 27,159 1 15.97 98

* Percentage is less than 0.5%.

(1) Second lien mortgage loans held by third parties are not included in the calculation of the estimated mark-to-market

LTV ratios.

(2) Consists of Illinois, Indiana, Michigan and Ohio.

(3) For 2009, data for Alt-A loans does not reflect loans we acquired in 2009 upon the refinance of existing Alt-A loans.

Management of Problem Loans and Loan Workout Metrics

The efforts of our mortgage servicers are critical in keeping people in their homes, preventing foreclosures and

providing homeowner assistance. We have substantially increased the number of personnel designated to work

with our servicers. In addition, we have employees working on-site with our largest servicers. Three key areas

where our servicers play a critical role in implementing our home retention and foreclosure prevention

initiatives are: (1) establishing contact with the borrower; (2) reviewing the borrower’s financial profile in

identifying potential home retention strategies to reduce the likelihood that the borrower will re-default; and

(3) in the event that there is not a suitable home retention strategy available, offering a viable foreclosure

alternative to the borrower.

We require our single-family servicers to evaluate all problem loans under HAMP first before considering

other workout alternatives, unless the borrower is unemployed, in which case the borrower should be

considered for forbearance. If it is determined that a borrower is not eligible for a modification under HAMP,

our servicers are required to exhaust all other workout alternatives before proceeding to foreclosure. We

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continue to work with our servicers to implement our foreclosure prevention initiatives effectively and to find

ways to enhance our workout protocols and their workflow processes.

Loan modifications involve changes to the original mortgage terms such as product type, interest rate,

amortization term, maturity date and/or unpaid principal balance. Modifications include TDRs, which is the

only form of modification in which we do not expect to collect the full original contractual principal and

interest due under the loan. Other resolutions and modifications may result in our receiving the full amount

due, or certain installments due, under the loan over a period of time that is longer than the period of time

originally provided for under the terms of the loan.

During 2009 and 2010, we experienced a significant shift in our approach to workouts to address the

increasing number of borrowers facing long-term, rather than short-term, financial hardships. While it has

always been our objective to help borrowers retain their homes, prior to 2009, our workout solutions focused

on borrowers after the hardship that caused them to be delinquent on their mortgage obligation had been

resolved. These solutions included (1) loan modifications that capitalized the delinquent principal and interest

payments and/or extended the term of the loan, or (2) a personal loan, called a HomeSaver Advance, used to

cover the delinquent principal and interest. When a home retention solution was not available, the borrower

would sell the property as a means of paying off the entire mortgage obligation as the value of the property

was generally in excess of their mortgage obligation.

During 2009 and 2010, the prolonged economic stress and high levels of unemployment hindered the efforts

of many delinquent borrowers to bring their loans current. Accordingly, borrowers have become increasingly

in need of a workout solution prior to the resolution of the hardships that are causing their mortgage

delinquency. As a result, we completed more loan modifications during 2010 that are concentrated on

lowering or deferring the borrowers’ monthly mortgage payments for a predetermined period of time to allow

borrowers to work through their hardships. The vast majority of our loan modifications during 2010 and 2009

were designed to help distressed borrowers by reducing the borrower’s monthly principal and interest payment

through an extension of the loan term, a reduction in the interest rate, or a combination of both.

In March 2009, we implemented HAMP, a modification initiative under the Making Home Affordable

Program. Intended to be uniform across servicers, HAMP is aimed at helping borrowers whose loan is either

currently delinquent or is at imminent risk of default. HAMP modifications can include reduced interest rates,

term extensions, and/or principal forbearance to bring the monthly payment down to 31% of the borrower’s

gross (pre-tax) income. We require that servicers first evaluate borrowers for eligibility under HAMP before

considering other workout options or foreclosure. By design, not all borrowers facing foreclosure will be

eligible for a HAMP modification. As a result, we are working with servicers to ensure that borrowers who do

not qualify for HAMP or who fail to successfully complete the HAMP required trial period are provided with

alternative home retention options or a foreclosure avoidance alternative.

In addition, there has been greater focus on alternatives to foreclosure for borrowers who are unable to retain

their homes. Foreclosure alternatives may be more appropriate if the borrower has experienced a significant

adverse change in financial condition due to events such as unemployment or reduced income, divorce, or

unexpected issues like medical bills and is therefore no longer able to make the required mortgage payments.

Since the cost of foreclosure can be significant to both the borrower and Fannie Mae, to avoid foreclosure and

satisfy the first lien mortgage obligation, our servicers work with a borrower to sell their home prior to

foreclosure in a preforeclosure sale or accept the deed-in-lieu of foreclosure whereby the borrower voluntarily

signs over the title to their property to the servicer. These alternatives are designed to reduce our credit losses

while helping borrowers avoid the pressure and stigma associated with a foreclosure.

Table 44 provides statistics on our single-family loan workouts that were completed, by type, for the periods

indicated. These statistics include loan modifications but do not include trial modifications under HAMP or

repayment and forbearance plans that have been initiated but not completed.

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Table 44: Statistics on Single-Family Loan Workouts

Unpaid

Principal

Balance

Number

of Loans

Unpaid

Principal

Balance

Number

of Loans

Unpaid

Principal

Balance

Number

of Loans

2010 2009 2008

For the Year Ended

(Dollars in millions)

Home retention strategies:

Modifications . . . . . . . . . . . . . . . . . . . . . . . . . $ 82,826 403,506 $18,702 98,575 $ 5,119 33,388

Repayment plans and forbearances completed(1) . . 4,385 31,579 2,930 22,948 936 7,892

HomeSaver Advance first-lien loans. . . . . . . . . . 688 5,191 6,057 39,199 11,196 70,967

$ 87,899 440,276 $27,689 160,722 $17,251 112,247

Foreclosure alternatives:

Preforeclosure sales . . . . . . . . . . . . . . . . . . . . . $ 15,899 69,634 $ 8,457 36,968 $ 2,212 10,355

Deeds-in-lieu of foreclosure . . . . . . . . . . . . . . . 1,053 5,757 491 2,649 252 1,341

$ 16,952 75,391 $ 8,948 39,617 $ 2,464 11,696

Total loan workouts . . . . . . . . . . . . . . . . . . . . . . . $104,851 515,667 $36,637 200,339 $19,715 123,943

Loan workouts as a percentage of single-family

guaranty book of business(2) . . . . . . . . . . . . . . . 3.66% 2.87% 1.26% 1.10% 0.70% 0.68%

(1) For the years ended December 31, 2010 and 2009, repayment plans reflected those plans associated with loans that

were 60 days or more delinquent. For the year ended December 31, 2008, repayment plans reflected those plans

associated with loans that were 90 days or more delinquent. If we had included repayment plans associated with loans

that were 60 days or more delinquent for the year ended December 31, 2008, the unpaid principal balance that had

repayment plans and forbearances completed would have been $2.8 billion and the number of loans that had

repayment plans and forbearances completed would have been 22,337.

(2) Represents total loan workouts during the period as a percentage of our single-family guaranty book of business as of

the end of each year.

We increased the volume of workouts during 2010 compared with 2009, through our home retention and

foreclosure prevention efforts. Loan modification volume was more than four times larger in 2010 than in

2009, as the number of borrowers who were experiencing financial difficulty increased and a significant

number of HAMP trial modifications were completed and became permanent HAMP modifications.

HomeSaver Advance workout volume substantially declined and this workout option was ultimately retired in

2010. HomeSaver Advances were only used in limited circumstances as a result of more borrowers facing

permanent, instead of short-term, hardships as well as our requirement that all potential loan workouts first be

evaluated under HAMP before being considered for other alternatives. We also agreed to an increasing number

of preforeclosure sales and accepted a higher number of deeds-in-lieu of foreclosure during 2010 as these are

favorable solutions for a growing number of borrowers. The volume of our foreclosure alternatives remained

high throughout 2010.

Because we did not begin implementing HAMP until March 2009, the vast majority of loan modifications

performed during 2009 were not made under HAMP; during 2010, slightly less than half of our loan

modifications were completed under HAMP. During 2010, we initiated approximately 163,000 trial

modifications under HAMP, along with other types of loan modifications, repayment plans and forbearance

compared with 333,000 during 2009. It is difficult to predict how many of these trial modifications and

initiated plans will be completed. During 2009, there were only a limited number of permanent HAMP

modifications because the program entails at least a three month trial period. During this trial period, the loan

servicer evaluates the borrower’s ability to make the required modified loan payment and collects all required

documentation before making the modification effective. The inability to obtain proper documentation from

borrowers who had entered into a trial modification was a significant factor in the low number of

modifications that became permanent under HAMP in 2009. In a February 2010 announcement, as directed by

Treasury, servicers are required to conduct a full verification of a borrower’s eligibility prior to offering a

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HAMP trial period plan. This is effective for all HAMP trial period plans with effective dates on or after

June 1, 2010.

We remain focused on our goals to minimize our credit losses and continue to look for additional solutions to

help borrowers stay in their homes and avoid foreclosure. However, in those instances where borrowers are

unable to stay in their homes, we expect to increase the use of foreclosure alternatives. Also during 2010, we

began offering an Alternative ModificationTM option for Fannie Mae borrowers who were believed to be

eligible for and accepted a HAMP trial modification plan, made their required payments during their trial

period, but were subsequently denied a permanent modification because they were unable to demonstrate

compliance with the eligibility requirements for a permanent modification under HAMP. In many cases, these

borrowers initially qualified for a HAMP trial modification based on verbal information and, upon verification

of their income, it was discovered that their income was either too high or too low relative to their monthly

mortgage payment for them to meet the program’s requirements. Alternative Modifications are available only

for borrowers who were in a HAMP trial modification that was initiated by March 1, 2010. Alternative

Modifications were not available after August 31, 2010.

Table 45 displays the profile of loan modifications (HAMP and non-HAMP) provided to borrowers during

2010, 2009 and 2008.

Table 45: Loan Modification Profile

2010 2009 2008

Term extension, interest rate reduction, or combination of both(1) . . . . . . . . . . . . . . . . . . . . . . . . . 93% 93% 57%

Initial reduction in monthly payment(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 87 38

Estimated mark-to-market LTV ratio H 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 47 22

Troubled debt restructurings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 92 60

(1) Reported statistics for term extension, interest rate reduction or the combination include subprime adjustable-rate

mortgage loans that have been modified to a fixed-rate loan.

(2) These modification statistics do not include subprime adjustable-rate mortgage loans that were modified to a fixed-rate

loan and were current at the time of the modification.

A significant portion of our modifications pertain to loans with a mark-to-market LTV ratio greater than 100%

because these borrowers are typically unable to refinance their mortgages or sell their homes for a price that

allows them to pay off their mortgage obligation as their mortgages are greater than the value of their homes.

Additionally, the serious delinquency rate for these loans tends to be significantly higher than the overall

average serious delinquency rate. As of December 31, 2010, the serious delinquency rate for loans with a

mark-to-market LTV ratio greater than 100% was 18%, compared with our overall average single-family

serious delinquency rate of 4.48%.

Approximately 50% of loans modified during 2009 were current or had paid off as of one year following loan

modification date. In comparison, 36% of loans modified during 2008 were current or had paid off as of one

year following the loan modification date. There is significant uncertainty regarding the ultimate long term

success of our current modification efforts because of the economic and financial pressures on borrowers.

Modifications, even those with reduced monthly payments, may also not be sufficient to help borrowers with

second liens and other significant non-mortgage debt obligations. FHFA, other agencies of the

U.S. government or Congress may ask us to undertake new initiatives to support the housing and mortgage

markets should our current modification efforts ultimately not perform in a manner that results in the

stabilization of these markets.

As we have focused our efforts on distressed borrowers who are experiencing current economic hardship, the

short-term performance of our workouts may not be indicative of long-term performance. We believe the

performance of our workouts will be highly dependent on economic factors, such as unemployment rates,

household wealth and home prices.

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REO Management

Foreclosure and REO activity affect the level of credit losses. Table 46 compares our foreclosure activity, by

region, for the periods indicated. Regional REO acquisition and charge-off trends generally follow a pattern

that is similar to, but lags, that of regional delinquency trends.

Table 46: Single-Family Foreclosed Properties

2010 2009 2008

For the Year Ended December 31,

Single-family foreclosed properties (number of properties):

Beginning of period inventory of single-family foreclosed properties (REO)(1). . . . 86,155 63,538 33,729

Acquisitions by geographic area:(2)

Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,761 36,072 30,026

Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,049 7,934 5,984

Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,453 39,302 24,925

Southwest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,276 31,197 18,340

West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,539 31,112 15,377

Total properties acquired through foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . 262,078 145,617 94,652

Dispositions of REO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (185,744) (123,000) (64,843)

End of period inventory of single-family foreclosed properties (REO)(1) . . . . . . . . 162,489 86,155 63,538

Carrying value of single-family foreclosed properties (dollars in millions)(3) . . . . . $ 14,955 $ 8,466 $ 6,531

Single-family foreclosure rate(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.46% 0.80% 0.52%

(1) Includes acquisitions through deeds-in-lieu of foreclosure.

(2) See footnote 9 to “Table 40: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book

of Business” for states included in each geographic region.

(3) Excludes foreclosed property claims receivables, which are reported in our consolidated balance sheets as a component

of “Acquired property, net.”

(4) Estimated based on the total number of properties acquired through foreclosure as a percentage of the total number of

loans in our single-family conventional guaranty book of business as of the end of each respective period.

The continued weak economy, as well as high unemployment rates, continues to result in an increase in the

percentage of our mortgage loans that transition from delinquent to REO status, either through foreclosure or

deed-in-lieu of foreclosure. Additionally, the prolonged decline in home prices on a national basis has

significantly reduced the values of our single-family REO. Despite the increase in our foreclosure rate during

2010, foreclosure levels were lower than what they otherwise would have been due to our directive to

servicers to delay foreclosure sales until the loan servicer verifies that the borrower is ineligible for a HAMP

modification and that all other home retention and foreclosure prevention alternatives have been exhausted and

the delay due to the foreclosure pause. Additionally, foreclosure levels during 2009 were affected by the

foreclosure moratoria. To increase the effectiveness of our loss mitigation efforts, it is important that our

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

foreclosure alternative will be viable and, where no alternative is viable, to reduce delays in proceeding to

foreclosure. Accordingly, we are working to manage our foreclosure timelines more efficiently.

Further, we have seen an increase in the percentage of our properties that we are unable to market for sale in

2010 compared with 2009. The most common reasons for our inability to market properties for sale are:

(1) properties are within the period during which state law allows the former mortgagor and second lien

holders to redeem the property (states which allow this are known as “redemption states”); (2) properties are

still occupied by the person or personal property and the eviction process is not yet complete (“occupied

status”); or (3) properties are being repaired. As we are unable to market a higher portion of our inventory, it

slows the pace at which we can dispose of our properties and increases our foreclosed property expense

related to costs associated with ensuring that the property is vacant and maintaining the property. For example,

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as of December 31, 2010, approximately 27% of our properties that we were unable to market for sale were in

redemption status, which lengthens the time a property is in our REO inventory by an average of two to six

months. Additionally, as of December 31, 2010, approximately 40% of our properties that we were unable to

market for sale were in occupied status, which lengthens the time a property is in our REO inventory by an

average of one to two months.

As shown in Table 47 we have experienced a disproportionate share of foreclosures in certain states as

compared to their share of our guaranty book of business. This is primarily because these states have had

significant home price depreciation or weak economies, and in the case of California and Florida specifically,

a significant number of Alt-A loans.

Table 47: Single-Family Acquired Property Concentration Analysis

Percentage of

Book

Outstanding(1)

Percentage of

Properties

Acquired

by Foreclosure(2)

Percentage of

Book

Outstanding(1)

Percentage of

Properties

Acquired

by Foreclosure(2)

Percentage of

Book

Outstanding(1)

Percentage of

Properties

Acquired

by Foreclosure(2)

December 31, 2010 December 31, 2009 December 31, 2008

As of For The Year Ended As of For The Year Ended As of For The Year Ended

States:

Arizona, California, Florida

and Nevada . . . . . . . . . 28% 36% 28% 36% 27% 27%

Illinois, Indiana, Michigan

and Ohio . . . . . . . . . . . 11 17 11 20 11 25

(1) Calculated based on the unpaid principal balance of loans, where we have detailed loan-level information, for each

category divided by the unpaid principal balance of our single-family conventional guaranty book of business.

(2) Calculated based on the number of properties acquired through foreclosure during the period divided by the total

number of properties acquired through foreclosure.

Although we have expanded our loan workout initiatives to help borrowers stay in their homes, our

foreclosure levels for 2010 were higher than 2009 as a result of the continued adverse impact that the weak

economy and high unemployment have had on the financial condition of borrowers. As described in

“Executive Summary,” a number of our single-family mortgage servicers have recently halted foreclosures in

some or all states after discovering deficiencies in their processes relating to the execution of affidavits in

connection with the foreclosure process. Although the foreclosure pause has negatively affected our

foreclosure timelines and increased the number of our REO properties that we are unable to market for sale,

we cannot yet predict the full impact on our REO inventory and our credit-related expenses.

Multifamily Mortgage Credit Risk Management

The credit risk profile of our multifamily mortgage credit book of business is influenced by: the structure of

the financing; the type and location of the property; the condition and value of the property; the financial

strength of the borrower and lender; market and sub-market trends and growth; and the current and anticipated

cash flows from the property. These and other factors affect both the amount of expected credit loss on a

given loan and the sensitivity of that loss to changes in the economic environment. We provide information on

our credit-related expenses and credit losses in “Consolidated Results of Operations—Credit-Related

Expenses.”

While our multifamily mortgage credit book of business includes all of our multifamily mortgage-related

assets, both on- and off-balance sheet, our guaranty book of business excludes non-Fannie Mae multifamily

mortgage-related securities held in our portfolio for which we do not provide a guaranty. Our multifamily

guaranty book of business consists of: multifamily mortgage loans held in our mortgage portfolio; Fannie Mae

MBS held in our portfolio or by third parties; and other credit enhancements that we provide on mortgage

assets.

The credit statistics reported below, unless otherwise noted, pertain only to a specific portion of our

multifamily guaranty book of business for which we have access to detailed loan-level information. We

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typically obtain this data from the sellers or servicers of the mortgage loans in our guaranty book of business

and receive representations and warranties from them as to the accuracy of the information. While we perform

various quality assurance checks by sampling loans to assess compliance with our underwriting and eligibility

criteria, we do not independently verify all reported information. The portion of our multifamily guaranty

book of business for which we have detailed loan level-information, excluding loans that have been defeased,

constituted 99% of our total multifamily guaranty book as of both December 31, 2010 and 2009. See “Risk

Factors” for a discussion of the risk due to our reliance on lender representations regarding the accuracy of the

characteristics of loans in our guaranty book of business.

Multifamily Acquisition Policy and Underwriting Standards

Our Multifamily business, in conjunction with our Enterprise Risk Management division, is responsible for

pricing and managing the credit risk on multifamily mortgage loans we purchase and on Fannie Mae MBS

backed by multifamily loans (whether held in our portfolio or held by third parties). Our primary multifamily

delivery channel is the DUS program, which is comprised of multiple lenders that span the spectrum from

large financial institutions to smaller independent multifamily lenders. Multifamily loans that we purchase or

that back Fannie Mae MBS are either underwritten by a Fannie Mae-approved lender or subject to our

underwriting review prior to closing depending on the product type and/or loan size. Loans delivered to us by

DUS lenders and their affiliates represented 84% of our multifamily guaranty book of business as of

December 31, 2010 compared with 81% as of December 31, 2009.

We use various types of credit enhancement arrangements for our multifamily loans, including lender

risk-sharing, lender repurchase agreements, pool insurance, subordinated participations in mortgage loans or

structured pools, cash and letter of credit collateral agreements, and cross-collateralization/cross-default

provisions. The most prevalent form of credit enhancement on multifamily loans is lender risk-sharing.

Lenders in the DUS program typically share in loan-level credit losses in one of two ways: (1) they bear

losses up to the first 5% of unpaid principal balance of the loan and share in remaining losses up to a

prescribed limit; or (2) they share up to one-third of the credit losses on an equal basis with us. Other lenders

typically share or absorb credit losses based on a negotiated percentage of the loan or the pool balance.

Multifamily Portfolio Diversification and Monitoring

Diversification within our multifamily mortgage credit book of business by geographic concentration,

term-to-maturity, interest rate structure, borrower concentration and credit enhancement arrangements is an

important factor that influences credit quality and performance and helps reduce our credit risk.

The weighted average original LTV ratio for our multifamily guaranty book of business was 67% as of each

of the three years ended December 31, 2010, 2009, and 2008. The percentage of our multifamily guaranty

book of business with an original LTV ratio greater than 80% was 5% as of each of the three years ended

December 31, 2010, 2009, and 2008. We present the current risk profile of our multifamily guaranty book of

business in “Note 7, Financial Guarantees and Master Servicing.”

We monitor the performance and risk concentrations of our multifamily loans and the underlying properties on

an ongoing basis throughout the life of the investment at the loan, property and portfolio level. We closely

track the physical condition of the property, the relevant local market and economic conditions that may signal

changing risk or return profiles and other risk factors. For example, we closely monitor the rental payment

trends and vacancy levels in local markets to identify loans that merit closer attention or loss mitigation

actions. We are managing our exposure to refinancing risk for multifamily loans maturing in the next several

years. We recently formed a team to proactively manage upcoming loan maturities and minimize losses on

maturing loans. This team assists lenders and borrowers with timely and appropriate refinancing of maturing

loans with the goal of reducing defaults and foreclosures related to loans maturing in the near term. For our

investments in multifamily loans, the primary asset management responsibilities are performed by our DUS

and other multifamily lenders. We periodically evaluate the performance of our third-party service providers

for compliance with our asset management criteria.

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Problem Loan Management and Foreclosure Prevention

Unfavorable economic conditions have caused continued increases in our multifamily serious delinquency rate

and the level of defaults. Since delinquency rates are a lagging indicator, even if the market shows some

improvement, we expect to incur additional credit losses. We periodically refine our underwriting standards in

response to market conditions and enact proactive portfolio management and monitoring which are each

designed to keep credit losses to a low level relative to our multifamily guaranty book of business.

Problem Loan Statistics

Table 48 provides a comparison of our multifamily serious delinquency rates for loans with and without credit

enhancement in our multifamily guaranty book of business. We classify multifamily loans as seriously

delinquent when payment is 60 days or more past due. We include the unpaid principal balance of multifamily

loans that we own or that back Fannie Mae MBS and any housing bonds for which we provide credit

enhancement in the calculation of the multifamily serious delinquency rate.

Table 48: Multifamily Serious Delinquency Rates

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

2010 2009 2008

As of December 31,

Multifamily loans:

Credit enhanced . . . . . . . . . . . . 89% 0.67% 89% 0.54% 86% 0.26%

Non-credit enhanced . . . . . . . . . 11 1.01 11 1.33 14 0.54

Total multifamily loans . . . . . 100% 0.71% 100% 0.63% 100% 0.30%

Table 49 provides a comparison of our multifamily serious delinquency rates for loans acquired through DUS

lenders and loans acquired through non-DUS lenders.

Table 49: Multifamily Concentration Analysis

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate

Percentage of

Book

Outstanding

Serious

Delinquency

Rate 2010 2009 2008

Percentage of

Multifamily

Credit

Losses For the

Year Ended

December 31,

2010 2009 2008

As of December 31,

DUS small balance loans(1) . . . . . . . 8% 0.55% 7% 0.47% 7% 0.24% 7% 9% 15%

DUS non small balance loans(2) . . . . 70 0.56 69 0.38 66 0.24 61 77 66

Non-DUS small balance loans(1) . . . 10 1.47 11 1.16 13 0.52 10 11 10

Non-DUS non small balance

loans(2) . . . . . . . . . . . . . . . . . . 12 0.97 13 1.54 14 0.37 22 3 9

(1) Loans with unpaid principal balances less than or equal to $3 million except in high cost markets where they are loans

with unpaid principal balances less than or equal to $5 million.

(2) Loans with unpaid principal balances greater than $3 million except in high cost markets where they are loans with

unpaid principal balances greater than $5 million.

The weak economic environment negatively affected serious delinquency rates across our multifamily guaranty

book of business, with all loan sizes experiencing higher delinquencies. The multifamily serious delinquency

rate increased as of December 31, 2010 compared with December 31, 2009, even as market conditions began

to stabilize throughout the year, as delinquency rates are a lagging indicator. The DUS loans in our guaranty

book of business have a lower rate of delinquencies when compared with the total book of business while the

non-DUS loans are experiencing a higher rate of delinquencies.

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Multifamily loans with an original balance of less than $3 million nationwide or $5 million in high cost

markets, which we refer to as small balance loans, acquired through non-DUS lenders continue to exhibit

higher delinquencies than small balance loans acquired through DUS lenders. These small balance non-DUS

loans account for 21% of our multifamily serious delinquency rate while representing approximately 10% of

our multifamily guaranty book of business as of December 31, 2010. These small balance non-DUS loan

acquisitions were most common in 2007 and 2008 and have not been a significant portion of our total

multifamily acquisitions since 2008. Although our 2007 and early 2008 acquisitions were underwritten to our

then-current credit standards and required borrower cash equity, they were acquired near the peak of

multifamily housing values. During the second half of 2008, our underwriting standards were adjusted to

reflect the evolving market trends at that time. While these non-DUS small balance loans represent a higher

proportionate share of delinquencies, they generally are covered by loss sharing arrangements, which limits the

credit losses incurred.

In addition, Arizona, Florida, Georgia, and Ohio, have a disproportionate share of seriously delinquent loans

compared to their share of the multifamily guaranty book of business as a result of slow economic recovery in

certain areas of these states. These states accounted for 39% of multifamily serious delinquencies but only

10% of the multifamily guaranty book of business.

REO Management

Foreclosure and REO activity affect the level of credit losses. Table 50 compares our multifamily REO

balances for the periods indicated.

Table 50: Multfamily Foreclosed Properties

2010 2009 2008

As of December 31,

Multifamily foreclosed properties (number of properties):

Beginning of period inventory of multifamily foreclosed properties (REO) . . . . . . . . . . . . . . . . . . 73 29 9

Total properties acquired through foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 105 33

Disposition of REO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (83) (61) (13)

End of period inventory of multifamily foreclosed properties (REO) . . . . . . . . . . . . . . . . . . . . . . 222 73 29

Carrying value of multifamily foreclosed properties (dollars in millions) . . . . . . . . . . . . . . . . . . . $596 $265 $105

Our multifamily foreclosed property inventory increase reflects the continuing stress on our multifamily

guaranty book of business as weak economic conditions have caused new foreclosures to outpace dispositions.

Institutional Counterparty Credit Risk Management

We rely on our institutional counterparties to provide services and credit enhancements, including primary and

pool mortgage insurance coverage, risk sharing agreements with lenders and financial guaranty contracts that

are critical to our business. Institutional counterparty risk is the risk that these institutional counterparties may

fail to fulfill their contractual obligations to us, including seller/servicers who are obligated to repurchase

loans from us or reimburse us for losses in certain circumstances. Defaults by a counterparty with significant

obligations to us could result in significant financial losses to us.

Several of our institutional counterparties may now be subject to provisions of the Dodd-Frank Act, which was

signed into law in July 2010. However, we cannot predict its potential impact on our company or our industry

at this time. For additional discussion on key provisions and additional information about this legislation

please see “Legislation and GSE Reform—Financial Regulatory Reform Legislation: The Dodd-Frank Act”

and “Risk Factors” in this report.

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We have exposure primarily to the following types of institutional counterparties:

• mortgage seller/servicers that service the loans we hold in our investment portfolio or that back our

Fannie Mae MBS;

• third-party providers of credit enhancement on the mortgage assets that we hold in our investment

portfolio or that back our Fannie Mae MBS, including mortgage insurers, financial guarantors and lenders

with risk sharing arrangements;

• custodial depository institutions that hold principal and interest payments for Fannie Mae portfolio loans

and MBS certificateholders, as well as collateral posted by derivatives counterparties, repurchase

transaction counterparties and mortgage originators or servicers;

• issuers of securities held in our cash and other investments portfolio;

• derivatives counterparties;

• mortgage originators and investors;

• debt security and mortgage dealers; and

• document custodians.

We routinely enter into a high volume of transactions with counterparties in the financial services industry,

including brokers and dealers, mortgage lenders and commercial banks, and mortgage insurers, resulting in a

significant credit concentration with respect to this industry. We also have significant concentrations of credit

risk with particular counterparties. Many of our institutional counterparties provide several types of services

for us. For example, many of our lender customers or their affiliates act as mortgage seller/servicers,

derivatives counterparties, custodial depository institutions and document custodians on our behalf.

Unfavorable market conditions have adversely affected, and continue to adversely affect, the liquidity and

financial condition of many of our institutional counterparties, which has significantly increased the risk to our

business of defaults by these counterparties due to bankruptcy or receivership, lack of liquidity, insufficient

capital, operational failure or other reasons. Although we believe that government actions to provide liquidity

and other support to specified financial market participants has initially helped and may continue to help

improve the financial condition and liquidity position of a number of our institutional counterparties, there can

be no assurance that these actions will continue to be effective or will be sufficient. As described in “Risk

Factors,” the financial difficulties that our institutional counterparties are experiencing may negatively affect

their ability to meet their obligations to us and the amount or quality of the products or services they provide

to us.

In the event of a bankruptcy or receivership of one of our counterparties, we may be required to establish our

ownership rights to the assets these counterparties hold on our behalf to the satisfaction of the bankruptcy

court or receiver, which could result in a delay in accessing these assets causing a decline in their value. In

addition, if we are unable to replace a defaulting counterparty that performs services that are critical to our

business with another counterparty, it could materially adversely affect our ability to conduct our operations.

On September 22, 2009, we filed a proof of claim as a creditor in the bankruptcy case of Lehman Brothers

Holdings, Inc., which filed for bankruptcy in September 2008. The claim of $8.9 billion included losses we

incurred in connection with the termination of our outstanding derivatives contracts with a subsidiary of

Lehman Brothers, federal securities law claims related to Lehman Brothers private-label securities and notes

held in our cash and other investments portfolio, losses arising under certain REMIC and grantor trust

transactions, and mortgage loan repurchase obligations. A contingent claim of $6.9 billion was also included,

primarily relating to a large multifamily transaction. However, based on Lehman Brothers’ financial condition,

we believe we will receive only a portion of these claims.

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Mortgage Seller/Servicers

Mortgage seller/servicers collect mortgage and escrow payments from borrowers, pay taxes and insurance

costs from escrow accounts, monitor and report delinquencies, and perform other required activities on our

behalf. We have minimum standards and financial requirements for mortgage seller/servicers. For example, we

require servicers to collect and retain a sufficient level of servicing fees to reasonably compensate a

replacement servicer in the event of a servicing contract breach. In addition, we perform periodic on-site and

financial reviews of our servicers and monitor their financial and portfolio performance as compared to peers

and internal benchmarks. We work with our largest servicers to establish performance goals and monitor

performance against the goals, and our servicing consultants work with servicers to improve servicing results

and compliance with our servicing guide.

Our business with our mortgage seller/servicers is concentrated. Our ten largest single-family mortgage

servicers, including their affiliates, serviced 77% of our single-family guaranty book of business as of

December 31, 2010, compared to 80% as of December 31, 2009. Our largest mortgage servicer is Bank of

America, which, together with its affiliates, serviced approximately 26% of our single-family guaranty book of

business as of December 31, 2010, compared to 27% as of December 31, 2009. In addition, we had two other

mortgage servicers, JP Morgan and Wells Fargo, that, with their affiliates, each serviced over 10% of our

single-family guaranty book of business as of December 31, 2010 and 2009. In addition, Wells Fargo, with its

affiliates, serviced over 10% of our multifamily guaranty book of business as of both December 31, 2010 and

2009. Also, PNC Financial Services Group, Inc., together with its affiliates, serviced over 10% of our

multifamily guaranty book of business as of December 31, 2009. Because we delegate the servicing of our

mortgage loans to mortgage servicers and do not have our own servicing function, servicers’ lack of

appropriate process controls or the loss of business from a significant mortgage servicer counterparty could

pose significant risks to our ability to conduct our business effectively.

Unfavorable market conditions have adversely affected, and continue to adversely affect, the liquidity and

financial condition and performance of many of our mortgage seller/servicers. Several mortgage seller/

servicers have experienced ratings downgrades and liquidity constraints. However, our primary mortgage

servicer counterparties have generally continued to meet their obligations to us during 2009 and 2010. The

growth in the number of delinquent loans on their books of business may negatively affect the ability of these

counterparties to continue to meet their obligations to us in the future. We are also relying on our mortgage

seller/servicers to play a significant role in our homeownership assistance programs; the broad scope of some

of these programs, as well as the recent economic challenges in the market, may limit their capacity to support

these programs.

Our mortgage seller/servicers are obligated to repurchase loans or foreclosed properties, or reimburse us for

losses if the foreclosed property has been sold, under certain circumstances, such as if it is determined that the

mortgage loan did not meet our underwriting or eligibility requirements, if loan representations and warranties

are violated or if mortgage insurers rescind coverage. We refer to these collectively as “repurchase requests.”

In 2010 and 2009, the number of our repurchase requests remained high. During 2010, the aggregate unpaid

principal balance of loans repurchased by our seller/servicers pursuant to their contractual obligations was

approximately $8.8 billion, compared to $4.6 billion during 2009. As of December 31, 2010, we had

$5.0 billion in outstanding repurchase requests related to loans that had been reviewed for potential breaches

of contractual obligations. Approximately 41% of our total outstanding repurchase requests had been made to

one of our seller/servicers. As of December 31, 2010, 30% of our outstanding repurchase requests had been

outstanding for more than 120 days from either the original loan repurchase request date or, for lenders

remitting after the REO is disposed, the date of our final loss determination.

The amount of our outstanding repurchase requests provided above is based on the unpaid principal balance of

the loans underlying the repurchase request issued, not the actual amount we have requested from the lenders.

Lenders have the option to remit payment equal to our loss, including imputed interest, on the loan after we

have disposed of the REO, which is less than the unpaid principal balance of the loan. As a result, we expect

our actual cash receipts relating to these outstanding repurchase requests to be significantly lower than this

amount. In addition, amounts relating to repurchase requests originating from missing documentation or loan

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files are excluded from the total requests outstanding until the completion of a full underwriting review, once

the documents and loan files are received.

On December 31, 2010, we entered into an agreement with Bank of America, N.A., and its affiliates, BAC

Home Loans Servicing, LP, and Countrywide Home Loans, Inc., to address outstanding repurchase requests

for residential mortgage loans with an unpaid principal balance of $3.9 billion delivered to us by affiliates of

Countrywide Financial Corporation. Bank of America agreed, among other things, to a resolution amount of

$1.5 billion, consisting of a cash payment of $1.3 billion made by Bank of America on December 31, 2010,

and other payments recently made or to be made by them.

The agreement substantially resolves or addresses outstanding repurchase requests on loans sold to us by

Countrywide and permits us to bring claims for any additional breaches of our representations and warranties

that are identified with respect to those loans. We continue to work with Bank of America to resolve

repurchase requests that remain outstanding, including requests relating to loans delivered to us by Bank of

America, N.A.

In December 2010, we entered into an agreement with certain wholly-owned subsidiaries of Ally Financial,

Inc. (“Ally”). Under the agreement, we received a cash payment of $462 million in exchange for our release

of specified Ally affiliates from potential liability relating to certain private-label securities sponsored by the

subsidiaries and for certain selling representation and warranty liability related to mortgage loans sold and/or

serviced by one of the subsidiaries as of or prior to June 30, 2010.

We continue to work with our mortgage seller/servicers to fulfill outstanding repurchase requests; however, as

the volume of repurchase requests increases, the risk increases that affected seller/servicers will not be willing

or able to meet the terms of their repurchase obligations and we may be unable to recover on all outstanding

loan repurchase obligations resulting from seller/servicers’ breaches of contractual obligations. If a significant

seller/servicer counterparty, or a number of seller/servicer counterparties, fails to fulfill its repurchase

obligations to us, it could result in a significant increase in our credit losses and have a material adverse effect

on our results of operations and financial condition. We expect that the amount of our outstanding repurchase

requests could remain high in 2011.

We likely would incur costs and potential increases in servicing fees and could also face operational risks if

we decide to replace a mortgage seller/servicer due to its default, our assessment of its financial condition or

for other reasons. If a significant mortgage servicer counterparty fails, and its mortgage servicing obligations

are not transferred to a company with the ability and intent to fulfill all of these obligations, we could incur

penalties for late payment of taxes and insurance on the properties that secure the mortgage loans serviced by

that mortgage seller/servicer. We could also be required to absorb losses on defaulted loans that a failed

servicer is obligated to repurchase from us if we determine there was an underwriting or eligibility breach.

We are exposed to the risk that a mortgage seller/servicer or another party involved in a mortgage loan

transaction will engage in mortgage fraud by misrepresenting the facts about the loan. We have experienced

financial losses in the past and may experience significant financial losses and reputational damage in the

future as a result of mortgage fraud. See “Risk Factors” for additional discussion on risks of mortgage fraud

we are exposed to.

Risk management steps we have taken to mitigate our risk to servicers with whom we have material

counterparty exposure include guaranty of obligations by a higher-rated entity, reduction or elimination of

exposures, reduction or elimination of certain business activities, transfer of exposures to third parties, receipt

of additional collateral and suspension or termination of the servicing relationship.

Mortgage Insurers

We use several types of credit enhancement to manage our single-family mortgage credit risk, including

primary and pool mortgage insurance coverage. Mortgage insurance “risk in force” represents our maximum

potential loss recovery under the applicable mortgage insurance policies. We had total mortgage insurance

coverage risk in force of $95.9 billion on the single-family mortgage loans in our guaranty book of business as

of December 31, 2010, which represented approximately 3% of our single-family guaranty book of business as

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of December 31, 2010. Primary mortgage insurance represented $91.2 billion of this total, and pool mortgage

insurance was $4.7 billion. We had total mortgage insurance coverage risk in force of $106.5 billion on the

single-family mortgage loans in our guaranty book of business as of December 31, 2009, which represented

approximately 4% of our single-family guaranty book of business as of December 31, 2009. Primary mortgage

insurance represented $99.6 billion of this total, and pool mortgage insurance was $6.9 billion of this total.

Increases in mortgage insurance claims due to higher defaults and credit losses in recent periods have

adversely affected the financial results and condition of mortgage insurers. Since January 1, 2009, Standard &

Poor’s, Fitch and Moody’s have downgraded, in some cases more than once, the insurer financial strength

ratings of each of our top seven mortgage insurer counterparties that continue to be rated. As a result of the

downgrades, these mortgage insurer counterparties’ current insurer financial strength ratings are below the

“AA-” level that we require under our qualified mortgage insurer approval requirements to be considered

qualified as a “Type 1” mortgage insurer. Due to these downgrades, we have begun to primarily rely on our

internal credit ratings when assessing our exposure to a counterparty.

Our rating structure is based on a scale of 1 to 8. A rating of 1 represents a counterparty that we view as

having excellent credit quality. We consider the credit quality of an 8 to be poor. These internal ratings, which

reflect our views of a mortgage insurer’s claims paying ability, are based primarily on an assessment of the

mortgage insurer’s capital adequacy and liquidity. These assessments conducted in making our credit quality

determinations involve in-depth credit reviews of each mortgage insurer, a comprehensive analysis of the

mortgage insurance sector, stress analyses of the insurer’s portfolio, discussions with the insurer’s

management, the insurer’s plans to maintain capital within the insuring entity and our views on

macroeconomic variables which impact a mortgage insurer’s estimated future paid losses, such as changes in

home prices and changes in interest rates. From time to time, we may also discuss its situation with the rating

agencies.

Table 51 presents our maximum potential loss recovery for the primary and pool mortgage insurance coverage

on single-family loans in our guaranty book of business by mortgage insurer for our top eight mortgage

insurer counterparties as of December 31, 2010. These mortgage insurers provided over 99% of our total

mortgage insurance coverage on single-family loans in our guaranty book of business as of December 31,

2010.

Table 51: Mortgage Insurance Coverage

Counterparty:(1) Primary Pool Total

Maximum Coverage(2)

As of December 31, 2010

(Dollars in millions)

Mortgage Guaranty Insurance Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,334 $1,943 $23,277

Radian Guaranty, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,002 368 15,370

Genworth Mortgage Insurance Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,250 81 14,331

United Guaranty Residential Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,831 213 14,044

PMI Mortgage Insurance Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,065 294 12,359

Republic Mortgage Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,573 993 10,566

Triad Guaranty Insurance Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,986 823 3,809

CMG Mortgage Insurance Company(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,938 — 1,938

(1) Insurance coverage amounts provided for each counterparty may include coverage provided by consolidated affiliates

and subsidiaries of the counterparty.

(2) Maximum coverage refers to the aggregate dollar amount of insurance coverage (i.e., “risk in force”) on single-family

loans in our guaranty book of business and represents our maximum potential loss recovery under the applicable

mortgage insurance policies.

(3) CMG Mortgage Insurance Company is a joint venture owned by PMI Mortgage Insurance Co. and CUNA Mutual

Insurance Society.

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The current weakened financial condition of our mortgage insurer counterparties creates an increased risk that

these counterparties will fail to fulfill their obligations to reimburse us for claims under insurance policies. A

number of our mortgage insurers have received waivers from their regulators regarding state-imposed

risk-to-capital limits. Without these waivers, these mortgage insurers would not be able to continue to write

new business in accordance with state regulatory requirements, should they fall below their regulatory capital

requirements. In 2010, the parent companies of several of our largest mortgage insurer counterparties raised

capital, which may improve their ability to meet state-imposed risk-to-capital limits and their ability to

continue paying our claims in full as they come due, to the extent that the capital raised by the parent

companies is contributed to their respective mortgage insurance entities. It is uncertain as to how long our

mortgage insurer counterparties will remain below their state-imposed risk-to-capital limits. Additionally,

mortgage insurers continue to approach us with various proposed corporate restructurings that would require

our approval of affiliated mortgage insurance writing entities. In 2010, we approved PMI Mortgage Assurance

Co., a wholly-owned subsidiary of PMI Mortgage Insurance Co., to provide mortgage insurance in a limited

number of states, subject to certain conditions.

If mortgage insurers are not able to raise capital and exceed their risk-to-capital limits, they will likely be

forced into run-off or receivership unless they can secure a waiver from their state regulator. A mortgage

insurer that is in run-off continues to collect premiums and pay claims on its existing insurance business, but

no longer writes new insurance. This would increase the risk that the mortgage insurer will fail to pay our

claims under insurance policies, and could also cause the quality and speed of their claims processing to

deteriorate. In addition, if we are no longer willing or able to conduct business with one or more of our

mortgage insurer counterparties, and we are unable to replace them with another mortgage insurer, it is likely

we would further increase our concentration risk with the remaining mortgage insurers in the industry.

Triad Guaranty Insurance Corporation ceased issuing commitments for new mortgage insurance and began to

run-off its existing business in July 2008. In April 2009, Triad received an order from its regulator that

changes the way it will pay all policyholder claims. Under the order, all valid claims under Triad’s mortgage

guaranty insurance policies will be paid 60% in cash and 40% by the creation of a deferred payment

obligation. Triad began paying claims through this combination of cash and deferred payment obligations in

June 2009. When, and if, Triad’s financial position permits, Triad’s regulator will allow Triad to begin paying

its deferred payment obligations and/or increase the amount of cash Triad pays on claims.

When we estimate the credit losses that are inherent in our mortgage loan portfolio and under the terms of our

guaranty obligations we also consider the recoveries that we will receive on primary mortgage insurance, as

mortgage insurance recoveries would reduce the severity of the loss associated with defaulted loans. We adjust

the contractually due recovery amount to ensure that only amounts which are probable of collection as of the

balance sheet date are included in our loss reserve estimate. As a result, if our assessment of one or more of

our mortgage insurer counterparty’s ability to fulfill their respective obligations to us worsens, it could result

in an increase in our loss reserves.

As of December 31, 2010, our allowance for loan losses of $61.6 billion, allowance for accrued interest

receivable of $3.4 billion and reserve for guaranty losses of $323 million incorporated an estimated recovery

amount of approximately $16.4 billion from mortgage insurance related both to loans that are individually

measured for impairment and those that are measured collectively for impairment. This amount is comprised

of the contractual recovery of approximately $17.5 billion as of December 31, 2010 and an adjustment of

approximately $1.2 billion which reduces the contractual recovery for our assessment of our mortgage insurer

counterparties’ inability to fully pay those claims. As of December 31, 2009, our allowance for loan losses of

$9.9 billion, allowance for accrued interest receivable of $536 million and reserve for guaranty losses of

$54.4 billion incorporated an estimated recovery amount of approximately $16.3 billion from mortgage

insurance related both to loans that are individually measured for impairment and those that are measured

collectively for impairment. This amount is comprised of the contractual recovery of approximately

$18.5 billion as of December 31, 2009 and an adjustment of approximately $2.2 billion which reduces the

contractual recovery for our assessment of our mortgage insurer counterparties’ inability to fully pay those

claims.

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For loans that are collectively evaluated for impairment, we estimate the portion of our incurred loss that we

expect to recover from each of our mortgage insurance counterparties based on the losses that have been

incurred, the contractual mortgage insurance coverage, and an estimate of each counterparty’s resources

available to pay claims to Fannie Mae. An analysis by our Counterparty Risk division determines whether,

based on all the information available to us, any counterparty is considered probable to fail to meet their

obligations in the next 30 months. This period is consistent with the amount of time over which claims related

to losses incurred today are expected to be paid. If that separate analysis finds a counterparty is probable to

fail, we then reserve for the shortfall between incurred claims and estimated resources available to pay claims

to Fannie Mae.

For loans that have been determined to be individually impaired, we calculate a net present value of the

expected cash flows for each loan to determine the level of impairment, which is included in our allowance

for loan losses or reserve for guaranty losses. These expected cash flow projections include proceeds from

mortgage insurance, that are based, in part, on the internal credit ratings for each of our mortgage insurance

counterparties. Specifically, for loans insured by a mortgage insurer with a poorer credit rating, our cash flow

projections include fewer proceeds from the insurer. Also, as our internal credit ratings of our mortgage

insurer counterparties decrease, we reduce the amount of benefits we expect to receive from the insurance they

provide, which in turn increases the fair value of our guaranty obligation.

As described above, our methodologies for individually and collectively impaired loans differ as required by

GAAP, but both consider the ability of our counterparties to pay their obligations in a manner that is

consistent with each methodology. As the loans individually assessed for impairment consider the life of the

loan, we use the noted risk ratings to adjust the loss severity in our best estimates of future cash flows. As the

loans collectively assessed for impairment only look to the probable payments we would receive associated

with our loss emergence period, we use the noted shortfall to adjust the loss severity.

When an insured loan held in our mortgage portfolio subsequently goes into foreclosure, we charge off the

loan, eliminating any previously-recorded loss reserves, and record REO and a mortgage insurance receivable

for the claim proceeds deemed probable of recovery, as appropriate. However, if a mortgage insurer rescinds

their insurance coverage, the initial receivable becomes due from the mortgage seller/servicer. We had

outstanding receivables of $4.4 billion as of December 31, 2010 and $2.5 billion as of December 31, 2009

related to amounts claimed on insured, defaulted loans that we have not yet received, of which $648 million

as of December 31, 2010 and $301 million as of December 31, 2009 was due from our mortgage seller/

servicers. We assessed the receivables for collectibility, and they are recorded net of a valuation allowance of

$317 million as of December 31, 2010 and $51 million as of December 31, 2009 in “Other assets.” These

mortgage insurance receivables are short-term in nature, having a duration of approximately three to six

months, and the valuation allowance reduces our claim receivable to the amount that we consider probable of

collection. We received proceeds under our primary and pool mortgage insurance policies for single-family

loans of $6.4 billion for the year ended December 31, 2010 and $3.6 billion for the year ended December 31,

2009. During the years ended December 31, 2010 and 2009, we negotiated the cancellation and restructurings

of some of our mortgage insurance coverage in exchange for a fee. The cash fees received of $796 million for

the year ended December 31, 2010 and $668 million for the year ended December 31, 2009 are included in

our total insurance proceeds amount.

Our mortgage insurer counterparties have generally continued to pay claims owed to us, except where deferred

payment terms have been established. Our mortgage insurer counterparties have increased the number of

mortgage loans for which they have rescinded coverage. In those cases where the mortgage insurance was

obtained to meet our charter requirements or where we independently agree with the materiality of the finding

that was the basis for the rescission, we generally require the seller/servicer to repurchase the loan or

indemnify us against loss. We also independently review the origination loan files based upon internal

protocols, and seek repurchase of those loans where we discover material underwriting defects,

misrepresentation, or fraud.

In the second quarter of 2010, some mortgage insurers disclosed agreements with certain lenders whereby they

agree to waive certain rights to investigate claims for significant product segments of the insured loans for that

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particular lender, and in return receive some compensation. This means that these mortgage insurers will

require fewer mortgage insurance rescissions for origination defects for the impacted loans. For loans covered

by these agreements, to the extent we do not uncover loan defects independently for loans that otherwise

would have resulted in mortgage insurance rescission, we may be at risk of additional loss. It is unclear how

prevalent this type of agreement between mortgage insurers and lenders may become or how many loans it

may impact. We have required our top mortgage insurer counterparties to notify us promptly of any such

agreements to waive rights either to investigate claims or to rescind mortgage insurance coverage. Because

loans covered by such agreements will be subject to fewer mortgage insurance rescissions, we expect that our

own independent review process will lead to loan repurchases that otherwise would have been subject to a

rescission of mortgage insurance coverage. We examine these arrangements to determine if other actions are

necessary.

Besides evaluating their condition to assess whether we have incurred probable losses in connection with our

coverage, we also evaluate these counterparties individually to determine whether or under what conditions

they will remain eligible to insure new mortgages sold to us. Except for Triad Guaranty Insurance

Corporation, as of February 24, 2011, our private mortgage insurer counterparties remain qualified to conduct

business with us. However, based on our evaluation of them, we may impose additional terms and conditions

of approval on some of our mortgage insurers, including: limiting the volume and types of loans they may

insure for us; requiring them to obtain our consent prior to providing risk sharing arrangements with mortgage

lenders; and requiring them to meet certain financial conditions, such as maintaining a minimum level of

policyholders’ surplus, a maximum risk-to-capital ratio, a maximum combined ratio, parental or other capital

support agreements and limitations on the types and volumes of certain assets that may be considered as liquid

assets.

From time to time, we may enter into negotiated transactions with mortgage insurer counterparties pursuant to

which we agree to cancel or restructure insurance coverage, in excess of charter requirements, in exchange for

a fee. These insurance cancellations and restructurings may provide our counterparties with capital relief and

provide us with cash in lieu of future claims that the counterparty may not be able to pay, thereby reducing

our future counterparty credit exposure. We may negotiate additional insurance coverage restructurings in

2011, though fewer than prior years.

We generally are required pursuant to our charter to obtain credit enhancement on single-family conventional

mortgage loans that we purchase or securitize with LTV ratios over 80% at the time of purchase. In

connection with Refi Plus, we are generally able to purchase an eligible loan if the loan has mortgage

insurance in an amount at least equal to the amount of mortgage insurance that existed on the loan that was

refinanced. As a result, these refinanced loans with updated LTV ratios above 80% and up to 125% may have

no mortgage insurance or less insurance than we would otherwise require for a loan not originated under this

program. In the current environment, many mortgage insurers have stopped insuring new mortgages with

higher LTV ratios or with lower borrower credit scores or on select property types, which has contributed to

the reduction in our business volumes for high LTV ratio loans. In addition, FHA’s role as the lower-cost

option for loans with higher LTV ratios has also reduced our acquisitions of these types of loans. If our

mortgage insurer counterparties further restrict their eligibility requirements or new business volumes for high

LTV ratio loans, or if we are no longer willing or able to obtain mortgage insurance from these counterparties,

and we are not able to find suitable alternative methods of obtaining credit enhancement for these loans, or if

FHA continues to be the lower-cost option for some consumers, and in some cases the only option, for loans

with higher LTV ratios, we may be further restricted in our ability to purchase or securitize loans with LTV

ratios over 80% at the time of purchase.

Financial Guarantors

We were the beneficiary of financial guarantees totaling $8.8 billion as of December 31, 2010 and $9.6 billion

as of December 31, 2009 on securities held in our investment portfolio or on securities that have been

resecuritized to include a Fannie Mae guaranty and sold to third parties. The securities covered by these

guarantees consist primarily of private-label mortgage-related securities and mortgage revenue bonds. We are

also the beneficiary of financial guarantees included in securities issued by Freddie Mac, the federal

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government and its agencies that totaled $25.7 billion as of December 31, 2010 and $51.3 billion as of

December 31, 2009.

Most of the financial guarantors that provided bond insurance coverage to us as of December 31, 2010

experienced material adverse changes to their investment grade ratings and their financial condition during

2010 and 2009 because of significantly higher claim losses that have impaired their claims paying ability.

From time to time, we may enter into negotiated transactions with financial guarantor counterparties pursuant

to which we agree to cancellation of their guaranty in exchange for a cancellation fee. With the exception of

Ambac Assurance Corporation (“Ambac”), as described below, none of our financial guarantor counterparties

has failed to repay us for claims under guaranty contracts. However, based on the stressed financial condition

of our financial guarantor counterparties, we believe that one or more of our financial guarantor counterparties

may not be able to fully meet their obligations to us in the future. We model our securities assuming the

benefit of those external financial guarantees that are deemed creditworthy. For additional discussions of our

model methodology and key inputs used to estimate other-than-temporary impairment see “Note 6,

Investments in Securities.”

In March 2010, Ambac and its insurance regulator, the Wisconsin Office of the Commissioner of Insurance,

imposed a court-ordered moratorium on certain claim payments under Ambac’s bond insurance coverage,

including claims arising under coverage on $1.2 billion of our private-label securities insured by Ambac as of

December 31, 2010. Prior to March 2010, we received payments from Ambac for our claims on Ambac

insured private-label securities. As a result of the moratorium, we have not received payments for the

additional claims filed with Ambac in 2010. On January 24, 2011, the Wisconsin Circuit Court of Dane

County confirmed Ambac’s rehabilitation plan; however, the plan is subject to stay and appeal. The outcome

of legal proceedings regarding the moratorium and the proposed company rehabilitation each remain uncertain

at this time. We assumed no benefit for Ambac’s financial guaranty when estimating other-than-temporary

impairment. See “Consolidated Balance Sheet Analysis—Investments in Mortgage-Related Securities” for

more information on our investments in private-label mortgage-related securities.

Lenders with Risk Sharing

We enter into risk sharing agreements with lenders pursuant to which the lenders agree to bear all or some

portion of the credit losses on the covered loans. Our maximum potential loss recovery from lenders under

these risk sharing agreements on single-family loans was $15.6 billion as of December 31, 2010 and

$18.3 billion as of December 31, 2009. As of December 31, 2010, 56% of our maximum potential loss

recovery on single-family loans was from three lenders. As of December 31, 2009, 53% of our maximum

potential loss recovery on single-family loans was from three lenders. Our maximum potential loss recovery

from lenders under these risk sharing agreements on multifamily loans was $30.3 billion as of December 31,

2010 and $28.7 billion as of December 31, 2009. As of December 31, 2010, 41% of our maximum potential

loss recovery on multifamily loans was from three lenders. As of December 31, 2009, 51% of our maximum

potential loss recovery on multifamily loans was from three lenders.

Unfavorable market conditions have adversely affected, and continue to adversely affect, the liquidity and

financial condition of our lender counterparties. The percentage of single-family recourse obligations to

lenders with investment grade credit ratings (based on the lower of Standard & Poor’s, Moody’s and Fitch

ratings) was 46% as of December 31, 2010, compared with 45% as of December 31, 2009. The percentage of

these recourse obligations to lender counterparties rated below investment grade was 23% as of December 31,

2010, compared to 22% as of December 31, 2009. The remaining percentage of these recourse obligations

were to lender counterparties that were not rated by rating agencies, which was 31% as of December 31,

2010, compared with 33% as of December 31, 2009. Given the stressed financial condition of some of our

lenders, we expect in some cases we will recover less, perhaps significantly less, than the amount the lender is

obligated to provide us under our risk sharing arrangement with them. Depending on the financial strength of

the counterparty, we may require a lender to pledge collateral to secure its recourse obligations.

As noted above in “Multifamily Credit Risk Management,” our primary multifamily delivery channel is our

DUS program, which is comprised of lenders that span the spectrum from large depositories to independent

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non-bank financial institutions. As of December 31, 2010, loans representing approximately 55% of the unpaid

principal balance of loans in our guaranty book of business acquired from our DUS lenders are serviced by

institutions with an external investment grade credit rating or a guarantee from an affiliate with an external

investment grade credit rating. Given the recourse nature of the DUS program, the lenders are bound by

eligibility standards that dictate, among other items, minimum capital and liquidity levels, and the posting of

collateral at a highly rated custodian to backstop a portion of the lenders’ future obligations. To ensure the

level of risk associated with these lenders remains within our standards, we actively monitor their financial

condition. Due to the current credit trends within the multifamily market, effective January 2011, we increased

the collateral requirements for DUS lenders to better align with more recent actual and modeled loss

projections. Lenders delivering loans with higher-risk characteristics will be required to maintain increased

levels of collateral with our designated custodian. Although the current capital requirements have withstood

significant testing, we believe these changes will more closely align the DUS program with current levels of

risk in the market and better protect our assets.

Several of our DUS lenders and their parent companies, including Capmark Finance Inc. (“Capmark”), have

experienced financial stress during the recent market downturn. Capmark, along with its parent and various

other affiliates, filed for Chapter 11 bankruptcy protection on October 25, 2009. On December 11, 2009,

Berkadia Commercial Mortgage LLC (“Berkadia”) acquired Capmark’s mortgage origination and servicing

business, including its Fannie Mae portfolio, through the Section 363 bankruptcy auction process. While

Berkadia subsequently became an active DUS lender and servicer of the former Capmark Fannie Mae

portfolio, our contractual and investment relationships continue with other Capmark affiliates that remain

subject to bankruptcy court jurisdiction. At this time, we cannot determine what, if any, impact the bankruptcy

might have on us. Any action taken by Capmark, including an entity or asset sale, likely would affect only our

investments in LIHTC funds, which have a carrying value of zero in our consolidated financial statements.

Custodial Depository Institutions

A total of $75.4 billion in deposits for single-family payments were received and held by 289 institutions in

the month of December 2010 and a total of $51.0 billion in deposits for single-family payments were received

and held by 284 institutions in the month of December 2009. Of these total deposits, 92% as of December 31,

2010 and 95% as of December 31, 2009 were held by institutions rated as investment grade by Standard &

Poor’s, Moody’s and Fitch. Our ten largest custodial depository institutions held 93% of these deposits as of

both December 31, 2010 and 2009.

If a custodial depository institution were to fail while holding remittances of borrower payments of principal

and interest due to us in our custodial account, we would be an unsecured creditor of the depository for

balances in excess of the deposit insurance protection and might not be able to recover all of the principal and

interest payments being held by the depository on our behalf, or there might be a substantial delay in

receiving these amounts. If this were to occur, we would be required to replace these amounts with our own

funds to make payments that are due to Fannie Mae MBS certificateholders. Accordingly, the insolvency of

one of our principal custodial depository counterparties could result in significant financial losses to us.

Due to the challenging market conditions, several of our custodial depository counterparties experienced

ratings downgrades and liquidity constraints. In response, we reduced the aggregate amount of our funds

permitted to be held with these counterparties and required more frequent remittances of funds. These rules

are effective through December 2013.

The Dodd-Frank Act, signed into law July 21, 2010, permanently increased the amount of federal deposit

insurance available to $250,000 per depositor, which substantially lowered our counterparty exposure relating

to principal and interest payments held on our behalf. Prior to this legislation, this increase was set to expire

in December 2013.

Issuers of Investments Held in our Cash and Other Investments Portfolio

Our cash and other investments portfolio primarily consists of cash and cash equivalents, federal funds sold

and securities purchased under agreements to resell or similar arrangements, U.S. Treasury securities and

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asset-backed securities. See “Liquidity and Capital Management—Liquidity Management—Liquidity Risk

Management Practices and Contingency Planning—Cash and Other Investments Portfolio” for more detailed

information on our cash and other investments portfolio. Our counterparty risk is primarily with financial

institutions and U.S. Treasury.

Our cash and other investments portfolio, which totaled $61.8 billion as of December 31, 2010, included

$31.5 billion of U.S. Treasury securities and $10.3 billion of unsecured positions all of which were short-term

deposits with financial institutions which had short-term credit ratings of A-1, P-1, F1 (or equivalent) or

higher from Standard & Poor’s, Moody’s and Fitch ratings, respectively. As of December 31, 2009, our cash

and other investments portfolio totaled $69.4 billion and included $45.8 billion of unsecured positions with

issuers of corporate debt securities or short-term deposits with financial institutions, of which approximately

92% were with issuers which had short-term credit ratings of A-1, P-1, F1 (or its equivalent) or higher from

Standard & Poor’s, Moody’s and Fitch ratings, respectively.

We monitor the credit risk position of our cash and other investments portfolio by duration and rating level. In

addition, we monitor the financial position and any downgrades of these counterparties. The outcome of our

monitoring could result in a range of events, including selling some of these investments. If one of our

primary cash and other investments portfolio counterparties fails to meet its obligations to us under the terms

of the investments, it could result in financial losses to us and have a material adverse effect on our earnings,

liquidity, financial condition and net worth. During 2010, we evaluated the growing uncertainty of the stability

of various European economies and financial institutions and as a result of this evaluation, reduced the number

of counterparties in our cash and other investments portfolio in those markets and began to lend to remaining

counterparties on a secured basis.

Derivatives Counterparties

Our derivative credit exposure relates principally to interest rate and foreign currency derivatives contracts. We

estimate our exposure to credit loss on derivative instruments by calculating the replacement cost, on a present

value basis, to settle at current market prices all outstanding derivative contracts in a net gain position by

counterparty where the right of legal offset exists, such as master netting agreements, and by transaction where

the right of legal offset does not exist. Derivatives in a gain position are included in our consolidated balance

sheets in “Other assets.”

We expect our credit exposure on derivative contracts to fluctuate with changes in interest rates, implied

volatility and the collateral thresholds of the counterparties. Typically, we seek to manage this exposure by

contracting with experienced counterparties that are rated A- (or its equivalent) or better. These counterparties

consist of large banks, broker-dealers and other financial institutions that have a significant presence in the

derivatives market.

We also manage our exposure to derivatives counterparties by requiring collateral in specified instances. We

have a collateral management policy with provisions for requiring collateral on interest rate and foreign

currency derivative contracts in net gain positions based upon the counterparty’s credit rating. The collateral

includes cash, U.S. Treasury securities, agency debt and agency mortgage-related securities. We analyze credit

exposure on our derivative instruments daily and make collateral calls as appropriate based on the results of

internal pricing models and dealer quotes. In the case of a bankruptcy filing by an interest rate or foreign

currency derivative counterparty or other default by the counterparty under the derivative contract, we would

have the right to terminate all outstanding derivative contracts with that counterparty and may retain collateral

previously posted by that counterparty to the extent that we are in a net gain position on the termination date.

Our net credit exposure on derivatives contracts decreased to $152 million as of December 31, 2010, from

$238 million as of December 31, 2009. We had outstanding interest rate and foreign currency derivative

transactions with 15 counterparties as of December 31, 2010 and 16 counterparties as of December 31, 2009.

Derivatives transactions with nine of our counterparties accounted for approximately 90% of our total

outstanding notional amount as of December 31, 2010, with each of these counterparties accounting for

between approximately 5% and 19% of the total outstanding notional amount. In addition to the 15

counterparties with whom we had outstanding notional amounts as of December 31, 2010, we had master

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netting agreements with three counterparties with whom we may enter into interest rate derivative or foreign

currency derivative transactions in the future.

The Dodd-Frank Act includes additional regulation of the over-the-counter derivatives market that will likely

directly and indirectly affect many aspects of our business and our business partners. Under the Dodd-Frank

Act, if a swap is required by the CFTC to be cleared, it will be unlawful to enter into such a swap unless it is

submitted for clearing to a derivatives clearing organization. In anticipation of those requirements, we cleared

a small number of new interest rate swap transactions with a derivatives clearing organization. The

Dodd-Frank Act also requires certain institutions meeting the definition of “swap dealer” or “major swap

participant” to register with the CFTC. The CFTC and SEC issued joint proposed rules regarding certain

definitions in the Dodd-Frank Act, including the definition of “major swap participant.” See “Legislation and

GSE Reform—Financial Regulatory Reform Legislation: The Dodd-Frank Act” and “Risk Factors” for

additional details regarding the Dodd-Frank Act and risks to our business posed by the Act.

See “Note 10, Derivative Instruments and Hedging Activities” for information on the outstanding notional

amount and additional information on our risk management derivative contracts as of December 31, 2010 and

2009. See “Risk Factors” for a discussion of the risks to our business posed by interest rate risk and a

discussion of the risks to our business as a result of the increasing concentration of our derivatives

counterparties.

Mortgage Originators and Investors

We are routinely exposed to pre-settlement risk through the purchase or sale of closed mortgage loans and

mortgage-related securities with mortgage originators and mortgage investors. The risk is the possibility that

the counterparty will be unable or unwilling to either deliver closed mortgage assets or compensate us for the

cost to cancel or replace the transaction. We manage this risk by determining position limits with these

counterparties, based upon our assessment of their creditworthiness, and monitoring and managing these

exposures.

Debt Security and Mortgage Dealers

The credit risk associated with dealers that commit to place our debt securities is that they will fail to honor

their contracts to take delivery of the debt, which could result in delayed issuance of the debt through another

dealer. The primary credit risk associated with dealers who make forward commitments to deliver mortgage

pools to us is that they may fail to deliver the agreed-upon loans to us on the agreed-upon date, which could

result in our having to replace the mortgage pools at higher cost to meet a forward commitment to sell the

MBS. We manage these risks by establishing approval standards and limits on exposure and monitoring both

our exposure positions and changes in the credit quality of dealers.

Document Custodians

We use third-party document custodians to provide loan document certification and custody services for some

of the loans that we purchase and securitize. In many cases, our lender customers or their affiliates also serve

as document custodians for us. Our ownership rights to the mortgage loans that we own or that back our

Fannie Mae MBS could be challenged if a lender intentionally or negligently pledges or sells the loans that we

purchased or fails to obtain a release of prior liens on the loans that we purchased, which could result in

financial losses to us. When a lender or one of its affiliates acts as a document custodian for us, the risk that

our ownership interest in the loans may be adversely affected is increased, particularly in the event the lender

were to become insolvent. We mitigate these risks through legal and contractual arrangements with these

custodians that identify our ownership interest, as well as by establishing qualifying standards for document

custodians and requiring removal of the documents to our possession or to an independent third-party

document custodian if we have concerns about the solvency or competency of the document custodian.

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Market Risk Management, Including Interest Rate Risk Management

We are subject to market risk, which includes interest rate risk, spread risk and liquidity risk. These risks arise

from our mortgage asset investments. Interest rate risk is the risk of loss in value or expected future earnings

that may result from changes to interest rates. Spread risk is the resulting impact of changes in the spread

between our mortgage assets and our debt and derivatives we use to hedge our position. Liquidity risk is the

risk that we will not be able to meet our funding obligations in a timely manner.

Interest Rate Risk Management

Our goal is to manage market risk to be neutral to the movements in interest rates and volatility, subject to

model constraints and prevailing market conditions. We employ an integrated interest rate risk management

strategy that allows for informed risk taking within pre-defined corporate risk limits. Decisions regarding our

strategy in managing interest rate risk are based upon our corporate market risk policy and limits that are

established by our Chief Market Risk Officer and our Chief Risk Officer and are subject to review and

approval by our Board of Directors. Our Capital Markets Group has primary responsibility for executing our

interest rate risk management strategy.

We have actively managed the interest rate risk of our “net portfolio,” which is defined below, through the

following techniques: (1) asset selection and structuring (that is, by identifying or structuring mortgage assets

with attractive prepayment and other risk characteristics); (2) issuing a broad range of both callable and noncallable debt instruments; and (3) using LIBOR-based interest-rate derivatives. We have not actively managed

or hedged our spread risk, or the impact of changes in the spread between our mortgage assets and debt

(referred to as mortgage-to-debt spreads) after we purchase mortgage assets, other than through asset

monitoring and disposition. For mortgage assets in our portfolio that we intend to hold to maturity to realize

the contractual cash flows, we accept period-to-period volatility in our financial performance attributable to

changes in mortgage-to-debt spreads that occur after our purchase of mortgage assets. For more information

on the impact that changes in spreads have on the value of the fair value of our net assets, see “Supplemental

Non-GAAP Information—Fair Value Balance Sheets.”

We monitor current market conditions, including the interest rate environment, to assess the impact of these

conditions on individual positions and our overall interest rate risk profile. In addition to qualitative factors,

we use various quantitative risk metrics in determining the appropriate composition of our consolidated

balance sheet and relative mix of debt and derivatives positions in order to remain within pre-defined risk

tolerance levels that we consider acceptable. We regularly disclose two interest rate risk metrics that estimate

our overall interest rate exposure: (1) fair value sensitivity to changes in interest rate levels and the slope of

the yield curve and (2) duration gap.

The metrics used to measure our interest rate exposure are generated using internal models. Our internal

models, consistent with standard practice for models used in our industry, require numerous assumptions.

There are inherent limitations in any methodology used to estimate the exposure to changes in market interest

rates. The reliability of our prepayment estimates and interest rate risk metrics depends on the availability and

quality of historical data for each of the types of securities in our net portfolio. When market conditions

change rapidly and dramatically, as they did during the financial market crisis of late 2008, the assumptions of

our models may no longer accurately capture or reflect the changing conditions. On a continuous basis,

management makes judgments about the appropriateness of the risk assessments indicated by the models.

Sources of Interest Rate Risk Exposure

The primary source of our interest rate risk is the composition of our net portfolio. Our net portfolio consists

of our existing investments in mortgage assets, investments in non-mortgage securities, our outstanding debt

used to fund those assets and the derivatives used to supplement our debt instruments and manage interest rate

risk, and any fixed-price asset, liability or derivative commitments.

Our mortgage assets consist mainly of single-family fixed-rate mortgage loans that give borrowers the option

to prepay at any time before the scheduled maturity date or continue paying until the stated maturity. Given

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this prepayment option held by the borrower, we are exposed to uncertainty as to when or at what rate

prepayments will occur, which affects the length of time our mortgage assets will remain outstanding and the

timing of the cash flows related to these assets. This prepayment uncertainty results in a potential mismatch

between the timing of receipt of cash flows related to our assets and the timing of payment of cash flows

related to our liabilities.

Changes in interest rates, as well as other factors, influence mortgage prepayment rates and duration and also

affect the value of our mortgage assets. When interest rates decrease, prepayment rates on fixed-rate

mortgages generally accelerate because borrowers usually can pay off their existing mortgages and refinance

at lower rates. Accelerated prepayment rates have the effect of shortening the duration and average life of the

fixed-rate mortgage assets we hold in our portfolio. In a declining interest rate environment, existing mortgage

assets held in our portfolio tend to increase in value or price because these mortgages are likely to have higher

interest rates than new mortgages, which are being originated at the then-current lower interest rates.

Conversely, when interest rates increase, prepayment rates generally slow, which extends the duration and

average life of our mortgage assets and results in a decrease in value.

Although the fair value of our guaranty assets and our guaranty obligations is highly sensitive to changes in

interest rates and the market’s perception of future credit performance, we do not actively manage the change

in the fair value of our guaranty business that is attributable to changes in interest rates. We do not believe

that periodic changes in fair value due to movements in interest rates are the best indication of the long-term

value of our guaranty business because these changes do not take into account future guaranty business

activity.

Interest Rate Risk Management Strategy

Our strategy for managing the interest rate risk of our net portfolio involves asset selection and structuring of

our liabilities to match and offset the interest rate characteristics of our balance sheet assets and liabilities as

much as possible. Our strategy consists of the following principal elements:

• Debt Instruments. We issue a broad range of both callable and non-callable debt instruments to manage

the duration and prepayment risk of expected cash flows of the mortgage assets we own.

• Derivative Instruments. We supplement our issuance of debt with derivative instruments to further

reduce duration and prepayment risks.

• Monitoring and Active Portfolio Rebalancing. We continually monitor our risk positions and actively

rebalance our portfolio of interest rate-sensitive financial instruments to maintain a close match between

the duration of our assets and liabilities.

Debt Instruments

Historically, the primary tool we have used to fund the purchase of mortgage assets and manage the interest

rate risk implicit in our mortgage assets is the variety of debt instruments we issue. The debt we issue is a mix

that typically consists of short- and long-term, non-callable debt and callable debt. The varied maturities and

flexibility of these debt combinations help us in reducing the mismatch of cash flows between assets and

liabilities in order to manage the duration risk associated with an investment in long-term fixed-rate assets.

Callable debt helps us manage the prepayment risk associated with fixed-rate mortgage assets because the

duration of callable debt changes when interest rates change in a manner similar to changes in the duration of

mortgage assets. See “Liquidity and Capital Management—Liquidity Management—Debt Funding” for

additional information on our debt activity.

Derivative Instruments

Derivative instruments also are an integral part of our strategy in managing interest rate risk. Derivative

instruments may be privately negotiated contracts, which are often referred to as over-the-counter derivatives,

or they may be listed and traded on an exchange. When deciding whether to use derivatives, we consider a

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number of factors, such as cost, efficiency, the effect on our liquidity, results of operations, and our overall

interest rate risk management strategy.

The derivatives we use for interest rate risk management purposes fall into four broad categories:

• Interest rate swap contracts. An interest rate swap is a transaction between two parties in which each

agrees to exchange, or swap, interest payments. The interest payment amounts are tied to different interest

rates or indices for a specified period of time and are generally based on a notional amount of principal.

The types of interest rate swaps we use include pay-fixed swaps, receive-fixed swaps and basis swaps.

• Interest rate option contracts. These contracts primarily include pay-fixed swaptions, receive-fixed

swaptions, cancelable swaps and interest rate caps. A swaption is an option contract that allows us or a

counterparty to enter into a pay-fixed or receive-fixed swap at some point in the future.

• Foreign currency swaps. These swaps convert debt that we issue in foreign-denominated currencies into

U.S. dollars. We enter into foreign currency swaps only to the extent that we issue foreign currency debt.

• Futures. These are standardized exchange-traded contracts that either obligate a buyer to buy an asset at

a predetermined date and price or a seller to sell an asset at a predetermined date and price. The types of

futures contracts we enter into include Eurodollar, U.S. Treasury and swaps.

We use interest rate swaps, interest rate options and futures, in combination with our issuance of debt

securities, to better match the prepayment risk and duration of our assets with the duration of our liabilities.

We are generally an end user of derivatives; our principal purpose in using derivatives is to manage our

aggregate interest rate risk profile within prescribed risk parameters. We generally only use derivatives that are

relatively liquid and straightforward to value. We use derivatives for four primary purposes:

(1) As a substitute for notes and bonds that we issue in the debt markets;

(2) To achieve risk management objectives not obtainable with debt market securities;

(3) To quickly and efficiently rebalance our portfolio and

(4) To hedge foreign currency exposure.

Decisions regarding the repositioning of our derivatives portfolio are based upon current assessments of our

interest rate risk profile and economic conditions, including the composition of our consolidated balance

sheets and relative mix of our debt and derivative positions, the interest rate environment and expected trends.

Table 52 presents, by derivative instrument type, our risk management derivative activity, excluding mortgage

commitments, for the years ended December 31, 2010 and 2009 along with the stated maturities of derivatives

outstanding as of December 31, 2010.

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Table 52: Activity and Maturity Data for Risk Management Derivatives(1)

PayFixedReceiveFixed(2) Basis(3) Foreign

Currency(4) PayFixed

ReceiveFixedInterest

Rate Caps Futures Other(5) Total

Interest Rate Swaps

Interest Rate

Swaptions

(Dollars in millions)

Notional balance as of

December 31, 2008 . . . . . $ 546,916 $ 451,081 $ 24,560 $1,652 $ 79,500 $ 93,560 $ 500 $ — $827 $1,198,596

Additions . ........... 297,379 279,854 2,765 577 32,825 19,175 6,500 — 13 639,088

Terminations(6) ........ (461,695) (455,518) (24,100) (692) (13,025) (37,355) — — (92) (992,477)

Notional balance as of

December 31, 2009 . . . . . $ 382,600 $ 275,417 $ 3,225 $1,537 $ 99,300 $ 75,380 $7,000 $ — $748 $ 845,207

Additions . ........... 212,214 250,417 55 636 51,700 51,025 — 598 — 566,645

Terminations(6) ........ (317,587) (301,657) (2,795) (613) (53,850) (47,790) — (353) (59) (724,704)

Notional balance as of

December 31, 2010 . . . . . $ 277,227 $ 224,177 $ 485 $1,560 $ 97,150 $ 78,615 $7,000 $ 245 $689 $ 687,148

Future maturities of notional

amounts:(7)

Less than 1 year ....... $ 70,656 $ 14,200 $ 50 $ 386 $ 20,750 $ — $ — $ 125 $ 75 $ 106,242

1 to less than 5 years . . . . 90,788 168,000 35 — 35,300 4,500 7,000 120 593 306,336

5 to less than 10 years. . . . 96,400 29,632 100 511 10,200 20,970 — — 21 157,834

10 years and over....... 19,383 12,345 300 663 30,900 53,145 — — — 116,736

Total . . ........... $ 277,227 $ 224,177 $ 485 $1,560 $ 97,150 $ 78,615 $7,000 $ 245 $689 $ 687,148

Weighted-average interest rate

as of December 31, 2010:

Pay rate . . ........... 2.84% 0.29% 0.09% — 5.14% — — — —

Receive rate . . . ....... 0.28% 2.27% 4.61% — — 4.15% 3.58% — —

Weighted-average interest rate

as of December 31, 2009:

Pay rate . . ........... 3.46% 0.26% 0.05% — 5.46% — — — —

Receive rate . . . ....... 0.26% 3.47% 1.59% — — 4.45% 3.58% — —

(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) Notional amounts include swaps callable by Fannie Mae of $394 million, $406 million and $418 million as of

December 31, 2010, 2009 and 2008, respectively. The notional amounts of swaps callable by derivatives counterparties

were $3.2 billion and $10.4 billion as of December 31, 2010 and 2008, respectively. There were no swaps callable by

derivatives counterparties as of December 31, 2009.

(3) Notional amounts include swaps callable by derivatives counterparties of $50 million, $610 million and $925 million

as of December 31, 2010, 2009 and 2008, respectively.

(4) Exchange rate adjustments to foreign currency swaps existing at both the beginning and the end of the period are

included in terminations. Exchange rate adjustments to foreign currency swaps that are added or terminated during the

period are reflected in the respective categories.

(5) Includes swap credit enhancements and mortgage insurance contracts.

(6) Includes matured, called, exercised, assigned and terminated amounts.

(7) Amounts reported are based on contractual maturities. Some of these amounts represent swaps that are callable by

Fannie Mae or by a derivative counterparty, in which case the notional amount would cease to be outstanding prior to

maturity if the call option were exercised. See notes (2) and (3) for information on notional amounts that are callable.

Measurement of Interest Rate Risk

Our interest rate risk measurement framework is based on the fair value of our assets, liabilities and derivative

instruments and the sensitivity of these values to changes in market factors. Estimating the impact of

prepayment risk is critical in managing interest rate risk. We use prepayment models to determine the

estimated duration and convexity of our mortgage assets and various quantitative methods for measuring our

interest rate exposure. Because no single method can reflect all aspects of the interest rate risk inherent in our

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mortgage portfolio, we utilize various risk measurements that together provide a more complete assessment of

our aggregate interest rate risk profile.

We measure and monitor the fair value sensitivity to both small and large changes in the level of interest rates,

changes in the shape of the yield curve, and changes in interest rate volatility. In addition, we perform a range

of stress test analyses that measure the sensitivity of the portfolio to severe hypothetical changes in market

conditions.

Our fair value sensitivity and duration gap metric, which are based on our net portfolio defined above, are

calculated using internal models that require standard assumptions regarding interest rates and future

prepayments of principal over the remaining life of our securities. These assumptions are derived based on the

characteristics of the underlying structure of the securities and historical prepayment rates experienced at

specified interest rate levels, taking into account current market conditions, the current mortgage rates of our

existing outstanding loans, loan age and other factors. On a continuous basis, management makes judgments

about the appropriateness of the risk assessments and will make adjustments as appropriate to properly assess

our interest rate exposure and manage our interest rate risk. The methodologies used to calculate risk estimates

are periodically changed on a prospective basis to reflect improvements in the underlying estimation process.

Below we present two quantitative metrics that provide estimates of our interest rate exposure: (1) fair value

sensitivity of net portfolio to changes in interest rate levels and slope of yield curve; and (2) duration gap. We

also provide additional information that may be useful in evaluating our interest rate exposure. Our overall

interest rate exposure, as reflected in the fair value sensitivity to changes in interest rate levels and the slope

of the yield curve and duration gap, was within acceptable, pre-defined corporate limits as of December 31,

2010.

Interest Rate Sensitivity to Changes in Interest Rate Level and Slope of Yield Curve

As part of our disclosure commitments with FHFA, we disclose on a monthly basis the estimated adverse

impact on the fair value of our net portfolio that would result from the following hypothetical situations:

• A 50 basis point shift in interest rates.

• A 25 basis point change in the slope of the yield curve.

In measuring the estimated impact of changes in the level of interest rates, we assume a parallel shift in all

maturities of the U.S. LIBOR interest rate swap curve.

In measuring the estimated impact of changes in the slope of the yield curve, we assume a constant 7-year

rate and a shift in the 1-year and 30-year rates of 16.7 basis points and 8.3 basis points, respectively. We

believe the aforementioned interest rate shocks for our monthly disclosures represent moderate movements in

interest rates over a one-month period.

Duration Gap

Duration gap measures the price sensitivity of our assets and liabilities to changes in interest rates by

quantifying the difference between the estimated durations of our assets and liabilities. Our duration gap

analysis reflects the extent to which the estimated maturity and repricing cash flows for our assets are

matched, on average, over time and across interest rate scenarios to the estimated cash flows of our liabilities.

A positive duration indicates that the duration of our assets exceeds the duration of our liabilities. We disclose

duration gap on a monthly basis under the caption “Interest Rate Risk Disclosures” in our Monthly

Summaries, which are available on our website and announced in a press release.

The sensitivity measures presented in Table 53, which we disclose on a quarterly basis as part of our

disclosure commitments with FHFA, are an extension of our monthly sensitivity measures. There are three

primary differences between our monthly sensitivity disclosure and the quarterly sensitivity disclosure

presented below: (1) the quarterly disclosure is expanded to include the sensitivity results for larger rate level

shocks of plus or minus 100 basis points; (2) the monthly disclosure reflects the estimated pre-tax impact on

the market value of our net portfolio calculated based on a daily average, while the quarterly disclosure

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reflects the estimated pre-tax impact calculated based on the estimated financial position of our net portfolio

and the market environment as of the last business day of the quarter; and (3) the monthly disclosure shows

the most adverse pre-tax impact on the market value of our net portfolio from the hypothetical interest rate

shocks, while the quarterly disclosure includes the estimated pre-tax impact of both up and down interest rate

shocks.

In addition, Table 53 also provides the average, minimum, maximum and standard deviation for duration gap

and for the most adverse market value impact on the net portfolio for non-parallel and parallel interest rate

shocks for the three months ended December 31, 2010.

Table 53: Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve(1)

2010 2009

As of December 31,

(Dollars in billions)

Rate level shock:

-100 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(0.8) $(0.1)

-50 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.2) 0.1

+50 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.2) (0.4)

+100 basis points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.5) (0.9)

Rate slope shock:

-25 basis points (flattening). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.1) (0.2)

+25 basis points (steepening) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 0.1

Duration

Gap

Rate Slope Shock

25 Bps

Rate Level Shock

50 Bps

For the Three Months Ended December 31, 2010

(In months)

Exposure

(Dollars in billions)

Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 $0.1 $0.3

Minimum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.7) — —

Maximum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9 0.1 0.4

Standard deviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 — 0.1

(1) Computed based on changes in LIBOR swap rates.

A majority of the interest rate risk associated with our mortgage-related securities and loans is hedged with

our debt issuance, which includes callable debt. We use derivatives to help manage the residual interest rate

risk exposure between our assets and liabilities. Derivatives have enabled us to keep our interest-rate risk

exposure at consistently low levels in a wide range of interest-rate environments. Table 54 shows an example

of how derivatives impacted the net market value exposure for a 50 basis point parallel interest rate shock.

Table 54: Derivative Impact on Interest Rate Risk (50 Basis Points)

Before

Derivatives

After

Derivatives

Effect of

Derivatives

(Dollars in billions)

As of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(0.9) $(0.2) $0.7

As of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2.1) $(0.4) $1.7

Other Interest Rate Risk Information

The interest rate risk measures discussed above exclude the impact of changes in the fair value of our net

guaranty assets resulting from changes in interest rates. We exclude our guaranty business from these

sensitivity measures based on our current assumption that the guaranty fee income generated from future

business activity will largely replace guaranty fee income lost due to mortgage prepayments.

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We provide additional interest rate sensitivities below in Table 55, including separate disclosure of the

potential impact on the fair value of our trading assets and our other financial instruments for the periods

indicated, from the same hypothetical changes in the level of interest rates as presented above in Table 53. We

also assume a parallel shift in all maturities along the interest rate swap curve in calculating these sensitivities.

We believe these interest rate changes represent reasonably possible near-term changes in interest rates over

the next twelve months.

Table 55: Interest Rate Sensitivity of Financial Instruments

Estimated

Fair Value -100 -50 +50 +100

Change in Interest Rates

(in basis points)

Pre-tax Effect on Estimated Fair

Value

As of December 31, 2010

(Dollars in billions)

Trading financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56.9 $ 0.9 $0.4 $(0.4) $(0.8)

Other financial instruments, net(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . (201.1) 10.8 4.1 (3.9) (6.1)

Estimated

Fair Value -100 -50 +50 +100

Change in Interest Rates

(in basis points)

Pre-tax Effect on Estimated Fair

Value

As of December 31, 2009

(Dollars in billions)

Trading financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 111.9 $ 2.7 $ 1.6 $(1.9) $(4.0)

Guaranty assets and guaranty obligations, net(1). . . . . . . . . . . . . . . . . (149.3) 11.3 5.7 (6.0) (4.3)

Other financial instruments, net(2) . . . . . . . . . . . . . . . . . . . . . . . . . . (72.5) (2.2) (1.1) 1.2 2.7

(1) Consists of the net of “Guaranty assets” and “Guaranty obligations” reported in our consolidated balance sheets. In

addition, includes certain amounts that have been reclassified from “Mortgage loans held for investment, net of

allowance for loan losses” reported in our consolidated balance sheets to reflect how the risk of the interest rate and

credit risk components of these loans are managed by our business segments.

(2) Also consists of the net of all other financial instruments reported in “Note 19, Fair Value.”

Liquidity Risk Management

See “Liquidity and Capital Management—Liquidity Management—Liquidity Risk Management Practices and

Contingency Planning” for a discussion on how we manage liquidity risk.

Operational Risk Management

Our corporate operational risk framework is based on the OFHEO Enterprise Guidance on Operational Risk

Management, published September 23, 2008. Our framework is intended to provide a methodology to identify,

assess, mitigate, control and monitor operational risks across the company. Included in this framework is a

requirement and plan for the development of a new system for tracking and reporting of operational risk

incidents. The framework also includes a methodology for business owners to conduct risk and control self

assessments to self identify potential operational risks and points of execution failure, the effectiveness of

associated controls, and document corrective action plans to close identified deficiencies. This methodology is

in its early stage of execution and the success of our operational risk effort will depend on the consistent

execution of the operational risk programs and the timely remediation of high operational risk issues.

We have made a number of enhancements to our operational risk management efforts in 2010 including our

business process focus, policies and framework. To quantify our operational risk exposure, we rely on the

Basel Standardized approach, which is based on a percentage of revenue. As our operational risk management

program matures, it is our goal to measure our operational risk exposure using quantitative models that will

leverage data from our various operational risk programs.

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Management of Business Resiliency

Our business resiliency program is designed to provide reasonable assurance for continuity of critical business

operations in the event of disruptions caused by the loss of facilities, technology or personnel. Despite

proactive planning, testing and continuous preparation of back up venues, these measures may not prevent a

significant business disruption from an improbable but highly catastrophic event.

Non-Mortgage Related Fraud Risk

Our anti-fraud program provides a framework for managing non-mortgage related fraud risk. The program is

designed to provide reasonable assurance for the prevention and detection of non-mortgage related fraudulent

activity. However, because fraudulent activity requires the intentional circumvention of the internal control

structure, the efforts of the program may not always prevent, or immediately detect, instances of such activity.

See “Risk Factors” for a discussion on our operational risk.

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GLOSSARY OF TERMS USED IN THIS REPORT

Terms used in this report have the following meanings, unless the context indicates otherwise.

An “Acquired credit-impaired loan” refers to a loan we have acquired for which there is evidence of credit

deterioration since origination and for which it is probable we will not be able to collect all of the

contractually due cash flows. We record our net investment in such loans at the lower of the acquisition cost

of the loan or the estimated fair value of the loan at the date of acquisition. Typically, loans we acquire from

our MBS trusts pursuant to our option to purchase upon default meet these criteria. Because we acquire these

loans from our MBS trusts at par value plus accrued interest, to the extent the par value of a loan exceeds the

estimated fair value at the time we acquire the loan, we record the related fair value loss as a charge against

the “Reserve for guaranty losses.”

“Alt-A mortgage loan” or “Alt-A loan” generally refers to a mortgage loan originated under a lender’s

program offering reduced or alternative documentation than that required for a full documentation mortgage

loan but may also include other alternative product features. As a result, Alt-A mortgage loans have a higher

risk of default than non-Alt-A mortgage loans. In reporting our Alt-A exposure, we have classified mortgage

loans as Alt-A if the lenders that delivered the mortgage loans to us classified the loans as Alt-A based on

documentation or other product features. We have classified private-label mortgage-related securities held in

our investment portfolio as Alt-A if the securities were labeled as such when issued.

“Business volume” or “new business acquisitions” refers to the sum in any given period of the unpaid

principal balance of: (1) the mortgage loans and mortgage-related securities we purchase for our investment

portfolio; (2) the mortgage loans we securitize into Fannie Mae MBS that are acquired by third parties; and

(3) credit enhancements that we provide on our mortgage assets. It excludes mortgage loans we securitize

from our portfolio and the purchase of Fannie Mae MBS for our investment portfolio.

“Buy-ups” refer to upfront payments we make to lenders to adjust the monthly contractual guaranty fee rate

on a Fannie Mae MBS so that the pass-through coupon rate on the MBS is in a more easily tradable

increment of a whole or half percent.

“Buy-downs” refer to upfront payments we receive from lenders to adjust the monthly contractual guaranty

fee rate on a Fannie Mae MBS so that the pass-through coupon rate on the MBS is in a more easily tradable

increment of a whole or half percent.

“Charge-off” refers to loan amounts written off as uncollectible bad debts. When repayment is considered

unlikely, these loan amounts are removed from our consolidated balance sheet and charged against our loss

reserves.

“Conventional mortgage” refers to a mortgage loan that is not guaranteed or insured by the U.S. government

or its agencies, such as the VA, the FHA or the Rural Development Housing and Community Facilities

Program of the Department of Agriculture.

“Credit enhancement” refers to an agreement used to reduce credit risk by requiring collateral, letters of

credit, mortgage insurance, corporate guarantees, or other agreements to provide an entity with some assurance

that it will be compensated to some degree in the event of a financial loss.

“Duration” refers to the sensitivity of the value of a security to changes in interest rates. The duration of a

financial instrument is the expected percentage change in its value in the event of a change in interest rates of

100 basis points.

“Guaranty book of business” refers to the sum of the unpaid principal balance of: (1) mortgage loans held in

our mortgage portfolio; (2) Fannie Mae MBS held in our mortgage portfolio; (3) Fannie Mae MBS held by

third parties; and (4) other credit enhancements that we provide on mortgage assets. It excludes non-Fannie

Mae mortgage-related securities held in our investment portfolio for which we do not provide a guaranty.

“HomeSaver Advance” refers to a 15-year unsecured personal loan in an amount equal to all past due

payments relating to a borrower’s first lien mortgage loan, generally up to the lesser of $15,000 or 15% of the

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unpaid principal balance of the delinquent first lien loan. The advance is used to bring the first lien mortgage

loan current.

“HomeSaver Advance fair value losses” refer to losses recorded at the time we make a HomeSaver Advance

loan to a borrower, which result from our recording HomeSaver Advance loans at their estimated fair value at

the date of purchase from the servicers.

“Implied volatility” refers to the market’s expectation of the magnitude of future changes in interest rates.

“Interest rate swap” refers to a transaction between two parties in which each agrees to exchange payments

tied to different interest rates or indices for a specified period of time, generally based on a notional principal

amount. An interest rate swap is a type of derivative.

“LIHTC partnerships” refer to low-income housing tax credit limited partnerships or limited liability

companies.

“Loans,” “mortgage loans” and “mortgages” refer to both whole loans and loan participations, secured by

residential real estate, cooperative shares or by manufactured housing units.

“Mortgage assets,” when referring to our assets, refers to both mortgage loans and mortgage-related securities

we hold in our investment portfolio.

“Mortgage credit book of business” refers to the sum of the unpaid principal balance of: (1) mortgage loans

held in our mortgage portfolio; (2) Fannie Mae MBS held in our mortgage portfolio; (3) non-Fannie Mae

mortgage-related securities held in our investment portfolio; (4) Fannie Mae MBS held by third parties; and

(5) other credit enhancements that we provide on mortgage assets.

“Multifamily mortgage loan” refers to a mortgage loan secured by a property containing five or more

residential dwelling units.

“Notional amount” refers to the hypothetical dollar amount in an interest rate swap transaction on which

exchanged payments are based. The notional amount in an interest rate swap transaction generally is not paid

or received by either party to the transaction and is typically significantly greater than the potential market or

credit loss that could result from such transaction.

“Option-adjusted spread” or “OAS” refers to the incremental expected return between a security, loan or

derivative contract and a benchmark yield curve (typically, U.S. Treasury securities, LIBOR and swaps, or

agency debt securities). The OAS provides explicit consideration of the variability in the security’s cash flows

across multiple interest rate scenarios resulting from any options embedded in the security, such as

prepayment options. For example, the OAS of a mortgage that can be prepaid by the homeowner without

penalty is typically lower than a nominal yield spread to the same benchmark because the OAS reflects the

exercise of the prepayment option by the homeowner, which lowers the expected return of the mortgage

investor. In other words, OAS for mortgage loans is a risk-adjusted spread after consideration of the

prepayment risk in mortgage loans. The market convention for mortgages is typically to quote their OAS to

swaps. The OAS of our debt and derivative instruments are also frequently quoted to swaps. The OAS of our

net mortgage assets is therefore the combination of these two spreads to swaps and is the option-adjusted

spread between our assets and our funding and hedging instruments.

“Outstanding Fannie Mae MBS” refers to the total unpaid principal balance of Fannie Mae MBS that is held

by third-party investors and held in our mortgage portfolio.

“Pay-fixed swap” refers to an agreement under which we pay a predetermined fixed rate of interest based

upon a set notional principal amount and receive a variable interest payment based upon a stated index, with

the index resetting at regular intervals over a specified period of time. These contracts generally increase in

value as interest rates rise and decrease in value as interest rates fall.

“Private-label securities” refers to mortgage-related securities issued by entities other than agency issuers

Fannie Mae, Freddie Mac or Ginnie Mae.

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“Receive-fixed swap” refers to an agreement under which we make a variable interest payment based upon a

stated index, with the index resetting at regular intervals, and receive a predetermined fixed rate of interest

based upon a set notional amount and over a specified period of time. These contracts generally increase in

value as interest rates fall and decrease in value as interest rates rise.

“REMIC” or “Real Estate Mortgage Investment Conduit” refers to a type of mortgage-related security in

which interest and principal payments from mortgages or mortgage-related securities are structured into

separately traded securities.

“REO” refers to real-estate owned by Fannie Mae because we have foreclosed on the property or obtained the

property through a deed-in-lieu of foreclosure.

“Severity rate” or “loss severity rate” refers to the percentage of our total loss, which includes the unpaid

principal balance of a loan, purchased interest, and selling costs if applicable, that we believe will not be

recovered in the event of default.

“Single-class Fannie Mae MBS” refers to Fannie Mae MBS where the investors receive principal and interest

payments in proportion to their percentage ownership of the MBS issue.

“Single-family mortgage loan” refers to a mortgage loan secured by a property containing four or fewer

residential dwelling units.

“Small balance loans” refers to multifamily loans with an original balance of less than $3 million nationwide

or $5 million in high cost markets.

“Subprime mortgage loan” generally refers to a mortgage loan made to a borrower with a weaker credit

profile than that of a prime borrower. As a result of the weaker credit profile, subprime borrowers have a

higher likelihood of default than prime borrowers. Subprime mortgage loans were typically originated by

lenders specializing in this type of business or by subprime divisions of large lenders, using processes unique

to subprime loans. In reporting our subprime exposure, we have classified mortgage loans as subprime if the

mortgage loans were originated by one of these specialty lenders or a subprime division of a large lender. We

exclude loans originated by these lenders if we acquired the loans in accordance with our standard

underwriting criteria, which typically require compliance by the seller with our Selling Guide (including

standard representations and warranties) and/or evaluation of the loans through our Desktop Underwriter

system. We have classified private-label mortgage-related securities held in our investment portfolio as

subprime if the securities were labeled as such when issued.

“Structured Fannie Mae MBS” refers to Fannie Mae MBS that are resecuritizations of other Fannie Mae

MBS.

“Swaptions” refers to options on interest rate swaps in the form of contracts granting an option to one party

and creating a corresponding commitment from the counterparty to enter into specified interest rate swaps in

the future. Swaptions are traded in the over-the-counter market and not through an exchange.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosure about market risk is set forth in “MD&A—Risk Management—Market

Risk Management, including Interest Rate Risk Management.”

Item 8. Financial Statements and Supplementary Data

Our consolidated financial statements and notes thereto are included elsewhere in this annual report on

Form 10-K as described below in “Exhibits and Financial Statement Schedules.”

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

None.

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Item 9A. Controls and Procedures

OVERVIEW

We are required under applicable laws and regulations to maintain controls and procedures, which include

disclosure controls and procedures as well as internal control over financial reporting, as further described

below.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures refer to controls and other procedures designed to provide reasonable

assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is

recorded, processed, summarized and reported within the time periods specified in the rules and forms of the

SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide

reasonable assurance that information required to be disclosed by us in the reports that we file or submit under

the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and

Deputy Chief Financial Officer, who is acting as our chief financial officer, as appropriate, to allow timely

decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures,

management recognizes that any controls and procedures, no matter how well designed and operated, can

provide only reasonable assurance of achieving the desired control objectives, and management was required to

apply its judgment in evaluating and implementing possible controls and procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our

Chief Executive Officer and Deputy Chief Financial Officer, the effectiveness of our disclosure controls and

procedures as in effect as of December 31, 2010, the end of the period covered by this report. As a result of

management’s evaluation, our Chief Executive Officer and Deputy Chief Financial Officer concluded that our

disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2010

or as of the date of filing this report.

Our disclosure controls and procedures were not effective as of December 31, 2010 or as of the date of filing

this report because they did not adequately ensure the accumulation and communication to management of

information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws.

As a result, we were not able to rely upon the disclosure controls and procedures that were in place as of

December 31, 2010 or as of the date of this filing, and we continue to have a material weakness in our

internal control over financial reporting. This material weakness is described in more detail below under

“Description of Material Weakness.”

Based on discussions with FHFA and the structural nature of the weakness in our disclosure controls and

procedures, it is likely that we will not remediate the weakness in our disclosure controls and procedures

relating to information known to FHFA while we are under conservatorship.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Overview

Our management is responsible for establishing and maintaining adequate internal control over financial

reporting. Internal control over financial reporting, as defined in rules promulgated under the Exchange Act, is

a process designed by, or under the supervision of, our Chief Executive Officer and Deputy Chief Financial

Officer and effected by our Board of Directors, management and other personnel to provide reasonable

assurance regarding the reliability of financial reporting and the preparation of financial statements for external

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purposes in accordance with GAAP. Internal control over financial reporting includes those policies and

procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions

and dispositions of our assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial

statements in accordance with GAAP, and that our receipts and expenditures are being made only in

accordance with authorizations of our management and our Board of Directors; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or

disposition of our assets that could have a material effect on our financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting

objectives because of its inherent limitations. Internal control over financial reporting is a process that involves

human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human

failures. Internal control over financial reporting also can be circumvented by collusion or improper override.

Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a

timely basis by internal control over financial reporting. However, these inherent limitations are known

features of the financial reporting process, and it is possible to design into the process safeguards to reduce,

though not eliminate, this risk.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31,

2010. In making its assessment, management used the criteria established in Internal Control—Integrated

Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Management’s assessment of our internal control over financial reporting as of December 31, 2010 identified a

material weakness, which is described below. Because of this material weakness, management has concluded

that our internal control over financial reporting was not effective as of December 31, 2010 or as of the date

of filing this report.

Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on our

internal control over financial reporting, expressing an adverse opinion on the effectiveness of our internal

control over financial reporting as of December 31, 2010. This report is included below.

Description of Material Weakness

The Public Company Accounting Oversight Board’s Auditing Standard No. 5 defines a material weakness as a

deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a

reasonable possibility that a material misstatement of the company’s annual or interim financial statements

will not be prevented or detected on a timely basis.

Management has determined that we had the following material weakness as of December 31, 2010:

• Disclosure Controls and Procedures. We have been under the conservatorship of FHFA since

September 6, 2008. Under the Regulatory Reform Act, FHFA is an independent agency that currently

functions as both our conservator and our regulator with respect to our safety, soundness and mission.

Because of the nature of the conservatorship under the Regulatory Reform Act, which places us under the

“control” of FHFA (as that term is defined by securities laws), some of the information that we may need

to meet our disclosure obligations may be solely within the knowledge of FHFA. As our conservator,

FHFA has the power to take actions without our knowledge that could be material to our shareholders and

other stakeholders, and could significantly affect our financial performance or our continued existence as

an ongoing business. Although we and FHFA attempted to design and implement disclosure policies and

procedures that would account for the conservatorship and accomplish the same objectives as a disclosure

controls and procedures policy of a typical reporting company, there are inherent structural limitations on

our ability to design, implement, test or operate effective disclosure controls and procedures. As both our

regulator and our conservator under the Regulatory Reform Act, FHFA is limited in its ability to design

and implement a complete set of disclosure controls and procedures relating to Fannie Mae, particularly

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with respect to current reporting pursuant to Form 8-K. Similarly, as a regulated entity, we are limited in

our ability to design, implement, operate and test the controls and procedures for which FHFA is

responsible.

Due to these circumstances, we have not been able to update our disclosure controls and procedures in a

manner that adequately ensures the accumulation and communication to management of information

known to FHFA that is needed to meet our disclosure obligations under the federal securities laws,

including disclosures affecting our consolidated financial statements. As a result, we did not maintain

effective controls and procedures designed to ensure complete and accurate disclosure as required by

GAAP as of December 31, 2010 or as of the date of filing this report. Based on discussions with FHFA

and the structural nature of this weakness, it is likely that we will not remediate this material weakness

while we are under conservatorship.

MITIGATING ACTIONS RELATING TO MATERIAL WEAKNESS

Disclosure Controls and Procedures

As described above under “Description of Material Weakness,” we continue to have a material weakness in

our internal control over financial reporting relating to our disclosure controls and procedures. However, we

and FHFA have engaged in the following practices intended to permit accumulation and communication to

management of information needed to meet our disclosure obligations under the federal securities laws:

• FHFA has established the Office of Conservatorship Operations, which is intended to facilitate operation

of the company with the oversight of the conservator.

• We have provided drafts of our SEC filings to FHFA personnel for their review and comment prior to

filing. We also have provided drafts of external press releases, statements and speeches to FHFA

personnel for their review and comment prior to release.

• FHFA personnel, including senior officials, have reviewed our SEC filings prior to filing, including this

annual report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”), and engaged in

discussions regarding issues associated with the information contained in those filings. Prior to filing our

2010 Form 10-K, FHFA provided Fannie Mae management with a written acknowledgement that it had

reviewed the 2010 Form 10-K, and it was not aware of any material misstatements or omissions in the

2010 Form 10-K and had no objection to our filing the Form 10-K.

• The Director of FHFA or, after August 2009, the Acting Director of FHFA, and our Chief Executive

Officer have been in frequent communication, typically meeting on a weekly basis.

• FHFA representatives attend meetings frequently with various groups within the company to enhance the

flow of information and to provide oversight on a variety of matters, including accounting, credit and

market risk management, liquidity, external communications and legal matters.

• Senior officials within FHFA’s Office of the Chief Accountant have met frequently with our senior finance

executives regarding our accounting policies, practices and procedures.

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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Overview

Management has evaluated, with the participation of our Chief Executive Officer and Deputy Chief Financial

Officer, whether any changes in our internal control over financial reporting that occurred during our last

fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over

financial reporting. Below we describe changes in our internal control over financial reporting since

September 30, 2010 that management believes have materially affected, or are reasonably likely to materially

affect, our internal control over financial reporting.

• Change in Management. During the fourth quarter of 2010, our Chief Financial Officer resigned from

the company and our Deputy Chief Financial Officer assumed his responsibilities as chief financial

officer.

• Model Change. In the fourth quarter of 2010, we transitioned from using an internal model to a thirdparty vendor as the source for determining cash flows used to assess other-than-temporary impairment on

Alt-A and subprime private-label securities. The implementation of the third-party vendor model required

operational and system changes to enable the processing of the cash flows and analytical data that include

certain internal controls. Accordingly, the implementation has required revisions to our internal control

over financial reporting. We reviewed the implementation of the third-party vendor model, as well as the

controls impacted, and made appropriate changes to affected internal controls.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Fannie Mae:

We have audited Fannie Mae and consolidated entities’ (in conservatorship) (the “Company”) internal control

over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated

Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The

Company’s management is responsible for maintaining effective internal control over financial reporting and

for its assessment of the effectiveness of internal control over financial reporting, included in the

accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to

express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board

(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance

about whether effective internal control over financial reporting was maintained in all material respects. Our

audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a

material weakness exists, testing and evaluating the design and operating effectiveness of internal control

based on that risk, and performing such other procedures as we considered necessary in the circumstances. We

believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the

company’s principal executive and principal financial officers, or persons performing similar functions, and

effected by the company’s board of directors, management, and other personnel to provide reasonable

assurance regarding the reliability of financial reporting and the preparation of financial statements for external

purposes in accordance with generally accepted accounting principles. A company’s internal control over

financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,

in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the

company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of

financial statements in accordance with generally accepted accounting principles, and that receipts and

expenditures of the company are being made only in accordance with authorizations of management and

directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of

unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the

financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of

collusion or improper management override of controls, material misstatements due to error or fraud may not

be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the

internal control over financial reporting to future periods are subject to the risk that the controls may become

inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures

may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial

reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or

interim financial statements will not be prevented or detected on a timely basis. The following material

weakness has been identified and included in management’s assessment:

• Disclosure Controls and Procedures—The Company’s disclosure controls and procedures did not

adequately ensure the accumulation and communication to management of information known to the

Federal Housing Finance Agency that is needed to meet its disclosure obligations under the federal

securities laws as they relate to financial reporting.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in

our audit of the consolidated financial statements as of and for the year ended December 31, 2010, of the

Company and this report does not affect our report on such financial statements.

In our opinion, because of the effect of the material weakness identified above on the achievement of the

objectives of the control criteria, the Company has not maintained effective internal control over financial

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reporting as of December 31, 2010, based on the criteria established in Internal Control—Integrated

Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the consolidated financial statements as of and for the year ended December 31, 2010, of the

Company and our report dated February 24, 2011 expressed an unqualified opinion on those financial

statements and included explanatory paragraphs regarding the Company’s adoption of new accounting

standards and the Company’s dependence upon the continued support of the United States Government,

various United States Government agencies and the Company’s conservator and regulator, the Federal Housing

Finance Agency.

/s/ DELOITTE & TOUCHE LLP

Washington, DC

February 24, 2011

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Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

DIRECTORS

Our current directors are listed below. They have provided the following information about their principal

occupation, business experience and other matters. Upon FHFA’s appointment as our conservator on

September 6, 2008, FHFA succeeded to all rights, titles, powers and privileges of any director of Fannie Mae

with respect to Fannie Mae and its assets. More information about FHFA’s September 6, 2008 appointment as

our conservator and its subsequent reconstitution of our Board and direction regarding the Board’s function

and authorities can be found below in “Corporate Governance—Conservatorship and Delegation of Authority

to Board of Directors.”

As discussed in more detail below under “Corporate Governance—Composition of Board of Directors,” FHFA,

as conservator, appointed an initial group of directors to our Board following our entry into conservatorship,

delegated to the Board the authority to appoint directors to subsequent vacancies subject to conservator review,

and defined the term of service of directors during conservatorship. The Nominating and Corporate

Governance Committee evaluates the qualifications of individual directors on an annual basis. In its

assessment of current directors and evaluation of potential candidates for director, the Nominating and

Corporate Governance Committee considers, among other things, whether the Board as a whole possesses

meaningful experience, qualifications and skills in the following subject areas:

• business;

• finance;

• capital markets;

• accounting;

• risk management;

• public policy;

• mortgage lending, real estate, low-income housing and/or homebuilding; and

• the regulation of financial institutions.

See “Corporate Governance—Composition of Board of Directors” below for further information on the factors

the Nominating and Corporate Governance Committee considers in evaluating and selecting board members.

Dennis R. Beresford, 72, has served as Ernst & Young Executive Professor of Accounting at the J.M. Tull

School of Accounting, Terry College of Business, University of Georgia since 1997. From 1987 to 1997,

Mr. Beresford served as Chairman of the Financial Accounting Standards Board, or FASB, the designated

organization in the private sector for establishing standards of financial accounting and reporting in the

U.S. From 1961 to 1986, Mr. Beresford was with Ernst & Young LLP, including ten years as a Senior Partner

and National Director of Accounting. In addition, Mr. Beresford served on the SEC Advisory Committee on

Improvements to Financial Reporting. Mr. Beresford is currently a member of the Board of Directors and

Chairman of the Audit Committee of Kimberly-Clark Corporation and of Legg Mason, Inc. He also serves as

a member of the Risk Committee of Legg Mason, Inc. He previously was a member of the Board of Directors

of MCI, Inc. from July 2002 to January 2006, where he served as Chairman of the Audit Committee.

Mr. Beresford is a certified public accountant. Mr. Beresford initially became a Fannie Mae director in May

2006, before we were put into conservatorship, and FHFA appointed Mr. Beresford to Fannie Mae’s Board in

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December 2008. Mr. Beresford serves as Chair of the Audit Committee and is also a member of the

Compensation Committee and the Executive Committee.

The Nominating and Corporate Governance Committee concluded that Mr. Beresford should continue to serve

as a director due to his extensive experience in accounting, finance, business and risk management, which he

gained in the positions described above.

William Thomas Forrester, 62, served as Chief Financial Officer of The Progressive Corporation from 1999

until his retirement in March 2007, and served in a variety of senior financial and operating positions with

Progressive prior to that time. Prior to joining The Progressive Corporation in 1984, Mr. Forrester was with

Price Waterhouse LLP, a major public accounting firm, from 1976 to 1984. Mr. Forrester is currently a

member of the Board of Directors and Chairman of the Audit Committee of The Navigators Group, Inc. He

also serves on the Finance Committee and Compensation Committee of The Navigators Group, Inc.

Mr. Forrester is also currently a member of the Board of Directors of Alterra Capital Holdings Limited, where

he serves on the Audit and Risk Management Committee. He previously was a member of the Board of

Directors of Axis Capital Holdings Limited from December 2003 to May 2006, where he served as Chairman

of the Audit Committee. Mr. Forrester has been a Fannie Mae director since December 2008. Mr. Forrester

serves as a member of both the Audit Committee and the Nominating and Corporate Governance Committee.

The Nominating and Corporate Governance Committee concluded that Mr. Forrester should continue to serve

as a director due to his extensive experience in business, finance, accounting and risk management, which he

gained in the positions described above.

Brenda J. Gaines, 61, served as President and Chief Executive Officer of Diners Club North America, a

subsidiary of Citigroup, from October 2002 until her retirement in April 2004. She served as President, Diners

Club North America, from February 1999 to September 2002. From 1988 until her appointment as President,

she held various positions within Diners Club North America, Citigroup and Citigroup’s predecessor

corporations. She also served as Deputy Chief of Staff for the Mayor of the City of Chicago from 1985 to

1987 and as Chicago Commissioner of Housing from 1983 to 1985. Ms. Gaines also has over 12 years of

experience with the Department of Housing and Urban Development, including serving as Deputy Regional

Administrator from 1980 to 1981. Ms. Gaines is currently a member of the Board of Directors of Office

Depot, Inc., where she serves as Chair of the Audit Committee and a member of the Corporate Governance

and Nominating Committee. Ms. Gaines is also a member of the Board of Directors of NICOR, Inc., where

she serves as a member of the Corporate Governance Committee, and Tenet Healthcare Corporation, where

she serves as a member of both the Audit Committee and Compensation Committee. She previously was a

member of the Board of Directors of CNA Financial Corporation from October 2004 to May 2007, where she

served as Chair of the Audit Committee. Ms. Gaines initially became a Fannie Mae director in September

2006, before we were put into conservatorship, and FHFA appointed Ms. Gaines to Fannie Mae’s Board in

December 2008. Ms. Gaines serves as Chair of the Compensation Committee and is also a member of the

Audit Committee and the Executive Committee.

The Nominating and Corporate Governance Committee concluded that Ms. Gaines should continue to serve as

a director due to her extensive experience in business, finance, accounting, risk management, public policy

matters, mortgage lending, low-income housing, and the regulation of financial institutions, which she gained

in the positions described above.

Charlynn Goins, 68, served as Chairperson of the Board of Directors of New York City Health and Hospitals

Corporation from June 2004 to October 2008. She also served on the Board of Trustees of The Mainstay

Funds, New York Life Insurance Company’s retail family of funds, from June 2001 through July 2006 and on

the Board of Directors of The Community’s Bank from February 2001 through June 2004. Ms. Goins also was

a Senior Vice President of Prudential Financial, Inc. (formerly, Prudential Securities, Inc.) from 1990 to 1997.

Ms. Goins serves as the Chairperson of the New York Community Trust. She also serves as a director and a

member of the Organization and Compensation Committee of AXA Financial Inc. She is also a director of

AXA Equitable, MONY Life and MONY Life of America, which are subsidiaries of AXA Financial Inc.

Ms. Goins is an attorney. Ms. Goins has been a Fannie Mae director since December 2008. Ms. Goins serves

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as Chair of the Nominating and Corporate Governance Committee and is also a member of the Compensation

Committee and the Executive Committee.

The Nominating and Corporate Governance Committee concluded that Ms. Goins should continue to serve as

a director due to her extensive experience in business, finance, public policy matters, and the regulation of

financial institutions, which she gained in the positions described above.

Frederick B. “Bart” Harvey III, 61, retired in March 2008 from his role as chairman of the Board of Trustees

of Enterprise Community Partners and Enterprise Community Investment, providers of development capital

and technical expertise to create affordable housing and rebuild communities. Enterprise is a national nonprofit that raises funds from the private sector to finance homes primarily for low and very low income

people. Enterprise has also pioneered “green” affordable housing with its EnterpriseGreen Communities

initiative. Mr. Harvey was Enterprise’s chief executive officer from 1993 to 2007. He joined Enterprise in

1984, and a year later became vice chairman. Before joining Enterprise, Mr. Harvey served for 10 years in

various domestic and international positions with Dean Witter Reynolds (now Morgan Stanley), leaving as

Managing Director of Corporate Finance. Mr. Harvey was a member of the Board of Directors of the Federal

Home Loan Bank of Atlanta from 1996 to 1999, a director of the National Housing Trust from 1990 to 2008,

and also served as an executive committee member of the National Housing Conference from 1999 to 2008.

Mr. Harvey initially became a Fannie Mae director in August 2008, before we were put into conservatorship,

and FHFA appointed Mr. Harvey to Fannie Mae’s Board in December 2008. Mr. Harvey serves as a member

of the Audit Committee, the Nominating and Corporate Governance Committee, and the Risk Policy and

Capital Committee.

The Nominating and Corporate Governance Committee concluded that Mr. Harvey should continue to serve as

a director due to his extensive experience in business, finance, capital markets, risk management, public policy

matters, mortgage lending, low-income housing and homebuilding, which he gained in the positions described

above.

Philip A. Laskawy, 69, retired from Ernst & Young in September 2001, after having held several positions

during his employment there from 1961 to 2001, including serving as Chairman and Chief Executive Officer

from 1994 until his retirement in September 2001. Mr. Laskawy currently serves on the Boards of Directors of

General Motors Corporation, Henry Schein, Inc., Lazard Ltd. and Loews Corporation. He is a member of the

Audit Committee of each of these companies, including Chairman of the Audit Committee of General Motors

Corporation. He is also Chair of the Nominating and Governance Committee and a member of the Strategic

Advisory Committee at Henry Schein, Inc. Mr. Laskawy previously was a member of the Board of Directors

of The Progressive Corporation (from 2001 through December 2007) and Discover Financial Services (from

June 2007 through September 2008). He served as Chairman of the Audit Committee at each of these

companies. Mr. Laskawy initially became a director and Chairman of Fannie Mae’s Board in September 2008.

Mr. Laskawy is Chair of the Executive Committee.

The Nominating and Corporate Governance Committee concluded that Mr. Laskawy should continue to serve

as a director due to his extensive experience in business, finance, accounting and risk management, which he

gained in the positions described above.

Egbert L. J. Perry, 55, is the Chairman and Chief Executive Officer of The Integral Group LLC. Founded in

1993 by Mr. Perry, Integral is a real estate advisory, investment management and development company based

in Atlanta. Mr. Perry has over 29 years experience as a real estate professional, including work in urban

development, developing and investing in mixed-income, mixed-use communities, affordable/work force

housing and commercial real estate projects in markets across the country. Mr. Perry currently serves as Chair

of the Board of Directors of Atlanta Life Financial Group, where he serves as a member of the Audit

Committee, as Chair of the Advisory Board of the Penn Institute for Urban Research and as a trustee of the

University of Pennsylvania and Children’s Healthcare of Atlanta. Mr. Perry served from 2002 through 2008 as

a director of the Federal Reserve Bank of Atlanta. Mr. Perry has been a Fannie Mae director since

December 2008. Mr. Perry is a member of both the Nominating and Corporate Governance Committee and the

Risk Policy and Capital Committee.

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The Nominating and Corporate Governance Committee concluded that Mr. Perry should continue to serve as a

director due to his extensive experience in business, finance, accounting, mortgage lending, real estate, lowincome housing and homebuilding, which he gained in the positions described above.

Jonathan Plutzik, 56, has served as Chairman of Betsy Ross Investors, LLC since August 2005. He also has

served as President of the Jonathan Plutzik and Lesley Goldwasser Family Foundation Inc. and as Chairman of

the Coro New York Leadership Center since January 2003. Mr. Plutzik served as Non-Executive Chairman of

the Board of Directors at Firaxis Games from June 2002 to December 2005. Before that, he served from 1978

to June 2002 in various positions with Credit Suisse First Boston, retiring in June 2002 from his role as Vice

Chairman. Mr. Plutzik has been a Fannie Mae director since November 2009. Mr. Plutzik is a member of both

the Compensation Committee and the Risk Policy and Capital Committee.

The Nominating and Corporate Governance Committee concluded that Mr. Plutzik should continue to serve as

a director due to his extensive experience in business, finance, capital markets, risk management and the

regulation of financial institutions, which he gained in the positions described above.

David H. Sidwell, 57, served as Executive Vice President and Chief Financial Officer of Morgan Stanley from

March 2004 to October 2007, when he retired. From 1984 to March 2004, Mr. Sidwell worked for JPMorgan

Chase & Co. in a variety of financial and operating positions, most recently as Chief Financial Officer of

JPMorgan Chase’s investment bank from January 2000 to March 2004. Prior to joining JP Morgan in 1984,

Mr. Sidwell was with Price Waterhouse LLP, a major public accounting firm, from 1975 to 1984. Mr. Sidwell

serves as a Trustee of the International Accounting Standards Committee Foundation. Mr. Sidwell is currently

a member of the Board of Directors, Senior Independent Director, and Chair of the Risk Committee of UBS

AG. He previously was a member of the Board of Directors of MSCI Inc. from November 2007 through

September 2008, where he served as Chair of the Audit Committee and a member of the Nominating and

Corporate Governance Committee. Mr. Sidwell has been a Fannie Mae director since December 2008.

Mr. Sidwell is Chair of the Risk Policy and Capital Committee and a member of the Compensation Committee

and the Executive Committee.

The Nominating and Corporate Governance Committee concluded that Mr. Sidwell should continue to serve as

a director due to his extensive experience in business, finance, capital markets, accounting, risk management

and the regulation of financial institutions, which he gained in the positions described above.

Michael J. Williams, 53, has been President and Chief Executive Officer of Fannie Mae since April 2009. He

previously served as Fannie Mae’s Executive Vice President and Chief Operating Officer from November 2005

to April 2009. Mr. Williams also served as Fannie Mae’s Executive Vice President for Regulatory Agreements

and Restatement from February 2005 to November 2005, as President—Fannie Mae eBusiness from July 2000

to February 2005 and as Senior Vice President—e-commerce from July 1999 to July 2000. Prior to this,

Mr. Williams served in various roles in the Single-Family and Corporate Information Systems divisions of

Fannie Mae. Mr. Williams joined Fannie Mae in 1991. Mr. Williams has been a Fannie Mae director since

April 2009. He is a member of the Executive Committee.

Mr. Williams serves as a member of our Board of Directors pursuant to a FHFA order that specifies that our

Chief Executive Officer will serve as a member of the Board. In addition, the Nominating and Corporate

Governance Committee concluded that Mr. Williams should continue to serve as a director due to his

extensive experience in business, finance, accounting, mortgage lending, real estate, low-income housing and

the regulation of financial institutions, which he gained in the positions described above.

CORPORATE GOVERNANCE

Conservatorship and Delegation of Authority to Board of Directors

On September 6, 2008, the Director of FHFA appointed FHFA as our conservator in accordance with the GSE

Act. Upon its appointment, the conservator immediately succeeded to all rights, titles, powers and privileges of

Fannie Mae, and of any shareholder, officer or director of Fannie Mae with respect to Fannie Mae and its

assets, and succeeded to the title to the books, records and assets of any other legal custodian of Fannie Mae.

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As a result, our Board of Directors no longer had the power or duty to manage, direct or oversee our business

and affairs.

On November 24, 2008, FHFA, as conservator, reconstituted our Board of Directors and directed us regarding

the function and authorities of the Board of Directors. FHFA has delegated to our Board of Directors and

management the authority to conduct our day-to-day operations, subject to the direction of the conservator.

FHFA’s delegation of authority to the Board became effective on December 19, 2008 when FHFA appointed

nine Board members to serve in addition to the Board Chairman, who was appointed by FHFA on

September 16, 2008. Pursuant to FHFA’s delegation of authority to the Board, the Board is responsible for

carrying out normal Board functions, but is required to obtain the review and approval of FHFA as conservator

before taking action in the specified areas described below. The delegation of authority will remain in effect

until modified or rescinded by the conservator. The conservatorship has no specified termination date. The

directors serve on behalf of the conservator and exercise their authority as directed by and with the approval,

where required, of the conservator. Our directors have no duties to any person or entity except to the

conservator. Accordingly, our directors are not obligated to consider the interests of the company, the holders

of our equity or debt securities or the holders of Fannie Mae MBS unless specifically directed to do so by the

conservator.

The conservator instructed that in taking actions the Board should ensure that appropriate regulatory approvals

have been received. In addition, the conservator directed the Board to consult with and obtain the approval of

the conservator before taking action in the following areas:

(1) actions involving capital stock, dividends, the senior preferred stock purchase agreement, increases in risk

limits, material changes in accounting policy and reasonably foreseeable material increases in operational

risk;

(2) the creation of any subsidiary or affiliate or any substantial non-ordinary course transactions with any

subsidiary or affiliate;

(3) matters that relate to conservatorship;

(4) actions involving hiring, compensation and termination benefits of directors and officers at the executive

vice president level and above and other specified executives;

(5) actions involving retention and termination of external auditors and law firms serving as consultants to the

Board;

(6) settlements of litigation, claims, regulatory proceedings or tax-related matters in excess of a specified

threshold;

(7) any merger with or acquisition of a business for consideration in excess of $50 million; and

(8) any action that in the reasonable business judgment of the Board at the time that the action is taken is

likely to cause significant reputational risk.

For more information on the conservatorship, refer to “Business—Conservatorship and Treasury Agreements—

Conservatorship.”

Composition of Board of Directors

In November 2008, FHFA directed that our Board will have a minimum of nine and not more than thirteen

directors. There will be a non-executive Chairman of the Board, and our Chief Executive Officer will be the

only corporate officer serving as a director. Our initial directors were appointed by the conservator and

subsequent vacancies have been and may continue to be filled by the Board, subject to review by the

conservator. Each director will serve on the Board until the earlier of (1) resignation or removal by the

conservator or (2) the election of a successor director at an annual meeting of shareholders.

Fannie Mae’s bylaws provide that each director holds office for the term to which he or she was elected or

appointed and until his or her successor is chosen and qualified or until he or she dies, resigns, retires or is

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removed from office in accordance with the law, whichever occurs first. Under the Charter Act, each director

is elected or appointed for a term ending on the date of our next shareholders’ meeting. As noted above,

however, the conservator appointed the initial directors to our Board, delegated to the Board the authority to

appoint directors to subsequent vacancies subject to conservator review, and defined the term of service of

directors during conservatorship.

Under the Charter Act, our Board shall at all times have as members at least one person from each of the

homebuilding, mortgage lending and real estate industries, and at least one person from an organization that

has represented consumer or community interests for not less than two years or one person who has

demonstrated a career commitment to the provision of housing for low-income households. It is the policy of

the Board that a substantial majority of Fannie Mae’s directors will be independent, in accordance with the

standards adopted by the Board. In addition, the Board, as a group, must be knowledgeable in business,

finance, capital markets, accounting, risk management, public policy, mortgage lending, real estate, lowincome housing, homebuilding, regulation of financial institutions and any other areas that may be relevant to

the safe and sound operation of Fannie Mae.

In addition to knowledge in the areas noted above, the Nominating and Corporate Governance Committee

considers the personal attributes and diversity of backgrounds offered by candidates, but does not have a

formal policy on the consideration of diversity in identifying Board members. The Nominating and Corporate

Governance Committee seeks out Board members who possess the highest personal values, judgment and

integrity, diverse ideas and perspectives, and an understanding of the regulatory environment in which Fannie

Mae does business. The Committee also considers whether a prospective candidate for the Board has the

ability to attend meetings and fully participate in the activities of the Board.

The Nominating and Corporate Governance Committee evaluates the qualifications of current directors on an

annual basis. Factors taken into consideration by the Committee in making this evaluation include:

• a director’s contribution to the effective functioning of the corporation;

• any change in the director’s principal area of responsibility with his or her company or his or her

retirement from the company;

• whether the director continues to bring relevant experience to the Board;

• whether the director has the ability to attend meetings and fully participate in the activities of the Board;

• whether the director has developed any relationships with Fannie Mae or another organization, or other

circumstances have arisen, that might make it inappropriate for the director to continue serving on the

Board;

• the director’s age and length of service on the Board; and

• the director’s particular experience, qualifications, attributes and skills.

Information regarding the particular experience, qualifications, attributes or skills of each of our current

directors is provided above under “Directors.”

Board Leadership Structure

We have had a non-executive Chairman of the Board since 2004. FHFA examination guidance requires

separate Chairman of the Board and Chief Executive Officer positions and requires that the Chairman of the

Board be an independent director. Our Board is also structured so that all but one of our directors, our Chief

Executive Officer, are independent. A non-executive Chairman structure enables non-management directors to

raise issues and concerns for Board consideration without immediately involving management and is

consistent with the Board’s emphasis on independent oversight, as well as our conservator’s directives.

Our Board has five standing committees: the Audit Committee, the Compensation Committee, the Executive

Committee, the Nominating and Corporate Governance Committee, and the Risk Policy and Capital

Committee. The Board and the standing Board committees function in accordance with their designated duties

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and with the authorities as set forth in federal statutes, regulations and FHFA examination and policy

guidance, Delaware law (for corporate governance purposes) and in Fannie Mae’s bylaws and applicable

charters of Fannie Mae’s Board committees. Such duties or authorities may be modified by the conservator at

any time. In January 2011, the Board dissolved the Strategic Planning Committee and determined that its

strategic planning oversight roles and responsibilities would be discharged by the full Board of Directors.

The Board oversees risk management primarily through the Risk Policy and Capital Committee. This

Committee oversees management’s risk-related policies, including receiving, reviewing and discussing with

management presentations and analyses on corporate level risk policies and limits, performance against these

policies and limits, and the sufficiency of risk management capabilities. For more information on the Board’s

role in risk oversight, see “MD&A—Risk Management—Enterprise Risk Governance—Board of Directors.”

Corporate Governance Information, Committee Charters and Codes of Conduct

Our Corporate Governance Guidelines, as well as the charters for our Board’s Audit Committee,

Compensation Committee, Nominating and Corporate Governance Committee, and Risk Policy and Capital

Committee, are posted on our Web site, www.fanniemae.com, under “Corporate Governance” in the “About

Us” section of our Web site. Our Executive Committee does not have a written charter. The responsibilities,

duties and authorities of the Executive Committee are set forth in our Bylaws, which are also posted on our

Web site, www.fanniemae.com, under “Corporate Governance” in the “About Us” section of our Web site.

We have a Code of Conduct that is applicable to all officers and employees and a Code of Conduct and

Conflicts of Interest Policy for Members of the Board of Directors. Our Code of Conduct also serves as the

code of ethics for our Chief Executive Officer and senior financial officers required by the Sarbanes-Oxley

Act of 2002 and implementing regulations of the SEC. We have posted these codes on our Web site,

www.fanniemae.com, under “Corporate Governance” in the “About Us” section of our Web site. We intend to

disclose any changes to or waivers from these codes that apply to any of our executive officers or directors by

posting this information on our Web site.

Although our equity securities are no longer listed on the New York Stock Exchange (“NYSE”), we are

required by FHFA’s corporate governance regulations and examination guidance for corporate governance,

compensation practices and accounting practices to follow specified NYSE corporate governance requirements

relating to, among other things, the independence of our Board members and the charters, independence,

composition, expertise, duties and other requirements of our Board Committees.

Audit Committee Membership

Our Board has a standing Audit Committee consisting of Mr. Beresford, who is the Chair, Mr. Forrester,

Ms. Gaines and Mr. Harvey, all of whom are independent under the requirements of independence set forth in

FHFA’s corporate governance regulations (which requires the standard of independence adopted by the

NYSE), Fannie Mae’s Corporate Governance Guidelines and other SEC rules and regulations applicable to

audit committees. The Board has determined that Mr. Beresford, Mr. Forrester, Ms. Gaines and Mr. Harvey

each have the requisite experience to qualify as an “audit committee financial expert” under the rules and

regulations of the SEC and has designated each of them as such.

Executive Sessions

Our non-management directors meet regularly in executive sessions without management present. Our Board

of Directors reserves time for executive sessions at every regularly scheduled Board meeting. The nonexecutive Chairman of the Board, Mr. Laskawy, presides over these sessions.

Communications with Directors

Interested parties wishing to communicate any concerns or questions about Fannie Mae to the non-executive

Chairman of the Board or to our non-management directors individually or as a group may do so by electronic

mail addressed to “board@fanniemae.com,” or by U.S. mail addressed to Fannie Mae Board of Directors,

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c/o Office of the Corporate Secretary, Fannie Mae, Mail Stop 1H-2S/05, 3900 Wisconsin Avenue NW,

Washington, DC 20016-2892. Communications may be addressed to a specific director or directors, including

Mr. Laskawy, the Chairman of the Board, or to groups of directors, such as the independent or nonmanagement directors.

The Office of the Corporate Secretary is responsible for processing all communications to a director or

directors. Communications that are deemed by the Office of the Corporate Secretary to be commercial

solicitations, ordinary course customer inquiries, incoherent or obscene are not forwarded to directors.

Director Nominations; Shareholder Proposals

During the conservatorship, FHFA, as conservator, has all powers of the shareholders and Board of Directors

of Fannie Mae. As a result, under the GSE Act, Fannie Mae’s common shareholders no longer have the ability

to recommend director nominees or elect the directors of Fannie Mae or bring business before any meeting of

shareholders pursuant to the procedures in our bylaws. In consultation with the conservator, we currently do

not plan to hold an annual meeting of shareholders in 2011. For more information on the conservatorship,

refer to “Business—Conservatorship and Treasury Agreements—Conservatorship.”

EXECUTIVE OFFICERS

Our current executive officers who are not also members of the Board of Directors are listed below. They have

provided the following information about their principal occupation, business experience and other matters.

Kenneth J. Bacon, 56, has been Executive Vice President—Multifamily (formerly, Housing and Community

Development) since July 2005 and was interim head of Housing and Community Development from January

2005 to July 2005. He was Senior Vice President—Multifamily Lending and Investment from May 2000 to

January 2005, and Senior Vice President—American Communities Fund from October 1999 to May 2000.

From August 1998 to October 1999 he was Senior Vice President of the Community Development Capital

Corporation. He was Senior Vice President of Fannie Mae’s Northeastern Regional Office in Philadelphia from

May 1993 to August 1998. Mr. Bacon was a director of the Fannie Mae Foundation from January 1995 until it

was dissolved in June 2009. He was Vice Chairman of the Fannie Mae Foundation from January 2005 to

September 2008 and was Chairman from September 2008 to June 2009. Mr. Bacon is a director of Comcast

Corporation and the Corporation for Supportive Housing. He is a member of the Executive Leadership

Council.

David C. Benson, 51, has been Executive Vice President—Capital Markets since April 2009 and has also

served as Treasurer since June 2010. Mr. Benson previously served as Fannie Mae’s Executive Vice

President—Capital Markets and Treasury from August 2008 to April 2009, as Fannie Mae’s Senior Vice

President and Treasurer from March 2006 to August 2008, and as Fannie Mae’s Vice President and Assistant

Treasurer from June 2002 to February 2006. Prior to joining Fannie Mae in 2002, Mr. Benson was Managing

Director in the fixed income division of Merrill Lynch & Co. From 1988 through 2002, he served in several

capacities at Merrill Lynch in the areas of risk management, trading, debt syndication and e-commerce based

in New York and London.

Terence W. Edwards, 55, has been Executive Vice President—Credit Portfolio Management since September

2009, when he joined Fannie Mae. Prior to joining Fannie Mae, Mr. Edwards served as the President and

Chief Executive Officer of PHH Corporation, a leading outsource provider of mortgage and fleet management

services, from January 2005 to June 2009. Mr. Edwards was also a member of the Board of Directors of PHH

Corporation from January 2005 through June 2009. Prior to PHH Corporation’s spin-off from Cendant

Corporation (now known as Avis Budget Group, Inc.) in January 2005, Mr. Edwards served as President and

Chief Executive Officer of Cendant Mortgage Corporation (now known as PHH Mortgage Corporation), a

subsidiary of Cendant Corporation, beginning in February 1996. Mr. Edwards had previously served in other

executive roles at PHH Corporation, which he joined in 1980.

David C. Hisey, 50, has been Executive Vice President and Deputy Chief Financial Officer since November

2008 and also assumed the responsibilities of Chief Financial Officer in December 2010. Mr. Hisey previously

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served as Executive Vice President and Chief Financial Officer from August to November 2008, as Senior

Vice President and Controller from February 2005 to August 2008 and as Senior Vice President, Financial

Controls and Operations from January to February 2005. Prior to joining Fannie Mae, Mr. Hisey was

Corporate Vice President of Financial Services Consulting, Managing Director and practice leader of the

Lending and Leasing Group of BearingPoint, Inc., a management consulting and systems integration company.

Prior to joining BearingPoint in 2000, Mr. Hisey was an audit partner with KPMG, LLP. Mr. Hisey serves as

our principal accounting officer and is a certified public accountant.

Linda K. Knight, 60, has served as the Executive Vice President leading Fannie Mae’s operating plan since

September 2010. Since January 2011, Ms. Knight has also led the Financial Planning & Analysis business unit

and the Strategy, Execution & Transformation business unit. Ms. Knight served as Executive Vice President—

Mortgage-Backed Securities and Pricing from June 2010 to September 2010, and she served as Executive Vice

President and Treasurer from April 2009 to June 2010. Ms. Knight previously served as Executive Vice

President—Enterprise Operations & Securities from November 2008 to April 2009. Ms. Knight was

responsible for securities operations from August 2008 to September 2010. She was responsible for enterprise

operations from April 2007 to April 2009, except for a period from August 2008 to September 2008.

Ms. Knight served under the title Executive Vice President—Securities from August to November 2008 and as

Executive Vice President—Enterprise Operations from April 2007 until August 2008. Previously, Ms. Knight

served as Executive Vice President—Capital Markets from March 2006 to April 2007. Before that, she served

as Senior Vice President and Treasurer from February 1993 to March 2006, and Vice President and Assistant

Treasurer from November 1986 to February 1993. Ms. Knight held the position of Director, Treasurer’s Office

from November 1984 to November 1986. Ms. Knight joined Fannie Mae in August 1982 as a senior market

analyst.

Timothy J. Mayopoulos, 51, has been Executive Vice President, Chief Administrative Officer, General Counsel

and Corporate Secretary since September 2010. Mr. Mayopoulos was Executive Vice President, General

Counsel and Corporate Secretary from April 2009 to September 2010. Before joining Fannie Mae,

Mr. Mayopoulos was Executive Vice President and General Counsel of Bank of America Corporation from

January 2004 to December 2008. He was Managing Director and General Counsel, Americas of Deutsche

Bank AG’s Corporate and Investment Bank from January 2002 to January 2004. He was Managing Director

and Senior Deputy General Counsel, Americas of Credit Suisse First Boston from November 2000 to May

2001, and Managing Director and Associate General Counsel of Donaldson, Lufkin & Jenrette, Inc. from May

1996 to November 2000. Mr. Mayopoulos was previously in private law practice at Davis Polk & Wardwell

and served in the Office of the Independent Counsel during the Whitewater investigation.

Karen R. Pallotta, 47, has been Executive Vice President—Single-Family Mortgage Business since June 2009.

Ms. Pallotta served as Senior Vice President—Product Acquisition Strategy and Support from September 2005

to May 2009. She previously served as Vice President—Marketing and Lender Strategies from November

2001 to September 2005. Ms. Pallotta held the positions of Director—Marketing from December 1999 to

November 2001 and Director—Transactions and Account Management from July 1997 to December 1999.

From July 1990, when she joined Fannie Mae, to July 1997, Ms. Pallotta held various analyst, manager and

specialist positions with Fannie Mae.

Kenneth J. Phelan, 51, has been Executive Vice President—Chief Risk Officer, from April 2009 through

February 2011. Prior to joining Fannie Mae, Mr. Phelan served as Chief Risk Officer of Wachovia

Corporation, a financial holding company and bank holding company, from October 2008 to January 2009.

Prior to Wachovia, Mr. Phelan served as Head of Risk Management Services at JPMorgan Chase & Co., a

financial holding company, from August 2004 to September 2008. He also served as Head of Risk Strategy

Development for Bank One Corporation, which was acquired by JPMorgan Chase & Co. in 2004, from

September 2001 to August 2004.

Michael A. Shaw, 63, has been Executive Vice President and Chief Credit Officer since April 2009. Mr. Shaw

previously served as Executive Vice President and Enterprise Risk Officer from November 2008 to April 2009,

and as Executive Vice President and Chief Risk Officer from August 2008 to November 2008. Prior to that

time, Mr. Shaw served as Senior Vice President—Credit Risk Oversight beginning in April 2006, when he

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joined Fannie Mae. Prior to that time, Mr. Shaw was employed at JPMorgan Chase & Co., where he served as

Senior Credit Executive from 2004 to 2006, as Senior Risk Executive, Policy, Reporting, Analytics and

Finance during 2004 and as Senior Credit Executive—Consumer, Chase Financial Services from 2003 to 2004.

Prior to joining JP Morgan, Mr. Shaw held senior risk positions at GE Capital and a subsidiary from 1997 to

2003. Mr. Shaw previously served in several senior risk positions at Citigroup Inc., which he joined in 1972.

Edward G. Watson, 49, has been Executive Vice President—Operations and Technology, since April 2009,

when he joined Fannie Mae. Prior to joining Fannie Mae, Mr. Watson held a variety of positions with

Citigroup Inc., a global diversified financial services holding company. From April 2004 to April 2008, he was

Global Head, Capital Markets Operations and Institutional Clients Group Business Services. Before that, he

served in a series of senior finance positions, including as Chief Financial Officer of Citigroup International,

the European Investment Bank, and of Global Investment Management. Upon joining Citigroup in 1994,

Mr. Watson led the effort to build the infrastructure for a start-up interest rate and equity over-the-counter

derivatives business, which he ran until 1998.

Under our bylaws, each executive officer holds office until his or her successor is chosen and qualified or until

he or she dies, resigns, retires or is removed from office.

Section 16(a) Beneficial Ownership Reporting Compliance

Our directors and officers file with the SEC reports on their ownership of our stock and on changes in their

stock ownership. Based on a review of forms filed during 2010 or with respect to 2010 and on written

representations from our directors and officers, we believe that all of our directors and officers timely filed all

required reports and reported all transactions reportable during 2010.

Item 11. Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

Our Board of Directors approved an executive compensation program in December 2009, which we used for

2009 and 2010 compensation actions. The program was approved by FHFA in consultation with the

Department of the Treasury.

As described in more detail below, our executive compensation structure consists of three principal elements:

base salary, deferred pay and a long-term incentive award. A key objective of our compensation program is to

tie pay to performance. Accordingly, half of the deferred pay award is based on achievement of corporate

goals and the entire long-term incentive award is based on performance against individual and corporate goals.

Another key objective of our compensation program is to attract and retain the executive talent needed to

continue to fulfill the company’s important role in providing liquidity to the mortgage market and supporting

the housing market, as well as to prudently manage our $3.2 trillion book of business and be an effective

steward of the government’s support. Our executive compensation program is also designed to follow the same

general structure of compensation arrangements approved by Treasury’s Special Master for TARP Executive

Compensation for top executives at financial institutions that have received exceptional assistance under the

Troubled Asset Relief Program (“TARP”).

As compared to 2009, our executive compensation program for 2010 includes the following changes designed

to further the objectives of the program:

• We increased the amount of the named executives’ pay that is subject to performance: half of deferred

pay is now based on corporate performance, whereas in 2009 all of deferred pay was service-based;

• We lengthened the performance period for the second installment of the 2010 long-term incentive award

to two years, whereas the performance period for the 2009 long-term incentive award was only one year;

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• We implemented a policy to limit perquisites for our named executives to no more than $25,000 per

person per year (with any exceptions to this limit requiring FHFA approval), and perquisites made

available to our named executives in 2010 were substantially lower than this limit. We also eliminated tax

reimbursements on perquisites for the named executives, as well as our executive life insurance

program; and

• We froze benefit accruals in the Executive Pension Plan for all participants, including our Chief Executive

Officer, for compensation years after 2009.

In addition, the Board of Directors did not increase the named executives’ 2010 target total direct

compensation from 2009 levels.

Our 2010 corporate performance goals were designed to support our current business objectives, which include

providing support to the housing and mortgage markets during this critical time while minimizing our credit

losses from delinquent mortgages. As such, our goals for 2010 were to achieve our mission of providing

liquidity, stability and affordability to the U.S. housing and mortgage markets, build a more streamlined and

higher-performing company, and build a stronger service and delivery model. The Compensation Committee

determined that our performance against these goals was strong in many areas in 2010. For example, we

provided significant liquidity to the market while maintaining the credit quality and expected economic returns

of our new business. The Compensation Committee also determined, however, that we did not fully meet our

subgoals relating to the management of our credit book and our risk and control environment. Based on its

review of our corporate performance for 2010, the Compensation Committee determined that, subject to FHFA

approval, the performance-based portion of 2010 deferred pay would be paid at 90% of target and the pool for

the first installment of the 2010 long-term incentive awards for executive officers would be funded at 90% of

target. Payment of the first installment of the 2010 long-term incentive awards was also subject to individual

performance. FHFA reviewed and approved the Compensation Committee’s determinations. See

“Determination of 2010 Compensation” for more information about how corporate and individual performance

were used to determine compensation of our named executives.

Named Executives for 2010

This Compensation Discussion and Analysis focuses on compensation decisions relating to our Chief

Executive Officer, our former Chief Financial Officer, our Deputy Chief Financial Officer (who assumed the

responsibilities of our former Chief Financial Officer on December 30, 2010), and our next three most highly

compensated executive officers during 2010. We refer to these individuals as our named executives. For 2010,

our named executives were:

• Michael J. Williams, President and Chief Executive Officer;

• David C. Hisey, Executive Vice President and Deputy Chief Financial Officer (assumed responsibilities of

the former Chief Financial Officer on December 30, 2010);

• David M. Johnson, Executive Vice President and Chief Financial Officer (through December 29, 2010);

• David C. Benson, Executive Vice President—Capital Markets;

• Terence W. Edwards, Executive Vice President—Credit Portfolio Management; and

• Timothy J. Mayopoulos, Executive Vice President, Chief Administrative Officer, General Counsel and

Corporate Secretary.

Impact of Conservatorship

As discussed above under “Business—Conservatorship and Treasury Agreements—Conservatorship,” we have

been under the conservatorship of FHFA since September 2008. The conservatorship has had a significant

impact on the compensation received by our named executives in 2010, as well as the process by which

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executive compensation for 2010 was determined. Regulatory requirements affecting our executive

compensation include:

• Our directors serve on behalf of FHFA and exercise their authority subject to the direction of FHFA.

More information about the role of our directors is described above in “Directors, Executive Officers and

Corporate Governance—Corporate Governance—Conservatorship and Delegation of Authority to Board of

Directors.”

• While we are in conservatorship, FHFA, as our conservator, retains the authority to approve and to modify

both the terms and amount of any compensation to any of our executive officers. FHFA, as our

conservator, has directed that our Board consult with and obtain FHFA’s consent before taking any actions

involving hiring, compensation or termination benefits of any officer at the executive vice president level

and above and including, regardless of title, executives who hold positions with the functions of the chief

operating officer, chief financial officer, general counsel, chief business officer, chief investment officer,

treasurer, chief compliance officer, chief risk officer and chief/general/internal auditor.

• FHFA, as our regulator, must approve any termination benefits we offer to our named executives and

certain other officers identified by FHFA.

• Under the terms of the senior preferred stock purchase agreement with Treasury, we may not enter into

any new compensation arrangements with, or increase amounts or benefits payable under existing

compensation arrangements of, any named executives or executive officers without the consent of the

Director of FHFA, in consultation with the Secretary of the Treasury.

• Under the terms of the senior preferred stock purchase agreement, we may not sell or issue any equity

securities without the prior written consent of Treasury, other than as required by the terms of any binding

agreement in effect on the date of the senior preferred stock purchase agreement. This effectively

eliminates our ability to offer stock-based compensation.

• Under the Housing and Economic Recovery Act of 2008 and related regulations issued by FHFA, the

Director of FHFA has the authority to prohibit or limit us from making any “golden parachute payment”

to specified categories of persons, including our named executives.

As a result of these requirements, the 2010 compensation determinations for our named executives discussed

in this Compensation Discussion and Analysis were approved by the Acting Director of FHFA.

2010 Executive Compensation Program

Overview of Program Objectives and Structure

Our executive compensation program is designed to fulfill two primary objectives:

• Pay for Performance. Our executive compensation program is intended to drive a pay for performance

environment through the use of performance-based long-term incentive awards and deferred pay.

• Attract and Retain Executive Talent. Our executive compensation program is also intended to attract and

retain the executive talent needed to continue to fulfill the company’s important role in providing liquidity

to the mortgage market and supporting the housing market, as well as to prudently manage our book of

business and be an effective steward of the government’s support.

As described in our 2009 Form 10-K, in 2009, FHFA worked with our management and Board of Directors,

and sought the guidance of Treasury’s Special Master for TARP Executive Compensation, to develop an

executive compensation program that meets these objectives and also reflects evolving standards regarding

executive compensation and, to the extent appropriate, is generally consistent with the structural standards

created for firms that received exceptional TARP assistance. The views of management and the Board of

Directors in the development of this executive compensation program reflected input from management’s and

the Compensation Committee’s compensation consultants.

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As a result of these efforts, in December 2009, we adopted a compensation program based on FHFA’s

guidance consisting of three primary elements: base salary, deferred pay and a long-term incentive award.

With regard to the relative distribution of total compensation among these elements, based on guidance from

FHFA, we targeted the long-term incentive award component at one-third of total direct compensation, with

base salary and deferred pay together constituting the remaining two-thirds of total direct compensation. In

addition, based on guidance from FHFA, we limited annual base salary rates to no more than $500,000, except

in the case of our Chief Executive Officer and Chief Financial Officer, which is similar to the pay structure

created for firms that received exceptional TARP assistance. FHFA, in consultation with Treasury, approved

our compensation program and the level of salary, deferred pay target and long-term incentive target for each

of our named executives.

The Board and the Compensation Committee reviewed compensation arrangements for the named executives

in March 2010 and did not make any changes to the named executives’ salaries, deferred pay targets or longterm incentive targets for 2010.

Elements of 2010 Compensation Program

Direct Compensation

• Base Salary. Base salary is paid in cash throughout the year on a bi-weekly basis and provides a

minimum, fixed level of cash compensation for the named executives. Base salary reflects the named

executive’s level of responsibility and experience, as well as individual performance over time. Base

salary is capped at $500,000 for all of our executive officers, including the named executives, other than

our Chief Executive Officer and Chief Financial Officer.

• Deferred Pay. Deferred pay is paid to the named executives in cash in quarterly installments in the year

following the performance year. We will pay 2010 deferred pay to the named executives in four equal

quarterly installments in March, June, September and December of 2011. Deferred pay is designed to

replicate the “stock salary” element of the compensation program applicable to financial institutions that

received exceptional TARP assistance and is also intended to serve as a retention incentive for the named

executives; however, deferred pay is paid in cash, not stock. Given the low market value of our common

stock since our entry into conservatorship, we and FHFA believe that stock-based compensation would not

provide appropriate retention incentives for our named executives. Further, large grants of low-priced

stock could provide substantial incentives for the named executives to seek and take large risks. In

addition, we are prohibited from paying new stock-based compensation under the senior preferred stock

purchase agreement without Treasury’s consent. Except in the limited circumstances described under

“Compensation Tables—Potential Payments Upon Termination or Change-in-Control” below, we will pay

installments of deferred pay only if the named executive is employed by Fannie Mae on the scheduled

payment dates.

Half of 2010 deferred pay is based on the Board of Directors’ determination of corporate performance in

2010, as approved by FHFA; the remaining half of 2010 deferred pay is service based. Accordingly, the

performance-based portion of deferred pay that a named executive actually receives may be more or less

than the named executive’s target.

• Long-term Incentive Award. A long-term incentive award is a performance-based cash award that is paid

over two calendar years. Long-term incentive awards are designed to provide incentives to the named

executives to achieve corporate and individual performance goals, and to serve as a retention incentive. A

named executive’s target for a long-term incentive award is one-third of the executive’s target total direct

compensation. Except in the limited circumstances described under “Compensation Tables—Potential

Payments Upon Termination or Change-in-Control” below, we will pay installments of a long-term

incentive award only if the named executive is employed by Fannie Mae on the scheduled payment dates.

Half of the 2010 long-term incentive award is based on corporate and individual performance for 2010,

and is paid in February 2011. The remaining half of the award will be determined and paid in early 2012

based on corporate and individual performance for both 2010 and 2011. Because the award is

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performance based, the long-term incentive award that a named executive actually receives may be more

or less than the named executive’s target; however, the sum of the individual long-term incentive awards

to all executive officers cannot exceed the overall amount of the long-term incentive pool for our

executive officers. In addition, each long-term incentive award paid to an executive officer must be

approved by FHFA.

Employee Benefits

Our employee benefits are a fundamental part of our executive compensation program, and serve as an

important tool in attracting and retaining senior executives. We describe these employee benefits below.

• Retirement Plans. Eligibility for our retirement plans is dependent on the named executive’s date of hire,

as we have made significant changes to our retirement programs over the last several years.

• Mr. Williams. Mr. Williams has a frozen benefit under the Executive Pension Plan. Mr. Williams also

participates in our tax-qualified defined benefit pension plan and supplemental defined benefit pension

plans. See “Compensation Tables—Pension Benefits—Defined Benefit Pension Plans” for more

information about Mr. Williams’ retirement benefits and changes made to those benefits during 2010.

• Messrs. Hisey and Benson. Messrs. Hisey and Benson participate in our tax-qualified defined benefit

pension plan and supplemental defined benefit pension plans.

• Messrs. Johnson, Edwards and Mayopoulos. Messrs. Johnson, Edwards and Mayopoulos do not

participate in any of our defined benefit pension plans because they were hired after we froze

participation in these plans. They participate instead in our Supplemental Retirement Savings Plan,

which is an unfunded, non-tax-qualified defined contribution plan.

All of the named executives are also eligible to participate in our Retirement Savings Plan, which is a

401(k) plan that is available to our employee population as a whole. We provide more detail on our

retirement plans under “Compensation Tables—Pension Benefits” and “Compensation Tables—

Nonqualified Deferred Compensation.”

• Other Employee Benefits and Plans. In general, the named executives are eligible for employee benefits

available to our employee population as a whole, including our medical insurance plans, life insurance

program and matching charitable gifts program. The named executives are also eligible to participate in

our voluntary supplemental long-term disability plan, which is available to many of our employees.

• Perquisites. Our policy is to limit perquisites for our named executives to no more than $25,000 per

person per year. Any exceptions to this limit would require the approval of FHFA in consultation with

Treasury. No named executive received more than $2,400 in perquisites in 2010.

• Severance Benefits. We have not entered into employment agreements with any of our named executives

that would entitle the executive to severance benefits. Information on compensation that we may pay to a

named executive in certain circumstances in the event the executive’s employment is terminated is

provided below in “Compensation Tables—Potential Payments Upon Termination or Change-in-Control.”

FHFA must approve any termination benefits we offer our named executives.

Determination of 2010 Compensation

Summary of 2010 Compensation Actions

The table below displays the named executives’ 2010 compensation targets compared to the actual awards or

payments to be received by the named executives. Only the first installment of the 2010 long-term incentive

award, which is paid in February 2011, is included in this chart. The target amount for the second installment

of the 2010 long-term incentive award is the same as the target for the first installment of the award. The

second installment of the 2010 long-term incentive award will be determined and paid in 2012 based on 2010

and 2011 corporate and individual performance, and therefore is excluded from the chart. This table is not

intended to replace the summary compensation table, required under applicable SEC rules, which is included

below under “Compensation Tables—Summary Compensation Table for 2010, 2009 and 2008.”

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Named Executive

2010 Base

Salary Rate Target

Actual Amount

Approved to be

Paid in 2011(1) Target

Actual Amount

Approved to be

Paid in 2011

Percentage

of Target

2010 Long-Term Incentive Award

(First Installment Only)(2) 2010 Deferred Pay

Michael Williams ................... $900,000 $3,100,000 $2,945,000 $1,000,000 $900,000 90%

David Hisey. . . .................... 425,000 1,045,000 992,750 365,000 325,000 89

David Johnson(3) .................... 650,000 1,700,000 — 575,000 — —

David Benson . .................... 500,000 1,369,667 1,301,184 465,167 440,000 95

Terence Edwards ................... 500,000 1,369,667 1,301,184 465,167 420,000 90

Timothy Mayopoulos . . ............... 500,000 1,469,667 1,396,184 490,167 485,000 99

(1) Target 2010 deferred pay is 50% service-based and 50% corporate performance-based. The Compensation Committee

determined that the corporate performance-based portion of 2010 deferred pay would be paid at 90% of target.

(2) Amounts do not include the second installment of each named executive’s 2010 long-term incentive award. For each

named executive, the target amount for the second installment of the award is the same as the target for the first

installment of the award. The amount of the second installment that will actually be paid to each named executive

will be determined and paid in 2012 based on an assessment of 2010 and 2011 corporate and individual performance.

(3) Mr. Johnson left the company in December 2010 and therefore will not receive 2010 deferred pay or payment of a

2010 long-term incentive award.

2010 Corporate Performance Goals and Assessment of 2010 Corporate Performance

In May 2010, the Board established, and FHFA approved, 2010 corporate performance goals for the

performance-based portion of deferred pay and for the first installment of the 2010 long-term incentive award,

as well as continuing two-year (2010 and 2011) corporate performance goals for the second installment of the

2010 long-term incentive award. The Board did not assign any relative weight to the goals and the

Compensation Committee may consider other factors in addition to the goals in assessing corporate

performance.

In December 2010 and January 2011, the Compensation Committee reviewed our performance against each of

our 2010 performance goals and related subgoals to determine the funding of the pool for the first installment

of the 2010 long-term incentive awards for the named executives and the amounts of the performance-based

portion of 2010 deferred pay for the named executives. In conducting its review, the Compensation Committee

took into consideration the views of the Committee members and its objective to correlate compensation with

performance, the views of FHFA, management’s assessment of the company’s performance against the goals,

and the discussion and review of corporate performance with the Chief Executive Officer. The results of the

Compensation Committee’s review are summarized below.

• Goal 1: Our first 2010 performance goal was to achieve our mission of providing liquidity, stability and

affordability to the U.S. housing and mortgage markets. Our subgoals under this goal consisted of:

providing liquidity to the market while maintaining the credit quality and expected economic returns of

our new business; managing our credit book of business; administering Treasury’s Making Home

Affordable Program; and addressing our duty to serve and housing goals. Key achievements during 2010

pursuant to this goal were as follows:

• Our Single-Family business provided liquidity to the market by achieving a market share of new singlefamily mortgage-related securities issuances of 44.0% for 2010, significantly exceeding its target of

33% while actively balancing this market position with prudent lending and pricing.

• Our Multifamily business provided liquidity to the market by achieving a multifamily GSE market

share of 53% for 2010, exceeding its target of 50% while actively balancing this market position with

prudent lending and pricing. Multifamily GSE market share refers to the percentage of multifamily

credit guaranty acquisitions by Fannie Mae versus Freddie Mac.

• Our Capital Markets business provided liquidity to the market through securities structuring, early

funding, whole loan conduit and related activities that generated revenues well in excess of its target of

$320 million.

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• We incurred single-family credit-related expenses of $26.4 billion for 2010, significantly lower than our

target of $45.4 billion.

• We significantly increased our default prevention and loss mitigation activities in 2010 as compared to

2009, completing over 400,000 modifications, disposing of more than 185,000 REO properties and

providing over 75,000 foreclosure alternatives in 2010. In addition, our serious delinquency rate

declined by more than 100 basis points from its peak in February 2010.

• We made improvements to the HAMP system of record, supported Treasury-hosted borrower outreach

events and conducted training of industry stakeholders and participating servicers.

• We made significant progress in meeting our new 2010 housing goals despite difficult market

conditions. We also prepared for implementation of the final duty to serve rule.

The Compensation Committee concluded that the company had substantially met this goal. The

Compensation Committee recognized the company’s 2010 achievements described above, particularly the

company’s strong performance with respect to its liquidity subgoal. The company provided substantial

liquidity to the market in 2010, while also acquiring new business with a high credit quality that is

expected to be profitable. The Compensation Committee concluded, however, that the company only

partially met its subgoal relating to the management of its credit book of business. While the company’s

credit losses were lower than expected in 2010, it was partially due to the temporary halt to foreclosures

by some of our servicers during the fourth quarter of 2010. In addition, the Committee took into account

the foreclosure process deficiencies of servicers, lawyers and other service providers that were discovered

in 2010.

• Goal 2: Our second 2010 performance goal was to build a more streamlined, higher-performing

company. Our subgoals under this goal consisted of: enhancing our financial metrics; improving our

business processes and technology infrastructure; developing and retaining employees; and achieving and

maintaining a strong risk and control environment. Key achievements during 2010 pursuant to this goal

were as follows:

• We operated within our 2010 corporate forecast of revenues and expenses, developed a three-year cost

reduction plan and developed new reporting and tracking methodologies for key business metrics.

• We implemented a corporate project quality office, documented the current state architecture, created a

baseline future state and made a number of organizational changes to optimize the technology and

operations areas.

• We enhanced our talent development and review processes, and retained high-performing employees at

a higher rate than lower performers.

• We resolved specified risk and control matters identified by internal audit and FHFA, and remediated

our material weakness in internal control over financial reporting relating to change management by

September 30, 2010.

• We conducted risk control self-assessments for all high risk and a majority of medium risk processes

and developed remediation plans for identified high exposure items.

The Compensation Committee concluded that the company had substantially met this goal. In making its

determination, the Committee took into account the company’s 2010 achievements described above. In

addition, while the Committee acknowledged the significant progress the company had made in

addressing risk and control issues in 2010, it concluded that the company only partially met its subgoal

relating to its risk and control environment, and that the company must continue to work toward

operational excellence and better manage its internal controls. For example, the company initially

produced information for Treasury’s June MHA report that contained an error.

• Goal 3: Our third 2010 performance goal was to build a stronger service and delivery model. The

Compensation Committee concluded that we met this goal for 2010 by successfully developing a threeyear operating plan to improve organizational efficiency and reduce costs.

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The Compensation Committee considered other factors in evaluating our 2010 performance in addition to

performance against the 2010 corporate goals. These factors included: the company’s implementation of

consolidation accounting; its launch of an initiative to improve the quality of loan data and underwriting in the

primary market; its participation in FHFA’s initiative to review and evaluate servicing compensation for singlefamily loans; its development and implementation of a strategy to move high-risk servicing portfolios; and its

resolution of a significant portion of its outstanding repurchase requests. The Compensation Committee also

considered the company’s continued substantial financial losses in 2010.

Based on its evaluation of the company’s performance against its goals and these additional factors, the

Compensation Committee determined that, subject to FHFA approval, the performance-based portion of 2010

deferred pay would be paid at 90% of target and the pool for the first installment of the 2010 long-term

incentive awards for executive officers would be funded at 90% of target. In making this determination, the

Compensation Committee did not give more weight to one goal or subgoal than any other goal or subgoal.

The Board and FHFA have reviewed and approved this determination.

Assessment of 2010 Individual Performance

Overview. The amounts of the first installment of the 2010 long-term incentive awards for the named

executives took into account not only the company’s performance against the 2010 corporate goals and

subgoals described above, but also an assessment by the Board of Directors of each named executive’s

performance during the year. The Board assessed the Chief Executive Officer’s performance with input from

the Compensation Committee and assessed each other named executive’s performance with input from both

the Compensation Committee and the Chief Executive Officer. Based on these assessments, the Board used its

judgment and discretion to determine the amount of compensation it deemed appropriate for each named

executive. The Board did not evaluate the performance of Mr. Johnson, who left the company in December

2010 and therefore did not receive a 2010 long-term incentive award.

We describe the Board’s determination with respect to the first installment of each named executive’s 2010

long-term incentive award, as well as the elements of each named executive’s performance the Board

considered in making this determination, below. FHFA has reviewed and approved these determinations. More

information on the compensation arrangements for each of our named executives is set forth below in the

“Summary Compensation Table for 2010, 2009 and 2008.”

Michael Williams, President and Chief Executive Officer. The Board determined that the first installment of

Mr. Williams’ 2010 long-term incentive award would be $900,000, which was 90% of his target.

Mr. Williams’ individual 2010 performance was evaluated based on the company’s performance against the

corporate performance goals for 2010, reflecting the fact that he is accountable for the success of the entire

organization. In addition, other achievements not reflected in the corporate performance goals were

considered. The Board determined that, under Mr. Williams’ leadership in 2010, the company substantially

met its corporate goals and subgoals, made solid progress in managing credit losses on its pre-2009 book of

business, acquired a 2010 book of business with a strong credit profile that is expected to be profitable, and

achieved substantial progress in making the company more operationally disciplined and efficient. The Board

also determined that, during his tenure as Chief Executive Officer, Mr. Williams has provided strong and

steady leadership in an extraordinarily challenging period for the company and a difficult market environment.

He has built and maintained good relationships with FHFA and Treasury. In addition, he has built an effective

executive management team and has also been instrumental in attracting and retaining strong employees at the

senior vice president level.

David Hisey, Executive Vice President—Deputy Chief Financial Officer. The Chief Executive Officer

recommended to the Board that the first installment of Mr. Hisey’s 2010 long-term incentive award be

$325,000, which was approximately 89% of his target. The Board approved this recommendation. In

recommending the amount of Mr. Hisey’s long-term incentive award, the Chief Executive Officer considered

Mr. Hisey’s leadership of the company’s implementation of the new consolidation accounting standards, which

was completed in the first quarter of 2010. Implementation of these new accounting standards required the

company to make major, complex operational and system changes in a very short time. The implementation

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effort involved the work of hundreds of people, and had a substantial impact on our overall internal control

environment. Mr. Hisey’s leadership of this project was critical in ensuring that it was completed successfully

and on time. The Chief Executive Officer also considered Mr. Hisey’s key partnership role in supporting the

Credit Portfolio Management team, particularly with respect to special servicing efforts. In addition, the Chief

Executive Officer considered Mr. Hisey’s leadership of the company’s participation in FHFA’s ongoing

initiative to review and evaluate servicing compensation for single-family loans, which includes not only

managing a large internal team but also coordinating with FHFA.

David Benson, Executive Vice President—Capital Markets. The Chief Executive Officer recommended to the

Board that the first installment of Mr. Benson’s 2010 long-term incentive award be $440,000, which was

approximately 95% of his target. The Board approved this recommendation. In recommending the amount of

Mr. Benson’s long-term incentive award, the Chief Executive Officer considered that, under Mr. Benson’s

leadership, the Capital Markets group provided significant liquidity support to the market through securities

structuring, early funding, whole loan conduit and related activities. The Chief Executive Officer also

considered the additional responsibilities Mr. Benson took on as the company’s Treasurer in 2010, and his key

role in refinancing and restructuring a significant portion of our outstanding debt. Mr. Benson also had a

significant role in obtaining funding for the company’s purchase of over $200 billion in delinquent loans from

our single-family MBS trusts in 2010, which had a beneficial impact on our financial results. The Chief

Executive Officer also considered Mr. Benson’s integral role in communicating with the company’s regulators

and his significant work in the company’s efforts to improve its culture.

Terence Edwards, Executive Vice President—Credit Portfolio Management. The Chief Executive Officer

recommended to the Board that the first installment of Mr. Edwards’ 2010 long-term incentive award be

$420,000, which was approximately 90% of his target. The Board approved this recommendation. In

recommending the amount of Mr. Edwards’ long-term incentive award, the Chief Executive Officer considered

Mr. Edwards’ outstanding leadership in transforming the credit portfolio management team, which was one of

the company’s most critical leadership challenges in 2010. Mr. Edwards built a strong credit portfolio

management team, adding over 600 people to his division through both internal and external resources. Under

Mr. Edwards’ effective leadership, his division handled an extraordinarily large volume of default prevention

and loss mitigation activities in 2010, which had a positive impact on both homeowners and Fannie Mae’s

credit losses. In addition, the Chief Executive Officer determined that Mr. Edwards’ leadership made it

possible for the credit portfolio management team to make significant progress in addressing and remediating

control issues.

Timothy Mayopoulos, Executive Vice President, Chief Administrative Officer, General Counsel and Corporate

Secretary. The Chief Executive Officer recommended to the Board that the first installment of

Mr. Mayopoulos’ 2010 long-term incentive award be $485,000, which was approximately 99% of his target.

The Board approved this recommendation. In recommending the amount of Mr. Mayopoulos’ long-term

incentive award, the Chief Executive Officer considered the additional responsibilities Mr. Mayopoulos took

on in 2010 as the company’s new Chief Administrative Officer, with responsibility for the Human Resources,

Communications and Marketing Services, and Government and Industry Relations divisions. The Chief

Executive Officer also considered Mr. Mayopoulos’ many significant accomplishments in 2010, which

included his effective leadership relating to the settlement and ongoing handling of the company’s litigation

matters and his critical leadership role relating to the company’s participation in Congressional hearings and in

the Financial Crisis Inquiry Commission hearings. In addition, the Chief Executive Officer considered

Mr. Mayopoulos’ significant role in developing the company’s operating plan as part of the company’s goal of

building a stronger service and delivery model, particularly in the early stages of this effort. He also

considered that Mr. Mayopoulos continues to play a key advisory role in connection with the company’s

operating plan.

Compensation Arrangements with our Former Chief Financial Officer

Mr. Johnson, the company’s former Chief Financial Officer, received base salary in 2010 through his departure

date of December 29, 2010. Mr. Johnson was not eligible to receive the fourth quarterly installment of his

2009 deferred pay because he was not employed by us on the payment date for that installment. In addition,

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Mr. Johnson is not eligible to receive payments of the second installment of his 2009 long-term incentive

award, the first or second installment of his 2010 long-term incentive award or any of the quarterly

installments of his 2010 deferred pay because he will not be employed by us on the respective payment dates

for these installments. In addition to base salary, Mr. Johnson received company contributions to his

Retirement Savings Plan and company credits to a Supplemental Retirement Savings Plan in 2010; however,

due to his resignation, he forfeited the 2% company contributions to the Retirement Savings Plan and the 2%

company credits to the Supplemental Retirement Savings Plan for 2008, 2009 and 2010, which have a threeyear vesting period. Mr. Johnson did not receive any severance payments as a result of his resignation from

Fannie Mae. For more detailed information regarding Mr. Johnson’s 2010, 2009 and 2008 compensation, refer

to the “Summary Compensation Table for 2010, 2009 and 2008” below.

Other Executive Compensation Considerations

Role of Compensation Consultants

Our current executive compensation program was developed in 2009 with assistance from the company’s

outside compensation consultant, McLagan, and the Compensation Committee’s independent compensation

consultant, Frederic W. Cook & Co., Inc. (“FW Cook”).

McLagan advised management on various compensation and human resources matters during 2010, including

the company’s risk assessment of its 2010 compensation program and the performance metrics under our

compensation plans. McLagan also advised management on competitive pay levels, organization structure and

headcount, and various compensation proposals for new hires and promotions. In addition, McLagan provided

market compensation data for senior management positions for purposes of determining 2011 compensation

targets, including the named executives’ positions.

FW Cook advised the Compensation Committee and the Board on various executive compensation matters

during 2010, including the company’s risk assessment of its 2010 compensation program, changes to the Chief

Executive Officer’s retirement benefits and various compensation proposals for new hires and promotions. FW

Cook also evaluated the company’s 2010 corporate performance goals and assisted the Compensation

Committee in its assessment of the company’s performance against these goals. In addition, FW Cook

informed the Compensation Committee of market trends in compensation and assisted the Committee in its

evaluation of our executive compensation program, including reviewing the market compensation data

prepared by McLagan for senior management positions for purposes of determining 2011 compensation

targets, including the named executives’ positions. FW Cook did not provide any services to management in

2010.

Compensation Recoupment Policy

Beginning with compensation for the 2009 performance year, our executive officers’ compensation is subject

to the following forfeiture and repayment provisions, also known as “clawback” provisions:

• Materially Inaccurate Information. If an executive officer has been granted deferred pay or incentive

payments (including long-term incentive awards) based on materially inaccurate financial statements or

any other materially inaccurate performance metric criteria, he or she will forfeit or must repay amounts

granted in excess of the amounts the Board of Directors determines would likely have been granted using

accurate metrics.

• Termination for Cause. If we terminate an executive officer’s employment for cause, he or she will

immediately forfeit all deferred pay, long-term incentive awards and any other incentive payments that

have not yet been paid. We may terminate an executive officer’s employment for cause if we determine

that the officer has: (a) materially harmed the company by, in connection with the officer’s performance

of his or her duties for the company, engaging in gross misconduct or performing his or her duties in a

grossly negligent manner, or (b) been convicted of, or pleaded nolo contendere with respect to, a felony.

• Subsequent Determination of Cause. If an executive officer’s employment was not terminated for cause,

but the Board of Directors later determines, within a specified period of time, that he or she could have

217
been terminated for cause and that the officer’s actions materially harmed the business or reputation of the

company, the officer will forfeit or must repay, as the case may be, deferred pay, long-term incentive

awards and any other incentive payments received by the officer to the extent the Board of Directors

deems appropriate under the circumstances. The Board of Directors may require the forfeiture or

repayment of all deferred pay, long-term incentive awards and any other incentive payments so that the

officer is in the same economic position as if he or she had been terminated for cause as of the date of

termination of his or her employment.

• Effect of Willful Misconduct. If an executive officer’s employment: (a) is terminated for cause (or the

Board of Directors later determines that cause for termination existed) due to either (i) willful misconduct

by the officer in connection with his or her performance of his or her duties for the company or (ii) the

officer has been convicted of, or pleaded nolo contendere with respect to, a felony consisting of an act of

willful misconduct in the performance of his or her duties for the company and (b) in the determination

of the Board of Directors, this has materially harmed the business or reputation of the company, then, to

the extent the Board of Directors deems it appropriate under the circumstances, in addition to the

forfeiture or repayment of deferred pay, long-term incentive awards and any other incentive payments

described above, the executive officer will also forfeit or must repay, as the case may be, deferred pay

and annual incentives or long-term awards paid to him or her in the two-year period prior to the date of

termination of his or her employment or payable to him or her in the future. Misconduct is not considered

willful unless it is done or omitted to be done by the officer in bad faith or without reasonable belief that

his or her action or omission was in the best interest of the company.

Certain of the bonus or other incentive-based or equity-based compensation for our Chief Executive Officer

and Chief Financial Officer also may be subject to a requirement that they be reimbursed to the company in

the event that Section 304 of the Sarbanes-Oxley Act of 2002 applies to that compensation.

Our complete compensation repayment provisions are attached as Exhibit 99.1 to our Form 8-K filed on

December 24, 2009.

The Compensation Committee plans to review our compensation recoupment policy and revise it as necessary

to comply with the Dodd-Frank Act once rules implementing the Act’s clawback requirements have been

finalized by the SEC.

Stock Ownership and Hedging Policies

In January 2009, our Board eliminated our stock ownership requirements because of the difficulty of meeting the

requirements at current market prices and because we had ceased paying our executives stock-based compensation.

All employees, including our named executives, are prohibited from transacting in derivative securities related to

our securities, including options, puts and calls, other than pursuant to our stock-based benefit plans.

Tax Deductibility of our Compensation Expenses

Subject to certain exceptions, section 162(m) of the Internal Revenue Code imposes a $1 million limit on the

amount that a company may annually deduct for compensation to its CEO and certain other named executives,

unless, among other things, the compensation is “performance-based,” as defined in section 162(m), and provided

under a plan that has been approved by the shareholders. We have not adopted a policy requiring all compensation

to be deductible under section 162(m). The impact of a potential lost deduction because of Section 162(m) is

substantially mitigated by our current and projected tax losses, and this approach allows us flexibility in light of the

conservatorship. Awards under the 2008 Retention Program, 2009 deferred pay and long-term incentive awards for

2009 performance received by the named executives in 2010 do not qualify as performance-based compensation

under section 162(m). In addition, 2010 deferred pay and long-term incentive awards for 2010 performance are not

structured to qualify as performance-based compensation under section 162(m).

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2011 Compensation

The Board and the Compensation Committee reviewed the current compensation arrangements for our named

executives in January 2011 and determined that the named executives’ base salary, deferred pay targets and

long-term incentive targets will not change in 2011. As of February 24, 2011, the Board of Directors had not

established 2011 corporate performance goals for purposes of determining the first installment of the 2011

long-term incentive awards.

The continuing two-year (2010 and 2011) performance goals against which the company’s performance will

be measured for purposes of the second installment of the 2010 long-term incentive awards (which are payable

in the first quarter of 2012) are to: reduce fixed general and administrative expenses; achieve our target

relating to the reduction of credit-related expenses; achieve risk-adjusted return on economic capital targets;

meet deliverables on business process and technology improvements; address all matters requiring attention

identified by our regulator; and make progress on certain strategic projects.

COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Board of Directors of Fannie Mae has reviewed and discussed the

Compensation Discussion and Analysis included in this Form 10-K with management. Based on such review

and discussions, the Compensation Committee has recommended to the Board of Directors that the

Compensation Discussion and Analysis be included in this Form 10-K.

Compensation Committee:

Brenda J. Gaines, Chair

Dennis R. Beresford

Charlynn Goins (member since January 2011)

Jonathan Plutzik

David H. Sidwell

COMPENSATION RISK ASSESSMENT

We conducted a risk assessment of our employee compensation policies and practices. In conducting this risk

assessment, we reviewed, among other things, our compensation plans, pay profiles, performance goals and

performance appraisal management process. We also assessed whether policies, procedures or other mitigating

controls existed that would reduce the opportunity for excessive or inappropriate risk-taking within our

compensation policies and practices.

Based on the results of our risk assessment, we concluded that our employee compensation policies and

practices do not create risks that are reasonably likely to have a material adverse effect on the company.

Several factors contributed to our conclusion, including:

• Payment of incentive compensation is based on the achievement of performance metrics that we have

concluded do not encourage unnecessary or excessive risk-taking. Our mix of multiple qualitative and

quantitative performance metrics without undue emphasis on any one metric provides an appropriate

balance of incentives.

• Our extensive performance appraisal process ensures achievement of goals without encouraging executives

or employees to take inappropriate risks.

• Although we have an all cash compensation program while under conservatorship, FHFA approval of our

executive compensation arrangements and our payment of most incentive payments over time, with a

portion based on future performance, encourages appropriate decision-making.

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• Our Board and Compensation Committee have an active and significant oversight role in compensationrelated decisions, including approving the company’s overall compensation structure, determining whether

corporate goals have been achieved and determining the overall funding level of the pool for incentive

awards, with final approval from FHFA. The Compensation Committee regularly reviews compensation

data and consults with its independent compensation consultant on compensation matters.

• Deferred pay and incentive compensation for our senior executive officers is subject to the terms of a

clawback policy.

• We have no severance arrangements for our executive officers that would pay additional compensation

when an executive leaves and there is no guarantee that an executive would receive payments of

previously awarded deferred pay or long-term incentive compensation if an executive’s employment were

terminated.

COMPENSATION TABLES

Summary Compensation Table for 2010, 2009 and 2008

The following table shows summary compensation information for 2010, 2009 and 2008 for the named

executives.

Name and

Principal Position Year

Salary

($)(1)

Bonus

($)(2)

Stock

Awards

($)(3)

Non-Equity

Incentive

Plan

Compensation

($)(4)

Change in

Pension

Value and

Nonqualified

Deferred

Compensation

Earnings

($)(5)

All Other

Compensation

($)(6)

Total

($)

Michael Williams(7) ................... 2010 900,000 1,550,000 — 2,295,000 833,156 16,300 5,594,456

President and Chief Executive 2009 860,523 2,867,200 — 2,051,100 790,803 111,180 6,680,806

Officer 2008 676,000 871,000 4,783,993 — 724,874 43,034 7,098,901

David Hisey(8) ...................... 2010 408,654 522,500 — 795,250 130,600 15,950 1,872,954

Executive Vice President and 2009 441,347 1,045,000 — 983,700 70,894 44,600 2,585,541

Deputy Chief Financial Officer 2008 382,904 737,000 940,487 160,000 62,450 43,209 2,326,050

David Johnson(9) ..................... 2010 645,000 — — — — 79,200 724,200

Executive Vice President and 2009 675,000 1,275,000 — 517,500 — 178,865 2,646,365

Chief Financial Officer 2008 48,077 — — — — — 48,077

David Benson . . ..................... 2010 500,000 684,834 — 1,056,350 218,844 22,250 2,482,278

Executive Vice President—Capital 2009 519,231 1,369,667 — 1,282,800 125,157 47,815 3,344,670

Markets

Terence Edwards..................... 2010 500,000 684,834 — 1,036,350 — 54,439 2,275,623

Executive Vice President—Credit Portfolio

Management

Timothy Mayopoulos(10) ................ 2010 500,000 734,834 — 1,146,350 — 88,308 2,469,492

Executive Vice President, 2009 439,346 1,278,610 — 842,601 — 87,138 2,647,695

Chief Administrative Officer, General

Counsel and Corporate Secretary

(1) Calendar year 2009 contained 27 biweekly pay periods, rather than the usual 26 biweekly pay periods. As a result,

salary amounts for 2009 reflect an additional biweekly pay period.

(2) Amounts shown for 2010 in the “Bonus” column consist of the service-based portion of 2010 deferred pay, which is

50% of the total 2010 deferred pay target. As described in footnote 4 below, the performance-based portion of 2010

deferred pay is included in the “Non-Equity Incentive Plan Compensation” column. Deferred pay for 2010 will be

paid in four equal installments in March, June, September and December 2011. These amounts generally will be paid

only if the named executive remains employed by us on the payment date. More information about deferred pay is

presented in “Compensation Discussion and Analysis—2010 Executive Compensation Program—Elements of 2010

Compensation Program.”

Amounts shown for 2009 in the “Bonus” column consist of the entire amount of 2009 deferred pay, all of which was

service-based. As noted in footnote 9 below, the amount of 2009 deferred pay originally awarded to Mr. Johnson was

$1,700,000; however, Mr. Johnson did not receive the fourth $425,000 installment of this award because he left the

company prior to the payment date for the installment. Accordingly, the 2009 amount shown in this column for

Mr. Johnson consists of only the $1,275,000 in 2009 deferred pay actually paid to him.

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(3) Amounts shown in the “Stock Awards” column represent the aggregate grant date fair value of restricted stock

granted during the applicable year computed in accordance with the accounting standards for stock compensation.

The amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. The grant

date fair value of restricted stock for each year is the average of the high and low trading price of our common stock

on the date of grant.

(4) Amounts shown for 2010 in the “Non-Equity Incentive Plan Compensation” column include the first installment of

the 2010 long-term incentive award, which was based on corporate and individual performance for 2010. The amount

of the first installment of the 2010 long-term incentive award awarded to each named executive was as follows:

$900,000 for Mr. Williams, $325,000 for Mr. Hisey, $440,000 for Mr. Benson, $420,000 for Mr. Edwards and

$485,000 for Mr. Mayopoulos. This first installment of the 2010 long-term incentive award is paid in February 2011.

The second installment of the 2010 long-term incentive award will be determined and paid in the first quarter of

2012 based on corporate and individual performance for both 2010 and 2011, and therefore is not included as 2010

compensation in this table. As noted in footnote 9 below, Mr. Johnson will not receive payment of a 2010 long-term

incentive award because he left the company prior to the payment dates for the award.

Amounts shown for 2010 in the “Non-Equity Incentive Plan Compensation” column also include the performancebased portion of 2010 deferred pay, which was based on corporate performance for 2010. The amount of the

performance-based portion of 2010 deferred pay awarded to each named executive was as follows: $1,395,000 for

Mr. Williams, $470,250 for Mr. Hisey, $616,350 for Mr. Benson, $616,350 for Mr. Edwards and $661,350 for

Mr. Mayopoulos. These amounts represent 90% of the target amount of the performance-based portion of 2010

deferred pay for each named executive. As noted in footnote 2, 2010 deferred pay will be paid in four equal

installments in March, June, September and December 2011. These amounts generally will be paid only if the named

executive remains employed by us on the payment date. As noted in footnote 9 below, Mr. Johnson will not receive

payment of 2010 deferred pay because he left the company prior to the payment dates.

More information about deferred pay and long-term incentive awards is presented in “Compensation Discussion and

Analysis—2010 Executive Compensation Program—Elements of 2010 Compensation Program.”

Amounts shown for 2009 in the “Non-Equity Incentive Plan Compensation” column include long-term incentive

awards awarded based on 2009 corporate and individual performance. The amount of this award was $1,665,000 for

Mr. Williams, $657,000 for Mr. Hisey, $837,300 for Mr. Benson and $842,601 for Mr. Mayopoulos. These long-term

incentive awards were payable in two equal installments. The first installment was paid in February 2010 and the

second installment is paid in February 2011. As described in footnote 9 below, the amount of the 2009 long-term

incentive award originally awarded to Mr. Johnson was $1,035,000; however, Mr. Johnson did not receive the second

$517,500 installment of this award because he left the company prior to the payment date for the installment.

Accordingly, the 2009 amount shown in this column for Mr. Johnson consists of only the first $517,500 installment

paid to him in February 2010.

Amounts shown for 2009 in the “Non-Equity Incentive Plan Compensation” column for Messrs. Williams, Hisey and

Benson also include the performance-based portion of their 2008 Retention Program award, which was based on

2009 corporate performance. The amount of this award was $386,100 for Mr. Williams, $326,700 for Mr. Hisey and

$445,500 for Mr. Benson. This portion of the 2008 Retention Program award was paid in February 2010.

Messrs. Johnson and Mayopoulos did not receive 2008 Retention Program awards.

(5) The reported amounts represent change in pension value. We calculated these amounts using the same assumptions

we use for financial reporting under GAAP, using a discount rate of 5.65% at December 31, 2010. None of our

named executives received above-market or preferential earnings on nonqualified deferred compensation.

(6) The table below shows more information about the amounts reported for 2010 in the “All Other Compensation”

column, which include (1) company contributions under our Retirement Savings Plan (401(k) Plan); (2) company

credits to our Supplemental Retirement Savings Plan; and (3) matching charitable contributions under our matching

charitable gifts program.

Name

Company

Contributions to

Retirement Savings

(401(k)) Plan

Company

Credits to

Supplemental

Retirement Savings

Plan

Charitable

Award

Programs

Michael Williams . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,350 — $ 8,950

David Hisey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,250 — 3,700

David Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,700 $ 64,500 —

David Benson. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,250 — 10,000

Terence Edwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,600 30,339 4,500

Timothy Mayopoulos . . . . . . . . . . . . . . . . . . . . . . . . . 19,600 48,708 20,000

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In accordance with SEC rules, amounts shown under “All Other Compensation” for 2010 do not include perquisites

or personal benefits for any named executives, because aggregate perquisites for each named executive in 2010 were

substantially less than $10,000.

Amounts shown in the “Charitable Award Programs” column reflect gifts we made under our matching charitable

gifts program, under which gifts made by our employees and directors to Section 501(c)(3) charities are matched, up

to an aggregate total of $10,000 in any calendar year. Effective January 1, 2011, we changed our matching charitable

gifts program to reduce the maximum amount of matching gifts to $5,000 in any calendar year. Amounts included in

this column for Mr. Mayopoulos consist of a $10,000 matching contribution submitted in March 2010 relating to

charitable contributions he made in 2009 and a $10,000 matching contribution submitted in January 2011 relating to

charitable contributions he made in 2010.

Mr. Johnson left the company before completing the three-year vesting period for the company’s 2% contribution to

the Retirement Savings Plan for 2010 and 2% credit to the Supplemental Retirement Savings Plan for 2010.

Accordingly, he forfeited the 2% company contribution to the Retirement Savings Plan for 2010 and the 2% company

credit to the Supplemental Retirement Savings Plan for 2010. Amounts included in this table for Mr. Johnson include

only the 6% company contribution to the Retirement Savings Plan for 2010 and the 6% company credit to the

Supplemental Retirement Savings Plan for 2010 that immediately vested, and do not include these forfeited amounts.

(7) Mr. Williams became our President and Chief Executive Officer on April 21, 2009. He previously served as Fannie

Mae’s Executive Vice President and Chief Operating Officer from November 2005 through April 20, 2009.

(8) Mr. Hisey joined Fannie Mae in January 2005. He has been Executive Vice President and Deputy Chief Financial

Officer since November 2008 and also assumed the responsibilities of Chief Financial Officer on December 30, 2010,

following the departure of Mr. Johnson. Mr. Hisey previously served as Executive Vice President and Chief Financial

Officer from August to November 2008, and as Senior Vice President and Controller from February 2005 to August

2008.

(9) Mr. Johnson joined Fannie Mae in November 2008 and left the company on December 29, 2010. Mr. Johnson was

not eligible to receive 2010 deferred pay or payment of his 2010 long-term incentive award because he left the

company prior to the payment dates for the awards. In addition, he did not receive the fourth installment of his 2009

deferred pay ($425,000) or the second installment of his 2009 long-term incentive award ($517,500) because he was

not employed by Fannie Mae on the respective payment dates for these installments. Mr. Johnson also forfeited the

2% company contributions to the Retirement Savings Plan and the 2% company credits to the Supplemental

Retirement Savings Plan for 2008, 2009 and 2010, which have a three-year vesting period. The amounts reported as

Mr. Johnson’s 2008, 2009 and 2010 compensation in this table exclude these forfeited payments and represent the

amounts he actually received, rather than the original amounts awarded to him.

(10) Mr. Mayopoulos has been an employee of Fannie Mae since April 21, 2009 and was engaged as a consultant for

Fannie Mae from February 17, 2009 through April 20, 2009. Amounts reported as Mr. Mayopoulos’ 2009

compensation in the “Salary” column consist of (a) $353,846 in base salary paid to him from April 21, 2009 (the

date he became an employee of Fannie Mae) through December 31, 2009; and (b) $85,500 in fees paid to him from

February 17, 2009 through April 20, 2009 for his services as a consultant.

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Grants of Plan-Based Awards in 2010

The following table shows grants of awards made to the named executives during 2010 under our long-term

incentive plan and deferred pay plan. The terms of these long-term incentive and deferred pay awards are

described above in “Compensation Discussion and Analysis—2010 Executive Compensation Program—

Elements of 2010 Compensation Program.” Deferred pay amounts shown represent only the performancebased portion (50%) of the named executives’ 2010 deferred pay award.

Name

Award

Type(1)

Threshold

($)

Target

($)

Maximum

($)

Estimated Future Payouts Under

Non-Equity Incentive Plan Awards(2)

Michael Williams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LTI — 2,000,000 —

DP — 1,550,000 —

David Hisey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LTI — 730,000 —

DP — 522,500 —

David Johnson(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LTI — 1,150,000 —

DP — 850,000 —

David Benson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LTI — 930,333 —

DP — 684,834 —

Terence Edwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LTI — 930,333 —

DP — 684,834 —

Timothy Mayopoulos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LTI — 980,333 —

DP — 734,834 —

(1) LTI indicates an award under our long-term incentive plan. DP indicates the corporate performance-based portion

(50%) of the named executives’ 2010 deferred pay award.

(2) For awards under our long-term incentive plan, the amounts shown are the target amounts of the named executives’

2010 long-term incentive awards established by our Board in 2010. Except for Mr. Johnson, the actual amount of the

first installment (50%) of each named executive’s 2010 long-term incentive award was determined in 2011 based on

2010 performance against pre-established corporate and individual performance goals. The second installment (50%)

of each named executive’s 2010 long-term incentive award will be determined in 2012 based on performance in 2010

and 2011 against pre-established corporate and individual performance goals. No amounts are shown in the

“Threshold” and “Maximum” columns because our long-term incentive plan does not specify threshold or maximum

payout amounts. Our Board has the discretion to pay awards in amounts below or above these target amounts, subject

to the approval of FHFA. The actual amounts of the first installment of the 2010 long-term incentive award awarded

by the Board and approved by FHFA for 2010 performance are included in the “Non-Equity Incentive Plan

Compensation” column of the “Summary Compensation Table for 2010, 2009 and 2008” and explained in footnote 4

to that table. The first installment of the long-term incentive award is paid to the named executives in February 2011.

The second installment of the long-term incentive award will be determined and paid in 2012.

For deferred pay awards, the amounts shown are the target amounts of the performance-based portion (50%) of the

named executives’ 2010 deferred pay award. Except for Mr. Johnson, the actual amount of the performance-based

portion of 2010 deferred pay was determined in 2011 based on 2010 performance against pre-established corporate

performance goals. No amounts are shown in the “Threshold” and “Maximum” columns because our deferred pay plan

does not specify threshold or maximum payout amounts. Our Board has the discretion to pay awards in amounts

below or above these target amounts, subject to the approval of FHFA. The actual amounts of the performance-based

portion of 2010 deferred pay awarded by the Board and approved by FHFA for 2010 performance are included in the

“Non-Equity Incentive Plan Compensation” column of the “Summary Compensation Table for 2010, 2009 and 2008”

and explained in footnote 4 to that table. The performance-based portion of 2010 deferred pay will paid to the named

executives in four equal quarterly installments in March, June, September and December 2011.

(3) Because Mr. Johnson left the company before the payment dates for the awards, he did not receive any payment of his

2010 long-term incentive award or 2010 deferred pay. See “Compensation Discussion and Analysis—Determination of

2010 Compensation—Assessment of 2010 Individual Performance” for further information.

Outstanding Equity Awards at 2010 Fiscal Year-End

The following table shows outstanding stock option awards and unvested restricted stock held by the named

executives as of December 31, 2010. The market value of stock awards shown in the table below is based on a

per share price of $0.30, which was the closing market price of our common stock on December 31, 2010. As

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of December 31, 2010, the exercise prices of all of the outstanding options referenced in the table below were

substantially higher than the market price of our common stock.

Name

Award

Type(1) Grant

Date

Number of

Securities

Underlying

Unexercised

Options (#)

Exercisable

Option

Exercise

Price ($)

Option

Expiration

Date

Number of

Shares or

Units of

Stock That

Have Not

Vested (#)

Market Value of

Shares or

Units of

Stock That

Have Not

Vested ($)

Option Awards(2) Stock Awards(2)

Michael Williams . . . . . . . . . . . . . . O 11/20/2001 44,735 80.95 11/20/2011

O 1/21/2003 63,836 69.43 1/21/2013

O 1/23/2004 73,880 78.32 1/23/2014

RS 1/25/2007 23,156 6,947

RS 1/28/2008 74,378 22,313

David Hisey . . . . . . . . . . . . . . . . . . O 1/3/2005 10,000 71.31 1/3/2015

RS 1/25/2007 4,022 1,207

RS 1/28/2008 14,622 4,387

David Johnson . . . . . . . . . . . . . . . . N/A

David Benson . . . . . . . . . . . . . . . . . O 6/3/2002 12,000 79.33 6/3/2012

O 6/3/2002 20,080(3) 79.33 6/3/2012

O 1/21/2003 9,624 69.43 1/21/2013

O 1/23/2004 12,223 78.32 1/23/2014

RS 1/25/2007 2,983 895

RS 1/28/2008 11,971 3,591

Terence Edwards. . . . . . . . . . . . . . . N/A

Timothy Mayopoulos. . . . . . . . . . . . N/A

(1) O indicates stock options and RS indicates restricted stock.

(2) Except as otherwise indicated, all awards of options and restricted stock listed in this table vest in four equal annual

installments beginning on the first anniversary of the date of grant. Amounts reported in this table for restricted stock

represent only the unvested portion of awards. Amounts reported in this table for options represent only the

unexercised portions of awards.

(3) This option award had special vesting provisions: 3,860 options vested immediately upon grant, 9,080 vested on

August 31, 2002, 4,370 vested on January 31, 2003, 1,610 vested on January 31, 2004 and 1,160 vested on

January 31, 2005.

Option Exercises and Stock Vested in 2010

The following table shows information regarding vesting of restricted stock held by the named executives

during 2010. We have calculated the value realized on vesting by multiplying the number of shares of stock by

the fair market value (based on the closing market price) of our common stock on the vesting date. We have

provided no information regarding stock option exercises because no named executives exercised stock options

during 2010.

Name

Number of Shares

Acquired on Vesting (#)

Value Realized on

Vesting ($)

Stock Awards

Michael Williams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,747 74,698

David Hisey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,246 19,403

David Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

David Benson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,383 10,261

Terence Edwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Timothy Mayopoulos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

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Pension Benefits

Defined Benefit Pension Plans

Executive Pension Plan. The Executive Pension Plan was designed to supplement the benefits payable under

our tax-qualified defined benefit retirement plan (the Federal National Mortgage Association Retirement Plan

for Employees Not Covered Under Civil Service Retirement Law or “Retirement Plan”). Mr. Williams is the

only named executive with a benefit under the Executive Pension Plan, and his benefit under the plan was

frozen as of December 31, 2009. Because the Executive Pension Plan is frozen, Mr. Williams’ compensation,

years of service and Retirement Plan benefits earned for years after 2009 are not taken into account in

determining his benefit under the Executive Pension Plan.

Executive Pension Plan benefits vested after ten years of participation in the plan, and Mr. Williams was 90%

vested at the time the plan was frozen. Mr. Williams’ maximum annual pension benefit under the Executive

Pension Plan, based on his status as 90% vested and a pension goal formula of 40%, is 36% of his average

annual covered compensation earned for the years 2007, 2008 and 2009. Covered compensation is

Mr. Williams’ average annual base salary, including deferred compensation, plus eligible incentive

compensation. For this purpose, eligible incentive compensation is limited in the aggregate to 50% of

Mr. Williams’ base salary, and consists of his Annual Incentive Plan cash bonus for 2007 and his 2008

Retention Program awards earned for 2008 and 2009. His payments under the Executive Pension Plan are

reduced by his Retirement Plan benefit determined as of December 31, 2009.

Early retirement is available under the plan at age 55, with a reduction in the plan benefit of 2% for each year

between the year in which benefit payments begin and the year in which the participant turns 60. The benefit

payment for Mr. Williams is a monthly amount equal to 1/12th of his annual retirement benefit payable during

the lives of Mr. Williams and his surviving spouse. If he dies before receiving benefits under the Executive

Pension Plan, his surviving spouse will be entitled to a death benefit that begins when Mr. Williams would

have reached age 55, based on his pension benefit at the date of death.

Supplemental Pension Plan and 2003 Supplemental Pension Plan. The purpose of the Supplemental Pension

Plan is to provide supplemental retirement benefits to employees whose salary exceeds the statutory

compensation cap applicable to the Retirement Plan or whose benefit under the Retirement Plan is limited by

the statutory benefit cap applicable to the Retirement Plan. The purpose of the Supplemental Pension Plan of

2003 (the “2003 Supplemental Pension Plan”) is to provide additional benefits based on eligible incentive

compensation not taken into account under the Retirement Plan or the Supplemental Pension Plan. For

executive officers, eligible incentive compensation includes Annual Incentive Plan bonuses, and awards under

the 2008 Retention Program for 2008 and 2009. Beginning with awards for 2009 performance, eligible

incentive compensation for executive officers also includes deferred pay awards. For purposes of determining

benefits under the 2003 Supplemental Pension Plan, the amount of an officer’s eligible incentive compensation

taken into account is limited in the aggregate to 50% of the officer’s base salary. Benefits under these plans

vest at the same time as benefits under the Retirement Plan, and benefits under these plans typically

commence at the later of age 55 or separation from service.

Messrs. Williams, Hisey and Benson are the only named executives who participate in the Supplemental

Pension Plan and the 2003 Supplemental Pension Plan. In general, officers who are eligible to participate in

the Executive Pension Plan receive the greater of their Executive Pension Plan benefits or combined

Supplemental Pension Plan and 2003 Supplemental Pension Plan benefits. However, for 2010 and 2011,

Mr. Williams will accrue benefits under the Supplemental Pension Plan and the 2003 Supplemental Pension

Plan that will not be offset by his Executive Pension Plan benefit. In light of its decision to freeze

Mr. Williams’ benefit under the Executive Pension Plan, the Board adopted this change, with the approval of

FHFA, to provide Mr. Williams a pension benefit for 2010 and 2011.

Retirement Plan. Participation in the Retirement Plan has been frozen, and employees hired after

December 31, 2007 and employees who did not satisfy the age and service requirements to be grandfathered

participants under the Retirement Plan do not earn benefits under the Retirement Plan. Prior to 2007,

participation in the Retirement Plan was generally available to employees. Participants are fully vested in the

225
Retirement Plan when they complete five years of credited service. Messrs. Williams, Hisey and Benson are

the only named executives who participate in the Retirement Plan.

Under the Retirement Plan, normal retirement benefits are computed on a single life basis using a formula

based on final average annual earnings and years of credited service. For years of service after 1988, the

pension formula is:

• 11

⁄2% multiplied by final average annual earnings, plus

• 1/2% multiplied by final average annual earnings over Social Security-covered compensation multiplied

by years of credited service.

A different formula applies for years of service after 35 years. Final average annual earnings are average

annual earnings in the participant’s highest paid 36 consecutive calendar months during his last 120 calendar

months of employment. Earnings are base salary. Provisions of the Internal Revenue Code of 1986, as

amended, limit the amount of annual compensation that may be used for calculating pension benefits and the

annual benefit that may be paid. For 2010, the statutory compensation and benefit caps were $245,000 and

$195,000, respectively. Early retirement under the Retirement Plan is generally available at age 55. For

employees who retire before age 65, benefits are reduced by stated percentages for each year that they are

younger than 65.

The table below shows the years of credited service and the present value of accumulated benefits for each

named executive under our defined benefit pension plans as of December 31, 2010.

Pension Benefits for 2010

Name Plan Name

Number of

Years

Credited

Service (#)(1)

Present Value of

Accumulated

Benefit ($)(2)

Michael Williams . . . . . Retirement Plan 20 496,799

Supplemental Pension Plan(3) 20 212,562

2003 Supplemental Pension Plan(3) 20 127,318

Executive Pension Plan 9 3,267,952

David Hisey . . . . . . . . . Retirement Plan 6 134,035

Supplemental Pension Plan 6 106,003

2003 Supplemental Pension Plan 6 127,263

David Johnson. . . . . . . . Not applicable

David Benson . . . . . . . . Retirement Plan 9 194,507

Supplemental Pension Plan 9 191,149

2003 Supplemental Pension Plan 9 203,159

Terence Edwards . . . . . . Not applicable

Timothy Mayopoulos . . . Not applicable

(1) Mr. Williams has fewer years of credited service under the Executive Pension Plan than under the Retirement Plan

because he worked at Fannie Mae prior to becoming a participant in the Executive Pension Plan. In addition, because

benefit accruals under the Executive Pension Plan for years after 2009 were frozen, Mr. Williams’ credited service

under the Executive Pension Plan was frozen in 2009 at 9 years.

(2) The present value for the Executive Pension Plan assumes that Mr. Williams will remain in service until age 60, the

normal retirement age under the Executive Pension Plan. The present value for the Retirement Plan, Supplemental

Pension Plan and 2003 Supplemental Pension Plan assumes that the named executives will remain in service until

age 65, the normal retirement age under those plans. The values also assume that benefits under the Executive Pension

Plan will be paid in the form of a monthly annuity for Mr. Williams’ life and that Mr. Williams’ surviving spouse and

benefits under the Retirement Plan will be paid in the form of a single life monthly annuity for Mr. Williams’ life.

The postretirement mortality assumption is based on the IRS prescribed mortality table for 2011 funding purposes.

Under the terms of the 2003 Supplemental Pension Plan, the deferred pay award for 2010 has been taken into account

for the purpose of determining present value as of December 31, 2010. For additional information regarding the

calculation of present value and the assumptions underlying these amounts, see “Note 14, Employee Retirement

Benefits” in this report.

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(3) The present value of accumulated benefit for Mr. Williams for the Supplemental Pension Plan and 2003 Supplemental

Pension Plan shown in this table reflects only the amounts accrued under these plans in 2010. Although Mr. Williams

has 20 years of credited service under the Supplemental Pension Plan and 2003 Supplemental Pension Plan, as of

December 31, 2010, his benefit for years prior to 2010 under these plans is offset by the benefit that he would receive

upon his retirement under the Executive Pension Plan.

Retirement Savings Plan

The Retirement Savings Plan is a defined contribution plan that includes a 401(k) before-tax feature, a regular

after-tax feature and a Roth after-tax feature. Under the plan, eligible employees may allocate investment

balances to a variety of investment options. Subject to IRS limits for 401(k) plans, we match in cash employee

contributions up to 3% of base salary for employees who are grandfathered participants in our Retirement Plan

and up to 6% of base salary and eligible incentive compensation (which for the applicable named executives

includes annual bonuses and deferred pay) for employees who are not grandfathered participants in our

Retirement Plan. All non-grandfathered employees are 100% vested in our matching contributions.

Grandfathered employees receive benefits under the 3% of base salary matching program and are fully vested

in our matching contributions after five years of service. Messrs. Williams, Hisey and Benson are

grandfathered employees under our Retirement Plan and therefore receive benefits under the 3% matching

program, while Messrs. Johnson, Edwards and Mayopoulos are non-grandfathered employees and therefore

receive benefits under the 6% matching program.

All regular employees, with the exception of those who participated in the Executive Pension Plan (which

includes Mr. Williams), receive an additional 2% contribution (based on base salary for grandfathered

employees and on base salary and eligible incentive compensation for non-grandfathered employees) from the

company regardless of employee contributions to this plan. Participants are fully vested in this 2%

contribution after three years of service.

Nonqualified Deferred Compensation

Our Supplemental Retirement Savings Plan is an unfunded, non-tax-qualified defined contribution plan for

non-grandfathered employees. The Supplemental Retirement Savings Plan is intended to supplement our

Retirement Savings Plan, or 401(k) plan, by providing benefits to participants whose annual eligible earnings

exceed the IRS annual limit on eligible compensation for 401(k) plans (for 2010, the limit was $245,000).

Messrs. Johnson, Edwards and Mayopoulos are the named executives who participated in the Supplemental

Retirement Savings Plan in 2010.

For 2010, we credited 8% of the eligible compensation for Messrs. Johnson, Edwards and Mayopoulos that

exceeded the IRS annual limit for 2010. Eligible compensation for Messrs. Johnson, Edwards and Mayopoulos

consists of base salary plus any eligible incentive compensation (which includes annual bonuses and deferred

pay) earned for that year, plus any awards earned for that year under the 2008 Retention Program, up to a

combined maximum of two times base salary. The 8% credit consists of two parts: (1) a 2% credit that will

vest after the participant has completed three years of service with us; and (2) a 6% credit that is immediately

vested.

While the Supplemental Retirement Savings Plan is not funded, amounts credited on behalf of a participant

under the Supplemental Retirement Savings Plan are deemed to be invested in mutual fund investments similar

to the investments offered under our 401(k) plan. Participants may change their investment elections on a daily

basis.

Amounts deferred under the Supplemental Retirement Savings Plan are payable to participants in the January

or July following separation from service with us, subject to a six month delay in payment for the 50 most

highly-compensated officers. Participants may not withdraw amounts from the Supplemental Retirement

Savings Plan while they are employed by us.

The table below provides information on the nonqualified deferred compensation of the named executives for

2010.

227
Nonqualified Deferred Compensation for 2010

Name

Executive

Contributions

in Last

Fiscal Year ($)

Company

Contributions in

Last Fiscal

Year ($)(1)

Aggregate

Earnings in

Last Fiscal

Year ($)(2)

Aggregate

Withdrawals/

Distributions ($)

Aggregate

Balance at

Last Fiscal

Year-End ($)(3)

Michael Williams

2001 Special Stock Award(4) . . . . . . . . . . — — (1,208) — 412

David Hisey . . . . . . . . . . . . . . . . . . . . . . . — — — — —

David Johnson

Supplemental Retirement Savings Plan . . . — 64,500 14,027 — 106,909

David Benson . . . . . . . . . . . . . . . . . . . . . . — — — — —

Terence Edwards

Supplemental Retirement Savings Plan . . . — 30,339 1,409 — 31,748

Timothy Mayopoulos

Supplemental Retirement Savings Plan . . . — 48,708 7,118 — 64,708

(1) All amounts reported in this column for Messrs. Johnson, Edwards and Mayopoulos as company contributions in the

last fiscal year pursuant to the Supplemental Retirement Savings Plan are also reported as 2010 compensation in the

“All Other Compensation” column of the “Summary Compensation Table for 2010, 2009 and 2008.” Company

contributions for Mr. Johnson in this column do not include $21,500 in company credits made under the Supplemental

Retirement Savings Plan in 2010 that he forfeited by leaving the company before completing the three-year vesting

period.

(2) None of the earnings reported in this column are reported as 2010 compensation in the “Summary Compensation

Table for 2010, 2009 and 2008” because the earnings are neither above-market nor preferential.

(3) Amounts reported in this column for Mr. Johnson include company contributions in 2009 to the Supplemental

Retirement Savings Plan of $25,800 that are also reported as 2009 compensation in the “All Other Compensation”

column of the “Summary Compensation Table for 2010, 2009 and 2008.” Amounts reported in this column for

Mr. Mayopoulos include company contributions in 2009 to the Supplemental Retirement Savings Plan of $8,708 that

are also reported as 2009 compensation in the “All Other Compensation” column of the “Summary Compensation

Table for 2010, 2009 and 2008.”

(4) The Board previously approved a special stock award to officers for 2001 performance. On January 15, 2002,

Mr. Williams deferred until retirement 1,142 shares he received in connection with this award. Aggregate earnings on

these shares reflect changes in stock price. Mr. Williams’ number of shares has grown through the reinvestment of

dividends to 1,373 shares as of December 31, 2010.

Potential Payments upon Termination or Change-in-Control

The information below describes and quantifies certain compensation and benefits that may have become

payable to each of our named executives under our existing plans and arrangements if our named executive’s

employment had terminated on December 31, 2010, taking into account the named executive’s compensation

and service levels as of that date and based on a per share price of $0.30, which was the closing price of our

common stock on December 31, 2010. The discussion below does not reflect retirement or deferred

compensation benefits to which our named executives may be entitled, as these benefits are described above

under “Pension Benefits” and “Nonqualified Deferred Compensation.” The information below also does not

generally reflect compensation and benefits available to all salaried employees upon termination of

employment with us under similar circumstances. We are not obligated to provide any additional

compensation to our named executives in connection with a change-in-control.

FHFA Must Approve Any Termination Benefits We Provide Named Executives

FHFA, as our regulator, must approve any termination benefits we offer our named executives. Moreover, as

our conservator, FHFA has directed that our Board consult with and obtain FHFA’s consent before taking any

action involving termination benefits for any officer at the executive vice president level and above and

including, regardless of title, executives who hold positions with the functions of the chief operating officer,

chief financial officer, general counsel, chief business officer, chief investment officer, treasurer, chief

compliance officer, chief risk officer and chief/general/internal auditor. In addition, as described below under

“Potential Payments to Named Executives,” in the event Fannie Mae terminates a named executive’s

228
employment other than for cause, any determination by the Board to pay unpaid deferred pay or long-term

incentive awards to the named executive is subject to the approval of FHFA in consultation with Treasury.

Potential Payments to Named Executives

We have not entered into employment agreements with any of our named executives that would entitle our

executives to severance benefits. Below we discuss various elements of compensation that may become

payable in the event a named executive dies or retires, or that may be paid in the event his employment is

terminated by Fannie Mae. We then quantify the amounts that might have been paid to our named executives

in these circumstances, in each case as of December 31, 2010.

• Deferred Pay and Long-Term Incentive Awards. In general, an executive officer, including our named

executives, must continue to be employed to receive payments of deferred pay or the long-term incentive

award, and will forfeit any unpaid amounts upon termination of his or her employment. Exceptions to this

general rule apply in the case of an executive officer’s death or retirement, and may apply in the event an

executive officer’s employment is terminated by Fannie Mae other than for cause, as follows:

• Death. In the event an executive officer’s employment is terminated due to his or her death, his or her

estate will receive the remaining installment payments of deferred pay for the prior year, as well as a

pro rata portion of deferred pay for the current year, based on time worked during the year. In addition,

his or her estate will receive any remaining installment payment of a long-term incentive award for a

completed performance year and a pro rata portion of a long-term incentive award for the current

performance year, based on time worked during the year; provided that the executive officer was

employed at least one complete calendar quarter during the current performance year.

• Retirement. If an executive officer retires from Fannie Mae at or after age 65 with at least 5 years of

service, he or she will receive the remaining installment payments of deferred pay for the prior year. In

addition, he or she will receive any remaining installment payment of a long-term incentive award for a

completed performance year.

• Termination by Fannie Mae. If Fannie Mae terminates an executive officer’s employment other than

for cause, the Board of Directors may determine, subject to the approval of FHFA in consultation with

Treasury, that he or she may receive certain unpaid deferred pay or long-term incentive awards. The

determination to pay amounts of unpaid deferred pay or long-term incentive awards is in the discretion

of the Board of Directors and FHFA; the named executives do not have any contractual right or right

under the terms of the deferred pay plan or the long-term incentive plan to receive any unpaid deferred

pay or long-term incentive awards in the event of a termination by Fannie Mae.

In each case, for any portion of a long-term incentive award or any performance-based portion of a deferred

pay award that has not been finally determined, the award will be adjusted based on performance relative to

the applicable performance goals and, in the case of a termination by Fannie Mae, cannot exceed 100% of

the target award. In addition, installment payments of the awards will be made on the original payment

schedule, rather than being provided in a lump sum. In the case of a termination by Fannie Mae, an

executive officer must agree to the terms of a standard termination agreement with the company in order to

receive these post-termination of employment payments. More information about deferred pay and the longterm incentive awards is provided above in “Compensation Discussion and Analysis—2010 Executive

Compensation Program—Elements of 2010 Compensation Program.”

• Stock Compensation Plans. Under the Fannie Mae Stock Compensation Plan of 2003, stock options,

restricted stock and restricted stock units held by our employees, including our named executives, fully vest

upon the employee’s death, total disability or retirement. Under both the Fannie Mae Stock Compensation

Plan of 2003 and the Fannie Mae Stock Compensation Plan of 1993, upon the occurrence of these events, or

if an option holder leaves our employment after age 55 with at least 5 years of service, the option holder, or

the holder’s estate in the case of death, can exercise any stock options until the initial expiration date of the

stock option, which is generally 10 years after the date of grant. For these purposes, “retirement” generally

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means that the executive retires at or after age 60 with 5 years of service or age 65 (with no service

requirement).

• Retiree Medical Benefits. We currently make certain retiree medical benefits available to our full-time

employees who retire and meet certain age and service requirements.

The table below shows the amounts that would have become payable if a named executive’s employment had

terminated on December 31, 2010 as a result of his death. The table below does not show any amounts that

would have become payable if a named executive had retired on December 31, 2010 since as of that date none

of the named executives had reached the minimum age required to receive any of these amounts upon his

retirement.

Potential Payments Upon Death as of December 31, 2010(1)

Name

Restricted

Stock(2)

2010

Deferred Pay(3)

2009

Long-Term

Incentive

Award(4)

2010

Long-Term

Incentive

Award(5) Total

Michael Williams . . . . . . . . . . . . . . . . . . . . . . $29,260 $2,945,000 $832,500 $900,000 $4,706,760

David Hisey . . . . . . . . . . . . . . . . . . . . . . . . . 5,594 992,750 328,500 325,000 1,651,844

David Johnson(6) ...................... — — — — —

David Benson . . . . . . . . . . . . . . . . . . . . . . . . 4,486 1,301,184 418,650 440,000 2,164,320

Terence Edwards . . . . . . . . . . . . . . . . . . . . . . — 1,301,184 163,095 420,000 1,884,279

Timothy Mayopoulos . . . . . . . . . . . . . . . . . . . — 1,396,184 421,301 485,000 2,302,485

(1) The named executives would also have received the applicable amounts shown in the “Restricted Stock” column of

this table in the event of their total disability, but not the amounts shown under any other column.

(2) These values are based on a per share price of $0.30, which was the closing price of our common stock on

December 31, 2010.

(3) Assumes that each named executive (other than Mr. Johnson) would have received the 2010 deferred pay awarded to

him, which is payable in March, June, September and December 2011. Each named executive was awarded 95% of his

target 2010 deferred pay (50% of deferred pay was based on corporate performance, which the Compensation

Committee determined would be paid at 90% of target, and the remaining 50% of deferred pay was service based and

therefore the named executives will receive 100% of this portion of the award).

(4) Assumes that each named executive (other than Mr. Johnson) would have received the second installment of his 2009

long-term incentive award, which was determined in February 2010 and is paid in February 2011.

(5) Assumes that each named executive (other than Mr. Johnson) would have received the first installment of his 2010

long-term incentive award, which was determined in January 2011 and is paid in February 2011. The named

executives would not have received the second installment of the 2010 long-term incentive award in the event of their

death on December 31, 2010, because that installment will be determined in the first quarter of 2012 based on

corporate and individual performance for both 2010 and 2011.

(6) Mr. Johnson left the company on December 29, 2010 and therefore would not be entitled to any payments upon death

as of December 31, 2010.

The table below shows the maximum amount of deferred pay and long-term incentive award that could have

become payable to the named executive if his employment was terminated other than for cause on

December 31, 2010. The named executives do not have any contractual right or right under the terms of the

deferred pay plan or the long-term incentive plan to receive any unpaid deferred pay or long-term incentive

awards in the event of a termination by Fannie Mae. Any amounts of unpaid deferred pay or long-term

incentive awards paid to executive officers if they are terminated other than for cause will be determined on a

case-by-case basis in the discretion of our Board of Directors and also subject to the approval of FHFA in

consultation with Treasury. We therefore cannot make a reasonable estimate of the amounts that would

become payable in such cases.

230
Maximum Potential Payments Upon Termination Other Than For Cause as of December 31, 2010

Name

2010

Deferred Pay(1)

2009

Long-Term

Incentive

Award(2)

2010

Long-Term

Incentive

Award(3) Total

Michael Williams . . . . . . . . . . . . . . . . . . . . . . . . . $2,945,000 $832,500 $900,000 $4,677,500

David Hisey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 992,750 328,500 325,000 1,646,250

David Johnson(4) .......................... — — — —

David Benson . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,301,184 418,650 440,000 2,159,834

Terence Edwards . . . . . . . . . . . . . . . . . . . . . . . . . . 1,301,184 163,095 420,000 1,884,279

Timothy Mayopoulos . . . . . . . . . . . . . . . . . . . . . . . 1,396,184 421,301 485,000 2,302,485

(1) Assumes that each named executive (other than Mr. Johnson) would have received 100% of the 2010 deferred pay

awarded to him, which is payable in March, June, September and December 2011. Each named executive was awarded

95% of his target 2010 deferred pay (50% of deferred pay was based on corporate performance, which the

Compensation Committee determined would be paid at 90% of target, and the remaining 50% of deferred pay was

service based and therefore the named executives will receive 100% of this portion of the award). The actual amount

of unpaid deferred pay a named executive would receive in the event his employment is terminated would be in the

discretion of our Board of Directors and also subject to the approval of FHFA in consultation with Treasury, and could

range from 0% to 100% of the amount shown in this column.

(2) Assumes that each named executive (other than Mr. Johnson) would have received 100% of the second installment of

his 2009 long-term incentive award, which was determined in February 2010 and is paid in February 2011. The actual

amount of the unpaid 2009 long-term incentive award a named executive would receive in the event his employment is

terminated would be in the discretion of our Board of Directors and also subject to the approval of FHFA in

consultation with Treasury, and could range from 0% to 100% of the amount shown in this column.

(3) Assumes that each named executive (other than Mr. Johnson) would have received 100% of the first installment of his

2010 long-term incentive award, which was determined in January 2011 and is paid in February 2011. We have not

included the second installment of the 2010 long-term incentive award because that installment will not be determined

until the first quarter of 2012 based on corporate and individual performance for both 2010 and 2011. The actual

amount of the unpaid 2010 long-term incentive award a named executive would receive in the event his employment is

terminated would be in the discretion of our Board of Directors and also subject to the approval of FHFA in

consultation with Treasury, and could range from 0% to 100% of the amount shown in this column.

(4) Mr. Johnson left the company on December 29, 2010 and therefore would not be entitled to any payments upon

termination as of December 31, 2010.

Payments to Former Chief Financial Officer

Mr. Johnson, who served as our Chief Financial Officer from November 2008 to December 2010, received no

severance payments from us as a result of his resignation from Fannie Mae.

Director Compensation

In November 2008, FHFA approved a new program under which our non-management directors receive all

compensation in cash, as described below. This compensation for the directors was designed to be reasonable,

appropriate and commensurate with the duties and responsibilities of their Board service.

The total 2010 compensation for our non-management directors is shown in the table below. Mr. Williams, our

only director who also served as an employee of Fannie Mae during 2010, was not entitled to receive any of

the benefits provided to our non-management directors other than those provided under the matching

charitable gifts program, which is available to all of our employees.

231
2010 Non-Employee Director Compensation Table

Name

Fees Earned

or Paid

in Cash

($)

All Other

Compensation

($)(1)

Total

($)

Dennis R. Beresford. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,000 — 185,000

William Thomas Forrester . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 — 170,000

Brenda J. Gaines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 — 180,000

Charlynn Goins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 — 170,000

Frederick B. “Bart” Harvey III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 10,000 180,000

Philip A. Laskawy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290,000 10,000 300,000

Egbert L. J. Perry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000 — 160,000

Jonathan Plutzik . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000 10,000 170,000

David H. Sidwell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000 10,000 170,000

(1) “All Other Compensation” consists of gifts we made or will make under our matching charitable gifts program. Our

matching charitable gifts program is discussed in greater detail following this table.

Compensation Arrangements for our Non-Management Directors

Our non-management directors receive a retainer at an annual rate of $160,000, with no meeting fees.

Committee chairs and Audit Committee members receive an additional retainer at an annual rate of $25,000

for the Audit Committee chair, $15,000 for the Risk Policy and Capital Committee chair and $10,000 for all

other committee chairs and each member of the Audit Committee. In recognition of the substantial amount of

time and effort necessary to fulfill the duties of non-executive Chairman of the Board, the annual retainer for

our non-executive Chairman, Mr. Laskawy, is $290,000. Our directors receive no equity compensation.

Additional Arrangements with our Non-Management Directors

Matching Charitable Gifts Program. To further our support for charitable giving, non-employee directors are

able to participate in our corporate matching gifts program on the same terms as our employees. Under this

program, gifts made by employees and directors to Section 501(c)(3) charities are matched, up to an aggregate

total of $10,000 in any calendar year, including up to $500 that may be matched on a 2-for-1 basis. Effective

January 1, 2011, we changed our matching charitable gifts program to reduce the maximum amount of

matching gifts to $5,000 in any calendar year and to eliminate the ability to match up to $500 on a 2-for-1

basis.

Stock Ownership Guidelines for Directors. In January 2009, our Board eliminated our stock ownership

requirements for directors and for senior officers in light of the difficulty of meeting the requirements at

current market prices and because we have ceased paying stock-based compensation.

Other Expenses. We also pay for or reimburse directors for out-of-pocket expenses incurred in connection

with their service on the Board, including travel to and from our meetings, accommodations, meals and

training.

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

Matters

The following table provides information as of December 31, 2010 with respect to shares of common stock

that may be issued under our existing equity compensation plans. At this time, we are prohibited from issuing

new stock without the prior written consent of Treasury under the terms of the senior preferred stock purchase

agreement, other than as required by the terms of any binding agreement in effect on the date of the senior

preferred stock purchase agreement, including as required by the terms of outstanding stock options and

restricted stock units.

Equity Compensation Plan Information

Plan Category

Number of

Securities to be

Issued upon

Exercise of

Outstanding

Options, Warrants

and Rights (#)

Weighted-Average

Exercise Price of

Outstanding

Options, Warrants

and Rights

Number of

Securities

Remaining Available

for Future Issuance

under Equity

Compensation Plans

(Excluding

Securities

Reflected in First

Column) (#)

As of December 31, 2010

Equity compensation plans approved by stockholders. . . . . 4,942,332(1) $75.07(2) 40,989,913(3)

Equity compensation plans not approved by stockholders . . N/A N/A N/A

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,942,332 $75.07 40,989,913

(1) This amount includes outstanding stock options; restricted stock units; deferred stock units; and shares issuable upon

the payout of deferred stock balances. Outstanding awards, options and rights include grants under the Fannie Mae

Stock Compensation Plan of 1993, the Stock Compensation Plan of 2003 and the payout of shares deferred upon the

settlement of awards made under the 1993 plan and a prior plan.

(2) The weighted average exercise price is calculated for the outstanding options and does not take into account restricted

stock units or deferred shares.

(3) This number of shares consists of 11,960,258 shares available under the 1985 Employee Stock Purchase Plan and

29,029,655 shares available under the Stock Compensation Plan of 2003 that may be issued as restricted stock, stock

bonuses, stock options or in settlement of restricted stock units, performance share program awards, stock appreciation

rights or other stock-based awards. No more than 1,433,784 of the shares issuable under the Stock Compensation Plan

of 2003 may be issued as restricted stock or restricted stock units vesting in full in fewer than three years,

performance shares with a performance period of less than one year or bonus shares subject to similar vesting

provisions or performance periods.

233
Beneficial Ownership

The following table shows the beneficial ownership of our common stock by each of our current directors and

the named executives, and all current directors and executive officers as a group, as of February 15, 2011,

unless otherwise indicated. As of that date, no director or named executive, nor all directors and current

executive officers as a group, owned as much as 1% of our outstanding common stock.

Name and Position

Common Stock

Beneficially

Owned Excluding

Stock Options

Stock Options

Exercisable or

Other Shares

Obtainable

Within 60 Days of

February 15,

2011(2)

Total

Common Stock

Beneficially

Owned

Amount and Nature of Beneficial Ownership(1)

David C. Benson(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,367 53,927 71,294

Executive Vice President—Capital Markets

Dennis R. Beresford . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,719 0 4,719

Director

Terence W. Edwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0

Executive Vice President—Credit Portfolio Management

W. Thomas Forrester . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0

Director

Brenda J. Gaines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487 0 487

Director

Charlynn Goins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0

Director

Frederick Barton Harvey, III . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0

Director

David C. Hisey(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,517 10,000 24,517

Executive Vice President and Deputy Chief Financial Officer

David M. Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0

Executive Vice President and Chief Financial Officer

Philip A. Laskawy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0

Chairman of the Board

Timothy J. Mayopoulos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0

Executive Vice President, Chief Administrative Officer,

General Counsel and Corporate Secretary

Egbert L. J. Perry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0

Director

Jonathan Plutzik. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0

Director

David H. Sidwell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0

Director

Michael J. Williams(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254,657 183,824 438,481

President and Chief Executive Officer

All directors and current executive officers as a group

(20 persons)(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457,286 403,965 861,251

(1) Beneficial ownership is determined in accordance with the rules of the SEC for computing the number of shares of

common stock beneficially owned by each person and the percentage owned. Holders of restricted stock have no

investment power but have sole voting power over the shares and, accordingly, these shares are included in this table.

Holders of stock options have no investment or voting power over the shares issuable upon the exercise of the options

until the options are exercised. Shares issuable upon the vesting of restricted stock units are not considered to be

beneficially owned under applicable SEC rules and, accordingly, restricted stock units are not included in the amounts

shown.

(2) These shares are issuable upon the exercise of outstanding stock options, except for 1,373 shares of deferred stock

held by Mr. Williams, which he could obtain within 60 days in certain circumstances.

(3) Mr. Benson’s shares include 5,986 shares of restricted stock.

234
(4) Mr. Hisey’s shares include 7,311 shares of restricted stock.

(5) Mr. Williams’ shares include 81,541 shares held jointly with his spouse, 700 shares held by his daughter, and

37,189 shares of restricted stock.

(6) The amount of shares held by all directors and current executive officers as a group includes 70,073 shares of

restricted stock held by our directors and current executive officers and 748 shares of stock held by their family

members. The beneficially owned total includes 1,373 shares of deferred stock. The shares in this table do not include

21,184 shares of restricted stock units over which the holders will not obtain voting rights or investment power until

the restrictions lapse.

The following table shows the beneficial ownership of our common stock by each holder of more than 5% of

our common stock as of February 15, 2011.

5% Holders

Common Stock

Beneficially Owned Percent of Class

Department of the Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Variable(1) 79.9%

1500 Pennsylvania Avenue, NW., Room 3000 Washington, DC 20220

(1) In September 2008, we issued to Treasury a warrant to purchase, for one one-thousandth of a cent ($0.00001) per

share, shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on

a fully diluted basis at the time the warrant is exercised. The warrant may be exercised in whole or in part at any time

until September 7, 2028. As of February 24, 2011, Treasury has not exercised the warrant. The information above

assumes Treasury beneficially owns no other shares of our common stock.

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

POLICIES AND PROCEDURES RELATING TO TRANSACTIONS WITH RELATED PERSONS

We review relationships and transactions in which Fannie Mae is a participant and in which any of our

directors and executive officers or their immediate family members has an interest to determine whether any

of those persons has a material interest in the relationship or transaction. Our current written policies and

procedures for the review, approval or ratification of relationships or transactions with related persons are set

forth in our:

• Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors;

• Nominating and Corporate Governance Committee Charter;

• Board of Directors’ delegation of authorities and reservation of powers;

• Code of Conduct for employees;

• Conflict of Interest Policy and Conflict of Interest Procedure for employees; and

• Employment of Relatives Practice.

In addition, depending on the circumstances, relationships and transactions with related persons may require

approval of the conservator pursuant to the delegation of authority issued to us by the conservator on

November 24, 2008 or may require the approval of Treasury pursuant to the senior preferred stock purchase

agreement.

Our Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors prohibits our

directors from engaging in any conduct or activity that is inconsistent with our best interests, as defined by the

conservator’s express directions. The Code of Conduct and Conflicts of Interest Policy for Members of the

Board of Directors requires each of our directors to excuse himself or herself from voting on any issue before

the Board that could result in a conflict, self-dealing or other circumstance where the director’s position as a

director would be detrimental to us or result in a noncompetitive, favored or unfair advantage to either the

director or the director’s associates. In addition, our directors must disclose to the Chair of the Nominating

and Corporate Governance Committee, or another member of the committee, any situation that involves or

appears to involve a conflict of interest. This includes, for example, any financial interest of a director, an

immediate family member of a director or a business associate of a director in any transaction being

235
considered by the Board, as well as any financial interest a director may have in an organization doing

business with us. Each of our directors also must annually certify compliance with the Code of Conduct and

Conflicts of Interest Policy for Members of the Board of Directors.

The Nominating and Corporate Governance Committee Charter and our Board’s delegation of authorities and

reservation of powers require the Nominating and Corporate Governance Committee to approve any

transaction that Fannie Mae engages in with any director, nominee for director or executive officer, or any

immediate family member of a director, nominee for director or executive officer, that is required to be

disclosed pursuant to Item 404 of Regulation S-K. In addition, the Board’s delegation of authorities and

reservation of powers requires the Board and the conservator to approve any action, including a related party

transaction, that in the reasonable business judgment of the Board at the time the action is taken is likely to

cause significant reputational risk.

Our Code of Conduct for employees requires that we and our employees seek to avoid any actual or apparent

conflict between our business interests and the personal interests of our employees or their relatives or

associates. An employee who knows or suspects a violation of our Code of Conduct must raise the issue with

the employee’s manager, another appropriate member of management, a member of our Human Resources

division or our Compliance and Ethics division.

Under our Conflict of Interest Policy and Conflict of Interest Procedure for employees, an employee who has

a potential or actual conflict of interest must request review and approval of the conflict. Conflicts requiring

review and approval include situations where the employee or a close relative of the employee has (1) a

financial interest worth more than $100,000 in an entity that does business with or seeks to do business with

or competes with Fannie Mae, (2) a financial interest worth more than $10,000 in such an entity combined

with the ability to control or influence Fannie Mae’s relationship with the entity, or (3) for senior vice

presidents and above, any financial interest in specified significant Fannie Mae counterparties and other

entities. In accordance with its charter, our Nominating and Corporate Governance Committee must review

activities engaged in by our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer,

Enterprise Risk Officer, General Counsel, Chief Audit Executive or Chief Compliance Officer that may result

in an actual or potential conflict of interest under the Employee Code of Conduct or Conflict of Interest Policy

and Conflict of Interest Procedure. Our Chief Executive Officer is responsible for reviewing and approving

conflicts involving other executive officers. If any conflicts are determined to involve significant reputational

risk, they must be raised to the conservator.

Our Employment of Relatives Practice prohibits, among other things, situations where an employee would

exercise influence, control or authority over the employee’s relative’s areas of responsibility or terms of

employment, including but not limited to job responsibilities, performance ratings or compensation.

Employees have an obligation to disclose the existence of any relation to another current employee prior to

applying for any position or engaging in any other work situation that may give rise to prohibited influence,

control or authority.

We are required by the conservator to obtain its approval for various matters, some of which may involve

relationships or transactions with related persons. These matters include actions involving the senior preferred

stock purchase agreement, the creation of any subsidiary or affiliate or any substantial non-ordinary course

transactions with any subsidiary or affiliate, actions involving hiring, compensation and termination benefits of

directors and officers at the executive vice president level and above and other specified executives, and any

action that in the reasonable business judgment of the Board at the time that the action is taken is likely to cause

significant reputational risk. The senior preferred stock purchase agreement requires us to obtain written

Treasury approval of transactions with affiliates unless, among other things, the transaction is upon terms no less

favorable to us than would be obtained in a comparable arm’s-length transaction with a non-affiliate or the

transaction is undertaken in the ordinary course or pursuant to a contractual obligation or customary employment

arrangement in existence at the time the senior preferred stock purchase agreement was entered into.

We require our directors and executive officers, not less than annually, to describe to us any situation

involving a transaction with us in which a director or executive officer could potentially have a personal

interest that would require disclosure under Item 404 of Regulation S-K. In addition, our Conflict of Interest

236
Policy and Conflict of Interest Procedure for employees require our executive officers to request review and

approval of any existing or proposed transaction with us, whether or not in the ordinary course of business, in

which that officer or a member of his or her immediate family has a direct or indirect interest.

TRANSACTIONS WITH RELATED PERSONS

Transactions with Treasury

Treasury beneficially owns more than 5% of the outstanding shares of our common stock by virtue of the

warrant we issued to Treasury on September 7, 2008. The warrant entitles Treasury to purchase shares of our

common stock equal to 79.9% of our outstanding common stock on a fully diluted basis on the date of

exercise, for an exercise price of $0.00001 per share, and is exercisable in whole or in part at any time on or

before September 7, 2028. We describe below our current agreements with Treasury.

Treasury Senior Preferred Stock Purchase Agreement

We issued the warrant to Treasury pursuant to the terms of the senior preferred stock purchase agreement we

entered into with Treasury on September 7, 2008. Under the senior preferred stock purchase agreement, we

also issued to Treasury one million shares of senior preferred stock. We issued the warrant and the senior

preferred stock as an initial commitment fee in consideration of Treasury’s commitment to provide up to

$100 billion in funds to us under the terms and conditions set forth in the senior preferred stock purchase

agreement. On May 6, 2009, Treasury amended the senior preferred stock purchase agreement to increase its

funding commitment to $200 billion and to revise some of the covenants in the agreement. Treasury further

amended the senior preferred stock purchase agreement on December 24, 2009 in order to further increase its

funding commitment to accommodate any net worth deficits for calendar quarters in 2010 through 2012. For

any net worth deficits after December 31, 2012, Treasury’s remaining funding commitment will be

$124.8 billion, ($200 billion less the $75.2 billion cumulatively drawn through March 31, 2010), less the

smaller of either (a) our positive net worth as of December 31, 2012 or (b) our cumulative draws from

Treasury for the calendar quarters in 2010 through 2012. The amendment also made some other revisions to

the agreement. The senior preferred stock purchase agreement also requires that we pay a quarterly

commitment fee, beginning on March 31, 2011, in an amount to be determined by Treasury no later than

December 31, 2010. In December 2010, Treasury notified FHFA that Treasury was waiving the quarterly

commitment fee for the first quarter of 2011 due to adverse conditions in the U.S. mortgage market and

because it believed that imposing the commitment fee would not generate increased compensation for

taxpayers. Treasury further noted that it would reevaluate matters in the next calendar quarter to determine

whether to set the quarterly commitment fee.

We have received an aggregate of $87.6 billion from Treasury under the senior preferred stock purchase

agreement, and in February 2011, the Acting Director of FHFA submitted a request on behalf of Fannie Mae

to Treasury for an additional $2.6 billion from Treasury under the senior preferred purchase stock agreement.

Through December 31, 2010, we have paid an aggregate of $10.2 billion to Treasury in dividends on the

senior preferred stock. See “Business—Conservatorship and Treasury Agreements—Treasury Agreements” for

more information about the senior preferred stock purchase agreement.

Treasury Making Home Affordable Program

On February 18, 2009, the Obama Administration announced its Homeowner Affordability and Stability Plan,

a plan to provide stability and affordability to the U.S. housing market. Pursuant to this plan, in March 2009,

the Administration announced the details of its Making Home Affordable Program, a program intended to

provide assistance to homeowners and prevent foreclosures. One of the primary initiatives under the Making

Home Affordable Program is the Home Affordable Modification Program, or HAMP, which is aimed at

helping borrowers whose loan is either currently delinquent or at imminent risk of default by modifying their

mortgage loan to make their monthly payments more affordable. In addition to our participation in the

Administration’s initiatives under the Making Home Affordable Program, Treasury engaged us to serve as

program administrator for loans modified under HAMP pursuant to the financial agency agreement between

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Treasury and us, dated February 18, 2009. See “Business—Making Home Affordable Program—Our Role as

Program Administrator” for a description of our principal activities as program administrator for HAMP and

other initiatives under the Making Home Affordable Program.

Under our arrangement with Treasury, Treasury has agreed to compensate us for a significant portion of the

work we have performed in our role as program administrator for HAMP and other initiatives under the

Making Home Affordable Program. In December 2009, Treasury established an initial budget for services

provided by us in our role as program administrator. This initial budget covered U.S. government fiscal years

2009, 2010 and 2011, and has since been updated to reflect changes in program scope. We expect to receive

an aggregate of approximately $200.5 million from Treasury for our work as program administrator for

U.S. government fiscal years 2009, 2010 and 2011, as well as receive from Treasury an additional amount of

approximately $45.3 million to be passed through to third-party vendors engaged by us for HAMP and other

initiatives under the Making Home Affordable Program. These amounts are based on current workload

estimates and program scope, and will be updated to reflect any changes in policy, workload and program

scope.

Treasury Housing Finance Agency Initiative

On October 19, 2009, we entered into a memorandum of understanding with Treasury, FHFA and Freddie Mac

that established terms under which we, Freddie Mac and Treasury would provide assistance to state and local

housing finance agencies (“HFAs”) so that the HFAs could continue to meet their mission of providing

affordable financing for both single-family and multifamily housing. Pursuant to this HFA initiative, we,

Freddie Mac and Treasury are providing assistance to the HFAs through two primary programs: a temporary

credit and liquidity facilities (“TCLF”) program, which is intended to improve the HFAs’ access to liquidity

for outstanding HFA bonds, and a new issue bond (“NIB”) program, which is intended to support new lending

by the HFAs. We entered into various agreements in November and December 2009 to implement these HFA

assistance programs, including several to which Treasury is a party. Pursuant to the TCLF program, Treasury

has purchased participation interests in temporary credit and liquidity facilities provided by us and Freddie

Mac to the HFAs, which facilities create a credit and liquidity backstop for the HFAs. Pursuant to the NIB

program, Treasury has purchased new securities issued by us and Freddie Mac backed by new housing bonds

issued by the HFAs. Freddie Mac is also providing assistance to the HFAs through a multifamily credit

enhancement program. We did not participate in this program.

The total amount originally established by Treasury for the TCLF program and the NIB program was

$23.4 billion: an aggregate of $8.2 billion for the TCLF program (of which $7.7 billion consisted of principal

and approximately $500 million consisted of accrued interest) and an aggregate of $15.2 billion for the NIB

program (of which $12.4 billion related to single-family bonds and $2.8 billion related to multifamily bonds).

The amounts outstanding under these programs have been reduced since the programs were established and

will continue to be reduced over time as principal payments are received on the mortgage loans financed by

the NIB program and as liquidity facilities under the TCLF program are replaced by the HFAs. As of

December 31, 2010, the total outstanding principal balance under the TCLF program was $6.9 billion and the

total unpaid principal amount outstanding under the NIB program was $15.2 billion.

We and Freddie Mac administer these programs on a coordinated basis. We provide temporary credit and

liquidity facility support and issued securities backed by HFA bonds on a 50-50 pro rata basis with Freddie

Mac under these programs. Treasury will bear the initial losses of principal under the TCLF program and the

NIB program up to 35% of total principal on a combined program-wide basis, and thereafter we and Freddie

Mac each will bear the losses of principal that are attributable to our own portion of the temporary credit and

liquidity facilities and the securities that we have issued. Treasury will bear all losses of unpaid interest under

the two programs. Accordingly, as of December 31, 2010, Fannie Mae’s maximum potential risk of loss under

these programs, assuming a 100% loss of principal, was approximately $7.2 billion.

FHFA, as conservator, approved the senior preferred stock purchase agreement and the amendments to the

agreement, our role as program administrator for HAMP and other initiatives under the Making Home

Affordable Program, and the HFA transactions described above.

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Transactions with PHH Corporation

Terence W. Edwards has been Executive Vice President—Credit Portfolio Management of Fannie Mae since

September 14, 2009, when he joined Fannie Mae. Prior to joining Fannie Mae, Mr. Edwards served as the

President and Chief Executive Officer, as well as a member of the Board of Directors, of PHH Corporation,

until June 17, 2009. Mr. Edwards continued to be employed by PHH Corporation until September 11, 2009.

PHH Mortgage Corporation (“PHH”), a subsidiary of PHH Corporation, is a single-family seller-servicer

customer of Fannie Mae. We regularly enter into transactions with PHH in the ordinary course of this business

relationship. In 2010, PHH delivered approximately $15 billion in mortgage loans to us, which included the

delivery of loans for direct payment and the delivery of pools of mortgage loans in exchange for Fannie Mae

MBS. We acquired most of these mortgage loans pursuant to our early funding programs. This represented

approximately 2.5% of our single-family business volume in 2010 and made PHH our eighth-largest singlefamily customer. In addition, as of December 31, 2010, PHH serviced approximately $66 billion of singlefamily mortgage loans either owned directly by Fannie Mae or backing Fannie Mae MBS, which represented

approximately 2.4% of our single-family servicing book, making PHH our seventh-largest servicer. PHH also

entered into transactions with us to purchase or sell approximately $16 billion in Fannie Mae, Freddie Mac

and Ginnie Mae mortgage-related securities in 2010. As a single-family seller-servicer customer, PHH also

pays us fees for its use of certain Fannie Mae technology, enters into risk-sharing arrangements with us, and

provides us with collateral to secure some of its obligations. PHH renewed its delivery commitment to us in

November 2010 for a 17-month term.

In December 2010, we entered into a committed purchase facility with PHH, pursuant to which PHH may

have, at any given time during the term of the facility, up to $1.0 billion in outstanding early funding

transactions with us. This agreement is in addition to our existing uncommitted transaction limits with PHH

under our early funding programs. We have also provided PHH with an early reimbursement facility to fund

certain of PHH’s servicing advances. The maximum amount outstanding under this early reimbursement

facility during 2010 was approximately $68 million. PHH is also a participating lender in our HomePath»

Mortgage financing initiative relating to our REO properties.

We believe that Fannie Mae is one of PHH’s largest business partners and that transactions with Fannie Mae

are material to PHH’s business. According to PHH Corporation’s quarterly report on Form 10-Q for the

quarter ended September 30, 2010, 96% of its mortgage loan sales during the first nine months of 2010 were

to Fannie Mae, Freddie Mac or Ginnie Mae, and its business is highly dependent on programs administered by

the GSEs.

Pursuant to a separation agreement with PHH Corporation, Mr. Edwards is entitled to receive additional

compensation from PHH Corporation for his prior services to the company. Some of this additional

compensation is dependent on the performance of PHH Corporation. According to Forms 8-K filed by PHH

Corporation on August 5, 2009 and September 16, 2009, Mr. Edwards’ separation agreement with PHH

Corporation provided that he would receive the following additional compensation from PHH Corporation:

(a) an amount equal to his base salary for a 24-month period beginning on PHH Corporation’s first regular pay

date after March 11, 2010; (b) annual cash bonuses for calendar years 2009, 2010 and 2011 in an amount

equal to the bonus he would have received based on actual performance of the company (except that the 2011

bonus will be prorated to reflect the actual number of months covered by the severance period in 2011), which

bonuses will be paid to Mr. Edwards at the same time bonuses are payable to corporate employees, but no

later than March 15 after the end of the applicable performance year; and (c) a cash transition payment of

$50,000 on PHH Corporation’s first regular pay date after March 11, 2010. In addition, the outstanding

options and restricted stock units that have been previously awarded to him will continue to vest and, on the

last day of the severance period, all remaining unvested options and restricted stock units will become fully

vested, except for the 2009 performance-based restricted stock units which will become vested only to the

extent that performance goals have been satisfied.

Our policies and procedures for the review and approval of related party transactions described above under

“Policies and Procedures Relating to Transactions with Related Persons” did not require the review, approval

or ratification of the above-described transactions with PHH. Our Nominating and Corporate Governance

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Committee Charter and our Board’s delegation of authorities did not require the Nominating and Corporate

Governance Committee to review and approve these transactions because Fannie Mae did not engage in any

such transactions directly with Mr. Edwards. As required under our Conflict of Interest Policy and Conflict of

Interest Procedure for employees, Mr. Edwards reported his ongoing financial interest in PHH Corporation at

the time of his employment and requested review and approval of the conflict. Our Chief Executive Officer

reviewed and approved of the conflict, and to address the conflict has required that Mr. Edwards be recused

from all matters relating to PHH.

Transactions with Phelan Firms

Kenneth J. Phelan has been Executive Vice President—Chief Risk Officer from April 2009 through

February 2011. Mr. Phelan’s brother, Lawrence T. Phelan, is an equity partner with ownership interests in two

law firms that perform services for Fannie Mae, as well as a minority owner in a company that performs

services for these law firms on Fannie Mae matters. The services performed by these firms for Fannie Mae

include loss mitigation, foreclosures, bankruptcies, REO matters, evictions and related services.

Phelan Hallinan and Schmieg. Lawrence Phelan has an approximately 49% ownership interest in Phelan

Hallinan and Schmieg, LLP (“PHS”), a law firm representing lenders and servicers in Pennsylvania. PHS or

its predecessor (Federman and Phelan) has provided legal services to Fannie Mae for over 25 years, and is

currently part of Fannie Mae’s retained attorney network. In 2010, PHS invoiced approximately $8.5 million

in legal fees relating to work performed for Fannie Mae, which represented a significant portion of the firm’s

overall legal fees invoiced in 2010. PHS also invoiced approximately $17.9 million in third-party costs relating

to Fannie Mae matters in 2010. In 2009, PHS invoiced approximately $6.8 million in legal fees relating to

work performed for Fannie Mae, which represented a significant portion of the firm’s overall legal fees

invoiced in 2009. PHS also invoiced approximately $15.3 million in third-party costs relating to Fannie Mae

matters in 2009.

Phelan Hallinan Schmieg and Diamond. Lawrence Phelan also has an approximately 41% ownership interest in

Phelan Hallinan Schmieg and Diamond, PC (“PHSD”), a law firm representing lenders and servicers in New

Jersey. PHSD has provided legal services to Fannie Mae for over 10 years, and is currently part of Fannie Mae’s

retained attorney network. PHSD invoiced approximately $6.8 million in legal fees in 2010 relating to work

performed for Fannie Mae, which represented a significant portion of the firm’s overall legal fees invoiced in

2010. PHSD also invoiced approximately $11.2 million in third-party costs relating to Fannie Mae matters in

2010. PHSD invoiced approximately $4.7 million in legal fees in 2009 relating to work performed for Fannie

Mae, which represented a significant portion of the firm’s overall legal fees invoiced in 2009. PHSD also

invoiced approximately $6.7 million in third-party costs relating to Fannie Mae matters in 2009.

Full Spectrum Holdings. Lawrence Phelan also has an approximately 31% interest in Full Spectrum

Holdings LCC, a company that provides support services for PHS, PHSD and other firms. Full Spectrum

Holdings performs services such as title searches, investigations and service of process for PHSD and PHS on

Fannie Mae-related matters. Full Spectrum Holdings billed PHS and PHSD approximately $12.9 million for

work performed on Fannie Mae matters in 2010, which represented a significant portion of their 2010

revenues. This amount represents approximately 44% of the third-party costs invoiced by PHS and PHSD in

2010 described above. Full Spectrum Holdings billed PHS and PHSD approximately $8.3 million for work

performed on Fannie Mae matters in 2009, which represented a significant portion of their 2009 revenues.

This amount represents approximately 38% of the third-party costs invoiced by PHS and PHSD in 2009

described above.

Kenneth Phelan has no affiliation with PHS, PHSD or Full Spectrum Holdings and receives no compensation

or other financial benefits from these firms. In exercising his duties, Kenneth Phelan is required to recuse

himself from any decisions specifically relating to Fannie Mae’s relationship or transactions with PHS, PHSD

or Full Spectrum Holdings. In accordance with the requirements of our Nominating and Corporate Governance

Committee Charter and our Board’s delegation of authorities, the Nominating and Corporate Governance

Committee has approved Fannie Mae’s transactions with these firms.

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Transactions involving The Integral Group LLC

Mr. Perry, who joined our Board in December 2008, is the Chairman, Chief Executive Officer and controlling

shareholder of The Integral Group LLC, referred to as Integral. Over the past nine years, our Multifamily

(formerly, Housing and Community Development) business has invested indirectly in certain limited

partnerships or limited liability companies that are controlled and managed by entities affiliated with Integral,

in the capacity of general partner or managing member, as the case may be. These limited partnerships or

limited liability companies are referred to as the Integral Property Partnerships. The Integral Property

Partnerships own and manage LIHTC properties. We also hold multifamily mortgage loans made to borrowing

entities sponsored by Integral. We believe that Mr. Perry has no material direct or indirect interest in these

transactions. Mr. Perry has informed us that Integral accepted no further equity investments from us relating to

Integral Property Partnerships beginning in December 2008, when he joined our Board. Mr. Perry has also

informed us that Integral does not intend to seek debt financing intended specifically to be purchased by us,

although, as a secondary market participant, in the ordinary course of our business we may purchase

multifamily mortgage loans made to borrowing entities sponsored by Integral. See “Director Independence—

Our Board of Directors” below for further information.

DIRECTOR INDEPENDENCE

Our Board of Directors, with the assistance of the Nominating and Corporate Governance Committee, has

reviewed the independence of all current Board members under the requirements set forth in FHFA’s corporate

governance regulations (which requires the standard of independence adopted by the NYSE) and under the

standards of independence adopted by the Board, as set forth in our Corporate Governance Guidelines and

outlined below. It is the policy of our Board of Directors that a substantial majority of our seated directors will

be independent in accordance with these standards. Our Board is currently structured so that all but one of our

directors, our Chief Executive Officer, is independent. Based on its review, the Board has determined that all

of our non-employee directors meet the director independence requirements set forth in FHFA’s corporate

governance regulations and in our Corporate Governance Guidelines.

Independence Standards

Under the standards of independence adopted by our Board, which meet and in some respects exceed the definition

of independence required by FHFA’s corporate governance regulations (which requires the standard of

independence adopted by the NYSE), an “independent director” must be determined to have no material

relationship with us, either directly or through an organization that has a material relationship with us. A

relationship is “material” if, in the judgment of the Board, it would interfere with the director’s independent

judgment. The Board did not consider the Board’s duties to the conservator, together with the federal government’s

controlling beneficial ownership of Fannie Mae, in determining independence of the Board members.

In addition, under FHFA’s corporate governance regulations, our Audit Committee is required to be in

compliance with the NYSE’s listing requirements for audit committees, under which members of a company’s

audit committee must meet additional, heightened independence criteria. Our own independence standards

require all independent directors to meet these criteria.

To assist it in determining whether a director is independent, our Board has adopted the standards set forth

below, which are posted on our Web site, www.fanniemae.com, under “Corporate Governance” in the “About

Us” section of our Web site:

• A director will not be considered independent if, within the preceding five years:

• the director was our employee; or

• an immediate family member of the director was employed by us as an executive officer.

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• A director will not be considered independent if:

• the director is a current partner or employee of our external auditor, or within the preceding five years,

was (but is no longer) a partner or employee of our external auditor and personally worked on our audit

within that time; or

• an immediate family member of the director is a current partner of our external auditor, or is a current

employee of our external auditor and personally works on Fannie Mae’s audit, or, within the preceding

five years, was (but is no longer) a partner or employee of our external auditor and personally worked

on our audit within that time.

• A director will not be considered independent if, within the preceding five years:

• the director was employed by a company at a time when one of our current executive officers sat on

that company’s compensation committee; or

• an immediate family member of the director was employed as an officer by a company at a time when

one of our current executive officers sat on that company’s compensation committee.

• A director will not be considered independent if, within the preceding five years:

• the director received any compensation from us, directly or indirectly, other than fees for service as a

director; or

• an immediate family member of the director received any compensation from us, directly or indirectly,

other than compensation received for service as our employee (other than an executive officer).

• A director will not be considered independent if:

• the director is a current executive officer, employee, controlling stockholder or partner of a company or

other entity that does or did business with us and to which we made, or from which we received,

payments within the preceding five years that, in any single fiscal year, were in excess of $1 million or

2% of the entity’s consolidated gross annual revenues, whichever is greater; or

• an immediate family member of the director is a current executive officer of a company or other entity

that does or did business with us and to which we made, or from which we received, payments within

the preceding five years that, in any single fiscal year, were in excess of $1 million or 2% of the

entity’s consolidated gross annual revenues, whichever is greater.

• A director will not be considered independent if the director or the director’s spouse is an executive

officer, employee, director or trustee of a nonprofit organization to which we make or have made

contributions within the preceding three years (including contributions made by the Fannie Mae

Foundation prior to December 31, 2008) that in any year were in excess of 5% of the organization’s

consolidated gross annual revenues, or $120,000, whichever is less (amounts contributed under our

Matching Gifts Program are not included in the contributions calculated for purposes of this standard).

The Nominating and Corporate Governance Committee also will receive periodic reports regarding

charitable contributions to organizations otherwise associated with a director or any spouse of a director.

After considering all the facts and circumstances, our Board may determine in its judgment that a director is

independent (in other words, the director has no relationship with us that would interfere with the director’s

independent judgment), even though the director does not meet the standards listed above, so long as the

determination of independence is consistent with the NYSE definition of “independence.” Where the

guidelines above and the NYSE independence requirements do not address a particular relationship, the

determination of whether the relationship is material, and whether a director is independent, will be made by

our Board, based upon the recommendation of the Nominating and Corporate Governance Committee.

Our Board of Directors

Our Board of Directors, with the assistance of the Nominating and Corporate Governance Committee, has

reviewed the independence of all current Board members under the requirements set forth in FHFA’s corporate

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governance regulations (which requires the standard of independence adopted by the NYSE) and under the

standards of independence adopted by the Board contained in our Corporate Governance Guidelines, as

outlined above. Based on its review, the Board has affirmatively determined that all of our non-employee

directors meet the director independence standards of our Guidelines and the NYSE, and that each of the

following nine directors is independent: Philip A. Laskawy, Dennis R. Beresford, William Thomas Forrester,

Brenda J. Gaines, Charlynn Goins, Frederick B. Harvey III, Egbert L. J. Perry, Jonathan Plutzik and David H.

Sidwell.

In determining the independence of each of these Board members, the Board of Directors considered the

following relationships in addition to those addressed by the standards contained in our Guidelines as set forth

above:

• Certain of these Board members also serve as directors or advisory Board members of other companies

that engage in business with Fannie Mae. In each of these cases, the Board members are only directors or

advisory Board members of these other companies. In addition, in most instances, the payments made by

or to Fannie Mae pursuant to these relationships during the past five years fell below our Guidelines’

thresholds of materiality for a Board member that is a current executive officer, employee, controlling

shareholder or partner of a company engaged in business with Fannie Mae. In light of these facts, the

Board of Directors has concluded that these business relationships are not material to the independence of

these Board members.

• Certain of these Board members also serve as trustees or board members for charitable organizations that

have received donations from Fannie Mae. In each case, the amounts of these charitable donations fell

substantially below our Guidelines’ thresholds of materiality for a Board member who is a current trustee

or board member of a charitable organization that receives donations from Fannie Mae. In light of this

fact, the Board of Directors has concluded that these relationships with charitable organizations are not

material to the independence of these Board members.

• Certain of these Board members serve as directors of other companies that hold Fannie Mae fixed income

securities or control entities that direct investments in such securities. It is not possible for Fannie Mae to

determine the extent of the holdings of these companies in Fannie Mae fixed income securities as all

payments to holders are made through the Federal Reserve, and most of these securities are held in turn

by financial intermediaries. Each director has confirmed that the transactions by these other companies in

Fannie Mae fixed income securities are entered into in the ordinary course of business of these companies

and are not entered into at the direction of, or upon approval by, him or her in his or her capacity as a

director of these companies. In light of these facts, the Board of Directors has concluded that these

business relationships are not material to the independence of these Board members.

• Mr. Perry is an executive officer and majority shareholder of The Integral Group LLC, which indirectly

does business with Fannie Mae. This business includes the following:

• Fannie Mae purchased a 50% participation in a mortgage loan made in 2001 to a limited partnership

borrower sponsored by Integral. This mortgage loan was paid off in 2006.

• Since 2006, Fannie Mae has held six multifamily mortgage loans made to six borrowing entities

sponsored by Integral. In each case, Integral participates in the borrowing entity as a general partner of

the limited partnership, or as a managing member of the limited liability company, as the case may be,

and holds a 0.01% economic interest in such entity. The aggregate unpaid principal balance of these

loans as of December 31, 2010 constituted approximately 5% of Integral’s total debt outstanding. The

borrowing entities have made interest payments on these loans. The total amount of Integral’s pro rata

share of the interest payments made to Fannie Mae on these loans since 2006 is less than $1 million.

• Fannie Mae has invested as a limited partner or member in certain LIHTC funds that in turn have

invested indirectly as a limited partner or member in various Integral Property Partnerships, which are

lower-tier project partnerships or limited liability companies that own LIHTC properties. Integral

participates indirectly as a member or the general partner of the Integral Property Partnerships (each a

“Project General Partner”). The Integral Property Partnerships construct, develop and manage housing

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projects, a portion of which includes affordable housing units. Each Project General Partner and its

affiliates earn certain fees each year in connection with those project activities, and such fees are paid

from income generated by the project (other than certain developer fees paid from development

sources). Fannie Mae’s indirect investments in the Integral Property Partnerships, through the LIHTC

funds, have not resulted in any direct payments by Fannie Mae to any Project General Partner or its

affiliates, including Integral. Fannie Mae’s indirect equity investment in the Integral Property

Partnerships as of December 31, 2010 constituted approximately 3% of the total capitalization and

approximately 10% of the total equity in all of the Integral Property Partnerships.

The aggregate debt service and other required payments made, directly and indirectly, to or on behalf of

Fannie Mae pursuant to these relationships with Integral fall below our Guidelines’ thresholds of

materiality for a Board member who is a current executive officer, employee, controlling shareholder or

partner of a company that engages in business with Fannie Mae. In addition, as a limited partner or

member in the LIHTC funds, which in turn are limited partners in the Integral Property Partnerships,

Fannie Mae has no direct dealings with Integral or Mr. Perry and has not been involved in the

management of the Integral Property Partnerships. Mr. Perry also was not generally aware of the identity

of the limited partners or members of the LIHTC funds, as Integral sells the partnership or LLC interests

to syndicators who, in turn, syndicate these interests to limited partners or members of their choosing.

Further, Integral has not accepted additional equity investments from Fannie Mae since Mr. Perry joined

the Board and Mr. Perry has informed Fannie Mae that Integral does not intend to seek debt financing

specifically to be purchased by Fannie Mae. Based on the foregoing, the Board of Directors has

concluded that these business relationships are not material to Mr. Perry’s independence.

• Mr. Plutzik’s wife, Leslie Goldwasser, is a Managing Director with Credit Suisse. She is not an executive

officer of Credit Suisse. Fannie Mae has multiple business relationships with Credit Suisse in the ordinary

course of its business. We believe that payments made by or to Fannie Mae pursuant to its relationships

with Credit Suisse during the past five years likely fell below our Guidelines’ thresholds of materiality for

when an immediate family member of a director is a current executive officer, employee, controlling

shareholder or partner of a company engaged in business with Fannie Mae. Ms. Goldwasser has

confirmed that she has no direct or indirect interest or involvement in any transactions between Fannie

Mae and Credit Suisse and that her compensation is not affected directly or indirectly by any such

transactions. In light of these facts, the Board of Directors has concluded that these business relationships

are not material to Mr. Plutzik’s independence.

The Board determined that none of these relationships would interfere with the director’s independent

judgment.

Mr. Williams is not considered an independent director under the Guidelines because of his position as Chief

Executive Officer.

Item 14. Principal Accounting Fees and Services

The Audit Committee of our Board of Directors is directly responsible for the appointment, oversight and

evaluation of our independent registered public accounting firm, subject to conservator approval of matters

relating to retention and termination. In accordance with the Audit Committee’s charter, it must approve, in

advance of the service, all audit and permissible non-audit services to be provided by our independent

registered public accounting firm and establish policies and procedures for the engagement of the external

auditor to provide audit and permissible non-audit services. Our independent registered public accounting firm

may not be retained to perform non-audit services specified in Section 10A(g) of the Exchange Act.

Deloitte & Touche LLP was our independent registered public accounting firm for the years ended

December 31, 2010 and 2009. Deloitte & Touche LLP has advised the Audit Committee that they are

independent accountants with respect to the company, within the meaning of standards established by the

PCAOB and federal securities laws administered by the SEC.

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The following table sets forth the aggregate estimated or actual fees for professional services provided by

Deloitte & Touche LLP in 2010 and 2009, including fees for the 2010 and 2009 audits.

Description of Fees 2010 2009

For the Year Ended

December 31,

Audit fees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,000,000 $42,600,000

Audit-related fees(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000 2,800,000

Total fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,500,000 $45,400,000

(1) 2009 amounts include costs associated with the audit of our adoption of the new accounting standard on consolidation.

(2) Mainly consists of: (1) fees billed for attest-related services on securitization transactions and (2) in 2009,

reimbursement of costs associated with responding to subpoenas relating to Fannie Mae’s securities litigation.

Pre-Approval Policy

The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services to be provided by

the independent registered public accounting firm. The independent registered public accounting firm and

management are required to present reports on the nature of the services provided by the independent

registered public accounting firm for the past year and the fees for such services, categorized into audit

services, audit-related services, tax services and other services.

In connection with its approval of Deloitte & Touche as Fannie Mae’s independent registered public

accounting firm for Fannie Mae’s 2010 integrated audit, the Audit Committee delegated the authority to preapprove any additional audit and audit-related services to its Chairman, Mr. Beresford, who was required to

report any such pre-approvals at the next scheduled meeting of the Audit Committee. Additionally, any

services provided by Deloitte & Touche outside of the scope of this engagement must be approved by the

Conservator.

In 2010, we paid no fees to the independent registered public accounting firm pursuant to the de minimis

exception established by the SEC, and all services were pre-approved.

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PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) Documents filed as part of this report

1. Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Balance Sheets as of December 31, 2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Statements of Operations for the years ended December 31, 2010, 2009, and 2008. . F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, and

2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5

Consolidated Statements of Changes in Equity (Deficit) for the years ended December 31, 2010,

2009, and 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8

Note 1— Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8

Note 2— Adoption of the New Accounting Standards on the Transfers of Financial Assets

and Consolidation of Variable Interest Entities ................................... F-36

Note 3— Consolidations and Transfers of Financial Assets .......................... F-45

Note 4— Mortgage Loans .................................................. F-50

Note 5— Allowance for Loan Losses and Reserve for Guaranty Losses ................. F-55

Note 6— Investments in Securities ............................................ F-60

Note 7— Financial Guarantees and Master Servicing............................... F-68

Note 8— Acquired Property, Net ............................................. F-73

Note 9— Short-term Borrowings and Long-term Debt .............................. F-74

Note 10— Derivative Instruments and Hedging Activities ............................ F-77

Note 11— Income Taxes .................................................... F-83

Note 12— Loss Per Share ................................................... F-86

Note 13— Stock-Based Compensation .......................................... F-87

Note 14— Employee Retirement Benefits ........................................ F-89

Note 15— Segment Reporting . . .............................................. F-96

Note 16— Equity (Deficit) ................................................... F-103

Note 17— Regulatory Capital Requirements ...................................... F-110

Note 18— Concentrations of Credit Risk ........................................ F-112

Note 19— Fair Value ....................................................... F-117

Note 20— Commitments and Contingencies ...................................... F-134

Note 21— Selected Quarterly Financial Information (Unaudited) ....................... F-138

2. Financial Statement Schedules

None.

3. Exhibits

An index to exhibits has been filed as part of this report beginning on page E-1 and is incorporated

herein by reference.

246
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has

duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Federal National Mortgage Association

/s/ Michael J. Williams

Michael J. Williams

President and Chief Executive Officer

Date: February 24, 2011

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes

and appoints Michael J. Williams and David C. Hisey, and each of them severally, his or her true and lawful

attorney-in-fact with power of substitution and resubstitution to sign in his or her name, place and stead, in

any and all capacities, to do any and all things and execute any and all instruments that such attorney may

deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and

requirements of the U.S. Securities and Exchange Commission in connection with the Annual Report on

Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he or she might or

could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone,

and his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the

following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature Title Date

/s/ Philip A. Laskawy

Philip A. Laskawy

Chairman of the Board of Directors February 24, 2011

/s/ Michael J. Williams

Michael J. Williams

President and Chief Executive Officer and

Director

February 24, 2011

/s/ David C. Hisey

David C. Hisey

Executive Vice President and Deputy Chief

Financial Officer

February 24, 2011

/s/ Dennis R. Beresford

Dennis R. Beresford

Director February 24, 2011

/s/ William Thomas Forrester

William Thomas Forrester

Director February 24, 2011

247
Signature Title Date

/s/ Brenda J. Gaines

Brenda J. Gaines

Director February 24, 2011

/s/ Charlynn Goins

Charlynn Goins

Director February 24, 2011

/s/ Frederick B. Harvey III

Frederick B. Harvey III

Director February 24, 2011

/s/ Egbert L. J. Perry

Egbert L. J. Perry

Director February 24, 2011

/s/ Jonathan Plutzik

Jonathan Plutzik

Director February 24, 2011

/s/ David H. Sidwell

David H. Sidwell

Director February 24, 2011

248
INDEX TO EXHIBITS

Item Description

3.1 Fannie Mae Charter Act (12 U.S.C. § 1716 et seq.) as amended through July 30, 2008

3.2 Fannie Mae Bylaws, as amended through January 30, 2009 (Incorporated by reference to

Exhibit 3.2 to Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2008,

filed February 26, 2009.)

4.1 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series D (Incorporated by

reference to Exhibit 4.1 to Fannie Mae’s registration statement on Form 10, filed March 31,

2003.)

4.2 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series E (Incorporated by

reference to Exhibit 4.2 to Fannie Mae’s registration statement on Form 10, filed March 31,

2003.)

4.3 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series F (Incorporated by

reference to Exhibit 4.3 to Fannie Mae’s registration statement on Form 10, filed March 31,

2003.)

4.4 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series G (Incorporated by

reference to Exhibit 4.4 to Fannie Mae’s registration statement on Form 10, filed March 31,

2003.)

4.5 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series H (Incorporated by

reference to Exhibit 4.5 to Fannie Mae’s registration statement on Form 10, filed March 31,

2003.)

4.6 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series I (Incorporated by

reference to Exhibit 4.6 to Fannie Mae’s registration statement on Form 10, filed March 31,

2003.)

4.7 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series L (Incorporated by

reference to Exhibit 4.7 to Fannie Mae’s Quarterly Report on Form 10-Q, filed August 8, 2008.)

4.8 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series M (Incorporated by

reference to Exhibit 4.8 to Fannie Mae’s Quarterly Report on Form 10-Q, filed August 8, 2008.)

4.9 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series N (Incorporated by

reference to Exhibit 4.9 to Fannie Mae’s Quarterly Report on Form 10-Q, filed August 8, 2008.)

4.10 Certificate of Designation of Terms of Fannie Mae Non-Cumulative Convertible Preferred Stock,

Series 2004-1(Incorporated by reference to Exhibit 4.10 to Fannie Mae’s Annual Report on

Form 10-K for the year ended December 31, 2009, filed February 26, 2010.)

4.11 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series O (Incorporated by

reference to Exhibit 4.11 to Fannie Mae’s Annual Report on Form 10-K for the year ended

December 31, 2009, filed February 26, 2010.)

4.12 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series P (Incorporated by

reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed September 28, 2007.)

4.13 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series Q (Incorporated by

reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed October 5, 2007.)

4.14 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series R (Incorporated by

reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed November 21, 2007.)

4.15 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series S (Incorporated by

reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed December 11, 2007.)

4.16 Certificate of Designation of Terms of Fannie Mae Non-Cumulative Mandatory Convertible

Preferred Stock, Series 2008-1 (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current

Report on Form 8-K, filed May 14, 2008.)

4.17 Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series T (Incorporated by

reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed May 19, 2008.)

4.18 Certificate of Designation of Terms of Variable Liquidation Preference Senior Preferred Stock,

Series 2008-2 (Incorporated by reference to Exhibit 4.2 to Fannie Mae’s Current Report on

Form 8-K, filed September 11, 2008.)

E-1
Item Description

4.19 Warrant to Purchase Common Stock, dated September 7, 2008 conservator (Incorporated by

reference to Exhibit 4.3 to Fannie Mae’s Current Report on Form 8-K, filed September 11, 2008.)

4.20 Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of September 26,

2008, between the United States Department of the Treasury and Federal National Mortgage

Association, acting through the Federal Housing Finance Agency as its duly appointed conservator

(Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report on Form 8-K, filed

October 2, 2008.)

4.21 Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of

May 6, 2009, between the United States Department of the Treasury and Federal National

Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed

conservator (Incorporated by reference to Exhibit 4.21 to Fannie Mae’s Quarterly Report on

Form 10-Q, filed May 8, 2009.)

4.22 Second Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated

as of December 24, 2009, between the United States Department of the Treasury and Federal

National Mortgage Association, acting through the Federal Housing Finance Agency as its duly

appointed conservator (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report

on Form 8-K, filed December 30, 2009.)

10.1 Fannie Mae’s Elective Deferred Compensation Plan, as amended effective November 15, 2004†

(Incorporated by reference to Exhibit 10.21 to Fannie Mae’s Annual Report on Form 10-K for the

year ended December 31, 2007, filed February 27, 2008.)

10.2 Amendment to Fannie Mae Elective Deferred Compensation Plan I, effective October 27, 2008†

(Incorporated by reference to Exhibit 10.7 to Fannie Mae’s Annual Report on Form 10-K for the

year ended December 31, 2008, filed February 26, 2009.)

10.3 Fannie Mae Elective Deferred Compensation Plan II† (Incorporated by reference to Exhibit 10.7

to Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2007, filed

February 27, 2008.)

10.4 Amendment to Fannie Mae Elective Deferred Compensation Plan II, effective April 29, 2008†

(Incorporated by reference to Exhibit 10.1 to Fannie Mae’s Quarterly Report on Form 10-Q, filed

August 8, 2008.)

10.5 Amendment to Fannie Mae Elective Deferred Compensation Plan II, effective October 27, 2008†

(Incorporated by reference to Exhibit 10.10 to Fannie Mae’s Annual Report on Form 10-K for the

year ended December 31, 2008, filed February 26, 2009.)

10.6 Compensation Repayment Provisions† (Incorporated by reference to Exhibit 99.1 to Fannie Mae’s

Current Report on Form 8-K, filed December 24, 2009.)

10.7 Long-Term Incentive Plan, effective December 16, 2009† (Incorporated by reference to

Exhibit 10.9 to Fannie Mae’s Annual Report on Form 10-K for the year ended December 31,

2009, filed February 26, 2010.)

10.8 Deferred Pay Plan, effective December 16, 2009† (Incorporated by reference to Exhibit 10.10 to

Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2009, filed

February 26, 2010.)

10.9 Fannie Mae Form of Indemnification Agreement for directors and officers of Fannie Mae

(Incorporated by reference to Exhibit 10.15 to Fannie Mae’s Annual Report on Form 10-K for the

year ended December 31, 2008, filed February 26, 2009.)

10.10 Federal National Mortgage Association Supplemental Pension Plan, as amended November 20,

2007† (Incorporated by reference to Exhibit 10.10 to Fannie Mae’s Annual Report on Form 10-K

for the year ended December 31, 2007, filed February 27, 2008.)

10.11 Amendment to Fannie Mae Supplemental Pension Plan for Internal Revenue Code Section 409A,

effective January 1, 2009† (Incorporated by reference to Exhibit 10.11 to Fannie Mae’s Annual

Report on Form 10-K for the year ended December 31, 2007, filed February 27, 2008.)

10.12 Amendment to Fannie Mae Supplemental Pension Plan, executed December 22, 2008†

(Incorporated by reference to Exhibit 10.18 to Fannie Mae’s Annual Report on Form 10-K for the

year ended December 31, 2008, filed February 26, 2009.)

E-2
Item Description

10.13 Fannie Mae Supplemental Pension Plan of 2003, as amended November 20, 2007† (Incorporated

by reference to Exhibit 10.12 to Fannie Mae’s Annual Report on Form 10-K for the year ended

December 31, 2007, filed February 27, 2008.)

10.14 Amendment to Fannie Mae Supplemental Pension Plan of 2003 for Internal Revenue Code

Section 409A, effective January 1, 2009† (Incorporated by reference to Exhibit 10.13 to Fannie

Mae’s Annual Report on Form 10-K for the year ended December 31, 2007, filed February 27,

2008.)

10.15 Amendment to Fannie Mae Supplemental Pension Plan of 2003 for Internal Revenue Code

Section 409A, adopted December 22, 2008† (Incorporated by reference to Exhibit 10.21 to Fannie

Mae’s Annual Report on Form 10-K for the year ended December 31, 2008, filed February 26,

2009.)

10.16 Amendment to Fannie Mae Supplement Pension Plan of 2003, effective May 14, 2010†

(Incorporated by reference to Exhibit 10.1 to Fannie Mae’s Quarterly Report on Form 10-Q, filed

August 5, 2010.)

10.17 Executive Pension Plan of the Federal National Mortgage Association as amended and restated†

(Incorporated by reference to Exhibit 10.10 to Fannie Mae’s registration statement on Form 10,

filed March 31, 2003)

10.18 Amendment to the Executive Pension Plan of the Federal National Mortgage Association, as

amended and restated, effective March 1, 2007† (Incorporated by reference to Exhibit 10.20 to

Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2005, filed May 2,

2007.)

10.19 Amendment to Fannie Mae Executive Pension Plan, effective November 20, 2007† (Incorporated

by reference to Exhibit 10.16 to Fannie Mae’s Annual Report on Form 10-K for the year ended

December 31, 2007, filed February 27, 2008.)

10.20 Amendment to the Executive Pension Plan of the Federal National Mortgage Association,

effective January 1, 2008† (Incorporated by reference to Exhibit 10.25 to Fannie Mae’s Annual

Report on Form 10-K for the year ended December 31, 2008, filed February 26, 2009.)

10.21 Amendment to the Executive Pension Plan of the Federal National Mortgage Association,

effective December 16, 2009† (Incorporated by reference to Exhibit 10.23 to Fannie Mae’s

Annual Report on Form 10-K for the year ended December 31, 2009, filed February 26, 2010.)

10.22 Amendment to the Executive Pension Plan of the Federal National Mortgage Association,

effective January 1, 2010†

10.23 Fannie Mae Annual Incentive Plan, as amended December 10, 2007† (Incorporated by reference

to Exhibit 10.17 to Fannie Mae’s Annual Report on Form 10-K for the year ended December 31,

2007, filed February 27, 2008.)

10.24 Fannie Mae Stock Compensation Plan of 2003, as amended through December 14, 2007†

(Incorporated by reference to Exhibit 10.18 to Fannie Mae’s Annual Report on Form 10-K for the

year ended December 31, 2007, filed February 27, 2008.)

10.25 Amendment to Fannie Mae Stock Compensation Plan of 2003, as amended, for Internal Revenue

Code Section 409A, adopted December 22, 2008† (Incorporated by reference to Exhibit 10.28 to

Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2008, filed

February 26, 2009.)

10.26 Fannie Mae Stock Compensation Plan of 1993† (Incorporated by reference to Exhibit 10.18 to

Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2004, filed

December 6, 2006.)

10.27 2009 Amendment to Fannie Mae Stock Compensation Plans of 1993 and 2003† (Incorporated by

reference to Exhibit 10.1 to Fannie Mae’s Quarterly Report on Form 10-Q, filed November 5,

2009.)

10.28 Fannie Mae Procedures for Deferral and Diversification of Awards, as amended effective

December 10, 2007† (Incorporated by reference to Exhibit 10.30 to Fannie Mae’s Annual Report

on Form 10-K for the year ended December 31, 2008, filed February 26, 2009.)

E-3
Item Description

10.29 Fannie Mae Supplemental Retirement Savings Plan, as amended through April 29, 2008†

(Incorporated by reference to Exhibit 10.2 to Fannie Mae’s Quarterly Report on Form 10-Q, filed

August 8, 2008.)

10.30 Amendment to Fannie Mae Supplemental Retirement Savings Plan, effective October 8, 2008†

(Incorporated by reference to Exhibit 10.32 to Fannie Mae’s Annual Report on Form 10-K for the

year ended December 31, 2008, filed February 26, 2009.)

10.31 Amendment to Fannie Mae Supplemental Retirement Savings Plan, effective May 14, 2010†

(Incorporated by reference to Exhibit 10.2 to Fannie Mae’s Quarterly Report on Form 10-Q, filed

August 5, 2010.)

10.32 Form of Nonqualified Stock Option Grant Award Document† (Incorporated by reference to

Exhibit 10.33 to Fannie Mae’s Annual Report on Form 10-K for the year ended December 31,

2009, filed February 26, 2010.)

10.33 Form of Restricted Stock Award Document† (Incorporated by reference to Exhibit 99.1 to Fannie

Mae’s Current Report on Form 8-K, filed January 26, 2007.)

10.34 Form of Restricted Stock Units Award Document adopted January 23, 2008† (Incorporated by

reference to Exhibit 10.27 to Fannie Mae’s Annual Report on Form 10-K for the year ended

December 31, 2007, filed February 27, 2008.)

10.35 Form of Restricted Stock Units Award Document† (Incorporated by reference to Exhibit 99.2 to

Fannie Mae’s Current Report on Form 8-K, filed January 26, 2007.)

10.36 Lending Agreement, dated September 19, 2008, between the U.S. Treasury and Fannie Mae†

(Incorporated by reference to Exhibit 10.4 to Fannie Mae’s Quarterly Report on Form 10-Q, filed

November 10, 2008.)

10.37 Senior Preferred Stock Purchase Agreement dated as of September 7, 2008, as amended and

restated on September 26, 2008, between the United States Department of the Treasury and

Federal National Mortgage Association (Incorporated by reference Exhibit 4.1 to Fannie Mae’s

Current Report on Form 8-K, filed October 2, 3008.)

10.38 Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of

May 6, 2009, between the United States Department of the Treasury and Federal National

Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed

conservator (Incorporated by reference to Exhibit 4.21 to Fannie Mae’s Quarterly Report on

Form 10-Q, filed May 8, 2009.)

10.39 Second Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated

as of December 24, 2009, between the United States Department of the Treasury and Federal

National Mortgage Association, acting through the Federal Housing Finance Agency as its duly

appointed conservator (Incorporated by reference to Exhibit 4.1 to Fannie Mae’s Current Report

on Form 8-K, filed December 30, 2009.)

10.40 Letters, dated September 1, 2005, setting forth an agreement between Fannie Mae and OFHEO

(Incorporated by reference to Exhibit 10.1 to Fannie Mae’s Current Report on Form 8-K, filed

September 8, 2005.)

10.41 Consent of Defendant Fannie Mae with Securities and Exchange Commission, dated May 23,

2006 (Incorporated by reference to Exhibit 10.2 to Fannie Mae’s Current Report on Form 8-K,

filed May 30, 2006.)

10.42 Letter Agreement between Fannie Mae and Timothy J. Mayopoulos, dated March 9, 2009†

(Incorporated by reference to Exhibit 10.44 to Fannie Mae’s Annual Report on Form 10-K for the

year ended December 31, 2009, filed February 26, 2010.)

10.43 Memorandum of Understanding among the Department of the Treasury, the Federal Housing

Finance Agency, the Federal National Mortgage Association, and the Federal Home Loan

Mortgage Corporation, dated October 19, 2009 (Incorporated by reference to Exhibit 99.1 to

Fannie Mae’s Current Report on Form 8-K, filed October 23, 2009.)

12.1 Statement re: computation of ratios to earnings to fixed charges

12.2 Statement re: computation of ratios of earnings to combined fixed charges and preferred stock

dividends

E-4
Item Description

31.1 Certification of Deputy Chief Executive Officer pursuant to Securities Exchange Act

Rule 13a-14(a)

31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)

32.1 Certification of Deputy Chief Executive Officer pursuant to 18 U.S.C. Section 1350

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

101. INS XBRL Instance Document*

101. SCH XBRL Taxonomy Extension Schema*

101. CAL XBRL Taxonomy Extension Calculation*

101. LAB XBRL Taxonomy Extension Labels*

101. PRE XBRL Taxonomy Extension Presentation*

101. DEF XBRL Taxonomy Extension Definition*

* The financial information contained in these XBRL documents is unaudited. The information in these

exhibits shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or

otherwise subject to the liabilities of Section 18, nor shall they be deemed incorporated by reference into

any disclosure document relating to Fannie Mae, except to the extent, if any, expressly set forth by

specific reference in such filing.

† This Exhibit is a management contract or compensatory plan or arrangement.

E-5
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Balance Sheets as of December 31, 2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Statements of Operations for the years ended December 31, 2010, 2009, and 2008 . . . . . F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, and 2008. . . . . F-5

Consolidated Statements of Changes in Equity (Deficit) for the years ended December 31, 2010, 2009,

and 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8

Note 1— Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8

Note 2— Adoption of the New Accounting Standards on the Transfers of Financial Assets and

Consolidation of Variable Interest Entities .......................................... F-36

Note 3— Consolidations and Transfers of Financial Assets .............................. F-45

Note 4— Mortgage Loans ...................................................... F-50

Note 5— Allowance for Loan Losses and Reserve for Guaranty Losses..................... F-55

Note 6— Investments in Securities . . .............................................. F-60

Note 7— Financial Guarantees and Master Servicing .................................. F-68

Note 8— Acquired Property, Net . . . .............................................. F-73

Note 9— Short-term Borrowings and Long-term Debt ................................. F-74

Note 10— Derivative Instruments and Hedging Activities ................................ F-77

Note 11— Income Taxes ........................................................ F-83

Note 12— Loss Per Share ....................................................... F-86

Note 13— Stock-Based Compensation .............................................. F-87

Note 14— Employee Retirement Benefits ........................................... F-89

Note 15— Segment Reporting .................................................... F-96

Note 16— Equity (Deficit) ...................................................... F-103

Note 17— Regulatory Capital Requirements.......................................... F-110

Note 18— Concentrations of Credit Risk ............................................ F-112

Note 19— Fair Value........................................................... F-117

Note 20— Commitments and Contingencies.......................................... F-134

Note 21— Selected Quarterly Financial Information (Unaudited) .......................... F-138

F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Fannie Mae:

We have audited the accompanying consolidated balance sheets of Fannie Mae and consolidated entities (in

conservatorship) (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements

of operations, cash flows, and changes in equity (deficit) for each of the three years in the period ended

December 31, 2010. These financial statements are the responsibility of the Company’s management. Our

responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight

Board (United States). Those standards require that we plan and perform the audit to obtain reasonable

assurance about whether the financial statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An

audit also includes assessing the accounting principles used and significant estimates made by management, as

well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable

basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial

position of Fannie Mae and consolidated entities (in conservatorship) as of December 31, 2010 and 2009, and

the results of their operations and their cash flows for each of the three years in the period ended

December 31, 2010, in conformity with accounting principles generally accepted in the United States of

America.

As discussed in Notes 1 and 2 to the consolidated financial statements, on January 1, 2010, the Company

prospectively adopted the Financial Accounting Standards Board (FASB) new accounting standards on the

transfers of financial assets and the consolidation of variable interest entities.

As discussed in Note 1 to the consolidated financial statements, on April 1, 2009, the Company adopted the

FASB modified standard on the model for assessing other-than-temporary impairments, applicable to existing

and new debt securities.

As also discussed in Note 1 to the consolidated financial statements, the Company is currently under the

control of its conservator and regulator, the Federal Housing Finance Agency (“FHFA”). Further, the Company

directly and indirectly receives substantial support from various agencies of the United States Government,

including the United States Department of Treasury and FHFA. The Company is dependent upon the

continued support of the United States Government, various United States Government agencies and the

Company’s conservator and regulator, FHFA.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the Company’s internal control over financial reporting as of December 31, 2010, based on

the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring

Organizations of the Treadway Commission and our report dated February 24, 2011 expressed an adverse

opinion on the Company’s internal control over financial reporting because of a material weakness.

/s/ Deloitte & Touche LLP

Washington, DC

February 24, 2011

F-2
FANNIE MAE

(In conservatorship)

Consolidated Balance Sheets

(Dollars in millions, except share amounts)

2010 2009

As of December 31,

ASSETS

Cash and cash equivalents (includes cash of consolidated trusts of $348 and $2,092, respectively) .......... $ 17,297 $ 6,812

Restricted cash (includes restricted cash of consolidated trusts of $59,619 and $-, respectively) . . .......... 63,678 3,070

Federal funds sold and securities purchased under agreements to resell or similar arrangements . . .......... 11,751 53,684

Investments in securities:

Trading, at fair value (includes securities of consolidated trusts of $21 and $5,599, respectively) ......... 56,856 111,939

Available-for-sale, at fair value (includes securities of consolidated trusts of $1,055 and $10,513, respectively, and

securities pledged as collateral that may be sold or repledged of $- and $1,148, respectively) . . .......... 94,392 237,728

Total investments in securities ................................................. 151,248 349,667

Mortgage loans:

Loans held for sale, at lower of cost or fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 915 18,462

Loans held for investment, at amortized cost:

Of Fannie Mae . ............................................................ 407,228 256,434

Of consolidated trusts (includes loans at fair value of $2,962 and $-, respectively, and loans pledged as

collateral that may be sold or repledged of $2,522 and $1,947, respectively) ................... 2,577,133 129,590

Total loans held for investment .................................................. 2,984,361 386,024

Allowance for loan losses ...................................................... (61,556) (9,925)

Total loans held for investment, net of allowance . . ................................... 2,922,805 376,099

Total mortgage loans ...................................................... 2,923,720 394,561

Accrued interest receivable:

Of Fannie Mae . . ............................................................ 5,344 3,774

Of consolidated trusts . . . ....................................................... 9,349 519

Allowance for accrued interest receivable ............................................ (3,414) (536)

Total accrued interest receivable, net of allowance . ................................... 11,279 3,757

Acquired property, net ........................................................... 16,173 9,142

Servicer and MBS trust receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 951 18,329

Other assets . ................................................................. 25,875 30,119

Total assets ................................................................. $3,221,972 $869,141

LIABILITIES AND EQUITY (DEFICIT)

Liabilities:

Accrued interest payable:

Of Fannie Mae . ............................................................ $ 4,052 $ 4,951

Of consolidated trusts. . ....................................................... 9,712 29

Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . 52 —

Short-term debt:

Of Fannie Mae . ............................................................ 151,884 200,437

Of consolidated trusts. . ....................................................... 5,359 —

Long-term debt:

Of Fannie Mae (includes debt at fair value of $893 and $3,274, respectively) .................... 628,160 567,950

Of consolidated trusts (includes debt at fair value of $2,271 and $-, respectively) . . . ............... 2,411,597 6,167

Reserve for guaranty losses (includes $54 and $4,772, respectively, related to Fannie Mae MBS included in

Investments in securities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 54,430

Servicer and MBS trust payable . .................................................. 2,950 25,872

Other liabilities . . ............................................................ 10,400 24,586

Total liabilities . ............................................................ 3,224,489 884,422

Commitments and contingencies (Note 20) . ............................................. — — Fannie Mae stockholders’ equity (deficit):

Senior preferred stock, 1,000,000 shares issued and outstanding . .............................. 88,600 60,900

Preferred stock, 700,000,000 shares are authorized—576,868,139 and 579,735,457 shares issued and

outstanding, respectively ....................................................... 20,204 20,348

Common stock, no par value, no maximum authorization—1,270,092,708 and 1,265,674,761 shares issued,

respectively; 1,118,504,194 and 1,113,358,051 shares outstanding, respectively . . . . . . . . . . . . . . . . . . . 667 664

Additional paid-in capital . ....................................................... — 2,083

Accumulated deficit ........................................................... (102,986) (90,237)

Accumulated other comprehensive loss . . ............................................. (1,682) (1,732)

Treasury stock, at cost, 151,588,514 and 152,316,710 shares, respectively ........................ (7,402) (7,398)

Total Fannie Mae stockholders’ deficit . . ............................................. (2,599) (15,372)

Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 91

Total deficit ................................................................ (2,517) (15,281)

Total liabilities and equity (deficit) . .................................................. $3,221,972 $869,141

See Notes to Consolidated Financial Statements

F-3
FANNIE MAE

(In conservatorship)

Consolidated Statements of Operations

(Dollars and shares in millions, except per share amounts)

2010 2009 2008

For the Year Ended

December 31,

Interest income:

Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,251 $ 3,859 $ 5,878

Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,290 13,618 13,214

Mortgage loans:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,992 15,378 18,547

Of consolidated trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,591 6,143 4,145

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 357 1,339

Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,270 39,355 43,123

Interest expense:

Short-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619 2,306 7,815

Of consolidated trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 — —

Long-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,857 22,195 26,145

Of consolidated trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,373 344 381

Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,861 24,845 34,341

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,409 14,510 8,782

Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,702) (9,569) (4,022)

Net interest income (loss) after provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,293) 4,941 4,760

Guaranty fee income (includes imputed interest of $111, $1,333 and $1,423, respectively) . . . . . 202 7,211 7,621

Investment gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346 1,458 (246)

Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (694) (9,057) (6,974)

Noncredit portion of other-than-temporary impairments recognized in other comprehensive loss. . (28) (804) —

Net other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (722) (9,861) (6,974)

Fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (511) (2,811) (20,129)

Debt extinguishment losses, net (includes debt extinguishment losses related to consolidated

trusts of $109, $- and $-, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (568) (325) (222)

Losses from partnership investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (74) (6,735) (1,554)

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 882 773 1,033

Non-interest loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (445) (10,290) (20,471)

Administrative expenses:

Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,277 1,133 1,032

Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 942 684 529

Occupancy expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 205 227

Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 185 191

Total administrative expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,597 2,207 1,979

Provision for guaranty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 63,057 23,929

Foreclosed property expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,718 910 1,858

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 853 1,484 1,093

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,362 67,658 28,859

Loss before federal income taxes and extraordinary losses . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,100) (73,007) (44,570)

Provision (benefit) for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (82) (985) 13,749

Loss before extraordinary losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,018) (72,022) (58,319)

Extraordinary losses, net of tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (409)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,018) (72,022) (58,728)

Less: Net loss attributable to the noncontrolling interest. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 53 21

Net loss attributable to Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,014) (71,969) (58,707)

Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,704) (2,474) (1,069)

Net loss attributable to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (21,718) $(74,443) $(59,776)

Loss per share — Basic and Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3.81) $ (13.11) $ (24.04)

Cash dividends per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ 0.75

Weighted-average common shares outstanding — Basic and Diluted . . . . . . . . . . . . . . . . . . . . 5,694 5,680 2,487

See Notes to Consolidated Financial Statements

F-4
FANNIE MAE

(In conservatorship)

Consolidated Statements of Cash Flows

(Dollars in millions)

2010 2009 2008

For the Year Ended December 31,

Cash flows (used in) provided by operating activities:

Net loss . ........................................................ $ (14,018) $ (72,022) $ (58,728)

Reconciliation of net loss to net cash (used in) provided by operating activities:

Amortization of cost basis adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 2,568 8,189

Provisions for loan and guaranty losses.................................... 24,896 72,626 27,951

Valuation (gains) losses .............................................. (1,289) 3,425 12,725

Losses from partnership investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 6,735 1,554

Current and deferred federal income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 (1,919) 12,904

Extraordinary losses, net of tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 409

Purchases of loans held for sale ........................................ (81) (109,684) (56,768)

Proceeds from repayments of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 2,413 617

Net change in trading securities, excluding non-cash transfers ..................... (23,612) 11,976 72,689

Other, net ....................................................... (13,837) (2,027) (5,689)

Net cash (used in) provided by operating activities.............................. (27,395) (85,909) 15,853

Cash flows provided by (used in) investing activities:

Purchases of trading securities held for investment . . .......................... (8,547) (48,659) (7,635)

Proceeds from maturities of trading securities held for investment . . ................ 2,638 12,918 9,530

Proceeds from sales of trading securities held for investment. ..................... 21,556 39,261 2,823

Purchases of available-for-sale securities................................... (413) (165,103) (147,337)

Proceeds from maturities of available-for-sale securities ......................... 17,102 48,096 33,369

Proceeds from sales of available-for-sale securities . . .......................... 7,867 306,598 146,630

Purchases of loans held for investment .................................... (86,724) (52,148) (63,097)

Proceeds from repayments of loans held for investment of Fannie Mae ............... 20,715 30,958 39,098

Proceeds from repayments of loans held for investment of consolidated trusts........... 574,740 26,184 10,230

Net change in restricted cash . ......................................... (15,025) — —

Advances to lenders . . .............................................. (74,130) (79,163) (81,483)

Proceeds from disposition of acquired property and preforeclosure sales . . . ........... 39,682 22,667 10,905

Contributions to partnership investments ................................... (351) (688) (1,507)

Proceeds from partnership investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 87 1,042

Net change in federal funds sold and securities purchased under agreements to resell or

similar agreements . .............................................. 41,471 4,230 (9,793)

Other, net ....................................................... (531) (27,503) (15,282)

Net cash provided by (used in) investing activities .............................. 540,179 117,735 (72,507)

Cash flows (used in) provided by financing activities:

Proceeds from issuance of short-term debt of Fannie Mae . . ..................... 699,346 1,641,119 1,913,685

Payments to redeem short-term debt of Fannie Mae . .......................... (748,550) (1,773,977) (1,824,511)

Proceeds from issuance of long-term debt of Fannie Mae . . . ..................... 456,602 289,806 243,180

Payments to redeem long-term debt of Fannie Mae . . .......................... (397,813) (256,728) (266,758)

Proceeds from issuance of short-term debt of consolidated trusts . . . ................ 12,613 — —

Payments to redeem short-term debt of consolidated trusts . . ..................... (37,210) — —

Proceeds from issuance of long-term debt of consolidated trusts . . . ................ 263,962 58 377

Payments to redeem long-term debt of consolidated trusts . . ..................... (771,292) (601) (467)

Payments of cash dividends on senior preferred stock to Treasury . . ................ (7,706) (2,470) (31)

Payments of cash dividends on common and preferred stock . ..................... — — (1,774)

Proceeds from issuance of common and preferred stock ......................... — — 7,211

Proceeds from senior preferred stock purchase agreement with Treasury . . . ........... 27,700 59,900 —

Net change in federal funds purchased and securities sold under agreements to repurchase . . 49 (54) (266)

Net cash (used in) provided by financing activities.............................. (502,299) (42,947) 70,646

Net increase (decrease) in cash and cash equivalents........................... 10,485 (11,121) 13,992

Cash and cash equivalents at beginning of period ............................... 6,812 17,933 3,941

Cash and cash equivalents at end of period ................................... $ 17,297 $ 6,812 $ 17,933

Cash paid during the period for:

Interest . . ........................................................ $ 140,651 $ 26,344 $ 35,959

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 876 845

Non-cash activities (excluding transition-related impacts — see Note 2):

Mortgage loans acquired by assuming debt ................................... $ 484,699 $ — $ 167

Net transfers from mortgage loans held for investment of consolidated trusts to mortgage loans

held for investment of Fannie Mae . . .................................... 121,852 — —

Transfers from advances to lenders to investments in securities . ..................... — 77,191 83,534

Transfers from advances to lenders to loans held for investment of consolidated trusts . ...... 68,385 — —

Net transfers from mortgage loans to acquired property . .......................... 66,081 5,707 4,272

See Notes to Consolidated Financial Statements

F-5
FANNIE MAE

(In conservatorship)

Consolidated Statements of Changes in Equity (Deficit)

(Dollars and shares in millions, except per share amounts)

Senior

Preferred Preferred Common SeniorPreferred PreferredStock CommonStock

Additional

Paid-In

Capital

Retained

Earnings

(Accumulated

Deficit)

Accumulated Other Comprehensive Loss Treasury

Stock

Non Controlling

Interest

Total

Equity

(Deficit)

Shares Outstanding

Fannie Mae Stockholders’ Equity (Deficit)

Balance as of December 31, 2007 . . . . . . — 466 974 $ — $16,913 $593 $ 1,831 $ 33,548 $ (1,362) $(7,512) $107 $ 44,118

Cumulative effect from the adoption of the

accounting standards on the fair value

option for financial instruments and fair

value measurement, net of tax . . . . . . — — — — — — — 148 (93) — — 55

Balances of January 1, 2008 adjusted . . . . — 466 974 — 16,913 593 1,831 33,696 (1,455) (7,512) 107 44,173

Change in investment in noncontrolling

interest . . . . . . . . . . . . . . . . . . . — — — — — — — — — — 71 71

Comprehensive loss:

Net loss . . . . . . . . . . . . . . . . . . . — — — — — — — (58,707) — — (21) (58,728)

Other comprehensive loss, net of tax

effect:

Changes in net unrealized losses on

available-for-sale securities (net of tax

of $5,395). . . . . . . . . . . . . . . . — — — — — — — — (10,020) — — (10,020)

Reclassification adjustment for

other-than- temporary impairments

recognized in net loss (net of tax of

$2,441) . . . . . . . . . . . . . . . . . — — — — — — — — 4,533 — — 4,533

Reclassification adjustment for gains

included in net loss (net of tax of

$36) . . . . . . . . . . . . . . . . . . — — — — — — — — (67) — — (67)

Unrealized losses on guaranty assets and

guaranty fee buy-ups . . . . . . . . . . — — — — — — — — (342) — — (342)

Amortization of net cash flow hedging

gains . . . . . . . . . . . . . . . . . . — — — — — — — — 1 — — 1

Prior service cost and actuarial gains,

net of amortization for defined benefit

plans . . . . . . . . . . . . . . . . . . — — — — — — — — (323) — — (323)

Total comprehensive loss . . . . . . . . . . (64,946)

Common stock dividends ($0.75 per

share) . . . . . . . . . . . . . . . . . . . — — — — — — — (741) — — — (741)

Senior preferred stock dividends . . . . . . — — — — — — (31) — — — — (31)

Common stock issued . . . . . . . . . . . . — — 94 — — 49 2,477 — — — — 2,526

Common stock warrant issued . . . . . . . — — — — — — 3,518 — — — — 3,518

Preferred stock dividends declared . . . . . — — — — — — — (1,038) — — — (1,038)

Senior preferred stock issued . . . . . . . . 1 — — 1,000 — — — — — — — 1,000

Preferred stock issued . . . . . . . . . . . . — 141 — — 4,812 — (127) — — — — 4,685

Conversion of convertible preferred stock

into common stock . . . . . . . . . . . . — (10) 16 — (503) 8 495 — — — — —

Treasury commitment . . . . . . . . . . . . — — — — — — (4,518) — — — — (4,518)

Other . . . . . . . . . . . . . . . . . . . . . — — 1 — — — (24) — — 168 — 144

Balance as of December 31, 2008 . . . . . . 1 597 1,085 1,000 21,222 650 3,621 (26,790) (7,673) (7,344) 157 (15,157)

Cumulative effect from the adoption of a

new accounting standard on other-thantemporary impairments, net of tax . . . . — — — — — — — 8,520 (5,556) — — 2,964

Change in investment in noncontrolling

interest . . . . . . . . . . . . . . . . . . . — — — — — — — — — — (13) (13)

Comprehensive loss:

Net loss . . . . . . . . . . . . . . . . . . . — — — — — — — (71,969) — — (53) (72,022)

Other comprehensive loss, net of tax

effect:

Changes in net unrealized losses on

available-for-sale securities (net of tax

of $2,658). . . . . . . . . . . . . . . . — — — — — — — — 4,936 — — 4,936

Reclassification adjustment for

other-than- temporary impairments

recognized in net loss (net of tax of

$3,441) . . . . . . . . . . . . . . . . . — — — — — — — — 6,420 — — 6,420

Reclassification adjustment for gains

included in net loss (net of tax of

$119) . . . . . . . . . . . . . . . . . . — — — — — — — — (220) — — (220)

Unrealized gains on guaranty assets and

guaranty fee buy-ups . . . . . . . . . . — — — — — — — — 245 — — 245

Amortization of net cash flow hedging

gains . . . . . . . . . . . . . . . . . . — — — — — — — — 9 — — 9

Prior service cost and actuarial gains, net of amortization for defined benefit

plans . . . . . . . . . . . . . . . . . . — — — — — — — — 107 — — 107

Total comprehensive loss . . . . . . . . . . (60,525)

Senior preferred stock dividends . . . . . . — — — — — — (2,470) — — — — (2,470)

Increase to senior preferred liquidation

preference . . . . . . . . . . . . . . . . . — — — 59,900 — — — — — — — 59,900

Conversion of convertible preferred stock

into common stock . . . . . . . . . . . . — (17) 27 — (874) 14 860 — — — — —

Other . . . . . . . . . . . . . . . . . . . . . — — 1 — — — 72 2 — (54) — 20

F-6

See Notes to Consolidated Financial Statements
Senior

Preferred Preferred Common SeniorPreferred PreferredStock CommonStock

Additional

Paid-In

Capital

Retained

Earnings

(Accumulated

Deficit)

Accumulated Other Comprehensive Loss Treasury

Stock

Non Controlling

Interest

Total

Equity

(Deficit)

Shares Outstanding

Fannie Mae Stockholders’ Equity (Deficit)

Balance as of December 31, 2009 . . . . . . 1 580 1,113 $60,900 $20,348 $664 $ 2,083 $ (90,237) $ (1,732) $(7,398) $ 91 $(15,281)

Cumulative effect from the adoption of the

accounting standards on transfers of

financial assets and consolidation . . . . — — — — — — — 6,706 (3,394) — (14) 3,298

Balance as of January 1, 2010, adjusted . . 1 580 1,113 60,900 20,348 664 2,083 (83,531) (5,126) (7,398) 77 (11,983)

Change in investment in noncontrolling

interest . . . . . . . . . . . . . . . . . . . — — — — — — — — — — 9 9

Comprehensive loss:

Net loss . . . . . . . . . . . . . . . . . . . — — — — — — — (14,014) — — (4) (14,018)

Other comprehensive loss, net of tax

effect:

Changes in net unrealized losses on

available-for-sale securities, (net of

tax of $1,644) . . . . . . . . . . . . . — — — — — — — — 3,054 — — 3,054

Reclassification adjustment for

other-than- temporary impairments

recognized in net loss (net of tax of

$253) . . . . . . . . . . . . . . . . . . — — — — — — — — 469 — — 469

Reclassification adjustment for gains

included in net loss (net of tax

of $10) . . . . . . . . . . . . . . . . . — — — — — — — — (19) — — (19)

Unrealized gains on guaranty assets and

guaranty fee buy-ups . . . . . . . . . . — — — — — — — — 1 — — 1

Prior service cost and actuarial gains, net of amortization for defined benefit

plans . . . . . . . . . . . . . . . . . . — — — — — — — — (61) — — (61)

Total comprehensive loss . . . . . . . . . . (10,574)

Senior preferred stock dividends . . . . . . — — — — — — (2,265) (5,441) — — — (7,706)

Increase to senior preferred liquidation

preference . . . . . . . . . . . . . . . . . — — — 27,700 — — — — — — — 27,700

Conversion of convertible preferred stock

into common stock . . . . . . . . . . . . — (3) 5 — (144) 3 141 — — — — —

Other . . . . . . . . . . . . . . . . . . . . . — — 1 — — — 41 — — (4) — 37

Balance as of December 31, 2010 . . . . . . 1 577 1,119 $88,600 $20,204 $667 $ — $(102,986) $ (1,682) $(7,402) $ 82 $ (2,517)

F-7

See Notes to Consolidated Financial Statements
FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Organization

We are a stockholder-owned corporation organized and existing under the Federal National Mortgage

Association Charter Act (the “Charter Act” or our “charter”). We are a government-sponsored enterprise

(“GSE”), and we are subject to government oversight and regulation. Our regulators include the Federal

Housing Finance Agency (“FHFA”), the U.S. Department of Housing and Urban Development (“HUD”), the

U.S. Securities and Exchange Commission (“SEC”), and the U.S. Department of the Treasury (“Treasury”).

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

We operate in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities,

including mortgage-related securities guaranteed by us, from primary mortgage market institutions, such as

commercial banks, savings and loan associations, mortgage banking companies, securities dealers and other

investors. We do not lend money directly to consumers in the primary mortgage market. We provide additional

liquidity in the secondary mortgage market by issuing guaranteed mortgage-related securities.

We operate under three business segments: Single-Family Credit Guaranty (“Single-Family”), Multifamily

(“Multifamily”—formerly “Housing and Community Development”) and Capital Markets. Our Single-Family

segment generates revenue primarily from the guaranty fees on the mortgage loans underlying guaranteed

single-family Fannie Mae mortgage-backed securities (“Fannie Mae MBS”). Our Multifamily segment

generates revenue from a variety of sources, including guaranty fees on the mortgage loans underlying

multifamily Fannie Mae MBS and on the multifamily mortgage loans held in our portfolio, transaction fees

associated with the multifamily business and bond credit enhancement fees. Our Capital Markets segment

invests in mortgage loans, mortgage-related securities and other investments, and generates income primarily

from the difference, or spread, between the yield on the mortgage assets we own and the interest we pay on

the debt we issue in the global capital markets to fund the purchases of these mortgage assets.

Conservatorship

On September 7, 2008, the Secretary of the Treasury and the Director of FHFA announced several actions

taken by Treasury and FHFA regarding Fannie Mae, which included: (1) placing us in conservatorship; (2) the

execution of a senior preferred stock purchase agreement by our conservator, on our behalf, and Treasury,

pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase common stock;

and (3) Treasury’s agreement to establish a temporary secured lending credit facility that was available to us

and the other GSEs regulated by FHFA under identical terms until December 31, 2009.

Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the

Federal Housing Finance Regulatory Reform Act of 2008, (together, the “GSE Act”), the conservator

immediately succeeded to (1) all rights, titles, powers and privileges of Fannie Mae, and of any stockholder,

officer or director of Fannie Mae with respect to Fannie Mae and its assets, and (2) title to the books, records

and assets of any other legal custodian of Fannie Mae. The conservator has since delegated specified

authorities to our Board of Directors and has delegated to management the authority to conduct our day-to-day

operations. The conservator retains the authority to withdraw its delegations at any time.

We were directed by FHFA to voluntarily delist our common stock and each listed series of our preferred

stock from the New York Stock Exchange and the Chicago Stock Exchange. The last trading day for the listed

securities on the New York Stock Exchange and the Chicago Stock Exchange was July 7, 2010, and since

July 8, 2010, the securities have been quoted on the over-the-counter market.

As of February 24, 2011, the conservator has advised us that it has not disaffirmed or repudiated any contracts

we entered into prior to its appointment as conservator. The GSE Act requires FHFA to exercise its right to

F-8
disaffirm or repudiate most contracts within a reasonable period of time after its appointment as conservator.

FHFA’s proposed rule on conservatorship and receivership operations, published on July 9, 2010, defines

“reasonable period” as a period of 18 months following the appointment of a conservator or receiver. This

proposed rule has not been finalized.

The conservator has the power to transfer or sell any asset or liability of Fannie Mae (subject to limitations

and post-transfer notice provisions for transfers of qualified financial contracts) without any approval,

assignment of rights or consent of any party. The GSE Act, however, provides that mortgage loans and

mortgage-related assets that have been transferred to a Fannie Mae MBS trust must be held by the conservator

for the beneficial owners of the Fannie Mae MBS and cannot be used to satisfy the general creditors of the

company. As of February 24, 2011, FHFA has not exercised this power.

Neither the conservatorship nor the terms of our agreements with Treasury change our obligation to make

required payments on our debt securities or perform under our mortgage guaranty obligations.

The conservatorship has no specified termination date and there continues to be uncertainty regarding the

future of our company, including how long we will continue to be in existence, the extent of our role in the

market, what form we will have, and what ownership interest, if any, our current common and preferred

stockholders will hold in us after the conservatorship is terminated. Under the GSE Act, FHFA must place us

into receivership if the Director of FHFA makes a written determination that our assets are less than our

obligations (that is, we have a net worth deficit) or if we have not been paying our debts, in either case, for a

period of 60 days. In addition, the Director of FHFA may place us in receivership at his discretion at any time

for other reasons, including conditions that FHFA has already asserted existed at the time the Director of

FHFA placed us into conservatorship. Placement into receivership would have a material adverse effect on

holders of our common stock, preferred stock, debt securities and Fannie Mae MBS. Should we be placed into

receivership, different assumptions would be required to determine the carrying value of our assets, which

could lead to substantially different financial results.

Senior Preferred Stock and Warrant Issued to Treasury

On September 7, 2008, we, through FHFA in its capacity as conservator, entered into a senior preferred stock

purchase agreement with Treasury. The agreement was amended on September 26, 2008, May 6, 2009 and

December 24, 2009. Pursuant to the amended senior preferred stock purchase agreement, Treasury has

committed to provide us with funding as needed to help us maintain a positive net worth thereby avoiding the

mandatory receivership trigger described above. Treasury’s maximum funding commitment to us under the

agreement is the greater of (a) $200 billion or (b) $200 billion plus the cumulative amount of our net worth

deficit (the amount by which our total liabilities exceed our total assets) as of the end of any and each

calendar quarter in 2010, 2011 and 2012, less any positive net worth as of December 31, 2012. As

consideration for Treasury’s funding commitment, we issued one million shares of senior preferred stock and a

warrant to purchase shares of our common stock to Treasury. We were scheduled to begin paying Treasury a

quarterly commitment fee beginning on March 31, 2011. On December 29, 2010, FHFA was notified by

Treasury that Treasury was waiving the commitment fee for the first quarter of 2011 due to adverse conditions

in the U.S. mortgage market and because Treasury believed that imposing the commitment fee would not

generate increased compensation for taxpayers. Treasury further noted that it would reevaluate whether to set

the fee the next quarter. Treasury, as holder of the senior preferred stock, is entitled to receive, when, as and if

directed by our conservator, cumulative quarterly cash dividends at the annual rate of 10% per year on the

current liquidation preference of the senior preferred stock. If at any time we do not pay cash dividends in a

timely manner, then all dividend periods thereafter until the dividend period following the date on which we

have paid in cash full cumulative dividends, the dividend rate will be 12% per year. We have received a total

of $87.6 billion to date under Treasury’s funding commitment and the Acting Director of FHFA has submitted

F-9

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
a request for an additional $2.6 billion from Treasury to eliminate our net worth deficit as of December 31,

2010. The aggregate liquidation preference of the senior preferred stock was $88.6 billion as of December 31,

2010 and will increase to $91.2 billion as a result of FHFA’s request on our behalf for funds to eliminate our

net worth deficit as of December 31, 2010.

On September 7, 2008, we issued a warrant to Treasury giving it the right to purchase, at a nominal price,

shares of our common stock equal to 79.9% of the total common stock outstanding on a fully diluted basis on

the date Treasury exercises the warrant. Treasury has the right to exercise the warrant, in whole or in part, at

any time on or before September 7, 2028. We recorded the warrant at fair value in our stockholders’ equity as

a component of additional paid-in-capital. The fair value of the warrant was calculated using the BlackScholes Option Pricing Model. Since the warrant has an exercise price of $0.00001 per share, the model is

insensitive to the risk-free rate and volatility assumptions used in the calculation and the share value of the

warrant is equal to the price of the underlying common stock. We estimated that the fair value of the warrant

at issuance was $3.5 billion based on the price of our common stock on September 8, 2008, which was after

the dilutive effect of the warrant had been reflected in the market price. Subsequent changes in the fair value

of the warrant are not recognized in the financial statements. If the warrant is exercised, the stated value of the

common stock issued will be reclassified as “Common stock” in our consolidated balance sheets. Because the

warrant’s exercise price per share is considered non-substantive (compared to the market price of our common

stock), the warrant was determined to have characteristics of non-voting common stock, and thus is included

in the computation of basic and diluted loss per share. The weighted-average shares of common stock

outstanding for the years ended December 31, 2010, 2009 and 2008, included shares of common stock that

would be issuable upon full exercise of the warrant issued to Treasury.

Impact of U.S. Government Support

We are dependent upon the continued support of Treasury to eliminate our net worth deficit, which avoids our

being placed into receivership. Based on consideration of all the relevant conditions and events affecting our

operations, including our dependence on the U.S. Government, we continue to operate as a going concern and

in accordance with our delegation of authority from FHFA.

Pursuant to the amended senior preferred stock purchase agreement, Treasury has committed to provide us

with funding as needed to help us maintain a positive net worth thereby avoiding the mandatory receivership

trigger described above.

We fund our business primarily through the issuance of short-term and long-term debt securities in the

domestic and international capital markets. Because debt issuance is our primary funding source, we are

subject to “roll-over,” or refinancing, risk on our outstanding debt. Our ability to issue long-term debt has been

strong in 2009 and 2010 primarily due to actions taken by the federal government to support us and the

financial markets. Demand for our long-term debt securities continues to be strong.

We believe that continued federal government support of our business and the financial markets, as well as our

status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in the

government’s support could materially adversely affect our ability to refinance our debt as it becomes due,

which could have a material adverse impact on our liquidity, financial condition and results of operations. In

addition, future changes or disruptions in the financial markets could significantly change the amount, mix and

cost of funds we obtain, which also could increase our liquidity and roll-over risk and have a material adverse

impact on our liquidity, financial condition and results of operations.

On February 11, 2011, Treasury and HUD released a report to Congress on reforming America’s housing

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

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

F-10

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
institutions. The report emphasizes the importance of proceeding with a careful transition plan and providing

the necessary financial support to Fannie Mae and Freddie Mac during the transition period.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting

principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated

financial statements include our accounts as well as the accounts of other entities in which we have a

controlling financial interest. All intercompany balances and transactions have been eliminated.

Related Parties

As a result of our issuance to Treasury of the warrant to purchase shares of Fannie Mae common stock equal

to 79.9% of the total number of shares of Fannie Mae common stock, we and the Treasury are deemed related

parties. As of December 31, 2010, Treasury held an investment in our senior preferred stock with a liquidation

preference of $88.6 billion. Beginning in 2009, Treasury engaged us to serve as program administrator for the

Home Affordable Modification Program (“HAMP”) and other initiatives under the Making Home Affordable

Program. Our administrative expenses were reduced by $167 million in the fourth quarter 2010 due to accrual

and receipt of reimbursements from Treasury and Freddie Mac for expenses incurred as program administrator.

In January 2011, we received a refund of $1.1 billion from the IRS, a bureau of Treasury, related to the

carryback of our 2009 operating loss to the 2008 and 2007 tax years.

In December 2010, we entered into an agreement with certain wholly-owned subsidiaries of Ally Financial,

Inc. (“Ally”). Under the agreement, we received $462 million in exchange for our release of specified Ally

affiliates from potential liability relating to certain private-label securities sponsored by the affiliates and for

certain selling representation and warranty liability related to mortgage loans sold and/or serviced by one of

the subsidiaries as of or prior to June 30, 2010. Treasury has majority ownership of Ally.

In addition, in 2009, we entered into a memorandum of understanding with Treasury, FHFA and Freddie Mac

in which we agreed to provide assistance to state and local housing finance agencies (“HFAs”) through three

separate assistance programs: a temporary credit and liquidity facilities (“TCLF”) program, a new issue bond

(“NIB”) program and a multifamily credit enhancement program.

Under the TCLF program, we had $3.7 billion and $870 million outstanding, which includes principal and

interest, of three-year standby credit and liquidity support as of December 31, 2010 and 2009, respectively.

Treasury has purchased participating interests in these temporary credit and liquidity facilities. Under the NIB

program, we had $7.6 billion and $3.5 billion outstanding of pass-through securities backed by single-family

and multifamily housing bonds issued by HFAs as of December 31, 2010 and 2009, respectively. Treasury

bears the initial loss of principal under the TCLF program and the NIB program up to 35% of the total

principal on a combined program-wide basis. We are not participating in the multifamily credit enhancement

program.

FHFA’s control of both us and Freddie Mac has caused us and Freddie Mac to be related parties. No

transactions outside of normal business activities have occurred between us and Freddie Mac. As of

December 31, 2010 and 2009, we held Freddie Mac mortgage-related securities with a fair value of

$18.3 billion and $42.6 billion, respectively, and accrued interest receivable of $93 million and $230 million,

respectively. We recognized interest income on Freddie Mac mortgage-related securities held by us of

$1.1 billion, $2.0 billion and $1.6 billion for the years ended December 31, 2010, 2009 and 2008, respectively.

In addition, Freddie Mac may be an investor in variable interest entities that we have consolidated, and we

may be an investor in variable interest entities that Freddie Mac has consolidated.

F-11

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Use of Estimates

Preparing consolidated financial statements in accordance with GAAP requires management to make estimates

and assumptions that affect our reported amounts of assets and liabilities, and disclosure of contingent assets

and liabilities as of the dates of our consolidated financial statements, as well as our reported amounts of

revenues and expenses during the reporting periods. Management has made significant estimates in a variety

of areas including, but not limited to, valuation of certain financial instruments and other assets and liabilities,

the allowance for loan losses and reserve for guaranty losses, and other-than-temporary impairment of

investment securities. Actual results could be different from these estimates.

Our allowance for loan losses includes an estimate for the benefit of payments from lenders and servicers to

make us whole for losses on loans due to a breach of selling or servicing representations and warranties.

Historically, this estimate was based significantly on historical cash collections. In the fourth quarter of 2010,

the following factors impacted this estimate:

• we revised our methodology to take into account trends in management actions taken before cash

collections, which resulted in our allowance for loan losses being $1.1 billion higher than it would have

been under the previous methodology; and

• agreements with seller/servicers that addressed their loan repurchase and other obligations to us impacted

our expectation of future make-whole payments, resulting in a decrease in our allowance for loan losses

of approximately $700 million.

In the fourth quarter of 2010, we updated our allowance for loan loss models to incorporate more recent data

on prepayments and modified loan performance which reduced the allowance on individually impaired loans

by $670 million, driven primarily by more favorable default expectations for modified loans that withstood

successful trial periods. In the second quarter of 2010, we updated our allowance for loan loss model to reflect

a change in our cohort structure for our severity calculations which resulted in a change in estimate and a

decrease in our allowance for loan losses of approximately $1.6 billion.

Principles of Consolidation

Our consolidated financial statements include our accounts as well as the accounts of other entities in which

we have a controlling financial interest. The typical condition for a controlling financial interest is ownership

of a majority of the voting interests of an entity. A controlling financial interest may also exist in entities

through arrangements that do not involve voting interests, such as a variable interest entity (“VIE”).

VIE Assessment

We have interests in various entities that are considered VIEs. A VIE is an entity (1) that has total equity at

risk that is not sufficient to finance its activities without additional subordinated financial support from other

entities, (2) where the group of equity holders does not have the power to direct the activities of the entity that

most significantly impact the entity’s economic performance, or the obligation to absorb the entity’s expected

losses or the right to receive the entity’s expected residual returns, or both, or (3) where the voting rights of

some investors are not proportional to their obligations to absorb the expected losses of the entity, their rights

to receive the expected residual returns of the entity, or both, and substantially all of the entity’s activities

either involve or are conducted on behalf of an investor that has disproportionately few voting rights.

In order to determine if an entity is considered a VIE, we first perform a qualitative analysis, which requires

certain subjective decisions including, but not limited to, the design of the entity, the variability that the entity

was designed to create and pass along to its interest holders, the rights of the parties, and the purpose of the

F-12

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
arrangement. If we cannot conclude after a qualitative analysis whether an entity is a VIE, we perform a

quantitative analysis.

The primary types of VIE entities with which we are involved are securitization trusts guaranteed by us via

lender swap and portfolio securitization transactions, limited partnership investments in low-income housing

tax credit (“LIHTC”) and other housing partnerships, as well as mortgage and asset-backed trusts that were

not created by us.

In June 2009, the Financial Accounting Standards Board (“FASB”) revised the accounting standard on the

consolidation of VIEs (the “new accounting standard”), and we adopted the new accounting standard

prospectively for all existing VIEs effective January 1, 2010.

Prior to the adoption of the new accounting standard on January 1, 2010, we were exempt from evaluating

certain securitization entities for consolidation if the entities met the criteria of a qualifying special purpose

entity (“QSPE”), and if we did not have the unilateral ability to cause the entity to liquidate or change the

entity’s QSPE status. The QSPE requirements significantly limited the activities in which a QSPE could

engage and the types of assets and liabilities it could hold. To the extent any entity failed to meet those

criteria, we were required to consolidate its assets and liabilities if we were determined to be the primary

beneficiary of the entity. The new accounting standard removed the concept of a QSPE and replaced the

previous primarily quantitative consolidation model with a qualitative model for determining the primary

beneficiary of a VIE.

Primary Beneficiary Determination

Upon the adoption of the new accounting standard on January 1, 2010, if an entity is a VIE, we consider

whether our variable interest in that entity causes us to be the primary beneficiary. Under the new accounting

standard, an enterprise is deemed to be the primary beneficiary of a VIE when the enterprise has both (1) the

power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and

(2) exposure to benefits and/or losses that could potentially be significant to the entity. The primary

beneficiary of the VIE is required to consolidate and account for the assets, liabilities, and noncontrolling

interests of the VIE in its consolidated financial statements. The assessment of the party that has the power to

direct the activities of the VIE may require significant management judgment when (1) more than one party

has power or (2) more than one party is involved in the design of the VIE but no party has the power to direct

the ongoing activities that could be significant.

We are required to continually assess whether we are the primary beneficiary and therefore may consolidate a

VIE through the duration of our involvement. Examples of certain events that may change whether or not we

consolidate the VIE include a change in the design of the entity or a change in our ownership such that we no

longer hold substantially all of the certificates issued by a multi-class resecuritization trust.

Prior to January 1, 2010, we determined whether our variable interest caused us to be considered the primary

beneficiary through a combination of qualitative and quantitative analyses. The qualitative analysis considered

the design of the entity, the risks that cause variability, the purpose for which the entity was created, and the

variability that the entity was designed to pass along to its variable interest holders. When the primary

beneficiary could not be identified through a qualitative analysis, we used internal cash flow models, which in

certain cases included Monte Carlo simulations, to compute and allocate expected losses or expected residual

returns to each variable interest holder based upon the relative contractual rights and preferences of each

interest holder in the VIE’s capital structure. We were the primary beneficiary and were required to

consolidate the entity if we absorbed the majority of expected losses or expected residual returns, or both.

F-13

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Measurement of Consolidated Assets and Liabilities

In accordance with the new accounting standard, on the transition date, January 1, 2010, we initially measured

the assets and liabilities of the newly consolidated securitization trusts at their unpaid principal balances and

established a corresponding valuation allowance and accrued interest, as it was not practicable to determine

the carrying amount of such assets and liabilities. The securitization assets and liabilities that did not qualify

for the use of this practical expedient were initially measured at fair value. As such, we recognized in our

consolidated balance sheet the mortgage loans underlying our consolidated trusts as “Mortgage loans held for

investment of consolidated trusts.” We also recognized securities issued by these trusts that are held by third

parties in our consolidated balance sheet as either “Short-term debt of consolidated trusts” or “Long-term debt

of consolidated trusts.”

Except for securitization trusts consolidated on the transition date, when we transfer assets into a VIE that we

consolidate at the time of transfer, we recognize the assets and liabilities of the VIE at the amounts that they

would have been recognized if they had not been transferred, and no gain or loss is recognized on the transfer.

For all other VIEs that we consolidate subsequent to transition, we recognize the assets and liabilities of the

VIE in our consolidated financial statements at fair value, and we recognize a gain or loss for the difference

between (1) the fair value of the consideration paid, fair value of noncontrolling interests and the reported

amount of any previously held interests, and (2) the net amount of the fair value of the assets and liabilities

consolidated. However, for the securitization trusts established under our lender swap program, no gain or loss

is recognized if the trust is consolidated at formation as there is no difference in the respective fair value of

(1) and (2) above.

If we cease to be deemed the primary beneficiary of a VIE, we deconsolidate the VIE. We use fair value to

measure the initial cost basis for any retained interests that are recorded upon the deconsolidation of a VIE.

Any difference between the fair value and the previous carrying amount of our investment in the VIE is

recorded as “Investment gains (losses), net” in our consolidated statements of operations. We also record gains

or losses that are associated with the consolidation of a VIE as “Investment gains (losses), net” in our

consolidated statements of operations.

Purchase/Sale of Fannie Mae Securities

We actively purchase and may subsequently sell guaranteed MBS that have been issued through our lender

swap and portfolio securitization transaction programs. The accounting for the purchase and sale of our

guaranteed MBS issued by the trusts differs based on the characteristics of the securitization trusts and

whether the trusts are consolidated.

Single-Class Securitization Trusts

Our single-class securitization trusts are trusts we create to issue single-class Fannie Mae MBS that evidence

an undivided interest in the mortgage loans held in the trust. Investors in single-class Fannie Mae MBS receive

principal and interest payments in proportion to their percentage ownership of the MBS issuance. We

guarantee to each single-class securitization trust that we will supplement amounts received by the single-class

securitization trust as required to permit timely payments of principal and interest on the related Fannie Mae

MBS. This guaranty exposes us to credit losses on the loans underlying Fannie Mae MBS.

We create single-class securitization trusts through both our lender swap and portfolio securitization

transaction programs. A lender swap transaction occurs when a mortgage lender delivers a pool of singlefamily mortgage loans to us, which we immediately deposit into an MBS trust. The MBS are then issued to

the lender in exchange for the mortgage loans. A portfolio securitization transaction occurs when we purchase

mortgage loans from third-party sellers for cash and later deposit these loans into an MBS trust. The securities

issued through a portfolio securitization are then sold to investors for cash. We consolidate most of the singleF-14

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
class securitization trusts that are issued under these programs because our role as guarantor and master

servicer provides us with the power to direct matters that impact the credit risk to which we are exposed.

When we purchase single-class Fannie Mae MBS issued from a consolidated trust, we account for the

transaction as an extinguishment of the related debt in our consolidated financial statements. We record a gain

or loss on the extinguishment of such debt to the extent that the purchase price of the MBS does not equal the

carrying value of the related consolidated debt reported in our consolidated balance sheet (including

unamortized premiums, discounts or the other cost basis adjustments) at the time of purchase. We account for

the sale of an MBS from Fannie Mae’s portfolio to a third party that was issued from a consolidated trust as

the issuance of debt in our consolidated financial statements. We amortize the related premiums, discounts and

other cost basis adjustments into income over time.

To determine the order in which consolidated debt is extinguished, we have elected to use a daily convention

in the application of the last-issued first-extinguished method. Under this method, we record the net daily

change in each MBS holding as either the issuance of debt if there has been an increase in the position that is

held by third parties, or the extinguishment of the most recently issued related debt if there has been a

decrease in the position held by third parties. The impact of this method is that we record the net daily

activity for an MBS as if it were a single buy or sell trade, which results in a change in our beginning debt

balance if the total unpaid principal balance purchased does not match the total unpaid principal balance sold.

If a single-class securitization trust is not consolidated, we account for the purchase and subsequent sale of

such securities as the transfer of an investment security in accordance with the new accounting standard for

the transfers of financial assets.

Single-Class Resecuritization Trusts

Single-class resecuritization trusts are created by depositing Fannie Mae MBS into a new securitization trust

for the purpose of aggregating multiple MBS into a single larger security. The cash flows from the new

security represent an aggregation of the cash flows from the underlying MBS. We guarantee to each singleclass resecuritization trust that we will supplement amounts received by the trust as required to permit timely

payments of principal and interest on the related Fannie Mae securities. However, we assume no additional

credit risk in such a resecuritization transaction, because the underlying assets are MBS for which we have

already provided a guaranty. Additionally, our involvement with these trusts does not provide any incremental

rights or power that would enable Fannie Mae to direct any activities of the trusts. As a result, we are not the

primary beneficiaries of, and therefore do not consolidate, our single-class resecuritization trusts.

As our single-class resecuritization securities pass through all of the cash flows of the underlying MBS

directly to the holders of the securities, they are deemed to be substantially the same as the underlying MBS.

Therefore, we account for purchases of our single-class resecuritization securities as an extinguishment of the

underlying MBS debt and the sale of these securities as an issuance of the underlying MBS debt.

Multi-Class Resecuritization Trusts

Multi-class resecuritization trusts are trusts we create to issue multi-class Fannie Mae securities, including

Real Estate Mortgage Investment Conduits (“REMICs”) and strip securities, in which the cash flows of the

underlying mortgage assets are divided, creating several classes of securities, each of which represents a

beneficial ownership interest in a separate portion of cash flows. We guarantee to each multi-class

resecuritization trust that we will supplement amounts received by the trusts as required to permit timely

payments of principal and interest, as applicable, on the related Fannie Mae securities. However, we assume

no additional credit risk in such a resecuritization transaction because the underlying assets are Fannie Mae

MBS for which we have already provided a guaranty. Although we may be exposed to prepayment risk via

F-15

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
our ownership of the securities issued by these trusts, we do not have the ability via our involvement with a

multi-class resecuritization trust to impact the economic risk to which we are exposed. Therefore, we do not

consolidate such a multi-class resecuritization trust until we hold a substantial portion of the outstanding

beneficial interests that have been issued by the trust and are therefore considered the primary beneficiary of

the trust.

We account for the purchase of the securities issued by consolidated multi-class resecuritization trusts as an

extinguishment of the debt issued by these trusts and the subsequent sale of such securities as the issuance of

multi-class debt. In contrast to our single-class resecuritization trust, the cash flows from the underlying

mortgage assets are divided between the debt securities issued by the multi-class resecuritization trust, and

therefore, the debt issued by a multi-class resecuritization trust is not substantially the same as the

consolidated MBS debt. As a result, if a multi-class resecuritization trust is not consolidated, we account for

the purchase and subsequent sale of such securities as the transfer of an investment security rather than the

issuance or extinguishment of the related multi-class debt in accordance with the new accounting standard for

the transfers of financial assets.

When we do not consolidate a multi-class resecuritization trust, we recognize in our consolidated financial

statements both our investment in the trust and the mortgage loans of the Fannie Mae MBS trusts that we

consolidate that underlie the multi-class resecuritization trust. Additionally, we recognize the unsecured

corporate debt issued to third parties to fund the purchase of our investments in the multi-class resecuritization

trusts as well as the debt issued to third parties of the MBS trusts we consolidate that underlie the multi-class

resecuritization trusts. This results in the recognition of interest income from investments in multi-class

resecuritization trusts and interest expense from the unsecured debt issued to third parties to fund the purchase

of the investments in multi-class resecuritization trusts, as well as interest income from the mortgage loans and

interest expense from the debt issued to third parties from the MBS trusts we consolidate that underlie the

multi-class resecuritization trusts.

See “Note 2, Adoption of the New Accounting Standards on the Transfers of Financial Assets and

Consolidation of Variable Interest Entities,” for additional information regarding the impact upon adoption.

Portfolio Securitizations

We evaluate a transfer of financial assets in a portfolio securitization transaction to an entity that is not

consolidated to determine whether the transfer qualifies as a sale. If a portfolio securitization does not meet

the criteria for sale treatment, the transferred assets remain in our consolidated balance sheets and we record a

liability to the extent of any proceeds received in connection with such a transfer. Transfers of financial assets

for which we surrender control of the transferred assets are recorded as sales.

When a transfer that qualifies as a sale is completed, we derecognize all assets transferred and recognize all

assets obtained and liabilities incurred at fair value. The difference between the carrying basis of the assets

transferred and the fair value of the proceeds from the sale is recorded as a component of “Investment gains

(losses), net” in our consolidated statements of operations. Retained interests are primarily in the form of

Fannie Mae MBS, REMIC certificates, guaranty assets and master servicing assets (“MSAs”). We separately

describe the subsequent accounting, as well as how we determine fair value, for our retained interests in the

“Investment in Securities,” and “Guaranty Accounting” sections of this note.

We also enter into repurchase agreements, including dollar roll transactions, which we account for as secured

borrowings. Refer to the “Securities Purchased under Agreements to Resell and Securities Sold under

Agreements to Repurchase” section of this note for discussion of our accounting policies related to these

transfers.

F-16

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash and Cash Equivalents and Statements of Cash Flows

Short-term investments that have a maturity at the date of acquisition of three months or less and are readily

convertible to known amounts of cash are generally considered cash equivalents. We may pledge as collateral

certain short-term investments classified as cash equivalents.

In the presentation of our consolidated statements of cash flows, we present cash flows from derivatives that

do not contain financing elements and mortgage loans held for sale as operating activities. We present cash

flows from federal funds sold and securities purchased under agreements to resell or similar arrangements as

investing activities and cash flows from federal funds purchased and securities sold under agreements to

repurchase as financing activities. We classify cash flows related to dollar roll transactions that do not meet

the requirements to be accounted for as secured borrowings as purchases and sales of securities in investing

activities. We classify cash flows from trading securities based on their nature and purpose. We classify cash

flows from trading securities that we intend to hold for investment (the majority of our mortgage-related

trading securities) as investing activities and cash flows from trading securities that we do not intend to hold

for investment (primarily our non-mortgage-related securities) as operating activities.

Prior to the adoption of the new accounting standards on the transfers of financial assets and the consolidation

of VIEs (“the new accounting standards”), we reflected the creation of Fannie Mae MBS through either the

securitization of loans held for sale or advances to lenders as a non-cash activity in our consolidated

statements of cash flows in the line items “Securitization-related transfers from mortgage loans held for sale to

investments in securities” or “Transfers from advances to lenders to investments in securities,” respectively.

Cash inflows from the sale of a Fannie Mae MBS created through the securitization of loans held for sale

were reflected in the consolidated statements of cash flows based on the balance sheet classification of the

associated Fannie Mae MBS as either “Net change in trading securities, excluding non-cash transfers,” or

“Proceeds from sales of available-for-sale securities.” Subsequent to the adoption of these new accounting

standards, we continue to apply this presentation to unconsolidated trusts. For consolidated trusts, we classify

cash flows related to mortgage loans held by our consolidated trusts as either investing activities (for principal

repayments) or operating activities (for interest received from borrowers included as a component of our net

loss). Cash flows related to debt securities issued by consolidated trusts are classified as either financing

activities (for repayments of principal to certificateholders) or operating activities (for interest payments to

certificateholders included as a component of our net loss). We distinguish between the payments and

proceeds related to the debt of Fannie Mae and the debt of consolidated trusts, as applicable. We present our

non-cash activities in the consolidated statements of cash flows at the associated unpaid principal balance.

During the fourth quarter of 2010, we identified certain servicer and consolidation related transactions that

were not appropriately reflected in our condensed consolidated statements of cash flows for the three, six and

nine month periods ended March 31, June 30, and September 30, 2010, respectively. As a result, our

consolidated statement of cash flows for the year ended December 31, 2010 includes a $6.6 billion adjustment

to increase net cash used in operating activities, included within “Other, net,” a $7.0 billion adjustment to

increase net cash provided by investing activities, primarily related to “Purchases of loans held for

investment,” and a $357 million adjustment to increase net cash used in financing activities. We have

evaluated the effects of these misstatements, both quantitatively and qualitatively, on our three months ended

March 31, 2010, six months ended June 30, 2010, and nine months ended September 30, 2010 condensed

consolidated statements of cash flows and concluded that these prior periods were not materially misstated.

Restricted Cash

We and our servicers advance payments on delinquent loans to consolidated Fannie Mae MBS trusts. We

recognize the cash advanced as “Restricted cash” in our consolidated balance sheets to the extent such

amounts are due to, but have not yet been remitted to, the MBS certificateholders. In addition, when we or our

F-17

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
servicers collect and hold cash that is due to certain Fannie Mae MBS trusts in advance of our requirement to

remit these amounts to the trusts, we recognize the collected cash amounts as “Restricted cash.”

We also recognize “Restricted cash” as a result of restrictions related to certain consolidated partnership funds

as well as for certain collateral arrangements.

Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase

When securities purchased under agreements to resell or securities sold under agreements to repurchase

resulting from dollar roll transactions do not meet all of the conditions of a secured financing, we account for

the transactions as purchases or sales, respectively. We treat securities purchased under agreements to resell

and securities sold under agreements to repurchase as secured financing transactions when all of the conditions

have been met. We record these transactions at the amounts at which the securities will be subsequently

reacquired or resold, including accrued interest.

Investments in Securities

Securities Classified as Available-for-Sale or Trading

We classify and account for our securities as either available-for-sale (“AFS”) or trading. We measure AFS

securities at fair value in our consolidated balance sheets, with unrealized gains and losses included in

“Accumulated other comprehensive loss” (“AOCI”), net of applicable income taxes. We recognize realized

gains and losses on AFS securities when securities are sold. We calculate the gains and losses using the

specific identification method and record them in “Investment gains (losses), net” in our consolidated

statements of operations. We measure trading securities at fair value in our consolidated balance sheets with

unrealized and realized gains and losses included as a component of “Fair value losses, net” in our

consolidated statements of operations. We include interest and dividends on securities, including amortization

of the premium and discount at acquisition, in our consolidated statements of operations. When we receive

multiple deliveries of securities on the same day that are backed by the same pools of loans, we calculate the

specific cost of each security as the average price of the trades that delivered those securities. Currently, we do

not have any securities classified as held-to-maturity, although we may elect to do so in the future.

We determine fair value using quoted market prices in active markets for identical assets when available. If

quoted market prices in active markets for identical assets are not available, we use quoted market prices for

similar securities that we adjust for observable or corroborated (i.e., information purchased from third-party

service providers) market information. In the absence of observable or corroborated market data, we use

internally developed estimates, incorporating market-based assumptions when such information is available.

Other-Than-Temporary Impairment of Debt Securities

On April 1, 2009, we adopted the FASB modified standard on the model for assessing other-than-temporary

impairments, applicable to existing and new debt securities held by us as of April 1, 2009. Under this new

standard, an other-than-temporary impairment is considered to have occurred when the fair value of a debt

security is below its amortized cost basis and we intend to sell or it is more likely than not that we will be

required to sell the security before recovery. In this case, we recognize in the consolidated statements of

operations the entire difference between the amortized cost basis of the security and its fair value. An

other-than-temporary impairment is also considered to have occurred if we do not expect to recover the entire

amortized cost basis of a debt security even if we do not intend or it is not more likely than not we will be

required to sell the security before recovery. In this case, we separate the difference between the amortized

cost basis of the security and its fair value into the amount representing the credit loss, which we recognize in

our consolidated statements of operations, and the amount related to all other factors, which we recognize in

F-18

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
“Other comprehensive loss,” net of applicable taxes. In determining whether a credit loss exists, we use our

best estimate of cash flows expected to be collected from the debt security.

We consider guarantees, insurance contracts or other credit enhancements (such as collateral) in determining

our best estimate of cash flows expected to be collected only if (1) such guarantees, insurance contracts or

other credit enhancements provide for payments to be made solely to reimburse us for failure of the issuer to

satisfy its required payment obligations, (2) such guarantees, insurance contracts or other credit enhancements

are contractually attached to the security and (3) collection of the amounts receivable under these agreements

is deemed probable. Guarantees, insurance contracts or other credit enhancements are considered contractually

attached if they are part of and trade with the security upon transfer of the security to a third party.

In periods after we recognize an other-than-temporary impairment of debt securities, we use the prospective

interest method to recognize interest income. Under the prospective interest method, we use the new cost basis

and the cash flows expected to be collected from the security to calculate the effective yield.

As a result of adopting the FASB modified standard on the model for assessing other-than-temporary

impairments, we recorded a cumulative-effect adjustment at April 1, 2009 of $8.5 billion on a pre-tax basis

($5.6 billion after tax) to reclassify the noncredit portion of previously recognized other-than-temporary

impairments from “Accumulated deficit” to AOCI. We also reduced the “Accumulated deficit” and valuation

allowance by $3.0 billion for the deferred tax asset related to the amounts previously recognized as

other-than-temporary impairments in our consolidated statements of operations based upon the assertion of our

intent and ability to hold certain of these securities until recovery.

Prior to April 1, 2009, we considered a debt security to be other-than-temporarily impaired if its estimated fair

value was less than its amortized cost basis and we determined that it was probable that we would be unable

to collect all of the contractual principal and interest payments or we did not intend to hold the security until

it recovered to its previous carrying amount. In making an other-than-temporary impairment assessment, we

considered many factors, including the severity and duration of the impairment, recent events specific to the

issuer and/or the industry to which the issuer belongs, external credit ratings and recent downgrades, as well as

our ability and intent to hold such securities until recovery.

We considered guarantees, insurance contracts or other credit enhancements (such as collateral) in determining

whether it was probable that we would be unable to collect all amounts due according to the contractual terms

of a debt security to the same extent that we currently consider them in estimating expected cash flows. When

we determined that it was probable that we would not collect all of the contractual principal and interest

amounts due or we determined that we did not have the ability or intent to hold the security until recovery of

an unrealized loss, we identified the security as other-than-temporarily impaired. For all other securities in an

unrealized loss position, we had the positive intent and ability to hold such securities until the earlier of full

recovery or maturity.

When we determined an investment was other-than-temporarily impaired, we wrote down the cost basis of the

investment to its fair value and included the loss in “Other-than-temporary-impairments” in our consolidated

statements of operations. The fair value of the investment then became its new cost basis. We did not increase

the investment’s cost basis for subsequent recoveries in fair value, which were recorded in AOCI.

F-19

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Mortgage Loans

Loans Held for Investment

When we acquire mortgage loans that we have the ability and the intent to hold for the foreseeable future or

until maturity, we classify the loans as held for investment (“HFI”). When we consolidate a trust, we

recognize the loans underlying the trust in our consolidated balance sheet. The trusts do not have the ability to

sell mortgage loans and the use of such loans is limited exclusively to the settlement of obligations of the

trusts. Therefore, mortgages acquired when we have the intent to securitize via trusts that are consolidated will

generally be classified as HFI in our consolidated balance sheets both prior to and subsequent to their

securitization. This is consistent with our intent and ability to hold the loans for the foreseeable future or until

maturity.

We report HFI loans at their outstanding unpaid principal balance adjusted for any deferred and unamortized

cost basis adjustments, including purchase premiums, discounts and other cost basis adjustments. We

recognize interest income on HFI loans on an accrual basis using the interest method, unless we determine

that the ultimate collection of contractual principal or interest payments in full is not reasonably assured.

Historically, mortgage loans held both by us and by consolidated trusts were reported collectively as

“Mortgage loans held for investment.” We now report loans held by consolidated trusts as “Mortgage loans

held for investment of consolidated trusts” and those held directly by us as “Mortgage loans held for

investment of Fannie Mae” in our consolidated balance sheets.

Loans Held for Sale

When we acquire mortgage loans that we intend to sell or securitize via trusts that are not consolidated, we

classify the loans as held for sale (“HFS”). Prior to the adoption of the new accounting standards, we initially

classified loans as HFS if they were product types that we actively securitized from our portfolio because we

had the intent, at acquisition, to securitize the loans (either during the month in which the acquisition occurred

or during the following month) via a trust that we did not consolidate and for which we sold all or a portion

of the resulting securities. At month-end, we reclassified the loans acquired during the month from HFS to

HFI, if we had not securitized or were not in the process of securitizing them because we had the intent to

hold the loans for the foreseeable future or until maturity.

We report HFS loans at the lower of cost or fair value. Any excess of an HFS loan’s cost over its fair value is

recognized as a valuation allowance, with changes in the valuation allowance recognized as “Investment gains

(losses), net” in our consolidated statements of operations. We recognize interest income on HFS loans on an

accrual basis, unless we determine that the ultimate collection of contractual principal or interest payments in

full is not reasonably assured. Purchase premiums, discounts and other cost basis adjustments on HFS loans

are deferred upon loan acquisition, included in the cost basis of the loan, and not amortized. We determine

any lower of cost or fair value adjustment on HFS loans on a pool basis by aggregating those loans based on

similar risks and characteristics, such as product types and interest rates.

In the event that we reclassify HFS loans to HFI, we record the loans at lower of cost or fair value on the date

of reclassification. We recognize any lower of cost or fair value adjustment recognized upon reclassification as

a basis adjustment to the HFI loan.

Nonaccrual Loans

We discontinue accruing interest on single-family and multifamily loans when we believe collectibility of

principal or interest is not reasonably assured, unless the loan is well secured and in the process of collection

based upon an individual loan assessment. When a loan is placed on nonaccrual status, interest previously

F-20

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
accrued but not collected becomes part of our recorded investment in the loan and is collectively reviewed for

impairment. We recognize interest income for loans on non-accrual status when cash is received. If we have

doubt regarding the ultimate collectibility of the remaining recorded investment in a nonaccrual loan, we apply

any payment received to reduce principal to the extent necessary to eliminate such doubt. We return a loan to

accrual status when we determine that the collectibility of principal and interest is reasonably assured.

Restructured Loans

A modification to the contractual terms of a loan that results in granting a concession to a borrower

experiencing financial difficulties is considered a troubled debt restructuring (“TDR”). For single-family loans,

we conclude that a concession has been granted to a borrower when we determine that the effective yield

based on the restructured loan term is less than the effective yield prior to the modification. For multifamily

loans, we consider other factors to determine if a concession has been granted to the borrower, such as

whether the modified loan terms represent a market rate of return relative to the risk profile of the borrower.

We measure impairment of a loan restructured in a TDR individually based on the excess of the recorded

investment in the loan over the present value of the expected future cash inflows discounted at the loan’s

original effective interest rate. Costs incurred to effect a TDR are expensed as incurred.

A loan modification for reasons other than a borrower experiencing financial difficulties or that results in

terms at least as favorable to us as the terms for comparable loans to other customers with similar credit risks

who are not refinancing or restructuring a loan is not considered a TDR. We further evaluate such a loan

modification to determine whether the modification is considered more than minor. If the modification is

considered more than minor and the modified loan is not subject to the accounting requirements for acquired

credit-impaired loans, we treat the modification as an extinguishment of the previously recorded loan and the

recognition of a new loan. We recognize any unamortized basis adjustments on the previously recorded loan

immediately in “Interest income” in our consolidated statements of operations. We account for a minor

modification as a continuation of the previously recorded loan.

Loans Purchased or Eligible to be Purchased from Trusts

For our single-class securitization trusts that include a Fannie Mae guaranty, we have the option to purchase a

loan from the trust after four or more consecutive monthly payments due under the loan are delinquent in

whole or in part. With respect to single-family mortgage loans in trusts with issue dates on or after January 1,

2009, we also have the option to purchase a loan from the trust after the loan has been delinquent for at least

one monthly payment, if the delinquency has not been fully cured on or before the next payment date (that is,

30 days delinquent), and it is determined that it is appropriate to execute loss mitigation activity that is not

permissible while the loan is held in a trust. Fannie Mae, as guarantor or as issuer, may also purchase

mortgage loans when other pre-defined contingencies have been met, such as when there is a material breach

of a seller’s representation and warranty. Under long-term standby commitments, we purchase credit-impaired

loans from lenders when the loans subject to these commitments meet certain delinquency criteria. This

arrangement also allows the lender to deliver qualified loans in exchange for our guaranteed Fannie Mae

MBS.

When we purchase mortgage loans from consolidated trusts, we reclassify the loans from “Mortgage loans

held for investment of consolidated trusts” to “Mortgage loans held for investment by Fannie Mae” and, upon

settlement, we record an extinguishment of the corresponding portion of the debt of the consolidated trusts.

For unconsolidated trusts and long-term standby commitments, loans that are credit impaired at the time of

acquisition are recorded at the lower of their acquisition cost (unpaid principal balance plus accrued interest)

or fair value. A loan is considered credit impaired at acquisition when there is evidence of credit deterioration

subsequent to the loan’s origination and it is probable, at acquisition, that we will be unable to collect all

F-21

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
contractually required payments receivable (ignoring insignificant delays in contractual payments). We record

each acquired loan that does not meet these criteria at its acquisition cost.

For unconsolidated trusts where we are considered the transferor, we recognize the loan in our consolidated

balance sheets at fair value and record a corresponding liability to the unconsolidated trust when the

contingency on our option to purchase the loan from the trust has been met and we regain effective control

over the transferred loan.

We base our estimate of the fair value of delinquent loans purchased from unconsolidated trusts or long-term

standby commitments upon an assessment of what a market participant would pay for the loan at the date of

acquisition. We utilize indicative market prices from large, experienced dealers to estimate the initial fair value

of delinquent loans purchased from unconsolidated trusts or long-term standby commitments. We consider

acquired credit-impaired loans to be individually impaired at acquisition, and no valuation allowance is

established or carried over. We record the excess of the loan’s acquisition cost over its fair value as a chargeoff against our “Reserve for guaranty losses” at acquisition. We recognize any subsequent decreases in

estimated future cash flows to be collected subsequent to acquisition as impairment losses through our

“Allowance for loan losses.”

We place credit-impaired loans that we acquire from unconsolidated trusts or long-term standby commitments

on nonaccrual status at acquisition in accordance with our nonaccrual policy. If we subsequently determine

that the collectibility of principal and interest is reasonably assured, we return the loan to accrual status. We

determine the initial accrual status of acquired loans that are not credit impaired in accordance with our

nonaccrual policy. Accordingly, we place loans purchased from trusts under other contingent call options on

accrual status at acquisition if they are current or if there has been only an insignificant delay in payment and

there are no other facts and circumstances that would lead us to conclude that the collection of principal and

interest is not reasonably assured.

When an acquired credit-impaired loan is returned to accrual status, the portion of the expected cash flows

incorporating changes in the timing and amount that are associated with credit and prepayment events that

exceeds the recorded investment in the loan is accreted into interest income over the expected remaining life

of the loan. We prospectively recognize increases in future cash flows expected to be collected as interest

income over the remaining expected life of the loan through a yield adjustment. If we subsequently refinance

or restructure an acquired credit-impaired loan, other than through a TDR, the loan is not accounted for as a

new loan but continues to be accounted for under the accounting standard for acquired credit-impaired loans.

Allowance for Loan Losses and Reserve for Guaranty Losses

The allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related

to our recorded investment in both single-family and multifamily HFI loans. This population includes both

HFI loans held by Fannie Mae and by consolidated Fannie Mae MBS trusts. The reserve for guaranty losses is

a liability account in our consolidated balance sheets that reflects an estimate of incurred credit losses related

to our guaranty to each unconsolidated Fannie Mae MBS trust that we will supplement amounts received by

the Fannie Mae MBS trust as required to permit timely payments of principal and interest on the related

Fannie Mae MBS and our agreements to purchase credit-impaired loans from lenders under the terms of our

long-term standby commitments. As a result, the guaranty reserve considers not only the principal and interest

due on the loan at the current balance sheet date, but also any additional interest payments due to the trust

from the current balance sheet date until the point of loan acquisition or foreclosure. We recognize incurred

losses by recording a charge to the “Provision for loan losses” or the “Provision for guaranty losses” in our

consolidated statements of operations.

F-22

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Single-Family Loans

Credit losses related to groups of similar single-family HFI loans that are not individually impaired are

recognized when (1) available information as of each balance sheet date indicates that it is probable a loss has

occurred and (2) the amount of the loss can be reasonably estimated. We aggregate single-family loans (except

for those that are deemed to be individually impaired), based on similar risk characteristics for purposes of

estimating incurred credit losses and establish a collective single-family loss reserve using an econometric

model that derives an overall loss reserve estimate given multiple factors which include but are not limited to:

origination year; loan product type; mark-to-market loan-to-value (“LTV”) ratio; and delinquency status. Once

loans are aggregated, there typically is not a single, distinct event that would result in an individual loan or

pool of loans being impaired. Accordingly, to determine an estimate of incurred credit losses, we base our

allowance and reserve methodology on historical events and trends, such as loss severity, default rates, and

recoveries from mortgage insurance contracts and other credit enhancements that provide loan level loss

coverage and are either contractually attached to a loan or that were entered into contemporaneous with and in

contemplation of a guaranty or loan purchase transaction. Our allowance calculation also incorporates a loss

confirmation period (the anticipated time lag between a credit loss event and the confirmation of the credit

loss resulting from that event) to ensure our allowance estimate captures credit losses that have been incurred

as of the balance sheet date but have not been confirmed. In addition, management performs a review of the

observable data used in its estimate to ensure it is representative of prevailing economic conditions and other

events existing as of the balance sheet date.

We record charge-offs as a reduction to the allowance for loan losses or reserve for guaranty losses when

losses are confirmed through the receipt of assets, such as cash in a preforeclosure sale or the underlying

collateral in full satisfaction of the mortgage loan upon foreclosure. The excess of a loan’s unpaid principal

balance, accrued interest, and any applicable cost basis adjustments (“our total exposure”) over the fair value

of the assets received in full satisfaction of the loan is treated as a charge-off loss that is deducted from the

allowance for loan losses or reserve for guaranty losses. Any excess of the fair value of the assets received in

full satisfaction over our total exposure at charge-off is applied first to recover any forgone, yet contractually

past due interest (for mortgage loans recognized in our consolidated balance sheets), and then to “Foreclosed

property expense” in our consolidated statements of operations. We also apply estimated proceeds from

primary mortgage insurance or other credit enhancements that provide loan level loss coverage and are either

contractually attached to a loan or that were entered into contemporaneous with and in contemplation of a

guaranty or loan purchase transaction as a recovery of our total exposure, up to the amount of loss recognized

as a charge-off. We record proceeds from credit enhancements in excess of our total exposure in “Foreclosed

property expense” in our consolidated statements of operations when received.

Individually Impaired Single-Family Loans

We consider a loan to be impaired when, based on current information, it is probable that we will not receive

all amounts due, including interest, in accordance with the contractual terms of the loan agreement. When

making our assessment as to whether a loan is impaired, we also take into account more than insignificant

delays in payment and shortfalls in amount received. Determination of whether a delay in payment or shortfall

in amount is more than insignificant requires management’s judgment as to the facts and circumstances

surrounding the loan.

Individually impaired single-family loans currently include those restructured in a TDR and acquired creditimpaired loans. Our measurement of impairment on an individually impaired loan follows the method that is

most consistent with our expectations of recovery of our recorded investment in the loan. When a loan has

been restructured, we measure impairment using a cash flow analysis discounted at the loan’s original

effective interest rate. If we expect to recover our recorded investment in an individually impaired loan

F-23

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
through probable foreclosure of the underlying collateral, we measure impairment based on the fair value of

the collateral, reduced by estimated disposal costs on a discounted basis and adjusted for estimated proceeds

from mortgage, flood, or hazard insurance or similar sources.

We use internal models to project cash flows used to assess impairment of individually impaired loans,

including acquired credit-impaired loans. We generally update the market and loan characteristic inputs we use

in these models monthly, using month-end data. Market inputs include information such as interest rates,

volatility and spreads, while loan characteristic inputs include information such as mark-to-market LTV ratios

and delinquency status. The loan characteristic inputs are key factors that affect the predicted rate of default

for loans evaluated for impairment through our internal cash flow models. We evaluate the reasonableness of

our models by comparing the results with actual performance and our assessment of current market conditions.

In addition, we review our models at least annually for reasonableness and predictive ability in accordance

with our corporate model review policy. Accordingly, we believe the projected cash flows generated by our

models that we use to assess impairment appropriately reflect the expected future performance of the loans.

Multifamily Loans

We identify multifamily loans for evaluation for impairment through a credit risk classification process and

individually assign them a risk rating. Based on this evaluation, we determine for loans that are not in

homogeneous pools whether or not a loan is individually impaired. If we deem a multifamily loan to be

individually impaired, we generally measure impairment on that loan based on the fair value of the underlying

collateral less estimated costs to sell the property on a discounted basis. If we determine that an individual

loan that was specifically evaluated for impairment is not individually impaired, we include the loan as part of

a pool of loans with similar characteristics that are evaluated collectively for incurred losses.

We stratify multifamily loans into different risk rating categories based on the credit risk inherent in each

individual loan. We categorize credit risk based on relevant observable data about a borrower’s ability to pay,

including reviews of current borrower financial information, operating statements on the underlying collateral,

historical payment experience, collateral values when appropriate, and other related credit documentation.

Multifamily loans that are categorized into pools based on their relative credit risk ratings are assigned certain

default and severity factors representative of the credit risk inherent in each risk category. We apply these

factors against our recorded investment in the loans, including recorded accrued interest associated with such

loans, to determine an appropriate allowance. As part of our allowance process for multifamily loans, we also

consider other factors based on observable data such as historical charge-off experience, loan size and trends

in delinquency. In addition, we consider any loss sharing arrangements with our lenders.

Advances to Lenders

Advances to lenders represent payments of cash in exchange for the receipt of mortgage loans from lenders in

a transfer that is accounted for as a secured lending arrangement. These transfers primarily occur when we

provide early funding to lenders for loans that they will subsequently either sell to us or securitize into a

Fannie Mae MBS that they will deliver to us. We individually negotiate early lender funding advances with

our lender customers. Early lender funding advances have terms up to 60 days and earn a short-term market

rate of interest. In other cases, the transfers are of loans that the lender has the unilateral ability to repurchase

from us.

We report cash outflows from advances to lenders as an investing activity in our consolidated statements of

cash flows. Settlements of the advances to lenders, other than through lender repurchases of loans, are not

collected in cash, but rather in the receipt of either loans or Fannie Mae MBS. Accordingly, this activity is

reflected as a non-cash transfer in our consolidated statements of cash flows. Currently, in our consolidated

statements of cash flows, we include advances settled through receipt of securities in the line item entitled

F-24

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
“Transfers from advances to lenders to investments in securities” or, if the security is issued from a

consolidated Fannie Mae MBS trust, in the line item entitled “Transfers from advances to lenders to loans held

for investment of consolidated trusts.”

Acquired Property, Net

“Acquired property, net” includes foreclosed property and any receivable outstanding on preforeclosure sales

received in full satisfaction of a loan. We recognize foreclosed property upon the earlier of the loan

foreclosure event or when we take physical possession of the property (i.e., through a deed-in-lieu of

foreclosure transaction). We initially measure foreclosed property at its fair value less its estimated costs to

sell. We treat any excess of our recorded investment in the loan over the fair value less estimated costs to sell

the property as a charge-off to the “Allowance for loan losses.” Any excess of the fair value less estimated

costs to sell the property over our recorded investment in the loan is recognized first to recover any forgone,

contractually due interest, then to “Foreclosed property expense” in our consolidated statements of operations.

Foreclosed properties that we intend to sell and are actively marketing and that are available for immediate

sale in their current condition such that the sale is reasonably expected to take place within one year are

classified as held for sale. We report these properties at the lower of their carrying amount or fair value less

estimated selling costs, on a discounted basis if the sale is expected to occur beyond one year from the date of

foreclosure. We do not depreciate these properties.

We determine the fair value of our foreclosed properties using third-party appraisals, when available. When

third-party appraisals are not available, we estimate fair value based on factors such as prices for similar

properties in similar geographical areas and/or assessment through observation of such properties. We

recognize a loss for any subsequent write-down of the property to its fair value less its estimated costs to sell

through a valuation allowance with an offsetting charge to “Foreclosed property expense” in our consolidated

statements of operations. We recognize a recovery for any subsequent increase in fair value less estimated

costs to sell up to the cumulative loss previously recognized through the valuation allowance. We recognize

gains or losses on sales of foreclosed property through “Foreclosed property expense” in our consolidated

statements of operations.

Properties that we do not intend to sell or that are not ready for immediate sale in their current condition are

classified separately as held for use, are depreciated and are evaluated for impairment when circumstances

indicate that the carrying amount of the property is no longer recoverable. Properties classified as held for use

are recorded in “Other assets” in our consolidated balance sheets.

Guaranty Accounting

Our primary guaranty transactions result from mortgage loan securitizations in which we issue Fannie Mae

MBS. The majority of our Fannie Mae MBS issuances fall within two broad categories: (1) lender swap

transactions, where a lender delivers mortgage loans to us to deposit into a trust in exchange for our

guaranteed Fannie Mae MBS backed by those mortgage loans and (2) portfolio securitizations, where we

securitize loans that were previously included in our consolidated balance sheets, and create guaranteed Fannie

Mae MBS backed by those loans. As guarantor, we guaranty to each MBS trust that we will supplement

amounts received by the MBS trust as required to permit timely payments of principal and interest on the

related Fannie Mae MBS. This obligation represents an obligation to stand ready to perform over the term of

the guaranty. Therefore, our guaranty exposes us to credit losses on the loans underlying Fannie Mae MBS.

The majority of our guaranty obligations have historically arisen from lender swap transactions. In a lender

swap transaction, we receive a monthly guaranty fee for our unconditional guaranty to the Fannie Mae MBS

trust. The guaranty fee we receive varies depending on factors such as the risk profile of the securitized loans

F-25

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
and the level of credit risk we assume. In lieu of charging a higher guaranty fee for loans with greater credit

risk, we may require that the lender pay an upfront fee to compensate us for assuming additional credit risk.

We refer to this payment as a risk-based pricing adjustment. In addition, we may charge a lower guaranty fee

if the lender assumes a portion of the credit risk through recourse or other risk-sharing arrangements. We refer

to these arrangements as credit enhancements. We also adjust the monthly guaranty fee so that the passthrough coupon rates on Fannie Mae MBS are in more easily tradable increments of a whole or half percent

by making an upfront payment to the lender (“buy-up”) or receiving an upfront payment from the lender

(“buy-down”).

Upon adoption of the new accounting standards on the transfer of financial assets and the consolidation of

VIE’s on January 1, 2010, we consolidated most of the single-class securitization trusts that are issued under

our guaranty accounting programs. As such, a significant portion of our guaranty-related assets and liabilities

have been derecognized from our consolidated balance sheet.

For those trusts that are not consolidated, we initially recognize a liability for the fair value of our obligation

to stand ready to perform over the term of the guaranty as a component of “Other liabilities” in our

consolidated balance sheets. We also record an offsetting asset (a retained interest for portfolio securitizations)

that represents the present value of cash flows expected to be received as compensation over the life of the

guaranty as a component of “Other assets.”

For lender swap transactions, we initially recognize our guaranty obligation at fair value using the transaction

price, as a practical expedient, upon initial recognition. Specifically, we estimate the compensation that we

would require to issue the same guaranty in a standalone arm’s-length transaction with an unrelated party.

Because the fair value of those guaranty obligations equals the fair value of the total compensation we receive,

we do not recognize losses or record deferred profit in our consolidated financial statements at inception of

our guaranty contracts. As such, all upfront cash received for buy-downs and risk-based price adjustments are

included as a component of our guaranty obligation at inception.

For portfolio securitizations, we initially recognize our guaranty obligation at fair value using an estimate of a

hypothetical transaction price that we would receive if we were to issue our guaranty to an unrelated party in a

standalone arm’s-length transaction at the measurement date. We recognize any difference between the fair

value of the guaranty asset and the fair value of the guaranty obligation as a component of the gain or loss on

the sale of mortgage-related assets and record the difference as “Investment gains (losses), net” in our

consolidated statements of operations.

Subsequent to initial recognition, we account for the guaranty asset on lender swap transactions at amortized

cost. As we collect monthly guaranty fees, we reduce guaranty assets to reflect cash payments received and

recognize imputed interest income on guaranty assets as a component of “Guaranty fee income” under the

prospective interest method. We reduce the corresponding guaranty obligation in proportion to the reduction in

guaranty assets and recognize this reduction in our consolidated statements of operations as an additional

component of “Guaranty fee income.” We assess guaranty assets for other-than-temporary impairment based

on changes in our estimate of the cash flows to be received. When we determine a guaranty asset is

other-than-temporarily impaired, we write down the cost basis of the guaranty asset to its fair value and

include the amount written-down in “Guaranty fee income” in our consolidated statements of operations. Any

other-than-temporary impairment recorded on guaranty assets results in a proportionate reduction in the

corresponding guaranty obligations. For portfolio securitizations, we subsequently account for the retained

guarantee asset in the same manner as a trading security, with unrealized gains and losses included in

“Guaranty fee income” in our consolidated statements of operations.

We record buy-ups in our consolidated balance sheets at fair value in “Other assets.” We subsequently account

for buy-ups in the same manner as a trading security.

F-26

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We account for our guaranty related to a long term standby commitment in the same manner as our guaranty

resulting from an unconsolidated lender swap transaction as described above.

In addition to our guaranty assets and obligations, we recognize a liability for estimable and probable losses

for the credit risk we assume on loans underlying Fannie Mae MBS and long term standby commitments

based on management’s estimate of probable losses incurred on those loans as of each balance sheet date. We

record this contingent liability in our consolidated balance sheets as “Reserve for guaranty losses.”

Fannie Mae MBS included in “Investments in securities”

When we own unconsolidated Fannie Mae MBS, we do not derecognize any components of the guaranty

assets, guaranty obligations, reserve for guaranty losses, or any other outstanding recorded amounts associated

with the guaranty transaction because our contractual obligation to the MBS trust remains in force until the

trust is liquidated. We value Fannie Mae MBS based on their legal terms, which includes the Fannie Mae

guaranty to the MBS trust, and continue to reflect the unamortized obligation to stand ready to perform over

the term of our guaranty and any incurred credit losses in our “Other liabilities” and “Reserve for guaranty

losses,” respectively. We disclose the aggregate amount of Fannie Mae MBS held as “Investments in

securities” in our consolidated balance sheets as well as the amount of our “Reserve for guaranty losses” and

“Other liabilities” that relates to Fannie Mae MBS held as “Investments in securities.” Upon subsequent sale

of a Fannie Mae MBS, we continue to account for any outstanding recorded amounts associated with the

guaranty transaction on the same basis of accounting as prior to the sale of Fannie Mae MBS, as no new

assets were retained and no new liabilities have been assumed upon the subsequent sale.

Credit Enhancements

Credit enhancements that we recognize separately as “Other assets” in our consolidated balance sheets are

amortized in our consolidated statements of operations as “Other expenses.” We amortize these assets at the

greater of amounts calculated (1) commensurate with the observed decline in the unpaid principal balance of

covered mortgage loans or (2) on a straight-line basis over a credit enhancement’s contract term. We record

recurring insurance premiums at the amount paid and amortize them over their contractual life.

Amortization of Cost Basis Adjustments

We amortize cost basis adjustments, including premiums and discounts on mortgage loans and securities, as a

yield adjustment using the interest method over the contractual or estimated life of the loan or security. We

amortize these cost basis adjustments into interest income for mortgage securities and for loans we classify as

HFI. We do not amortize cost basis adjustments for loans that we classify as HFS, but include them in the

calculation of the gain or loss on the sale of those loans.

F-27

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table displays unamortized premiums, discounts, and other cost basis adjustments included in

our consolidated balances sheets as of December 31, 2010 and 2009, that may result in net interest income in

our consolidated statements of operations in future periods.

2010 2009

As of December 31,

(Dollars in millions)

Of Fannie Mae:

Investments in securities:

Unamortized premiums and other cost basis adjustments, net. . . . . . . . . . . . . . . . $ 938 $ 1,185

Other-than-temporary impairments(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,057) (821)

Mortgage loans held-for-investment:

Unamortized discounts and other cost basis adjustments of loans in portfolio, net,

excluding acquired credit-impaired loans and hedged mortgage assets(2) . . . . . . (17,056) (10,332)

Unamortized discount on acquired credit-impaired loans(3) . . . . . . . . . . . . . . . . . (3,240) (11,467)

Unamortized premium on hedged mortgage assets(4) . . . . . . . . . . . . . . . . . . . . . . 598 806

Other assets(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (88) (254)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(21,905) $(20,883)

Of consolidated trusts:

Unamortized premiums, net in loans of consolidated trusts . . . . . . . . . . . . . . . . . $ 11,785

Unamortized premiums, net in debt of consolidated trusts . . . . . . . . . . . . . . . . . . (16,803)

Net unamortized premiums from consolidations. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,018)

(1) Represents the increase in expected cash flows since original impairment that we currently expect will be recorded as

interest income in future periods. This amount is calculated as the excess of expected cash flows, discounted at the

internal rate of return at acquisition, over the amortized cost basis of the security. To reduce costs associated with

maintaining our internal model and decrease the operational risk, in the fourth quarter of 2010, we ceased to use our

internally developed model and began using a third-party model as the source for cash flows used to assess

other-than-temporary impairments on Alt-A and subprime private-label securities. This model change resulted in more

favorable cash flow estimates that, based on estimates as of December 31, 2010, increased the amount that we will

recognize prospectively as interest income over the remaining life of the securities by $2.5 billion.

(2) Includes the unamortized balance of the fair value discounts that were recorded upon acquisition of credit-impaired

loans that have been subsequently modified as TDRs, which accretes into interest income for TDRs that are placed on

accrual status.

(3) Represents the unamortized balance of the fair value discounts that were recorded upon acquisition and consolidation

that may accrete into interest income for acquired credit-impaired loans that are placed on accrual status.

(4) Represents the net premium on mortgage assets designated for hedge accounting that are attributable to changes in

interest rates and will be amortized through interest income over the life of the hedged assets.

(5) Represents the fair value discount related to unsecured HomeSaver Advance loans that will accrete into interest

income based on the contractual terms of the loans for loans on accrual status.

We have elected to use the contractual payment terms to determine the amortization of cost basis adjustments

on mortgage loans and mortgage securities initially recognized on or after January 1, 2010 in our consolidated

balance sheets.

For substantially all mortgage loans and mortgage securities initially recorded on or before December 31,

2009, we use prepayment estimates in determining the periodic amortization of cost basis adjustments under

the interest method using a constant effective yield. For those mortgage loans and mortgage securities for

which we did not estimate prepayments, we used the contractual payment terms of the loan or security to

F-28

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
apply the interest method. When we anticipate prepayments for the application of the interest method to

mortgage loans initially recognized before January 1, 2010, we aggregate individual mortgage loans based

upon coupon rate, product type and origination year and consider Fannie Mae MBS to be aggregations of

similar loans for the purpose of estimating prepayments. We also recalculate the constant effective yield each

reporting period to reflect the actual payments and prepayments we have received to date and our new

estimate of future prepayments. We then adjust our net investment in the mortgage loans and mortgage

securities to the amount the investment would have been had we applied the recalculated constant effective

yield since their acquisition, with a corresponding charge or credit to interest income.

We cease amortization of cost basis adjustments during periods in which we are not recognizing interest

income on a loan because the collection of the principal and interest payments is not reasonably assured (that

is, when the loan is placed on nonaccrual status).

Other Investments

We primarily account for unconsolidated investments in limited partnerships under the equity method of

accounting. These investments include our LIHTC and other partnership investments. Under the equity

method, we increase or decrease our investment for our share of the limited partnership’s net income or loss

reflected in “Losses from partnership investments” in our consolidated statements of operations. These

investments are included as “Other assets” in our consolidated balance sheets. We periodically review our

investments to determine if an other-than-temporary loss in value has occurred.

Commitments to Purchase and Sell Mortgage Loans and Securities

We enter into commitments to purchase and sell mortgage-backed securities and to purchase single-family and

multifamily mortgage loans. Commitments to purchase or sell some mortgage-backed securities and to

purchase single-family mortgage loans are generally accounted for as derivatives. Our commitments to

purchase multifamily loans are not accounted for as derivatives because they do not meet the criteria for net

settlement.

For those commitments that we account for as derivatives, we report them in our consolidated balance sheets

at fair value in “Other assets” or “Other liabilities” and include changes in their fair value in “Fair value

losses, net” in our consolidated statements of operations. When derivative purchase commitments settle, we

include the fair value on the settlement date in the cost basis of the loan or unconsolidated security we

purchase. When derivative commitments to sell securities settle, we include the fair value of the commitment

on the settlement date in the cost basis of the security we sell. Purchases and sales of securities issued by our

consolidated MBS trusts are treated as extinguishment or issuance of debt, respectively. For commitments to

purchase and sell securities issued by our consolidated MBS trusts, we recognize the fair value of the

commitment on the settlement date as a component of debt extinguishment gains and losses or in the cost

basis of the debt issued, respectively.

Regular-way securities trades provide for delivery of securities within the time generally established by

regulations or conventions in the market in which the trade occurs and are exempt from application of the

derivative accounting literature. Commitments to purchase or sell securities that we account for on a trade-date

basis are also exempt from the derivative accounting requirements. We record the purchase and sale of an

existing security on its trade date when the commitment to purchase or sell the existing security settles within

the period of time that is customary in the market in which those trades take place.

Additionally, contracts for the forward purchase or sale of when-issued and to-be-announced (“TBA”)

securities are exempt from the derivative accounting requirements if there is no other way to purchase or sell

that security, delivery of that security and settlement will occur within the shortest period possible for that

F-29

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
type of security, and it is probable at inception and throughout the term of the individual contract that physical

delivery of the security will occur. Since our commitments for the purchase of when-issued and TBA

securities can be net settled and we do not document that physical settlement is probable, we account for all

such commitments as derivatives.

Commitments to purchase securities that we do not account for as derivatives and do not require trade-date

accounting are accounted for as forward contracts to purchase securities. We designate these commitments as

AFS or trading at inception and account for them in a manner consistent with that category of securities.

Derivative Instruments

We recognize all derivatives as either assets or liabilities in our consolidated balance sheets at their fair value

on a trade date basis. We report derivatives in a gain position after offsetting by counterparty in “Other assets”

and derivatives in a loss position after offsetting by counterparty in “Other liabilities” in our consolidated

balance sheets.

We offset the carrying amounts of derivatives (other than commitments) that are in gain positions and loss

positions with the same counterparty, as well as cash collateral receivables and payables associated with

derivative positions in master netting arrangements. We offset these amounts because the derivative contracts

have determinable amounts, we have the legal right to offset amounts with each counterparty, that right is

enforceable by law, and we intend to offset the amounts to settle the contracts.

We determine fair value using quoted market prices in active markets when available. If quoted market prices

are not available for particular derivatives, we use quoted market prices for similar derivatives that we adjust

for directly observable or corroborated (i.e., information purchased from third-party service providers) market

information. In the absence of observable or corroborated market data, we use internally-developed estimates,

incorporating market-based assumptions wherever such information is available. For derivatives (other than

commitments), we use a mid-market price when there is a spread between a bid and ask price.

We evaluate financial instruments that we purchase or issue and other financial and non-financial contracts for

embedded derivatives. To identify embedded derivatives that we must account for separately, we determine if:

(1) the economic characteristics of the embedded derivative are not clearly and closely related to the economic

characteristics of the financial instrument or other contract; (2) the financial instrument or other contract (i.e.,

the hybrid contract) itself is not already measured at fair value with changes in fair value included in earnings;

and (3) a separate instrument with the same terms as the embedded derivative would meet the definition of a

derivative. If the embedded derivative meets all three of these conditions we elect to carry the hybrid financial

instrument in its entirety at fair value with changes in fair value recorded in earnings.

Collateral

We enter into various transactions where we pledge and accept collateral, the most common of which are our

derivative transactions. Required collateral levels vary depending on the credit rating and type of counterparty.

We also pledge and receive collateral under our repurchase and reverse repurchase agreements. In order to

reduce potential exposure to repurchase counterparties, a third-party custodian typically maintains the

collateral and any margin. We monitor the fair value of the collateral received from our counterparties, and we

may require additional collateral from those counterparties, as we deem appropriate. Collateral received under

early funding agreements with lenders, whereby we advance funds to lenders prior to the settlement of a

security commitment, must meet our standard underwriting guidelines for the purchase or guarantee of

mortgage loans.

F-30

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash Collateral

We record cash collateral accepted from a counterparty that we have the right to use as “Cash and cash

equivalents” and cash collateral accepted from a counterparty that we do not have the right to use as

“Restricted cash” in our consolidated balance sheets. We net our obligation to return cash collateral pledged to

us against the fair value of derivatives in a gain position recorded in “Other assets” in our consolidated

balance sheets as part of our counterparty netting calculation.

For derivative positions with the same counterparty under master netting arrangements where we pledge cash

collateral, we remove it from “Cash and cash equivalents” and net the right to receive it against the fair value

of derivatives in a loss position recorded in “Other liabilities” in our consolidated balance sheets as a part of

our counterparty netting calculation.

The following table displays cash collateral accepted and pledged as of December 31, 2010 and 2009.

2010 2009

As of December 31,

(Dollars in millions)

Cash collateral accepted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,101 $ 4,052

Cash collateral pledged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,884 $ 5,434

Cash collateral pledged related to derivatives activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,453 5,437

Total cash collateral pledged. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,337 $10,871

(1) Includes restricted cash of $2.5 billion and $3.0 billion as of December 31, 2010 and 2009, respectively.

Non-Cash Collateral

We classify securities pledged to counterparties as either “Investments in securities” or “Cash and cash

equivalents” in our consolidated balance sheets. Securities pledged to counterparties that have been

consolidated with the underlying assets recognized as loans are included as “Mortgage loans” in our

consolidated balance sheets. The following table displays non-cash collateral pledged and accepted as of

December 31, 2010 and 2009.

2010 2009

As of December 31,

(Dollars in millions)

Non-cash collateral pledged where the secured party has the right to sell or repledge:

Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $1,148

Held-for-investment loans of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,522 1,947

Non-cash collateral accepted with the right to sell or repledge(1) . . . . . . . . . . . . . . . . . . . . $7,500 $ 67

Non-cash collateral accepted without the right to sell or repledge . . . . . . . . . . . . . . . . . . . . 6,744 6,285

(1) None of this collateral was sold or repledged as of December 31, 2010 and 2009.

Additionally, we provide early funding to lenders on a collateralized basis and account for the advances as

secured lending arrangements. We recognized $7.2 billion and $5.4 billion funded to lenders in “Other assets”

in our consolidated balance sheets as of December 31, 2010 and 2009, respectively.

Our liability to third-party holders of Fannie Mae MBS that arises as the result of a consolidation of a

securitization trust is collateralized by the underlying loans and/or mortgage-related securities.

F-31

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
When securities sold under agreements to repurchase meet all of the conditions of a secured financing, we

report the collateral of the transferred securities at fair value, excluding accrued interest. The fair value of

these securities is classified in “Investments in securities” in our consolidated balance sheets. We had

$49 million in repurchase agreements outstanding as of December 31, 2010. We had no such repurchase

agreements outstanding as of December 31, 2009.

Debt

Our consolidated balance sheets contain debt of Fannie Mae as well as debt of consolidated trusts. We classify

our outstanding debt as either short-term or long-term based on the initial contractual maturity. Prior to

January 1, 2010, we reported debt issued both by us and by consolidated trusts collectively as either “Shortterm debt” or “Long-term debt” in our consolidated balance sheets. Effective January 1, 2010, the debt of

consolidated trusts is reported as either “Short-term debt of consolidated trusts” or “Long-term debt of

consolidated trusts,” and represents the amount of Fannie Mae MBS issued from such trusts and held by thirdparty certificateholders. Debt issued by us is reported as either “Short-term debt of Fannie Mae” or “Longterm debt of Fannie Mae,” and represents debt that we issue to third parties to fund our general business

activities. The debt of consolidated trusts is prepayable without penalty at any time. We report deferred items,

including premiums, discounts and other cost basis adjustments, as adjustments to the related debt balances in

our consolidated balance sheets. We remeasure the carrying amount, accrued interest and basis adjustments of

debt denominated in a foreign currency into U.S. dollars using foreign exchange spot rates as of the balance

sheet dates and report any associated gains or losses as “Debt foreign exchange gains (losses), net” which is a

component of “Fair value losses, net” in our consolidated statements of operations.

We classify interest expense as either short-term or long-term based on the contractual maturity of the related

debt. We recognize the amortization of premiums, discounts and other cost basis adjustments through interest

expense using the effective interest method usually over the contractual term of the debt. Amortization of

premiums, discounts and other cost basis adjustments begins at the time of debt issuance. We remeasure

interest expense for debt denominated in a foreign currency into U.S. dollars using the daily spot rates. The

difference in rates arising from the month-end spot exchange rate used to calculate the interest accruals and

the daily spot rates used to record the interest expense is a foreign currency transaction gain or loss for the

period and is recognized as “Debt foreign exchange gains (losses), net” which is a component of “Fair value

losses, net” in our consolidated statements of operations.

When we purchase a Fannie Mae MBS issued from a consolidated single-class securitization trust, we

extinguish the related debt of the consolidated trust as the MBS debt is no longer owed to a third-party. We

record debt extinguishment gains or losses related to debt of consolidated trusts to the extent that the purchase

price of the MBS does not equal the carrying value of the related consolidated MBS debt reported on our

balance sheets (including unamortized premiums, discounts and other cost basis adjustments) at the time of

purchase.

Fees Received on the Structuring of Transactions

We offer certain re-securitization services to customers in exchange for fees. Such services include, but are not

limited to, the issuance, guarantee and administration of Fannie Mae REMIC, stripped mortgage-backed

securities (“SMBS”), grantor trust, and Fannie Mae Mega» securities (collectively, the “Structured

Securities”). We receive a one-time conversion fee upon issuance of a Structured Security that varies based on

the value of securities issued and the transaction structure. The conversion fee compensates us for all services

we provide in connection with the Structured Security, including services provided at and prior to security

issuance and over the life of the Structured Securities. Except for Structured Securities where the underlying

collateral is whole loans or private-label securities, we generally do not receive a guaranty fee as

F-32

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
compensation in connection with the issuance of a Structured Security, because the transferred mortgagerelated securities have previously been guaranteed by us or another party.

We defer a portion of the fee received upon issuance of a Structured Security based on our estimate of the fair

value of our future administration services. We amortize this portion of the fee on a straight-line basis over the

expected life of the Structured Security. We recognize the excess of the total fee over the fair value of the

future services in our consolidated statements of operations upon issuance of a Structured Security. However,

when we acquire a portion of a Structured Security contemporaneous with our structuring of the transaction,

we defer and amortize a portion of this upfront fee as an adjustment to the yield of the purchased security. We

present fees received and costs incurred related to our structuring of securities in “Fee and other income” in

our consolidated statements of operations.

Income Taxes

We recognize deferred tax assets and liabilities for the difference in the basis of assets and liabilities for

financial accounting and tax purposes. We measure deferred tax assets and liabilities using enacted tax rates

that are expected to be applicable to the taxable income or deductions in the period(s) the assets are realized

or the liabilities are settled. We adjust deferred tax assets and liabilities for the effects of changes in tax laws

and rates on the date of enactment. We recognize investment and other tax credits through our effective tax

rate calculation assuming that we will be able to realize the full benefit of the credits. We reduce our deferred

tax asset by an allowance if, based on the weight of available positive and negative evidence, it is more likely

than not that we will not realize some portion, or all, of the deferred tax asset.

We account for income tax uncertainty using a two-step approach whereby we recognize an income tax

benefit if, based on the technical merits of a tax position, it is more likely than not (a probability of greater

than 50%) that the tax position would be sustained upon examination by the taxing authority, which includes

all related appeals and litigation. We then recognize a tax benefit equal to the largest amount of tax benefit

that is greater than 50% likely to be realized upon settlement with the taxing authority, considering all

information available at the reporting date. We recognize interest expense on unrecognized tax benefits as

“Other expenses” in our consolidated statements of operations.

Pension and Other Postretirement Benefits

We provide pension and postretirement benefits and account for these benefit costs on an accrual basis. We

determine pension and postretirement benefit amounts recognized in our consolidated financial statements on

an actuarial basis using several different assumptions. The two most significant assumptions used in the

valuation are the discount rate and the long-term rate of return on assets. In determining our net periodic

benefit cost, we apply a discount rate in the actuarial valuation of our pension and postretirement benefit

obligations. In determining the discount rate as of each balance sheet date, we consider the current yields on

high-quality, corporate fixed-income debt instruments with maturities corresponding to the expected duration

of our benefit obligations. Additionally, the net periodic benefit cost recognized in our consolidated financial

statements for our qualified pension plan is impacted by the long-term rate of return on plan assets. We base

our assumption of the long-term rate of return on the current investment portfolio mix, actual long-term

historical return information and the estimated future long-term investment returns for each class of assets. We

measure plan assets and obligations as of the date of our consolidated financial statements. We recognize the

over-funded or under-funded status of our benefit plans as a prepaid benefit cost (an asset) in “Other assets” or

an accrued benefit cost (a liability) in “Other liabilities,” respectively, in our consolidated balance sheets. We

recognize actuarial gains and losses and prior service costs and credits when incurred as adjustments to the

prepaid benefit cost or accrued benefit cost with a corresponding offset in other comprehensive income (loss).

F-33

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Earnings (Loss) per Share

Earnings (loss) per share (“EPS”) is presented for both basic EPS and diluted EPS. We compute basic EPS by

dividing net income (loss) available to common stockholders by the weighted-average number of shares of

common stock outstanding during the year. In addition to common shares outstanding, the computation of

basic EPS includes instruments for which the holder has (or is deemed to have) the present rights as of the

end of the reporting period to share in current period earnings (loss) with common stockholders (i.e.,

participating securities and common shares that are currently issuable for little or no cost to the holder). We

include in the denominator of our EPS computation the weighted-average shares of common stock that would

be issued upon the full exercise of the warrant issued to Treasury. Diluted EPS is computed by dividing net

income (loss) available to common stockholders by the weighted-average number of shares of common stock

outstanding during the year, plus the dilutive effect of common stock equivalents such as convertible

securities, stock options and other performance awards. We exclude these common stock equivalents from the

calculation of diluted EPS when the effect of inclusion, assessed individually, would be anti-dilutive.

Other Comprehensive Income (Loss)

Other comprehensive income (loss) is the change in equity, net of tax, resulting from transactions that we

record directly to stockholders’ equity. These transactions include: unrealized gains and losses on AFS

securities and certain commitments whose underlying securities are classified as AFS; deferred hedging gains

and losses from cash flow hedges; unrealized gains and losses on guaranty assets resulting from portfolio

securitization transactions; buy-ups resulting from lender swap transactions; and change in prior service costs

and credits and actuarial gains and losses associated with pension and postretirement benefits in other

comprehensive income (loss).

As of December 31, 2010 and 2009, we recorded a valuation allowance for our deferred tax asset for the

portion of the future tax benefit that we more likely than not will not utilize in the future. We established no

valuation allowance for the deferred tax asset amount related to unrealized losses recorded through AOCI on

our AFS securities. We believe this deferred tax amount is recoverable because we have the intent and ability

to hold these securities until recovery of the unrealized loss amounts.

Servicer and MBS Trust Receivable and Payable

When a servicer advances payments to a consolidated MBS trust for delinquent loans, we record restricted

cash and a corresponding liability to reimburse the servicer. When a delinquency advance is made to an

unconsolidated trust, we record a receivable from the MBS trust, net of a valuation allowance, and a

corresponding liability to reimburse the servicer. Servicers are reimbursed for amounts that they do not collect

from the borrower at the earlier of our purchase of the loan out of the trust under our default call option or

foreclosure.

For unconsolidated MBS trusts where we are considered the transferor, when the contingency on our option to

purchase loans from the trust has been met and we regain effective control over the transferred loan, we

recognize the loan in our consolidated balance sheets at fair value and record a corresponding liability to the

unconsolidated MBS trust.

F-34

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Value Losses, Net

The following table displays the composition of “Fair value losses, net” for the years ended December 31,

2010, 2009 and 2008.

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Derivatives fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,000) $(6,350) $(15,416)

Trading securities gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,692 3,744 (7,040)

Hedged mortgage asset gains, net(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 2,154

Debt foreign exchange gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . (77) (173) 230

Debt fair value gain (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (32) (57)

Mortgage loans fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (131) — —

Fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (511) $(2,811) $(20,129)

(1) Represents adjustments to the carrying value of mortgage assets designated for hedge accounting that are attributable

to changes in interest rates.

Reclassifications

To conform to our current period presentation, we have reclassified amounts reported in our consolidated

financial statements.

In our consolidated balance sheet as of December 31, 2009, we reclassified $536 million from “Allowance for

loan losses” to “Allowance for accrued interest receivable.” Also, the following table displays the balance

sheet line items that were reclassified to “Other assets” and “Other liabilities.”

Before

Reclassification

After

Reclassification

As of December 31, 2009

(Dollars in millions)

Reclassified lines to:

Other assets:

Advances to lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,449 $

Derivative assets, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,474

Guaranty assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,356

Deferred tax assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 909

Partnership investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,372

Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,559 30,119

Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,119 $30,119

Other liabilities:

Derivatives liabilities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,029 $

Guaranty obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,996

Partnership liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,541

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,020 24,586

Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,586 $24,586

In our consolidated statements of operations, we reclassified $63.1 billion and $9.6 billion for 2009 from

“Provision for credit losses,” which is no longer presented, to “Provision for guaranty losses” and “Provision

F-35

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
for loan losses,” respectively. For 2008, we reclassified $23.9 billion to “Provision for guaranty losses” and

$4.0 billion to “Provision for loan losses.”

In our consolidated statements of cash flows, we reclassified $27.5 billion and $15.3 billion from

“Reimbursements to servicers for loan advances,” which is no longer presented, to “Other, net,” within “Cash

flows provided by (used in) investing activities” for the years ended December 31, 2009 and 2008,

respectively. Also, the following table displays the cash flows line items that we reclassified within “Cash

flows (used in) provided by operating activities” for the years ended December 31, 2009 and 2008.

Before

Reclassification

After

Reclassification

Before

Reclassification

After

Reclassification

2009 2008

For the Year Ended December 31,

(Dollars in millions)

Reclassified lines to:

Amortization of cost basis

adjustments:

Amortization of investment cost basis

adjustments . . . . . . . . . . . . . . . . . $ (687) $ $ (400) $

Amortization of debt cost basis

adjustments . . . . . . . . . . . . . . . . . 3,255 8,589

Amortization of cost basis

adjustments . . . . . . . . . . . . . . . $ 2,568 $ 2,568 $ 8,189 $ 8,189

Valuation (gains) losses:

Derivatives fair value adjustments . . . $(1,105) $ $ (1,239) $

Valuation losses . . . . . . . . . . . . . . . 4,530 3,425 13,964 12,725

Total valuation (gains) losses . . . . $ 3,425 $ 3,425 $12,725 $12,725

Other, net:

Debt extinguishment losses, net . . . . $ 325 $ $ 222 $

Debt foreign currency transaction

(gains) losses, net . . . . . . . . . . . . 173 (230)

Net change in:

Guaranty assets . . . . . . . . . . . . . . (1,072) 2,089

Guaranty obligations . . . . . . . . . . (903) (5,312)

Other, net. . . . . . . . . . . . . . . . . . . . (550) (2,027) (2,458) (5,689)

Total other, net . . . . . . . . . . . . . . $(2,027) $(2,027) $ (5,689) $ (5,689)

2. Adoption of the New Accounting Standards on the Transfers of Financial Assets and Consolidation

of Variable Interest Entities

Effective January 1, 2010, we prospectively adopted the new accounting standards on the transfer of financial

assets and the consolidation of VIEs for all VIEs existing as of January 1, 2010 (“transition date”). The new

accounting standards removed the scope exception for QSPEs and replaced the previous consolidation model

with a qualitative model for determining the primary beneficiary of a VIE. Upon adoption of the new accounting

standards, we consolidated the substantial majority of our single-class securitization trusts, which had significant

impacts on our consolidated financial statements. The key financial statement impacts are summarized below.

The mortgage loans and debt reported in our consolidated balance sheet increased significantly at the

transition date because we recognized the underlying assets and liabilities of the newly consolidated trusts. We

recorded the trusts’ mortgage loans and the debt held by third parties at their unpaid principal balance at the

transition date. Prospectively, we recognized the interest income on the trusts’ mortgage loans and interest

F-36

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
expense on the trusts’ debt, resulting in an increase in the interest income and interest expense reported in our

consolidated statements of operations compared to prior periods.

Another significant impact was the elimination of our guaranty accounting for the newly consolidated trusts.

We derecognized the previously recorded guaranty-related assets and liabilities associated with the newly

consolidated trusts from our consolidated balance sheets. We also eliminated our reserve for guaranty losses

and recognized an allowance for loan losses for such trusts. In our consolidated statements of operations, we

no longer recognize guaranty fee income for the newly consolidated trusts, as the revenue is now recorded as a

component of loan interest income.

When we recognized the newly consolidated trusts’ assets and liabilities at the transition date, we also

derecognized our investments in these trusts, resulting in a decrease in our investments in MBS that are classified

as trading and AFS securities. Instead of being recorded as an asset, our investments in Fannie Mae MBS reduce

the debt reported in our consolidated balance sheets. Accordingly, the purchase and subsequent sale of MBS

issued by consolidated trusts are accounted for in our consolidated financial statements as the extinguishment and

issuance of the debt of consolidated trusts, respectively. Furthermore, under the new accounting standards, a

transfer of mortgage loans from our portfolio to a trust will generally not qualify for sale treatment.

The new accounting standards do not change the economic risk to our business, specifically our exposure to

liquidity, credit, and interest rate risks. We continue to securitize mortgage loans originated by lenders in the

primary mortgage market into Fannie Mae MBS.

Refer to the “Principles of Consolidation” section in “Note 1, Summary of Significant Accounting Policies”

for additional information.

Summary of Transition Adjustments

The cumulative impact of our adoption of the new accounting standards was a decrease to our total deficit of

$3.3 billion at the transition date. This amount includes:

• A net decrease in our accumulated deficit of $6.7 billion, primarily driven by the reversal of the guaranty

assets and guaranty obligations related to the newly consolidated trusts; and

• A net increase in our accumulated other comprehensive loss of $3.4 billion primarily driven by the

reversal of net unrealized gains related to our investments in Fannie Mae MBS classified as AFS.

Our transition adjustment is a result of the following changes to our accounting:

• Net recognition of assets and liabilities of newly consolidated entities. At the transition date, trust assets

and liabilities required to be consolidated were recognized in our consolidated balance sheet at their unpaid

principal balance plus any accrued interest. An allowance for loan losses was established for the newly

consolidated mortgage loans. The reserve for guaranty losses previously established for such loans was

eliminated. Our investments in Fannie Mae MBS issued by the newly consolidated trusts were eliminated

along with the related accrued interest receivable and unrealized gains or losses at the transition date.

• Accounting for portfolio securitizations. At the transition date, we reclassified the majority of our HFS

loans to HFI. Under the new accounting standards, the transfer of mortgage loans to a trust and the sale

of the related securities in a portfolio securitization transaction will generally not qualify for sale

treatment. As such, mortgage loans acquired with the intent to securitize will generally be classified as

held for investment in our consolidated balance sheets both prior to and subsequent to their securitization.

• Elimination of accounting for guarantees. At the transition date, a significant portion of our guarantyrelated assets and liabilities were derecognized from our consolidated balance sheet. Upon consolidation

F-37

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
of a trust, our guaranty activities represent intercompany activities that must be eliminated for purposes of

our consolidated financial statements.

We also describe in this note the ongoing impacts of the new accounting standards on our consolidated

statements of operations, as well as the changes we have made to our segment reporting as a result of our

adoption of the new accounting standards. The substantial majority of the transition impact related to non-cash

activity, which has not been included in our consolidated statement of cash flows.

Balance Sheet Impact

In accordance with the new accounting standards, effective on the transition date, we report the assets and

liabilities of consolidated trusts separately from the assets and liabilities of Fannie Mae in our consolidated

balance sheets. As such, we have reclassified prior period amounts to conform to our current period

presentation. The following table presents the impact to our consolidated balance sheet at the transition date.

As of

December 31,

2009

Transition

Impact

As of

January 1,

2010

(Dollars in millions)

Assets

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,812 $ (19) $ 6,793

Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,070 45,583 48,653

Federal funds sold and securities purchased under agreements to

resell or similar arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . 53,684 (316) 53,368

Investments in securities:

Trading, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,939 (66,251) 45,688

Available-for-sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . 237,728 (122,328) 115,400

Total investments in securities . . . . . . . . . . . . . . . . . . . . . . . . 349,667 (188,579) 161,088

Mortgage loans:

Loans held for sale, at lower of cost or fair value . . . . . . . . . . . . 18,462 (18,115) 347

Loans held for investment, at amortized cost:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256,434 3,753 260,187

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,590 2,595,321 2,724,911

Total loans held for investment . . . . . . . . . . . . . . . . . . . . . . 386,024 2,599,074 2,985,098

Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . (9,925) (43,576) (53,501)

Total loans held for investment, net of allowance . . . . . . 376,099 2,555,498 2,931,597

Total mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . 394,561 2,537,383 2,931,944

Accrued interest receivable:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,774 (659) 3,115

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519 16,329 16,848

Allowance for accrued interest receivable . . . . . . . . . . . . . . . . (536) (6,989) (7,525)

Total accrued interest receivable, net of allowance . . . . . . . . 3,757 8,681 12,438

Acquired property, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,142 — 9,142

Servicer and MBS trust receivable. . . . . . . . . . . . . . . . . . . . . . . . . 18,329 (17,143) 1,186

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,119 (8,496) 21,623

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $869,141 $2,377,094 $3,246,235

F-38

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of

December 31,

2009

Transition

Impact

As of

January 1,

2010

(Dollars in millions)

Liabilities and Equity (Deficit)

Liabilities:

Accrued interest payable:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,951 $ 8 $ 4,959

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 10,564 10,593

Federal funds purchased and securities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —

Short-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,437 — 200,437

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 6,425 6,425

Long-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 567,950 (205) 567,745

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,167 2,442,280 2,448,447

Reserve for guaranty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,430 (54,103) 327

Servicer and MBS trust payable. . . . . . . . . . . . . . . . . . . . . . . . . 25,872 (16,600) 9,272

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,586 (14,573) 10,013

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 884,422 2,373,796 3,258,218

Fannie Mae’s stockholders’ equity (deficit):

Senior preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,900 — 60,900

Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,348 — 20,348

Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 664 — 664

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,083 — 2,083

Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (90,237) 6,706 (83,531)

Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . (1,732) (3,394) (5,126)

Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,398) — (7,398)

Total Fannie Mae stockholders’ deficit . . . . . . . . . . . . . . . . . . . . (15,372) 3,312 (12,060)

Noncontrolling interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 (14) 77

Total equity (deficit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,281) 3,298 (11,983)

Total liabilities and equity (deficit) . . . . . . . . . . . . . . . . . . . . . . . . $869,141 $2,377,094 $3,246,235

In the following sections, we describe the impacts to our consolidated balance sheet at the transition date in

the context of the three categories of transition adjustments noted above.

Net Recognition of the Assets and Liabilities of Newly Consolidated Entities

At the transition date, the majority of the net increase to both total assets and total liabilities resulted from the

recognition of the assets and liabilities of newly consolidated trusts. This includes the impact of derecognizing

our investments in Fannie Mae MBS issued from newly consolidated trusts. We describe the impacts to our

consolidated balance sheet resulting from the recognition of the assets and liabilities of newly consolidated

trusts below.

F-39

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Investments in Securities

At the transition date, we derecognized $66.3 billion and $122.3 billion in investments in securities classified

as trading and AFS, respectively. The net transition impact to our investments in securities was driven both by

the derecognition of investments in Fannie Mae MBS issued by the newly consolidated trusts and the

recognition of mortgage-related securities held by the newly consolidated trusts. We derecognized from our

consolidated balance sheet investments in the Fannie Mae MBS issued by the newly consolidated trusts as

these investments represent debt securities that are both debt of the consolidated trusts and investments in our

portfolio and therefore represent intercompany activity. Such investments act to reduce the debt held by third

parties in our consolidated balance sheets. We also derecognized the accrued interest receivable and net

unrealized gains related to securities that we derecognized at transition.

Additionally, we recognized mortgage-related securities at transition in situations where trusts that were

previously consolidated in our consolidated balance sheets deconsolidated under the new accounting standards.

Upon deconsolidation of these trusts, we derecognized the collateral of the trusts (that is, mortgage loans) and

recognized our investment in securities issued from the trusts in our consolidated balance sheet.

The table below presents the impact at the transition date to our investments in securities.

As of December 31,

2009

Transition

Impact

As of January 1,

2010

(Dollars in millions)

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $229,169 $(189,360) $ 39,809

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,551 — 42,551

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,354 (21) 1,333

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . 15,505 533 16,038

Subprime private-label securities. . . . . . . . . . . . . . . . . . 12,526 (118) 12,408

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,528 — 22,528

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . 13,446 21 13,467

Other mortgage-related securities . . . . . . . . . . . . . . . . . 3,706 366 4,072

Total mortgage-related securities . . . . . . . . . . . . . . . . 340,785 (188,579) 152,206

Total non-mortgage-related securities . . . . . . . . . . . . . . . . 8,882 — 8,882

Total investments in securities . . . . . . . . . . . . . . . . . . . . . $349,667 $(188,579) $161,088

Mortgage Loans

At the transition date, the recognition of loans held by the newly consolidated trusts resulted in an increase in

“Mortgage loans held for investment of consolidated trusts.” Loans held by consolidated trusts are generally

classified as HFI in our consolidated balance sheets. Prior to the transition date, we reported mortgage loans

held both by us in our mortgage portfolio and those held by consolidated trusts collectively as “Mortgage

loans held for investment” in our consolidated balance sheets. Effective at the transition date, we report loans

held by us as “Mortgage loans held for investment of Fannie Mae” and loans held by consolidated trusts as

“Mortgage loans held for investment of consolidated trusts.” Prior period amounts have been reclassified to

conform to our current period presentation.

The recognition of the mortgage loans held by newly consolidated trusts also resulted in an increase in

“Accrued interest receivable of consolidated trusts.” This increase was offset in part by an increase to

“Allowance for accrued interest receivable,” which represents estimated incurred losses on our accrued

interest. Prior to the transition date, incurred losses on interest of unconsolidated trusts were reported as a

F-40

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
portion of our “Reserve for guaranty losses.” Prior to the transition date, we reported the accrued interest

receivable relating to loans held by consolidated trusts as a component of “Accrued interest receivable.” Prior

period amounts have been reclassified to conform to our current period presentation.

The table below presents the impact to the unpaid principal balance of our mortgage loans at the transition

date.

Of Fannie

Mae

Of Consolidated

Trusts

Of Fannie

Mae

Of Consolidated

Trusts

Of Fannie

Mae

Of Consolidated

Trusts

As of December 31, 2009 Transition Impact As of January 1, 2010

(Dollars in millions)

Single-family:

Government insured or

guaranteed . . . . . . . . . . . . . . . . $ 51,454 $ 945 $ — $ 1 $ 51,454 $ 946

Conventional:

Long-term fixed-rate . . . . . . . . . 90,245 89,409 (5,272) 2,029,932 84,973 2,119,341

Intermediate-term fixed-rate . . . . 8,069 21,405 (178) 318,329 7,891 339,734

Adjustable-rate . . . . . . . . . . . . . 16,889 17,713 (2) 190,706 16,887 208,419

Total single-family conventional . . . 115,203 128,527 (5,452) 2,538,967 109,751 2,667,494

Total single-family . . . . . . . . . $166,657 $129,472 $(5,452) $2,538,968 $161,205 $2,668,440

Multifamily:

Government insured or

guaranteed . . . . . . . . . . . . . . . . $ 585 $ — $ — $ — $ 585 $ —

Conventional:

Long-term fixed-rate . . . . . . . . . 4,937 790 — 3,752 4,937 4,542

Intermediate-term fixed-rate . . . . 81,456 10,304 — 35,672 81,456 45,976

Adjustable-rate . . . . . . . . . . . . . 21,535 807 — 5,603 21,535 6,410

Total multifamily conventional . . . . 107,928 11,901 — 45,027 107,928 56,928

Total multifamily . . . . . . . . . . $108,513 $ 11,901 $ — $ 45,027 $108,513 $ 56,928

Allowance for Loan Losses and Reserve for Guaranty Losses

We maintain an allowance for loan losses related to HFI loans reported in our consolidated balance sheets and

a reserve for guaranty losses related to loans held by unconsolidated trusts. Upon recognition of the mortgage

loans held by newly consolidated trusts at the transition date, we increased our “Allowance for loan losses”

and decreased our “Reserve for guaranty losses.” The overall decrease in the combined reserves represents a

difference in the methodology used to estimate incurred losses for our allowance for loan losses versus our

reserve for guaranty losses. Our guaranty reserve considers all contractually past due interest income including

payments expected to be missed between the balance sheet date and the point of loan acquisition or

foreclosure, however, for our loan loss allowance, we consider only our net recorded investment in the loan at

the balance sheet date, which only includes interest income accrued while the loan was on accrual status. We

recognize the portion of the allowance related to principal as our “Allowance for loan losses” and the portion

of the allowance related to accrued interest as our “Allowance for accrued interest receivable.” We continue to

record a reserve for guaranty losses related to loans in unconsolidated trusts and loans that we have guaranteed

under long-term standby commitments, which require us to purchase loans from lenders if the loans meet

certain delinquency criteria. See “Note 5, Allowance for Loan Losses and Reserve for Guaranty Losses” for

additional information.

F-41

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Short-Term Debt and Long-Term Debt

At the transition date, we recognized an increase of $6.4 billion in “Short-term debt of consolidated trusts”

and $2.4 trillion in “Long-term debt of consolidated trusts.” The debt of consolidated trusts represents the

amount of Fannie Mae debt securities issued by such trusts and held by third-party certificateholders. We

recognized an increase of $10.6 billion in “Accrued interest payable of consolidated trusts,” which represents

the interest expense accrued as of the transition date on the long-term debt of the newly consolidated trusts.

Prior to the transition date, we reported debt issued both by us and by consolidated trusts collectively as either

“Short-term debt” or “Long-term debt.” Effective at the transition date, we report debt issued by us as either

“Short-term debt of Fannie Mae” or “Long-term debt of Fannie Mae.” We report the debt of consolidated

trusts as either “Short-term debt of consolidated trusts” or “Long-term debt of consolidated trusts.” Prior

period amounts have been reclassified to conform to our current period presentation.

Servicer and MBS Trust Receivable and Payable

At the transition date we recognized a net decrease of $17.1 billion in “Servicer and MBS trust receivable.”

Prior to our adoption of the new accounting standards, we recorded a receivable from unconsolidated trusts,

net of a valuation allowance, when a delinquency advance was made to the trust. This receivable now

represents intercompany activity that we eliminate for the purpose of our consolidated financial statements.

We also recognized a decrease of $16.6 billion in “Servicer and MBS trust payable,” which consisted of two

components. First, we have the option to purchase loans and foreclosed properties from the trust when certain

contingencies have been met. At December 31, 2009, we recorded a payable to the trust for loans and

foreclosed properties that had been purchased during the month of December. Second, prior to the

consolidation of certain out of portfolio trusts, we recognized a loan in our consolidated balance sheets at fair

value and recorded a corresponding liability to the unconsolidated trust when the contingency on our option to

purchase loans from the trust had been met. These payables now represent intercompany activity that we

eliminate for the purpose of our consolidated financial statements.

Restricted Cash

At the transition date, “Restricted cash” increased by $45.6 billion to record cash payments received by the

servicer or consolidated trusts due to be remitted to the MBS certificateholders that have been determined to

be restricted for use.

Federal Funds Sold and Securities Purchased Under Agreements to Resell or Similar Arrangements

At the transition date, we recognized a decrease of $316 million in “Federal funds sold and securities

purchased under agreements to resell or similar arrangements” relating to dollar roll transactions that utilized

Fannie Mae MBS. As a result of the dollar roll transactions, we held investments in Fannie Mae MBS in our

consolidated balance sheet as of December 31, 2009 that were issued from trusts that subsequently

consolidated at the transition date. Similar to our treatment of Fannie Mae MBS classified as trading or AFS,

we eliminated our secured financing receivable related to these dollar roll transactions and recharacterized the

transfer of the Fannie Mae MBS as debt extinguishment in our consolidated financial statements.

Accounting for Portfolio Securitizations

At the transition date, we reclassified the majority of our HFS mortgage loans to HFI due to the change in our

accounting for portfolio securitizations. Prior to our adoption of the new accounting standards, we classified

mortgage loans acquired with the intent to securitize as HFS in our consolidated balance sheets as the majority

of the transfers of mortgage loans under portfolio securitization transactions qualified as sales under the

F-42

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
previous accounting standards. Under the new accounting standards, the transfer of mortgage loans through

portfolio securitization transactions will generally not result in the derecognition of mortgage loans, thus we

have classified the loans as HFI.

Certain mortgage loans continue to be classified as HFS in our consolidated balance sheets, consistent with

our intent to securitize and transfer the mortgage loans to an MBS trust that we will not consolidate.

Elimination of Accounting for Guarantees

At the transition date, we made adjustments relating to our accounting for guarantees and master servicing.

We describe the impact of the new accounting standards on our accounting for guarantees and master

servicing below.

Guaranty Accounting

We continue to guarantee to our MBS trusts that we will supplement amounts received by the trust as required

to permit timely payments of principal and interest on the related Fannie Mae MBS, regardless of their

consolidation status. However, for consolidated trusts, our guarantee to the trust represents an intercompany

activity that must be eliminated for purposes of our consolidated financial statements. Thus, upon

consolidation of the trusts, we eliminated the related guaranty asset, guaranty obligation, buy-up, buy-down

and risk-based price adjustments from our consolidated balance sheet. This transition adjustment is included in

“Other assets” and “Other liabilities”. We continue to record guaranty assets and guaranty obligations in our

consolidated balance sheets relating to unconsolidated trusts.

Master Servicing

The transition adjustment to our “Other assets” and “Other liabilities” includes the derecognition of the

portion of our master servicing asset and master servicing liability relating to newly consolidated trusts, which

represents intercompany activity.

Impact on Statements of Operations

Our adoption of the new accounting standards affects how certain income and expense items are reported in

our consolidated statements of operations on an ongoing basis. We explain the key impacts below.

Interest Income on Mortgage Loans

The interest income earned on mortgage loans held by the newly consolidated trusts is recorded in our

consolidated statements of operations as loan interest income. This interest income was not recorded in our

consolidated statements of operations prior to the transition date as the trusts were not consolidated.

Prior to our adoption of the new accounting standards, we reported interest income on mortgage loans held

both by us and by consolidated trusts collectively as “Interest income on mortgage loans.” Effective at the

transition date, we report interest income on loans held by us as “Interest income on mortgage loans of Fannie

Mae” and interest income on loans held by consolidated trusts as “Interest income on mortgage loans of

consolidated trusts.” Prior period amounts have been reclassified to conform to our current period presentation.

“Interest income on mortgage loans of Fannie Mae” is not impacted by our adoption of the new accounting

standards.

F-43

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Interest Expense on Short-Term and Long-Term Debt

The interest expense incurred on debt of newly consolidated trusts is recorded in our consolidated statements

of operations as interest expense on short-term and long-term debt. This interest expense was not recorded in

our consolidated statements of operations prior to the transition date as the trusts were not consolidated.

Prior to our adoption of the new accounting standards, we reported interest expense on debt issued both by us

and by consolidated trusts as either “Interest expense on short-term debt” or “Interest expense on long-term

debt.” Effective at the transition date, we report interest expense as either “Interest expense on debt of Fannie

Mae” or “Interest expense on debt of consolidated trusts.” Prior period amounts have been reclassified to

conform to our current period presentation. “Interest expense on debt of Fannie Mae” is not impacted by our

adoption of the new accounting standards.

Provision for Loan Losses and Provision for Guaranty Losses

Since the majority of our MBS trusts were consolidated at the transition date, the provision for loan losses

recorded in periods after the transition date reflects the increase in the mortgage loans reported in our

consolidated balance sheets. The provision for guaranty losses recorded in periods after the transition date

reflects the subsequent decrease in unconsolidated trusts. The portion of the reserve for guaranty losses

relating to loans in previously unconsolidated MBS trusts that were consolidated at the transition date was

derecognized and we recognized an allowance for loan losses as the loans are now reflected in our

consolidated balance sheet.

Guaranty Fee Income

We do not recognize the guaranty fee income earned from consolidated trusts. Guaranty fees from

consolidated trusts are reported as a component of interest income on mortgage loans. As our guaranty-related

assets and liabilities pertaining to consolidated trusts were also eliminated, we no longer record amortization

income or fair value adjustments related to these trusts. The guaranty fee income that continues to be

recognized in our consolidated statements of operations relates to guarantees to unconsolidated trusts and other

credit enhancements that we have provided.

Debt Extinguishment Gains (Losses)

Upon purchase of Fannie Mae MBS debt securities issued from a consolidated trust for our mortgage

portfolio, we extinguish the related debt issued by the consolidated trust as we now own the debt securities

instead of a third party. We record debt extinguishment gains or losses related to debt of consolidated trusts to

the extent that the purchase price of the debt security does not equal the carrying value of the related

consolidated debt reported in our consolidated balance sheet at the time of purchase.

Trust Management Income

As master servicer, issuer, and trustee for Fannie Mae MBS, we earn a fee that reflects interest earned on cash

flows from the date of remittance of mortgage and other payments to us by the servicers until the date of

distribution of these payments to the MBS certificateholders. Previously, we reported this compensation as

“Trust management income” in our consolidated statements of operations. Upon adoption of the new

accounting standards, we report the trust management income earned by consolidated trusts as a component of

net interest income in our consolidated statements of operations. Trust management income earned by us

relating to unconsolidated trusts is now reported as a component of “Fee and other income.” Prior period

amounts have been reclassified to conform to our current period presentation.

F-44

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Impact on Segment Reporting

As a result of our adoption of the new accounting standards, we changed the presentation of segment financial

information that is currently evaluated by management. With this change, the sum of the results for our three

segments does not equal our consolidated results of operations as we separate the activity related to our

consolidated trusts from the results generated by our three segments.

Our three reportable segments continue to be: Single-Family, Multifamily (formerly “HCD”), and Capital

Markets. We use these three segments to generate revenue and manage business risk, and each segment is

measured based on the type of business activities it performs.

We have not restated prior period results nor have we presented current year results under the old presentation

as we determined that it was impracticable to do so; therefore, our segment results reported in the current

period are not comparable with prior periods.

We present our segment results in “Note 15, Segment Reporting.”

3. Consolidations and Transfers of Financial Assets

We have interests in various entities that are considered to be VIEs. The primary types of entities are

securitization trusts guaranteed by us via lender swap and portfolio securitization transactions, mortgage and

asset-backed trusts that were not created by us, as well as housing partnerships that are established to finance

the acquisition, construction, development or rehabilitation of affordable multifamily and single-family

housing. These interests also include investments in securities issued by VIEs, such as Fannie Mae MBS

created pursuant to our securitization transactions and our guaranty to the entity. Our adoption of the new

accounting standards on the transfers of financial assets and consolidation of VIEs resulted in the majority of

our single-class securitization trusts being consolidated by us.

Types of VIEs

Securitization Trusts

Under our lender swap and portfolio securitization transactions, mortgage loans are transferred to a trust

specifically for the purpose of issuing a single class of guaranteed securities that are collateralized by the

underlying mortgage loans. The trust’s permitted activities include receiving the transferred assets, issuing

beneficial interests, establishing the guaranty and servicing the underlying mortgage loans. In our capacity as

issuer, master servicer, trustee and guarantor, we earn fees for our obligations to each trust. Additionally, we

may retain or purchase a portion of the securities issued by each trust. We have securitized mortgage loans

since 1981.

In our structured securitization transactions, we earn fees for assisting lenders and dealers with the design and

issuance of structured mortgage-related securities. The trusts created in these transactions have permitted

activities that are similar to those for our lender swap and portfolio securitization transactions. The assets of

these trusts may include mortgage-related securities and/or mortgage loans. The trusts created for Fannie Mae

Mega securities issue single-class securities while the trusts created for REMIC, grantor trust and SMBS

securities issue single-class and multi-class securities, the latter of which separate the cash flows from

underlying assets into separately tradable interests. Our obligations and continued involvement in these trusts

are similar to those described for lender swap and portfolio securitization transactions. We have securitized

mortgage assets in structured transactions since 1986.

We also invest in mortgage-backed and asset-backed securities that have been issued via private-label trusts.

These trusts are structured to provide investors with a beneficial interest in a pool of receivables or other

financial assets, typically mortgage loans, credit card receivables, auto loans or student loans. The trusts act as

F-45

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
vehicles to allow loan originators to securitize assets. Securities are structured from the underlying pool of

assets to provide for varying degrees of risk. The originators of the financial assets or the underwriters of the

transaction create the trusts and typically own the residual interest in the trusts’ assets. Our involvement in

these entities is typically limited to our recorded investment in the beneficial interests that we have purchased.

We have invested in these vehicles since 1987.

Limited Partnerships

We have historically made equity investments in various limited partnerships that sponsor affordable housing

projects utilizing the low-income housing tax credit pursuant to Section 42 of the Internal Revenue Code. The

purpose of these investments is to increase the supply of affordable housing in the United States and to serve

communities in need. In addition, our investments in LIHTC partnerships generate both tax credits and net

operating losses that may reduce our federal income tax liability. Our LIHTC investments primarily represent

limited partnership interests in entities that have been organized by a fund manager who acts as the general

partner. These fund investments seek out equity investments in LIHTC operating partnerships that have been

established to identify, develop and operate multifamily housing that is leased to qualifying residential tenants.

During 2009, we explored options to sell or otherwise transfer our LIHTC investments for value consistent

with our mission. On February 18, 2010, FHFA informed us that after consultation with Treasury, we were not

authorized to sell or transfer our LIHTC partnership interests. The carrying value of our LIHTC “Partnership

investments” was reduced to zero in the consolidated financial statements as of December 31, 2009, as we no

longer had both the intent and ability to sell or otherwise transfer our LIHTC investments for value.

We recognized $145 million, $5.9 billion and $795 million for the years ended December 31, 2010, 2009 and

2008, respectively, of other-than-temporary impairment losses related to our limited partnerships in “Losses

from partnership investments” in our consolidated statements of operations. We no longer recognize net

operating losses or impairment on our LIHTC investments, since the carrying value was reduced to zero.

As of December 31, 2010, we have an obligation to fund $280 million in capital contributions. This obligation

has been recorded as a component of “Other liabilities” in our consolidated balance sheet. As a result of our

current tax position, we did not make any LIHTC investments in 2010 other than pursuant to existing prior

commitments. We are not currently recognizing the tax benefits associated with the tax credits and net

operating losses in our consolidated financial statements.

Consolidated VIEs

Upon adoption of the new accounting standards, if an entity is a VIE, we consider whether our variable

interest in that entity causes us to be the primary beneficiary. The primary beneficiary of the VIE is required

to consolidate and account for the assets, liabilities and noncontrolling interests of the VIE in its consolidated

financial statements. An enterprise is deemed to be the primary beneficiary when the enterprise has the power

to direct the activities of the VIE that most significantly impact the entity’s economic performance and

exposure to benefits and/or losses could potentially be significant to the entity.

The following table displays the assets and liabilities of consolidated VIEs in our consolidated balance sheets

as of December 31, 2010 and 2009. The difference between total assets of consolidated VIEs and total

liabilities of consolidated VIEs is primarily due to our investment in the debt securities of consolidated VIEs.

F-46

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In general, the investors in the obligations of consolidated VIEs have recourse only to the assets of those VIEs

and do not have recourse to us, except where we provide a guaranty to the VIE.

2010(1) 2009(1)

As of December 31,

(Dollars in millions)

Assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 348 $ 2,092

Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,619 —

Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5,599

Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,055 10,513

Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 661 11,646

Loans held for investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,577,133 129,590

Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,349 519

Servicer and MBS trust receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 593 466

Other assets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 451

Total assets of consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,648,779 $160,876

Liabilities:

Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,712 $ 29

Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,359 —

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,411,597 6,167

Servicer and MBS trust payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 562 850

Other liabilities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 385

Total liabilities of consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,427,561 $ 7,431

(1) Includes VIEs created through lender swaps, private label wraps and portfolio securitization transactions.

(2) Includes partnership investments of $430 million and cash, cash equivalents and restricted cash of $21 million in

limited partnerships as of December 31, 2009.

(3) Includes partnership liabilities of $385 million as of December 31, 2009.

The adoption of the new accounting standards resulted in significant changes in the consolidation status of

VIEs. Refer to “Note 2, Adoption of the New Accounting Standards on the Transfers of Financial Assets and

Consolidation of Variable Interest Entities” for additional information regarding the impact of transition.

In addition to the VIEs consolidated as a result of initially adopting the new accounting standards, we

consolidated VIEs as of December 31, 2010 that were not consolidated as of December 31, 2009. These VIEs are

Fannie Mae multi-class resecuritization trusts and were consolidated because we now hold in our portfolio a

substantial portion of the certificates. As a result of consolidating these multi-class resecuritization trusts, which

had combined total assets of $3.9 billion in unpaid principal balance as of December 31, 2010, we derecognized

our investment in these trusts and recognized the assets and liabilities of the consolidated trusts at their fair value.

As of December 31, 2009, we consolidated VIEs that were no longer consolidated as of December 31, 2010,

excluding the impact of adopting the new accounting standards. These VIEs were Fannie Mae multi-class

resecuritization trusts and were deconsolidated because we no longer hold in our portfolio a substantial portion

of the certificates. As a result of deconsolidating these multi-class resecuritization trusts, which had combined

total assets of $855 million in unpaid principal balance as of December 31, 2009, we derecognized the assets

and liabilities of the trusts and recognized at fair value our retained interests as securities in our consolidated

balance sheet.

F-47

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the years ended December 31, 2010 and 2009, we recognized a loss of $3 million and a gain of

$171 million, respectively, upon deconsolidation of VIEs. We recognize these amounts as a component of

“Investment gains (losses), net” in our consolidated statements of operations.

Unconsolidated VIEs

We also have investments in VIEs that we do not consolidate because we are not deemed to be the primary

beneficiary. These unconsolidated VIEs include securitization trusts, as well as other equity investments. The

following table displays the total assets as of December 31, 2010 and 2009 of unconsolidated VIEs with which

we are involved.

2010 2009

As of December 31,

(Dollars in millions)

Mortgage-backed trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 732,368 $3,044,516

Asset-backed trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363,721 484,703

Limited partnership investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,102 13,085

Mortgage revenue bonds and other credit-enhanced bonds . . . . . . . . . . . . . . . . . . . . 8,019 8,061

Total assets of unconsolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,117,210 $3,550,365

The following table displays the carrying amount and classification of the assets and liabilities as of

December 31, 2010 and 2009 and the maximum exposure to loss as of December 31, 2010 related to our

variable interests in unconsolidated VIEs with which we are involved.

Carrying

Amount

Maximum

Exposure to Loss

Carrying

Amount(1)

2010 2009

As of December 31,

(Dollars in millions)

Assets:

Available-for-sale securities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84,770 $67,367 $190,135

Trading securities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,342 27,627 91,222

Guaranty assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 — 8,195

Partnership investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 319 144

Servicer and MBS trust receivable . . . . . . . . . . . . . . . . . . . . . . . 11 11 15,903

Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,320

Total assets related to our interests in unconsolidated VIEs . . . . . . $114,463 $95,324 $306,919

Liabilities:

Reserve for guaranty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 291 $ — $ 52,703

Guaranty obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 21,318 13,504

Partnership liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 — 325

Servicer and MBS trust payable. . . . . . . . . . . . . . . . . . . . . . . . . 13 2 20,371

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 818

Total liabilities related to our interest in unconsolidated VIEs . . . . $ 943 $21,320 $ 87,721

(1) Includes VIEs created through lender swaps and portfolio securitization transactions. Our total maximum exposure to

loss relating to unconsolidated VIEs was $2.6 trillion as of December 31, 2009.

(2) Contains securities exposed through consolidation which may also represent an interest in other unconsolidated VIEs.

F-48

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Our maximum exposure to loss generally represents the greater of our recorded investment in the entity or the

unpaid principal balance of the assets covered by our guaranty. However, our securities issued by Fannie Mae

multi-class resecuritization trusts that are not consolidated do not give rise to any additional exposure to loss

as we already consolidate the underlying collateral.

Transfers of Financial Assets

We issue Fannie Mae MBS through portfolio securitization transactions by transferring pools of mortgage

loans or mortgage-related securities to one or more trusts or special purpose entities. We are considered to be

the transferor when we transfer assets from our own portfolio in a portfolio securitization transaction. For the

years ended December 31, 2010, 2009 and 2008 the unpaid principal balance of portfolio securitizations was

$120.0 billion, $216.1 billion and $41.1 billion, respectively.

Upon adoption of the new accounting standards, the majority of our portfolio securitization transactions do not

qualify for sale treatment. As a result, our continuing involvement in the form of guaranty assets and guaranty

liabilities with assets that were transferred into unconsolidated trusts has been greatly reduced and is no longer

material. We report the assets and liabilities of consolidated trusts created via portfolio securitization

transactions that do not qualify as sales in our consolidated balance sheets and in the consolidated VIEs table

above.

To determine the fair value of our securities created via portfolio securitizations, we utilize several

independent pricing services. The prices we receive from pricing services are typically based on information

they obtain on current trading activity, but may be based on models where trading activity is not observed. We

evaluate the reasonableness of fair value estimates obtained from pricing services through multiple means,

including our internal price verification group which uses alternate forms of pricing information to validate the

prices. Given that we do not base prices for the retained securities on internal models, but rather base them on

observable market inputs obtained by our pricing services, we believe it would not be meaningful to provide

sensitivities to changes in assumptions on the fair value of the retained securities.

The following table displays some key characteristics of the securities retained in unconsolidated portfolio

securitization trusts.

Fannie Mae

Single-class

MBS & Fannie

Mae Megas

REMICS &

SMBS

(Dollars in millions)

As of December 31, 2010

Unpaid principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63 $ 15,771

Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 16,745

Weighted-average coupon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.58% 6.28%

Weighted-average loan age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 years 4.4 years

Weighted-average maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.6 years 22.0 years

As of December 31, 2009

Unpaid principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,260 $ 19,472

Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,455 20,224

Weighted-average coupon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.62% 6.82%

Weighted-average loan age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 years 4.6 years

Weighted-average maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.2 years 26.1 years

For the years ended December 31, 2010, 2009 and 2008, the principal and interest received on retained

interests was $3.5 billion, $9.7 billion and $7.9 billion, respectively.

F-49

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Managed Loans

We define “managed loans” as on-balance sheet mortgage loans as well as mortgage loans that we have

securitized in unconsolidated portfolio securitization trusts. As noted above, our adoption of the new

accounting standards resulted in a significant increase in mortgage loans held for investment and a decrease in

loans held for sale in our consolidated balance sheets, as well as a decrease in the amount of loans securitized

in unconsolidated portfolio securitization trusts. The following table displays the unpaid principal balances of

managed loans, including those managed loans that are delinquent as of December 31, 2010 and 2009.

Unpaid

Principal Balance

Principal Amount of

Delinquent Loans

(Dollars in millions)

As of December 31, 2010

Loans held for investment

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 423,686 $141,342

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,565,347 34,080

Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 964 127

Securitized loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,147 78

Total loans managed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,992,144 $175,627

As of December 31, 2009

Loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 395,551 $ 51,051

Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,992 140

Securitized loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,922 5,161

Total loans managed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 604,465 $ 56,352

Qualifying Sales of Portfolio Securitizations

The gain or loss on a portfolio securitization transaction that qualifies as a sale depends, in part, on the

carrying amount of the financial assets sold. Prior to January 1, 2010, we allocated the carrying amount of the

financial assets sold between the assets sold and the interests retained, if any, based on their relative fair value

at the date of sale. Further, we recognized our recourse obligations at their full fair value at the date of sale,

which serves as a reduction of sale proceeds in the gain or loss calculation.

Beginning January 1, 2010, we recognize all assets obtained and all liabilities incurred in a portfolio

securitization at fair value. We recorded a net gain on portfolio securitizations of $26 million, $1.0 billion and

$49 million for the years ended December 31, 2010, 2009 and 2008, respectively. We recognize these amounts

as a component of “Investment gains (losses), net” in our consolidated statements of operations. We

recognized proceeds from the initial sale of securities from portfolio securitizations of $660 million,

$85.7 billion and $30.1 billion for the years ended December 31, 2010, 2009 and 2008, respectively.

4. Mortgage Loans

We own both single-family mortgage loans, which are secured by four or fewer residential dwelling units, and

multifamily mortgage loans, which are secured by five or more residential dwelling units. We classify these

loans as either HFI or HFS. We report HFI loans at the unpaid principal balance, net of unamortized

premiums and discounts, other cost basis adjustments, and an allowance for loan losses. We report HFS loans

at the lower of cost or fair value determined on a pooled basis, and record valuation changes in our

consolidated statements of operations. Our prospective adoption on December 31, 2010 of a new accounting

F-50

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
standard on disclosures regarding the credit quality of financing receivables and the allowance for credit losses

had a significant impact on the presentation and comparability of our loan and allowance related disclosures.

The following table displays our mortgage loans as of December 31, 2010 and 2009.

Of

Fannie

Mae

Of

Consolidated

Trusts Total

Of

Fannie

Mae

Of

Consolidated

Trusts Total

December 31, 2010 December 31, 2009(1)

As of

(Dollars in millions)

Single-family . . . . . . . . . . . . . . . . . . . . . $328,824 $2,490,623 $2,819,447 $166,657 $129,472 $296,129

Multifamily . . . . . . . . . . . . . . . . . . . . . . 95,157 75,393 170,550 108,513 11,901 120,414

Total unpaid principal balance of

mortgage loans . . . . . . . . . . . . . . . . 423,981 2,566,016 2,989,997 275,170 141,373 416,543

Unamortized premiums (discounts) and

other cost basis adjustments, net . . . . . . (16,470) 11,786 (4,684) (11,196) 28 (11,168)

Lower of cost or fair value adjustments on

loans held for sale . . . . . . . . . . . . . . . (28) (9) (37) (729) (160) (889)

Allowance for loan losses for loans held

for investment . . . . . . . . . . . . . . . . . . (48,530) (13,026) (61,556) (8,078) (1,847) (9,925)

Total mortgage loans . . . . . . . . . . . . $358,953 $2,564,767 $2,923,720 $255,167 $139,394 $394,561

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

For the year ended December 31, 2010, we did not redesignate loans between HFI and HFS other than at the

transition date. For the year ended December 31, 2009, we redesignated loans with a carrying value of $1.2 billion

from HFS to HFI. We redesignated $8.5 billion of HFI loans to HFS for the year ended December 31, 2009.

The following table displays an aging analysis of the total recorded investment in our HFI mortgage loans,

excluding loans for which we have elected the fair value option, by portfolio segment and class as of December 31,

2010. For purposes of this table, each loan in our portfolio is included in only one segment and class category.

30 - 59 Days

Delinquent

60 - 89 Days

Delinquent

Seriously

Delinquent(2) TotalDelinquent Current Total

Recorded

Investment in

Loans Over

90 Days

Delinquent

and Accruing

Interest

Recorded

Investment

in

Nonaccrual

Loans

As of December 31, 2010(1)

(Dollars in millions)

Single-Family:

Primary(3) ..... $47,048 $18,055 $ 93,302 $158,405 $2,299,080 $2,457,485 $139 $110,758

Government(4) . . . 125 58 371 554 51,930 52,484 354 —

Alt-A . . . ..... 8,547 4,097 37,557 50,201 156,951 207,152 21 41,566

Other(5) ....... 3,785 1,831 15,290 20,906 84,473 105,379 80 17,022

Total SingleFamily . . . . 59,505 24,041 146,520 230,066 2,592,434 2,822,500 594 169,346

Multifamily(6) . . . . 382 NA 1,132 1,514 171,000 172,514 — 1,012

Total. ..... $59,887 $24,041 $147,652 $231,580 $2,763,434 $2,995,014 $594 $170,358

(1) Recorded investment consists of unpaid principal balance, net of unamortized premiums and discounts, other cost basis

and fair value adjustments and accrued interest receivable on HFI loans, excluding loans for which we have elected the

fair value option.

(2) Single-family seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process.

Multifamily seriously delinquent loans are loans that are 60 days or more past due.

F-51

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(3) Consists of mortgage loans that are not included in other loan classes.

(4) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies

that are not Alt-A. Primarily consists of reverse mortgages which due to their nature are not aged and included in the

current column.

(5) Includes loans with higher-risk loan characteristics, such as interest-only loans and negative-amortizing loans that are

neither government nor Alt-A.

(6) Multifamily loans 60-89 days delinquent are included in the seriously delinquent column.

The recorded investment in loans over 90 days delinquent and accruing interest was $612 million as of

December 31, 2009. The carrying value of all nonaccrual loans was $34.1 billion as of December 31, 2009.

Individually Impaired Loans

Individually impaired loans include TDRs, acquired credit-impaired loans, and other multifamily loans

regardless of whether we are currently accruing interest. The following table displays the total recorded

investment, unpaid principal balance, related allowance, average recorded investment and interest income

recognized as of December 31, 2010 for individually impaired loans, excluding loans for which we have

elected the fair value option.

Unpaid

Principal

Balance

Total

Recorded

Investment(1)

Related

Allowance for

Loan Losses

Related

Allowance for

Accrued

Interest

Receivable

Average

Recorded

Investment

Total Interest

Income

Recognized(2)

Interest

Income

Recognized on

a Cash Basis

As of December 31, 2010

For the Year Ended

December 31, 2010

(Dollars in millions)

Individually impaired loans:

With related allowance recorded

Single-family

Primary(3) .............. $ 99,838 $ 93,024 $23,565 $ 772 $ 81,258 $3,314 $1,470

Government(4) . . . . . . . . . . . 240 248 38 7 141 9 —

Alt-A ................. 30,932 28,253 9,592 368 25,361 897 407

Other(5) ................ 14,429 13,689 4,479 137 12,094 384 204

Total single-family ....... 145,439 135,214 37,674 1,284 118,854 4,604 2,081

Multifamily . . . ............ 2,372 2,371 556 23 1,496 202 10

Total individually impaired loans

with related allowance

recorded . . . ............ 147,811 137,585 38,230 1,307 120,350 4,806 2,091

With no related allowance

recorded(6)

Single-family

Primary(3) .............. 10,586 7,237 — — 7,860 336 55

Government(4) . . . . . . . . . . . 19 13 — — 11 8 —

Alt-A ................. 3,600 1,884 — — 2,091 121 20

Other(5) . . . . . . . . . . . . . . . . 879 512 — — 589 36 7

Total single-family ....... 15,084 9,646 — — 10,551 501 82

Multifamily . . . . . . . . . . . . . . . 789 811 — — 642 71 5

Total individually impaired loans

with no related allowance

recorded . . . ............ 15,873 10,457 — — 11,193 572 87

Total individually impaired

loans(7) .................. $163,684 $148,042 $38,230 $1,307 $131,543 $5,378 $2,178

F-52

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(1) Consists of unpaid principal balance, net of unamortized premiums and discounts, other cost basis and fair value

adjustments and accrued interest receivable on HFI loans, excluding loans for which we have elected the fair value

option.

(2) Total single-family interest income recognized of $5.1 billion consists of $3.9 billion of contractual interest and

$1.3 billion of effective yield adjustments.

(3) Consists of mortgage loans that are not included in other loan classes.

(4) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies

that are not Alt-A.

(5) Includes loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans that are

neither government nor Alt-A.

(6) The discounted cash flows, collateral value or fair value equals or exceeds the carrying value of the loan and, as such,

no valuation allowance is required.

(7) Includes single-family loans restructured in a TDR with a recorded investment of $140.1 billion as of December 31,

2010. Includes multifamily loans restructured in a TDR with a recorded investment of $939 million as of

December 31, 2010.

The following table displays the recorded investment and corresponding specific loss allowance as of

December 31, 2009 for all impaired loans.

Recorded

Investment Allowance Net Investment

As of December 31, 2009

(Dollars in millions)

Impaired loans:(1)

With valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,050 $5,995 $21,055

Without valuation allowance(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 8,420 — 8,420

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,470 $5,995 $29,475

(1) Includes single-family loans restructured in a TDR with a recorded investment of $23.9 billion as of December 31,

2009. Includes multifamily loans restructured in a TDR with a recorded investment of $51 million as of December 31,

2009.

(2) The discounted cash flows, collateral value or fair value equals or exceeds the carrying value of the loan and, as such,

no valuation allowance is required.

The average recorded investment in impaired loans was $13.3 billion and $4.8 billion for the years ended

December 31, 2009 and 2008. Interest income recognized on impaired loans was $532 million and

$251 million for the years ended December 31, 2009 and 2008, respectively.

F-53

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Loans Acquired in a Transfer

We acquired delinquent loans from unconsolidated trusts and long-term standby commitments with an unpaid

principal balance plus accrued interest of $279 million, $36.4 billion and $4.5 billion for the years ended

December 31, 2010, 2009 and 2008, respectively. The following table displays the outstanding balance and

carrying amount of acquired credit-impaired loans as of December 31, 2010 and 2009, excluding loans that

were modified as TDRs subsequent to their acquisition from MBS trusts.

2010 2009

As of December 31,

(Dollars in millions)

Outstanding contractual balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,519 $24,106

Carrying amount:

Loans on accrual status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,029 2,560

Loans on nonaccrual status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,449 8,952

Total carrying amount of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,478 $11,512

The following table displays details on acquired credit-impaired loans at their acquisition dates for the years

ended December 31, 2010, 2009 and 2008.

2010 2009 2008

For the Year Ended

December 31,

(Dollars in millions)

Contractually required principal and interest payments at acquisition(1) . . . . . . . . . . $321 $39,197 $5,034

Nonaccretable difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 9,234 783

Cash flows expected to be collected at acquisition(1) . . . . . . . . . . . . . . . . . . . . . . . 167 29,963 4,251

Accretable yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 13,852 1,805

Initial investment in acquired credit-impaired loans at acquisition . . . . . . . . . . . . . . $ 91 $16,111 $2,446

(1) Contractually required principal and interest payments at acquisition and cash flows expected to be collected at

acquisition are adjusted for the estimated timing and amount of prepayments.

The following table displays activity for the accretable yield of all outstanding acquired credit-impaired loans

for the years ended December 31, 2010, 2009 and 2008. Accreted effective interest is shown for only those

loans that we were still accounting for as acquired credit-impaired loans for the respective periods.

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,117 $ 1,559 $ 2,252

Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 13,852 1,805

Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (314) (215) (279)

Reductions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,067) (13,693) (2,294)

Changes in estimated cash flows(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,163) 8,729 420

Reclassifications to nonaccretable difference(3) . . . . . . . . . . . . . . . . . . . . . . . (237) (115) (345)

Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,412 $ 10,117 $ 1,559

(1) Reductions are the result of liquidations and loan modifications due to TDRs.

(2) Represents changes in expected cash flows due to changes in prepayment and other assumptions.

(3) Represents changes in expected cash flows due to changes in credit quality or credit assumptions.

F-54

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table displays interest income recognized and the impact to the “Provision for loan losses”

related to loans that are still being accounted for as acquired credit-impaired loans, as well as loans that have

been subsequently modified as a TDR, for the years ended December 31, 2010, 2009 and 2008. The accretion

of fair value discount reported in the table below relates primarily to credit-impaired loans that were acquired

prior to the transition date. Subsequent to the transition date, our consolidated statements of operations no

longer reflect the recognition of fair value losses on the majority of acquisitions of credit-impaired loans

because the loans are already recorded in our consolidated balance sheets at the time of purchase.

2010 2009 2008

For the Year Ended

December 31,

(Dollars in millions)

Accretion of fair value discount(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,024 $405 $158

Interest income on loans returned to accrual status or subsequently modified as

TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,148 214 476

Total interest income recognized on acquired credit-impaired loans . . . . . . . . . . . $2,172 $619 $634

Increase in “Provision for loan losses” subsequent to the acquisition of credit-impaired

loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 963 $691 $185

(1) Represents accretion of the fair value discount that was recorded on acquired credit-impaired loans.

5. Allowance for Loan Losses and Reserve for Guaranty Losses

We maintain an allowance for loan losses for loans held for investment in our mortgage portfolio and loans

backing Fannie Mae MBS issued from consolidated trusts and a reserve for guaranty losses related to loans

backing Fannie Mae MBS issued from unconsolidated trusts and loans that we have guaranteed under longterm standby commitments. We refer to our allowance for loan losses and reserve for guaranty losses

collectively as our combined loss reserves. When calculating our reserve for guaranty losses, we consider all

contractually past due interest income including payments expected to be missed between the balance sheet

date and the point of loan acquisition or foreclosure. When calculating our loan loss allowance, we consider

only our net recorded investment in the loan at the balance sheet date, which includes interest income only

while the loan was on accrual status. Determining the adequacy of our allowance for loan losses and reserve

for guaranty losses is complex and requires judgment about the effect of matters that are inherently uncertain.

Upon recognition of the mortgage loans held by newly consolidated trusts and the associated accrued interest

receivable at the transition date of our adoption of the new accounting standards, we increased our “Allowance

for loan losses” by $43.6 billion, increased our “Allowance for accrued interest receivable” by $7.0 billion and

decreased our “Reserve for guaranty losses” by $54.1 billion. The net decrease of $3.5 billion reflects the

difference in the methodology used to estimate incurred losses for our allowance for loan losses and accrued

interest receivable versus our reserve for guaranty losses.

Although our loss models include extensive historical loan performance data, our loss reserve process is

subject to risks and uncertainties, particularly in a rapidly changing credit environment. In response to these

changes, our loss models were updated to reflect a change in our severity calculations to use mark-to-market

LTV ratios rather than LTV ratios at origination, which we believe better reflects the current values of the

loans, as well as our methodology for estimating the benefit of payments from lenders to make us whole for

losses on loans due to a breach of representations and warranties.

Our prospective adoption on December 31, 2010 of a new accounting standard on disclosures regarding the

credit quality of financing receivables and allowance for credit losses had a significant impact on the

presentation of our loan and allowance related disclosures.

F-55

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Allowance for Loan Losses

The following table displays changes in both single-family and multifamily allowance for loan losses for the

year ended December 31, 2010 and total allowance for loan losses for the years ended December 31, 2010,

2009 and 2008.

Of

Fannie

Mae

Of

Consolidated

Trusts Total

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Single-family allowance for loan losses:

Beginning balance, January 1(1) . . . . . . . . . . . . . $ 6,721 $ 1,749 $ 8,470

Adoption of new accounting standards . . . . . . . . — 43,170 43,170

Provision for loan losses. . . . . . . . . . . . . . . . . . 12,923 11,592 24,515

Charge-offs(2) . . . . . . . . . . . . . . . . . . . . . . . . . (15,438) (7,026) (22,464)

Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,913 1,164 3,077

Transfers(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,599 (44,599) —

Net reclassifications(4) . . . . . . . . . . . . . . . . . . . (3,341) 6,553 3,212

Ending balance, December 31 . . . . . . . . . . . . . . $ 47,377 $ 12,603 $ 59,980

Multifamily allowance for loan losses:

Beginning balance, January 1(1) . . . . . . . . . . . . . $ 1,357 $ 98 $ 1,455

Adoption of new accounting standards . . . . . . . . — 406 406

Provision for loan losses. . . . . . . . . . . . . . . . . . 144 43 187

Charge-offs(2) . . . . . . . . . . . . . . . . . . . . . . . . . (414) — (414)

Transfers(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 (115) —

Net reclassifications(4) . . . . . . . . . . . . . . . . . . . (49) (9) (58)

Ending balance, December 31 . . . . . . . . . . . . . . $ 1,153 $ 423 $ 1,576

Total allowance for loan losses:

Beginning balance, January 1(1) . . . . . . . . . . . . . $ 8,078 $ 1,847 $ 9,925 $ 2,772 $ 629

Adoption of new accounting standards . . . . . . . . — 43,576 43,576 — —

Provision for loan losses. . . . . . . . . . . . . . . . . . 13,067 11,635 24,702 9,569 4,022

Charge-offs(2) . . . . . . . . . . . . . . . . . . . . . . . . . (15,852) (7,026) (22,878) (2,245) (1,987)

Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,913 1,164 3,077 214 190

Transfers(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,714 (44,714) — — —

Net reclassifications(1)(4) . . . . . . . . . . . . . . . . . . (3,390) 6,544 3,154 (385) (82)

Ending balance, December 31(1)(5)(6) . . . . . . . . . $ 48,530 $ 13,026 $ 61,556 $ 9,925 $ 2,772

(1) Prior period amounts have been reclassified to conform to current year presentation. Current presentation excludes the

allowance for accrued interest receivable from the beginning and ending balances.

(2) Total charge-offs includes accrued interest of $2.4 billion, $1.5 billion and $642 million for the years ended

December 31, 2010, 2009 and 2008, respectively. Single-family charge-offs includes accrued interest of $2.3 billion for

the year ended December 31, 2010. Multifamily charge-offs includes accrued interest of $64 million for the year ended

December 31, 2010.

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

F-56

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(4) Represents reclassification of amounts recorded in provision for loan losses and charge-offs that relate to allowance for

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

(5) Total allowance for loan losses includes $385 million, $726 million and $150 million as of December 31, 2010, 2009

and 2008, respectively, for acquired credit-impaired loans.

(6) Total single-family allowance for loan losses was $8.5 billion and $2.7 billion as of December 31, 2009 and 2008,

respectively. Total multifamily allowance for loan losses was $1.4 billion and $74 million as of December 31, 2009

and 2008, respectively.

As of December 31, 2010, the allowance for accrued interest receivable for loans of Fannie Mae and loans of

consolidated trusts was $3.0 billion and $439 million, respectively. The allowance for accrued interest

receivable was $536 million as of December 31, 2009.

The following table displays the allowance for loan losses and total recorded investment in our HFI loans,

excluding loans for which we have elected the fair value option, by impairment or reserve methodology and

portfolio segment as of December 31, 2010.

Single-Family Multifamily Total

As of December 31, 2010

(Dollars in millions)

Allowance for loan losses by segment:

Individually impaired loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,296 $ 549 $ 37,845

Collectively reserved loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,306 1,020 23,326

Acquired credit impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . 378 7 385

Recorded investment in loans by segment:(1)

Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,822,500 $172,514 $2,995,014

Individually impaired loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,062 3,074 143,136

Collectively reserved loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,677,640 169,332 2,846,972

Acquired credit impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . 4,798 108 4,906

(1) Consists of unpaid principal balance, net of unamortized premiums and discounts, other cost basis and fair value

adjustments and accrued interest receivable on HFI loans, excluding loans for which we have elected the fair value

option.

On December 31, 2010, we entered into an agreement with Bank of America, N.A., and its affiliates, BAC

Home Loans Servicing, LP, and Countrywide Home Loans, Inc., to address outstanding repurchase requests

for residential mortgage loans with an unpaid principal balance of $3.9 billion delivered to us by affiliates of

Countrywide Financial Corporation. Bank of America agreed, among other things, to a resolution amount of

$1.5 billion, consisting of a cash payment of $1.3 billion and other payments recently made or to be made by

them. We recognized $930 million as a recovery of charge-offs resulting in a reduction to “Provision for loan

losses” and “Allowance for loan losses,” $266 million as a reduction to “Foreclosed property expense” and

$142 million as receipt of amounts receivable due to the rescission of mortgage insurance coverage included

in “Other Assets.”

The agreement substantially resolves or addresses outstanding repurchase requests on loans sold to us by

Countrywide and permits us to bring claims for any additional breaches of our representations and warranties

that are identified with respect to those loans. We continue to work with Bank of America to resolve

repurchase requests that remain outstanding, including requests relating to loans delivered to us by Bank of

America, N.A.

Our allowance for loan losses includes an estimate for the benefit of payments from lenders and servicers to

make us whole for losses on loans due to a breach of selling or servicing representations and warranties.

F-57

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Historically, this estimate was based significantly on historical cash collections. In the fourth quarter of 2010,

the following factors impacted this estimate:

• we revised our methodology to take into account trends in management actions taken before cash

collections, which resulted in our allowance for loan losses being $1.1 billion higher than it would have

been under the previous methodology; and

• agreements with seller/servicers that addressed their loan repurchase and other obligations to us impacted

our expectation of future make-whole payments, resulting in a decrease in our allowance for loan losses

of approximately $700 million.

In the three month period ended June 30, 2010, we identified that for a portion of our delinquent loans we had

not estimated and recorded our obligation to reimburse servicers for advances they made on our behalf for

preforeclosure property taxes and insurance. We previously recognized these expenses when we reimbursed

servicers. We also did not record a receivable from borrowers for these payments or assess the collectibility of

that receivable. As such, our allowance did not include an estimation of uncollectable amounts from those

borrowers. We evaluated the effects of this misstatement, both quantitatively and qualitatively and concluded

that the misstatement is not material to our 2010 loss or any prior consolidated financial statements.

The year ended December 31, 2010 includes an out-of-period adjustment of $1.1 billion to our consolidated

statement of operations reflecting our assessment of the collectibility of the receivable from the borrowers.

Reserve for Guaranty Losses

The following table displays changes in the reserve for guaranty losses for the years ended December 31,

2010, 2009 and 2008.

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Reserve for guaranty losses:

Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,430 $ 21,830 $ 2,693

Adoption of new accounting standards . . . . . . . . . . . . . . . . . . . . . . . . (54,103) — —

Provision for guaranty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 63,057 23,929

Charge-offs(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (203) (31,142) (4,986)

Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 685 194

Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 323 $ 54,430 $21,830

(1) Includes charges of $228 million and $333 million for the years ended December 31, 2009 and 2008, respectively,

related to unsecured HomeSaver Advance loans. There were no charges related to unsecured HomeSaver Advance

loans for the year ended December 31, 2010.

(2) Includes charges recorded at the date of acquisition of $180 million, $20.3 billion and $2.1 billion for the years ended

December 31, 2010, 2009 and 2008, respectively, for acquired credit-impaired loans where the acquisition cost

exceeded the fair value of the acquired loan.

F-58

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Credit Quality Indicators

The following table displays the total recorded investment in our HFI loans, excluding loans for which we

have elected the fair value option, by portfolio segment, class and credit quality indicators as of December 31,

2010. The single-family credit quality indicator is updated quarterly and the multifamily credit quality

indicators are as of the origination date of each loan.

Primary(3) Alt-A Other(4)

As of December 31, 2010(1)(2)

(Dollars in millions)

Single-family

Estimated mark-to-market LTV ratio:(5)

Less than or equal to 80% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,561,202 $ 79,305 $ 29,854

80.01% to 90% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376,414 27,472 13,394

90.01% to 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217,193 24,392 12,935

100.01% to 110%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,376 18,022 11,400

110.01% to 120%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,283 12,718 8,967

120.01% to 125%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,729 5,083 3,733

Greater than 125% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,288 40,160 25,096

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,457,485 $207,152 $105,379

As of December 31, 2010(1)

(Dollars in millions)

Multifamily

Originating LTV ratio:

Less than or equal to 70%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 96,844

70.01% to 80% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,560

Greater than 80% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,110

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $172,514

Originating debt service coverage ratio:

Less than or equal to 1.10% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,034

1.11% to 1.25% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,745

Greater than 1.25% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,735

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $172,514

(1) Recorded investment consists of unpaid principal balance, net of unamortized premiums and discounts, other cost basis

and fair value adjustments and accrued interest receivable on HFI loans, excluding loans for which we have elected the

fair value option.

(2) Excludes $52.5 billion of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of

its agencies that are not Alt-A loans. The segment class is primarily reverse mortgages for which we do not calculate

an estimated mark-to-market LTV.

(3) Consists of mortgage loans that are not included in other loan classes.

(4) Includes loans with higher-risk loan characteristics, such as interest-only loans and negative-amortizing loans that are

neither government nor Alt-A.

(5) The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end

of each reported period divided by the estimated current value of the property, which we calculate using an internal

valuation model that estimates periodic changes in home value.

F-59

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Investments in Securities

Trading Securities

Trading securities are recorded at fair value with subsequent changes in fair value recorded as “Fair value

losses, net” in our consolidated statements of operations. The following table displays our investments in

trading securities and the cumulative amount of net losses recognized from holding these securities as of

December 31, 2010 and 2009.

2010 2009

As of December 31,

(Dollars in millions)

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,398 $ 74,750

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,326 15,082

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 590 1

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,683 1,355

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,581 1,780

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,764 9,335

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 609 600

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 154

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,103 103,057

Non-mortgage-related securities:

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,432 3

Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,321 8,515

Corporate debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 364

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,753 8,882

Total trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56,856 $111,939

Losses in trading securities held in our portfolio, net . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,149 $ 2,685

As of December 31, 2010, we held U.S. Treasury securities and money market funds with fair values of

$4.0 billion and $2.3 billion, respectively, which we elected to classify as “Cash and cash equivalents” in our

consolidated balance sheets.

F-60

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table displays information about our net trading gains and losses for the years ended

December 31, 2010, 2009 and 2008.

2010 2009 2008

For the Year Ended

December 31,

(Dollars in millions)

Net trading gains (losses):

Mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,607 $2,457 $(4,297)

Non-mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 1,287 (2,743)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,692 $3,744 $(7,040)

Net trading gains (losses) recorded in the year related to securities still held at

year end:

Mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,485 $1,974 $(4,464)

Non-mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 1,146 (2,418)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,541 $3,120 $(6,882)

Available-for-Sale Securities

We measure AFS securities at fair value with unrealized gains and losses recorded as a component of AOCI,

net of tax, in our consolidated balance sheets. We record realized gains and losses from the sale of AFS

securities in “Investment gains (losses), net” in our consolidated statements of operations.

The following table displays the gross realized gains, losses and proceeds on sales of AFS securities for the

years ended December 31, 2010, 2009 and 2008.

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 566 $ 4,521 $ 4,022

Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293 3,080 3,635

Total proceeds(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,207 226,664 130,991

(1) Excludes proceeds from the initial sale of securities from new portfolio securitizations included in “Note 3,

Consolidations and Transfers of Financial Assets.”

F-61

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following tables display the amortized cost, gross unrealized gains and losses and fair value by major

security type for AFS securities we held as of December 31, 2010 and 2009.

Total

Amortized

Cost(1)

Gross

Unrealized

Gains

Gross

Unrealized

Losses -

OTTI(2)

Gross

Unrealized

Losses -

Other(3)

Total

Fair

Value

As of December 31, 2010

(Dollars in millions)

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . $21,428 $1,453 $ (9) $ (44) $22,828

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . 15,986 1,010 — — 16,996

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . 909 130 — — 1,039

Alt-A private-label securities . . . . . . . . . . . . . . 15,789 177 (1,791) (285) 13,890

Subprime private-label securities . . . . . . . . . . . 11,323 54 (997) (448) 9,932

CMBS(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,273 25 — (454) 14,844

Mortgage revenue bonds . . . . . . . . . . . . . . . . . 11,792 47 (64) (734) 11,041

Other mortgage-related securities . . . . . . . . . . . 4,098 106 (44) (338) 3,822

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $96,598 $3,002 $(2,905) $(2,303) $94,392

Total

Amortized

Cost(1)

Gross

Unrealized

Gains

Gross

Unrealized

Losses -

OTTI(2)

Gross

Unrealized

Losses -

Other(3)

Total

Fair

Value

As of December 31, 2009

(Dollars in millions)

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . $148,074 $6,413 $ (23) $ (45) $154,419

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . 26,281 1,192 — (4) 27,469

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . 1,253 102 — (2) 1,353

Alt-A private-label securities . . . . . . . . . . . . . 17,836 41 (2,738) (989) 14,150

Subprime private-label securities . . . . . . . . . . 13,232 33 (1,774) (745) 10,746

CMBS(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,797 — — (2,604) 13,193

Mortgage revenue bonds . . . . . . . . . . . . . . . . 13,679 71 (44) (860) 12,846

Other mortgage-related securities . . . . . . . . . . 4,225 29 (235) (467) 3,552

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $240,377 $7,881 $(4,814) $(5,716) $237,728

(1) Amortized cost includes unamortized premiums, discounts and other cost basis adjustments as well as the credit

component of other-than-temporary impairments recognized in our consolidated statements of operations.

(2) Represents the noncredit component of other-than-temporary impairment losses recorded in other comprehensive loss

as well as cumulative changes in fair value for securities for which we previously recognized the credit component of

an other-than-temporary impairment.

(3) Represents the gross unrealized losses on securities for which we have not recognized an other-than-temporary

impairment.

(4) Amortized cost includes $848 million and $1.0 billion as of December 31, 2010 and 2009, respectively, of increase to

the carrying amount from fair value hedge accounting in 2008.

F-62

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following tables display additional information regarding gross unrealized losses and fair value by major

security type for AFS securities in an unrealized loss position that we held as of December 31, 2010 and

2009.

Gross

Unrealized

Losses

Fair

Value

Gross

Unrealized

Losses

Fair

Value

Less Than 12

Consecutive Months

12 Consecutive

Months or Longer

As of December 31, 2010

(Dollars in millions)

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (35) $ 1,461 $ (18) $ 211

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 11 — 7

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1 — —

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . (104) 1,915 (1,972) 9,388

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . (47) 627 (1,398) 8,493

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15) 1,774 (439) 10,396

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . (206) 5,009 (592) 3,129

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . (2) 250 (380) 2,007

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(409) $11,048 $(4,799) $33,631

Gross

Unrealized

Losses

Fair

Value

Gross

Unrealized

Losses

Fair

Value

Less Than 12

Consecutive Months

12 Consecutive

Months or Longer

As of December 31, 2009

(Dollars in millions)

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (36) $ 1,461 $ (32) $ 544

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 85 (2) 164

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 139 — 26

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . (2,439) 7,018 (1,288) 6,929

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . (998) 4,595 (1,521) 5,860

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (2,604) 13,193

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . (54) 2,392 (850) 5,664

Other mortgage-related securities . . . . . . . . . . . . . . . . . . . . . . (96) 536 (606) 2,739

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,627) $16,226 $(6,903) $35,119

Other-Than-Temporary Impairments

We recognize the credit component of other-than-temporary impairments of our debt securities in our

consolidated statements of operations and the noncredit component in “Other comprehensive loss” for those

securities that we do not intend to sell and for which it is not more likely than not that we will be required to

sell before recovery.

The fair value of our securities varies from period to period due to changes in interest rates, in the

performance of the underlying collateral and in the credit performance of the underlying issuer, among other

factors. $4.8 billion of the $5.2 billion of gross unrealized losses on AFS securities as of December 31, 2010

have existed for a period of 12 consecutive months or longer. Gross unrealized losses on AFS securities as of

December 31, 2010 include unrealized losses on securities with other-than-temporary impairment in which a

F-63

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
portion of the impairment remains in AOCI. The securities with unrealized losses for 12 consecutive months

or longer, on average, had a fair value as of December 31, 2010 that was 88% of their amortized cost basis.

Based on our review for impairments of AFS securities, which includes an evaluation of the collectibility of

cash flows and any intent or requirement to sell the securities, we have concluded that we do not have an

intent to sell and we believe it is not more likely than not that we will be required to sell the securities.

Additionally, our projections of cash flows indicate that we will recover these unrealized losses over the lives

of the securities.

The following table displays our net other-than-temporary impairments by major security type recognized in

our consolidated statements of operations for the years ended December 31, 2010, 2009 and 2008.

2010 2009 2008

For the Year Ended

December 31,

(Dollars in millions)

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3) $ (117) $ (7)

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (327) (3,956) (4,820)

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (368) (5,660) (1,932)

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (22) (21)

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22) (106) (194)

Net other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(722) $(9,861) $(6,974)

For the year ended December 31, 2010, we recorded net other-than-temporary impairment of $722 million.

The net other-than-temporary impairment charges recorded in 2010 were primarily driven by a net decline in

forecasted home prices for certain geographic regions, which resulted in a decrease in the present value of our

cash flow projections on Alt-A and subprime securities.

The following table displays activity for the years ended December 31, 2010 and 2009 related to the credit

component recognized in earnings on debt securities held by us for which we recognized a portion of

other-than-temporary impairment in AOCI.

2010 2009

For the Year Ended

December 31,

(Dollars in millions)

Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,191 $ —

Credit component of other-than-temporary impairment not reclassified to AOCI in

conjunction with the cumulative effect transition adjustment . . . . . . . . . . . . . . . . . . . . . — 4,265

Additions for the credit component on debt securities for which OTTI was not previously

recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 1,090

Additions for credit losses on debt securities for which OTTI was previously recognized. . . 693 3,118

Reductions for securities no longer in portfolio at period end(1) . . . . . . . . . . . . . . . . . . . . (154) —

Reductions for amortization resulting from increases in cash flows expected to be collected

over the remaining life of the security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (544) (282)

Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,215 $8,191

(1) Includes securities sold, matured, called or consolidated to loans.

As of December 31, 2010, those debt securities with other-than-temporary impairment for which we

recognized in our consolidated statement of operations only the amount of loss related to credit consisted

predominantly of Alt-A and subprime securities. We evaluate Alt-A (including option adjustable rate mortgage

F-64

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(“ARM”)) and subprime private-label securities for other-than-temporary impairment by discounting the

projected cash flows from econometric models to estimate the portion of loss in value attributable to credit. To

reduce costs associated with maintaining our internal model and decrease the operational risk, in the fourth

quarter of 2010, we ceased to use our internally developed model and began using a third-party model to

project cash flow estimates on our private-label securities. Separate components of the third-party model

project regional home prices, unemployment and interest rates. The model combines these factors with

available current information regarding attributes of loans in pools backing the private-label mortgage-related

securities to project prepayment speeds, conditional default rates, loss severities and delinquency rates. It

incorporates detailed information on security-level subordination levels and cash flow priority of payments to

project security level cash flows. We model securities assuming the benefit of those external financial

guarantees that are deemed creditworthy. We have recorded other-than-temporary impairments for the year

ended December 31, 2010 based on this analysis, with amounts related to credit loss recognized in our

consolidated statements of operations. For securities we determined were not other-than-temporarily impaired,

we concluded that either the bond had no projected credit loss or if we projected a loss, that the present value

of expected cash flows was greater than the security’s cost basis.

The following table displays the modeled attributes, including default rates and severities, which are used to

determine whether our senior interests in certain non-agency mortgage-related securities will experience a cash

shortfall. Assumption of voluntary prepayment rates are also an input to the present value of expected losses.

Subprime Option ARM Fixed Rate Variable Rate Hybrid Rate

Alt-A

As of December 31, 2010

(Dollars in millions)

Vintage Year

2004 & Prior:

Unpaid principal balance . . . . . . . . . . . . . . . . $ 2,216 $ 521 $3,862 $ 544 $2,521

Weighted average collateral default(1) . . . . . . . 40.5% 38.8% 11.2% 34.9% 19.5%

Weighted average collateral severities(2). . . . . . 61.9% 46.6% 43.4% 45.0% 38.0%

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0% 6.1% 8.5% 8.3% 10.6%

Average credit enhancement(4) . . . . . . . . . . . . 51.1% 19.5% 11.9% 21.6% 10.7%

2005

Unpaid principal balance . . . . . . . . . . . . . . . . $ 206 $1,401 $1,297 $ 585 $2,578

Weighted average collateral default(1) . . . . . . . 76.2% 59.8% 41.9% 57.9% 42.0%

Weighted average collateral severities(2). . . . . . 73.9% 55.5% 59.3% 60.2% 52.6%

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6% 3.9% 6.4% 7.0% 7.9%

Average credit enhancement(4) . . . . . . . . . . . . 63.5% 30.0% 2.4% 19.5% 7.1%

2006

Unpaid principal balance . . . . . . . . . . . . . . . . $12,565 $1,379 $ 626 $1,793 $1,965

Weighted average collateral default(1) . . . . . . . 78.9% 73.8% 45.9% 61.8% 34.4%

Weighted average collateral severities(2). . . . . . 74.1% 62.0% 64.1% 64.6% 49.5%

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7% 3.2% 5.8% 6.2% 9.3%

Average credit enhancement(4) . . . . . . . . . . . . 20.4% 22.8% 3.2% 2.2% 2.1%

F-65

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Subprime Option ARM Fixed Rate Variable Rate Hybrid Rate

Alt-A

As of December 31, 2010

(Dollars in millions)

2007 & After:

Unpaid principal balance . . . . . . . . . . . . . . . . $ 656 $ — $ — $ — $ 129

Weighted average collateral default(1) . . . . . . . 72.8% N/A N/A N/A 43.7%

Weighted average collateral severities(2). . . . . . 70.2% N/A N/A N/A 54.8%

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6% N/A N/A N/A 6.7%

Average credit enhancement(4) . . . . . . . . . . . . 34.5% N/A N/A N/A 25.3%

Total

Unpaid principal balance . . . . . . . . . . . . . . . . $15,643 $3,301 $5,785 $2,922 $7,193

Weighted average collateral default(1) . . . . . . . 73.2% 62.4% 21.9% 56.0% 32.1%

Weighted average collateral severities(2). . . . . . 72.2% 56.8% 49.2% 60.1% 46.7%

Weighted average voluntary prepayment

rates(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0% 3.9% 7.7% 6.8% 9.2%

Average credit enhancement(4) . . . . . . . . . . . . 25.9% 25.3% 8.9% 9.3% 7.4%

(1) The expected remaining cumulative default rate of the collateral pool backing the securities, as a percentage of the

current collateral unpaid principal balance, weighted by security unpaid principal balance.

(2) The expected remaining loss given default of the collateral pool backing the securities, calculated as the ratio of

remaining cumulative loss divided by cumulative defaults, weighted by security unpaid principal balance.

(3) The average monthly voluntary prepayment rate, weighted by security unpaid principal balance.

(4) The average percent current credit enhancement provided by subordination of other securities. Excludes excess interest

projections and monoline bond insurance.

For mortgage revenue bonds, where we cannot utilize credit-sensitized cash flows, we perform a qualitative

and quantitative analysis to assess whether a bond is other-than-temporarily impaired. If a bond is deemed to

be other-than-temporarily impaired, the projected contractual cash flows of the security are reduced by a

default loss amount based on the security’s lowest credit rating as provided by the major nationally recognized

statistical rating organizations. The lower the security’s credit rating, the larger the amount by which the

contractual cash flows are reduced. These adjusted cash flows are then used in the present value calculation to

determine the credit portion of the other-than-temporary impairment. While we have recognized

other-than-temporary impairment on these bonds, we expect to realize no credit losses on the vast majority of

our holdings due to the inherent financial strength of the issuers, or in some cases, the amount of external

credit support from mortgage collateral or financial guarantees. The fair values of these bonds are likewise

impacted by the low levels of market liquidity and greater expected yield, which has led to unrealized losses

in the portfolio that we deem to be temporary.

Other mortgage-related securities include manufactured housing securities, some of which have been

other-than-temporarily impaired in 2010. For manufactured housing securities, we utilize models that

incorporate recent historical performance information and other relevant public data to run cash flows and

assess for other-than-temporary impairment. Given the significant seasoning of these securities we expect that

the future performance will be in line with how the securities are currently performing. We model securities

assuming the benefit of those external financial guarantees that are deemed creditworthy. If we determined

that securities were not other-than-temporarily impaired, we concluded that either the bond had no projected

credit loss or, if a loss was projected, that present value of expected cash flows was greater than the security’s

cost basis.

F-66

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We analyzed commercial mortgage-backed securities (“CMBS”) using a CMBS loss forecast model that

incorporates a loan level loss forecast. This forecast takes into account loan performance, loan status, loan

attributes, structures, metropolitan area, property type and macroeconomic expectations. Given the current high

level of credit enhancement and collateral loss expectations, no single bond is expected to experience a

principal write-down or interest shortfall. Our CMBS loss forecast expectations may change as

macroeconomic conditions and the commercial real estate market evolve. As of December 31, 2010, we had

no other-than-temporary impairments in our holdings of CMBS as we projected the remaining subordination to

be more than sufficient to absorb the level of projected losses. While downgrades have occurred in this sector,

all of our holdings remained investment grade as of December 31, 2010.

Maturity Information

The following table displays the amortized cost and fair value of our AFS securities by major security type

and remaining maturity, assuming no principal prepayments, as of December 31, 2010. Contractual maturity of

mortgage-backed securities is not a reliable indicator of their expected life because borrowers generally have

the right to prepay their obligations at any time.

Total

Amortized

Cost

Total

Fair

Value

Amortized

Cost

Fair

Value

Amortized

Cost

Fair

Value

Amortized

Cost

Fair

Value

Amortized

Cost

Fair

Value

One Year or Less

After One Year

Through Five Years

After Five Years

Through Ten Years After Ten Years

As of December 31, 2010

(Dollars in millions)

Fannie Mae. . .................. $21,428 $22,828 $ — $ — $ 2 $ 2 $ 3,876 $ 4,103 $17,550 $18,723

Freddie Mac . .................. 15,986 16,996 5 5 37 39 1,571 1,683 14,373 15,269

Ginnie Mae. . . . . . . . . . . . . . . . . . . . 909 1,039 — — — — 5 5 904 1,034

Alt-A private-label securities ........ 15,789 13,890 — — 1 1 294 296 15,494 13,593

Subprime private-label securities . . . . . . 11,323 9,932 — — — — — — 11,323 9,932

CMBS ....................... 15,273 14,844 308 308 275 276 14,342 13,953 348 307

Mortgage revenue bonds . . . ........ 11,792 11,041 61 62 374 385 818 819 10,539 9,775

Other mortgage-related securities. . . . . . 4,098 3,822 — — — — — 16 4,098 3,806

Total . ....................... $96,598 $94,392 $ 374 $375 $ 689 $703 $20,906 $20,875 $74,629 $72,439

Weighted average yield(1)........... 4.32% 5.52% 5.55% 4.25% 4.32%

(1) Yields are determined by dividing interest income (including the amortization and accretion of premiums, discounts

and other cost basis adjustments) by amortized cost balances as of year-end. Yields on tax exempt obligations have

been computed on a tax equivalent basis.

Accumulated Other Comprehensive Loss

The following table displays our accumulated other comprehensive loss by major categories as of

December 31, 2010, 2009 and 2008.

2010(1) 2009 2008

As of December 31,

(Dollars in millions)

Net unrealized gains (losses) on available-for-sale securities for which we have

not recorded other-than-temporary impairment . . . . . . . . . . . . . . . . . . . . . . . $ 304 $ 1,337 $(7,291)

Net unrealized losses on available-for-sale securities for which we have recorded

other-than-temporary impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,736) (3,059) —

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (250) (10) (382)

Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,682) $(1,732) $(7,673)

(1) Includes a net increase of $3.4 billion from the adoption of the new accounting standards.

F-67

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7. Financial Guarantees and Master Servicing

We generate revenue by absorbing the credit risk of mortgage loans in unconsolidated trusts in exchange for a

guaranty fee. We also provide credit enhancements on taxable or tax-exempt mortgage revenue bonds issued

by state and local governmental entities to finance multifamily housing for low- and moderate-income

families. Additionally, we issue long-term standby commitments that require us to purchase loans from lenders

if the loans meet certain delinquency criteria.

As a result of adopting the new accounting standards, we derecognized the previously recognized guaranty

assets, guaranty obligations, MSAs, and master servicing liabilities (“MSLs”) associated with the newly

consolidated trusts from our consolidated balance sheets.

For our guarantees to unconsolidated trusts and other guaranty arrangements, we recognize a guaranty

obligation for our obligation to stand ready to perform on these guarantees. For those guarantees recognized in

our consolidated balance sheet, our maximum potential exposure under these guarantees is primarily

comprised of the unpaid principal balance of the underlying mortgage loans, which totaled $52.4 billion as of

December 31, 2010. The maximum amount we could recover through available credit enhancements and

recourse with third parties on guarantees recognized in our consolidated balance sheet was $12.6 billion as of

December 31, 2010. In addition, we had exposure of $10.3 billion for other guarantees not recognized in our

consolidated balance sheet as of December 31, 2010, which primarily represents the unpaid principal balance

of loans underlying guarantees issued prior to the effective date of the current accounting standards on

guaranty accounting. The maximum amount we could recover through available credit enhancements and

recourse with third parties on guarantees not recognized in our consolidated balance sheet was $3.9 billion as

of December 31, 2010. Recoverability of such credit enhancements and recourse is subject to, among other

factors, our mortgage insurers’ and financial guarantors’ ability to meet their obligations to us.

As of December 31, 2009, our maximum potential exposure for guarantees recognized in our consolidated

balance sheet was primarily comprised of the unpaid principal balance of the underlying mortgage loans,

which totaled $2.5 trillion. The maximum amount we could recover through available credit enhancements and

recourse with third parties for these guarantees was $113.4 billion. In addition, we had exposure of

$135.7 billion for other guarantees not recognized in our consolidated balance sheet as of December 31, 2009.

The maximum amount we could recover through available credit enhancements and recourse with third parties

on guarantees not recognized in our consolidated balance sheet was $13.6 billion as of December 31, 2009.

Risk Characteristics of our Book of Business

We gauge our performance risk under our guaranty based on the delinquency status of the mortgage loans we

hold in portfolio, or in the case of mortgage-backed securities, the underlying mortgage loans of the related

securities. Management also monitors the serious delinquency rate, which is the percentage of single-family

loans three or more months past due or in the foreclosure process, and the percentage of multifamily loans

60 days or more past due, of loans with certain higher risk characteristics, such as high mark-to-market

loan-to-value ratios and low originating debt service coverage ratios. We use this information, in conjunction

with housing market and economic conditions, to structure our pricing and our eligibility and underwriting

criteria to accurately reflect the current risk of loans with these higher-risk characteristics, and in some cases

we decide to significantly reduce our participation in riskier loan product categories. Management also uses

this data together with other credit risk measures to identify key trends that guide the development of our loss

mitigation strategies.

F-68

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following tables display the current delinquency status and certain higher risk characteristics of our

single-family conventional and total multifamily guaranty book of business as of December 31, 2010 and

2009.

30 days

Delinquent

60 days

Delinquent

Seriously

Delinquent(2) 30 daysDelinquent

60 days

Delinquent

Seriously

Delinquent(2)

As of December 31, 2010(1) As of December 31, 2009(1)

Percentage of single-family

conventional guaranty book of

business(3) . . . . . . . . . . . . . . . . . 2.19% 0.89% 5.37% 2.38% 1.15% 6.68%

Percentage of single-family

conventional loans(4) . . . . . . . . . . 2.32 0.87 4.48 2.46 1.07 5.38

Percentage of

Single-Family

Conventional

Guaranty Book

of Business(3)

Percentage

Seriously

Delinquent(2)(4)

Percentage of

Single-Family

Conventional

Guaranty Book

of Business(3)

Percentage

Seriously

Delinquent(2)(4)

As of December 31, 2010(1) As of December 31, 2009(1)

Estimated mark-to-market loan-to-value

ratio:

Less than 100% . . . . . . . . . . . . . . . . . 84% 2.62% 86% 3.36%

100.01% to 110% . . . . . . . . . . . . . . . . 5 11.60 5 14.79

110.01% to 120% . . . . . . . . . . . . . . . . 3 14.74 3 18.55

120.01% to 125% . . . . . . . . . . . . . . . . 1 16.86 1 21.39

Greater than 125% . . . . . . . . . . . . . . . 7 24.71 5 31.05

Geographical distribution:

Arizona . . . . . . . . . . . . . . . . . . . . . . . 2 6.23 3 8.80

California . . . . . . . . . . . . . . . . . . . . . . 18 3.89 17 5.73

Florida . . . . . . . . . . . . . . . . . . . . . . . . 7 12.31 7 12.82

Nevada . . . . . . . . . . . . . . . . . . . . . . . 1 10.66 1 13.00

Select Midwest states(5) . . . . . . . . . . . . 11 4.80 11 5.62

All other states . . . . . . . . . . . . . . . . . . 61 3.46 61 4.11

Product distribution (not mutually

exclusive):(6)

Alt-A . . . . . . . . . . . . . . . . . . . . . . . . . 8 13.87 9 15.63

Subprime . . . . . . . . . . . . . . . . . . . . . . * 28.20 * 30.68

Negatively amortizing adjustable rate. . . * 9.02 1 10.29

Interest only . . . . . . . . . . . . . . . . . . . . 6 17.85 7 20.17

Investor property . . . . . . . . . . . . . . . . . 6 4.79 6 5.54

Condo/Coop . . . . . . . . . . . . . . . . . . . . 9 5.37 9 5.99

Original loan-to-value ratio H90%(7) . . . 10 10.04 9 13.05

FICO credit score G620(7) . . . . . . . . . . 4 14.63 4 18.20

Original loan-to-value ratio H90% and

FICO credit score G620(7) . . . . . . . . 1 21.41 1 27.96

Vintages:

2005 . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.20 10 7.27

2006 . . . . . . . . . . . . . . . . . . . . . . . . . 8 12.19 11 12.87

2007 . . . . . . . . . . . . . . . . . . . . . . . . . 12 13.24 15 14.06

2008 . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.88 13 3.98

All other vintages . . . . . . . . . . . . . . . . 62 1.73 51 2.19

* Represents less than 0.5% of the single-family conventional guaranty book of business.

(1) Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan

level information, which constituted over 99% and 98% of our total single-family conventional guaranty book of

business as of December 31, 2010 and 2009, respectively.

F-69

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(2) Consists of single-family conventional loans that were three months or more past due or in foreclosure as of

December 31, 2010 and 2009.

(3) Calculated based on the aggregate unpaid principal balance of delinquent single-family conventional loans divided by

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

(4) Calculated based on the number of single-family conventional loans that were delinquent divided by the total number

of loans in our single-family conventional guaranty book of business.

(5) Consists of Illinois, Indiana, Michigan, and Ohio.

(6) Categories are not mutually exclusive. Loans with multiple product features are included in all applicable categories.

(7) Includes housing goals-oriented products such as MyCommunityMortgage» and Expanded Approval».

30 Days

Delinquent

Seriously

Delinquent(3) 30 DaysDelinquent

Seriously

Delinquent(3)

As of December 31, 2010(1)(2) As of December 31, 2009(1)(2)

Percentage of multifamily guaranty book of business......... 0.21% 0.71% 0.28% 0.63%

Percentage of

Multifamily

Guaranty

Book of Business

Percentage

Seriously

Delinquent

Percentage of

Multifamily

Guaranty

Book of Business

Percentage

Seriously

Delinquent

As of December 31, 2010(1)(2) As of December 31, 2009(1)(2)

Originating loan-to-value ratio:

Greater than 80% . . . . . . . . . . . . . . . . . . . . 5% 0.59% 5% 0.50%

Less than or equal to 80%. . . . . . . . . . . . . . 95 0.71 95 0.63

Originating debt service coverage ratio:

Less than or equal to 1.10 . . . . . . . . . . . . . . 9 0.27 10 0.17

Greater than 1.10 . . . . . . . . . . . . . . . . . . . . 91 0.75 90 0.68

Acquisition loan size distribution:

Less than or equal to $750,000 . . . . . . . . . . 2 1.61 3 1.27

Greater than $750,000 and less than or equal

to $3 million . . . . . . . . . . . . . . . . . . . . . 12 1.17 13 1.01

Greater than $3 million and less than or

equal to $5 million . . . . . . . . . . . . . . . . . 9 0.88 9 1.08

Greater than $5 million and less than or

equal to $25 million . . . . . . . . . . . . . . . . 42 0.88 41 0.60

Greater than $25 million . . . . . . . . . . . . . . . 35 0.24 34 0.34

Maturing dates:

Maturing in 2011 . . . . . . . . . . . . . . . . . . . . 3 0.68 5 0.64

Maturing in 2012 . . . . . . . . . . . . . . . . . . . . 7 0.42 10 1.13

Maturing in 2013 . . . . . . . . . . . . . . . . . . . . 11 0.54 12 0.22

Maturing in 2014 . . . . . . . . . . . . . . . . . . . . 8 0.67 9 0.62

Maturing in 2015 . . . . . . . . . . . . . . . . . . . . 9 0.57

(1) Consists of the portion of our multifamily guaranty book of business for which we have detailed loan level

information, which constituted 99% our total multifamily guaranty book of business as of both December 31, 2010 and

2009, excluding loans that have been defeased. Defeasance is a pre-payment of a loan through substitution of

collateral.

(2) Calculated based on the aggregate unpaid principal balance of delinquent multifamily loans divided by the aggregate

unpaid principal balance of loans in our multifamily guaranty book of business.

(3) Consists of multifamily loans that were 60 days or more past due as of December 31, 2010 and 2009.

F-70

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Guaranty Obligations

The following table displays changes in our guaranty obligations recognized in “Other liabilities” in our

consolidated balance sheets for the years ended December 31, 2010, 2009 and 2008. We derecognized the

majority of our guaranty obligations and deferred profit from our consolidated balance sheet upon adoption of

the new accounting standards.

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,996 $12,147 $15,393

Adoption of new accounting standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,320) — —

Additions to guaranty obligations(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 7,577 7,279

Amortization of guaranty obligations into guaranty fee income . . . . . . . . . . . . (132) (5,260) (9,585)

Impact of consolidation activity(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (468) (940)

Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 769 $13,996 $12,147

(1) Represents the fair value of our contractual obligation at issuance of new guarantees.

(2) Represents the derecognition of guaranty obligations during the period due to consolidations excluding the impact of

adopting the new accounting standards.

Deferred profit is a component of guaranty obligations in “Other liabilities” in our consolidated balance sheets

and is included in the table above. Deferred profit had a carrying amount of $35 million and $1.6 billion as of

December 31, 2010 and 2009, respectively. We recognized deferred profit amortization of $6 million,

$830 million and $2.0 billion for the years ended December 31, 2010, 2009 and 2008, respectively.

Guaranty Assets

As guarantor at inception of a guaranty to an unconsolidated entity, we recognize a non-contingent liability for

the fair value of our obligation to stand ready to perform over the term of the guaranty in the event that

specified triggering events or conditions occur. We also record a guaranty asset that represents the present

value of cash flows expected to be received as compensation over the life of the guaranty.

The following table displays changes in guaranty assets recognized in “Other assets” in our consolidated

balance sheets for the years ended December 31, 2010, 2009 and 2008.

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Beginning balance, January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,356 $ 7,043 $ 9,666

Adoption of new accounting standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,014) — —

Fair value of expected cash flows at issuance for new guaranteed Fannie Mae

MBS issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 4,135 3,938

Net change in fair value of guaranty assets from portfolio securitizations. . . . . (1) 511 (136)

Impact of amortization on guaranty contracts . . . . . . . . . . . . . . . . . . . . . . . . (59) (2,719) (2,767)

Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) (347) (3,270)

Impact of consolidation of MBS trusts(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . — (267) (388)

Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 457 $ 8,356 $ 7,043

(1) Represents the derecognition of guaranty assets during the period due to consolidations excluding the impact of

adopting the new accounting standards.

F-71

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fannie Mae MBS Included in Investments in Securities

For Fannie Mae MBS included in “Investments in securities” in our consolidated balance sheets, we do not

eliminate or extinguish the guaranty arrangement because it is a contractual arrangement with the

unconsolidated MBS trusts. We determine the fair value of Fannie Mae MBS based on observable market

prices because most Fannie Mae MBS are actively traded. Fannie Mae MBS receive high credit quality ratings

primarily because of our guaranty. Absent our guaranty, Fannie Mae MBS would be subject to the credit risk

on the underlying loans. We continue to recognize a guaranty obligation and a reserve for guaranty losses

associated with these securities because we carry these securities in our consolidated financial statements as

guaranteed Fannie Mae MBS. The fair value of the guaranty obligation, net of deferred profit, associated with

Fannie Mae MBS included in “Investments in securities” approximates the fair value of the credit risk that

exists on these Fannie Mae MBS absent our guaranty. The fair value of our guaranty obligations associated

with the Fannie Mae MBS included in “Investments in securities” was $2.0 billion and $4.8 billion as of

December 31, 2010 and 2009, respectively.

Master Servicing

We do not perform the day-to-day servicing of mortgage loans in a Fannie Mae MBS trust. We are

compensated, however, for carrying out administrative functions for the trust and overseeing the primary

servicer’s performance of the day-to-day servicing of the trust’s mortgage assets. For trusts that are not

consolidated by us, this arrangement gives rise to either an MSA or an MSL. However, upon consolidation of

the majority of our MBS trusts on January 1, 2010, we eliminated the majority of our MSA and MSL.

The following table displays the carrying value and fair value of our MSA for the years ended December 31,

2010, 2009 and 2008.

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Cost basis:

Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 196 $ 764 $1,171

Adoption of new accounting standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (195) — —

Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 56 302

Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (44) (190)

Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (579) (491)

Reductions for MBS trusts paid-off and impact of consolidation activity(1) . . . . . — (1) (28)

Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 196 764

Valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 40 73

Carrying value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 156 $ 691

Fair value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 179 $ 855 $1,808

Fair value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 179 $ 855

(1) Excluding impact of adopting the new accounting standards.

The carrying value of our MSL, which approximates its fair value, was $25 million and $481 million as of

December 31, 2010 and 2009, respectively.

Prior to January 1, 2010, we recognized servicing income, referred to as “Trust management income,” in our

consolidated statements of operations. Upon implementation of the new accounting standards, we report the

F-72

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
trust management income earned by consolidated trusts as a component of net interest income in our

consolidated statements of operations. We recognized no servicing income for non-consolidated trusts in 2010.

Trust management income of $40 million and $261 million relating to non-consolidated trusts for the years

ended December 31, 2009 and 2008, respectively, has been reclassified as a component of “Fee and other

income” in our consolidated statements of operations.

8. Acquired Property, Net

Acquired property, net consists of held-for-sale foreclosed property received in full satisfaction of a loan net of

a valuation allowance for declines in the fair value of foreclosed properties after initial acquisition. We classify

as held for sale those properties that we intend to sell and are actively marketed for sale. The following table

displays the activity in acquired property and the related valuation allowance for the years ended

December 31, 2010, 2009 and 2008.

Acquired

Property

Valuation

Allowance(1) AcquiredProperty, Net

(Dollars in millions)

Balance, January 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,853 $ (251) $ 3,602

Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,853 (75) 10,778

Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,666) 664 (6,002)

Write-downs, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (1,460) (1,460)

Balance, December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,040 (1,122) 6,918

Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,165 (79) 14,086

Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,489) 1,379 (11,110)

Write-downs, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (752) (752)

Balance, December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,716 (574) 9,142

Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,982 (783) 25,199

Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,644) 1,407 (16,237)

Write-downs, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (1,931) (1,931)

Balance, December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,054 $(1,881) $ 16,173

(1) Reflects activities in the valuation allowance for acquired properties held primarily by our single-family segment.

We classify as held for use those properties that we do not intend to sell or that are not ready for immediate

sale in their current condition and are reflected in “Other assets” in our consolidated balance sheets. The

following table displays the activity and carrying amount of acquired properties held for use for the years

ended December 31, 2010, 2009 and 2008. The increase in held for use property is primarily from renting

properties rather than actively marketing them.

2010 2009 2008

For the Year Ended

December 31,

(Dollars in millions)

Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44 $ 11 $107

Transfers in from held for sale, net and additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 977 45 1

Transfers to held for sale, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64) (11) (93)

Depreciation and asset write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (68) (1) (4)

Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $889 $ 44 $ 11

F-73

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9. Short-Term Borrowings and Long-Term Debt

Our short-term borrowings and long-term debt increased significantly due to our adoption of the new

accounting standards on the transfers of financial assets and the consolidation of VIEs.

Short-Term Borrowings

Our short-term borrowings (borrowings with an original contractual maturity of one year or less) consist of

both “Federal funds purchased and securities sold under agreements to repurchase” and “Short-term debt” in

our consolidated balance sheets. The following table displays our outstanding short-term borrowings and

weighted-average interest rates of these borrowings as of December 31, 2010 and 2009.

Outstanding

WeightedAverage

Interest

Rate(1) Outstanding

WeightedAverage

Interest

Rate(1)

2010 2009

As of December 31,

(Dollars in millions)

Federal funds purchased and securities sold under

agreements to repurchase. . . . . . . . . . . . . . . . . . . . . . $ 52 2.20% $ — —%

Fixed-rate short-term debt:

Discount notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $151,500 0.32% $199,987 0.27%

Foreign exchange discount notes . . . . . . . . . . . . . . . . 384 2.43 300 1.50

Other short-term debt . . . . . . . . . . . . . . . . . . . . . . . . — — 100 0.53

Total fixed-rate short-term debt. . . . . . . . . . . . . . . . 151,884 0.32 200,387 0.27

Floating-rate short-term debt(2) . . . . . . . . . . . . . . . . . . . — — 50 0.02

Total short-term debt of Fannie Mae . . . . . . . . . . . . . . 151,884 0.32 200,437 0.27

Debt of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . 5,359 0.23 — —

Total short-term debt . . . . . . . . . . . . . . . . . . . . . . . . $157,243 0.32% $200,437 0.27%

(1) Includes the effects of discounts, premiums, and other cost basis adjustments.

(2) Includes a portion of structured debt instruments that is reported at fair value.

Our federal funds purchased and securities sold under agreements to repurchase represent agreements to

repurchase securities from banks with excess reserves on a particular day for a specified price, with repayment

generally occurring on the following day. Our short-term debt includes discount notes and foreign exchange

discount notes, as well as other short-term debt. Our discount notes are unsecured general obligations and have

maturities ranging from overnight to 360 days from the date of issuance.

Additionally, we issue foreign exchange discount notes in the Euro money market enabling investors to hold

short-term investments in different currencies. We have the ability to issue foreign exchange discount notes in

maturities ranging from 5 to 360 days.

F-74

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Long-Term Debt

Long-term debt represents borrowings with an original contractual maturity of greater than one year. The

following table displays our outstanding long-term debt as of December 31, 2010 and 2009.

Maturities Outstanding

WeightedAverage

Interest

Rate(1) Maturities Outstanding

WeightedAverage

Interest

Rate(1)

2010 2009

As of December 31,

(Dollars in millions)

Senior fixed:

Benchmark notes and bonds . . . . . . . 2011 - 2030 $ 300,344 3.20% 2010 - 2030 $279,945 4.10%

Medium-term notes . . . . . . . . . . . . . 2011 - 2020 199,266 2.13 2010 - 2019 171,207 2.97

Foreign exchange notes and bonds . . . 2017 - 2028 1,177 6.21 2010 - 2028 1,239 5.64

Other long-term debt(2) . . . . . . . . . . . 2011 - 2040 44,893 5.64 2010 - 2039 62,783 5.80

Total senior fixed . . . . . . . . . . . . . 545,680 3.02 515,174 3.94

Senior floating:

Medium-term notes . . . . . . . . . . . . . 2011 - 2015 72,039 0.31 2010 - 2014 41,911 0.26

Other long-term debt(2) . . . . . . . . . . . 2020 - 2037 386 4.92 2020 - 2037 1,041 4.12

Total senior floating . . . . . . . . . . . 72,425 0.34 42,952 0.34

Subordinated fixed:

Qualifying subordinated(3). . . . . . . . . 2011 - 2014 7,392 5.47 2011 - 2014 7,391 5.47

Subordinated debentures . . . . . . . . . . 2019 2,663 9.91 2019 2,433 9.89

Total subordinated fixed . . . . . . . . 10,055 6.65 9,824 6.57

Total long-term debt of Fannie

Mae(4) . . . . . . . . . . . . . . . . . . . . . 628,160 2.77 567,950 3.71

Debt of consolidated trusts(2) . . . . . . . . 2011 - 2051 2,411,597 4.59 2010 - 2039 6,167 5.63

Total long-term debt . . . . . . . . . . . $3,039,757 4.22% $574,117 3.73%

(1) Includes the effects of discounts, premiums and other cost basis adjustments.

(2) Includes a portion of structured debt instruments that is reported at fair value.

(3) Consists of subordinated debt issued with an interest deferral feature.

(4) Reported amounts include a net discount and other cost basis adjustments of $12.4 billion and $15.6 billion as of

December 31, 2010 and 2009, respectively.

Our long-term debt includes a variety of debt types. We issue both fixed and floating-rate medium-term notes

with maturities greater than one year that are issued through dealer banks. We also offer Benchmark Notes and

other bonds in large, regularly-scheduled issuances that provide increased efficiency, liquidity and tradability

to the market. Additionally, we have issued notes and bonds denominated in several foreign currencies and are

able to issue debt in numerous other currencies. We effectively convert all foreign currency-denominated

transactions into U.S. dollars through the use of foreign currency swaps for the purpose of funding our

mortgage assets.

Our other long-term debt includes callable and non-callable securities, which include all long-term nonBenchmark securities, such as zero-coupon bonds, fixed rate and other long-term securities, and are generally

negotiated underwritings with one or more dealers or dealer banks.

F-75

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Debt of Consolidated Trusts

Debt of consolidated trusts represents our liability to third-party beneficial interest holders when we have

included the assets of a corresponding trust in our consolidated balance sheets and we do not own all of the

beneficial interests in the trust.

Characteristics of Debt

As of December 31, 2010 and 2009, the face amount of our debt securities of Fannie Mae was $792.6 billion

and $784.0 billion, respectively. As of December 31, 2010 and 2009, we had zero-coupon debt with a face

amount of $174.2 billion and $226.5 billion, respectively, which had an effective interest rate of 0.83% and

0.67%, respectively.

We issue callable debt instruments to manage the duration and prepayment risk of expected cash flows of the

mortgage assets we own. Our outstanding debt as of December 31, 2010 and 2009 included $219.8 billion and

$210.2 billion, respectively, of callable debt that could be redeemed in whole or in part at our option any time

on or after a specified date.

The following table displays the amount of our long-term debt as of December 31, 2010 by year of maturity

for each of the years 2011 through 2015 and thereafter. The first column assumes that we pay off this debt at

maturity or on the call date if the call has been announced, while the second column assumes that we redeem

our callable debt at the next available call date.

Long-Term Debt by

Year of Maturity

Assuming Callable Debt

Redeemed at Next

Available Call Date

(Dollars in millions)

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,245 $ 297,703

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,913 146,091

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,278 65,677

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,705 45,553

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,741 18,282

Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,278 54,854

Total debt of Fannie Mae(1). . . . . . . . . . . . . . . . . . . . . . . . . . 628,160 628,160

Debt of consolidated trusts(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,411,597 2,411,597

Total long-term debt(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,039,757 $3,039,757

(1) Reported amount includes a net discount and other cost basis adjustments of $12.4 billion.

(2) Contractual maturity of debt of consolidated trusts is not a reliable indicator of expected maturity because borrowers

of the underlying loans generally have the right to prepay their obligations at any time.

(3) Includes a portion of structured debt instruments that is reported at fair value.

The following table displays the amount of our debt of Fannie Mae that was called and repurchased and the

associated weighted-average interest rates for the years ended December 31, 2010, 2009 and 2008.

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Debt called . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $289,770 $166,777 $158,988

Weighted-average interest rate of debt called . . . . . . . . . . . . . . . . . . . . . . 3.1% 4.2% 5.3%

Debt repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,333 $ 6,919 $ 13,214

Weighted-average interest rate of debt repurchased . . . . . . . . . . . . . . . . . . 3.3% 4.3% 4.8%

F-76

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Intraday Lines of Credit

We periodically use secured and unsecured intraday funding lines of credit provided by several large financial

institutions. We post collateral which, in some circumstances, the secured party has the right to repledge to

third parties. As these lines of credit are uncommitted intraday loan facilities, we may be unable to draw on

them if and when needed. We had secured uncommitted lines of credit of $25.0 billion and unsecured

uncommitted lines of credit of $500 million as of both December 31, 2010 and 2009. We had no borrowings

outstanding from these lines of credit as of December 31, 2010.

10. Derivative Instruments and Hedging Activities

Derivative instruments are an integral part of our strategy in managing interest rate risk. Derivative instruments

may be privately negotiated contracts, which are often referred to as over-the-counter derivatives, or they may

be listed and traded on an exchange. When deciding whether to use derivatives, we consider a number of

factors, such as cost, efficiency, the effect on our liquidity, results of operations, and our overall interest rate

risk management strategy. We choose to use derivatives when we believe they will provide greater relative

value or more efficient execution of our strategy than debt securities. We typically do not settle the notional

amount of our risk management derivatives; rather, notional amounts provide the basis for calculating actual

payments or settlement amounts. The derivatives we use for interest rate risk management purposes consist

primarily of contracts that fall into four broad categories:

• Interest rate swap contracts. An interest rate swap is a transaction between two parties in which each party

agrees to exchange payments tied to different interest rates or indices for a specified period of time,

generally based on a notional amount of principal. The types of interest rate swaps we use include pay-fixed

swaps, receive-fixed swaps and basis swaps.

• Interest rate option contracts. These contracts primarily include pay-fixed swaptions, receive-fixed

swaptions, cancelable swaps and interest rate caps. A swaption is an option contract that allows us or a

counterparty to enter into a pay-fixed or receive-fixed swap at some point in the future.

• Foreign currency swaps. These swaps convert debt that we issue in foreign-denominated currencies into

U.S. dollars. We enter into foreign currency swaps only to the extent that we issue foreign currency debt.

• Futures. These are standardized exchange-traded contracts that either obligate a buyer to buy an asset at a

predetermined date and price or a seller to sell an asset at a predetermined date and price. The types of

futures contracts we enter into include Eurodollar, U.S. Treasury and swaps.

We enter into forward purchase and sale commitments that lock in the future delivery of mortgage loans and

mortgage-related securities at a fixed price or yield. Certain commitments to purchase mortgage loans and

purchase or sell mortgage-related securities meet the criteria of a derivative. We typically settle the notional

amount of our mortgage commitments that are accounted for as derivatives.

We account for our derivatives pursuant to the accounting standards on derivative instruments, and recognize

all derivatives as either assets or liabilities in our consolidated balance sheets at their fair value on a trade date

basis. Fair value amounts, which are netted at the counterparty level and are inclusive of cash collateral posted

or received, are recorded in “Other assets” or “Other liabilities” in our consolidated balance sheets. We record

all derivative gains and losses, including accrued interest, in “Fair value losses, net” in our consolidated

statements of operations.

F-77

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Notional and Fair Value Position of our Derivatives

The following table displays the notional amount and estimated fair value of our asset and liability derivative

instruments on a gross basis, before the application of master netting agreements, as of December 31, 2010

and 2009.

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Notional

Amount

Estimated

Fair Value

Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives

2010 2009

As of December 31,

(Dollars in millions)

Risk management derivatives:

Swaps:

Pay-fixed . . . . . . . . . . . . . . . . . . . . . $ 49,085 $ 1,812 $228,142 $(14,115) $ 68,099 $ 1,422 $314,501 $(17,758)

Receive-fixed . . . . . . . . . . . . . . . . . . 172,174 6,493 52,003 (578) 160,384 8,250 115,033 (2,832)

Basis . . . . . . . . . . . . . . . . . . . . . . . . 435 29 50 — 2,715 61 510 (4)

Foreign currency . . . . . . . . . . . . . . . . 1,274 164 286 (51) 727 107 810 (49)

Swaptions:

Pay-fixed . . . . . . . . . . . . . . . . . . . . . 66,200 482 30,950 (1,773) 97,100 2,012 2,200 (1)

Receive-fixed . . . . . . . . . . . . . . . . . . 48,340 4,992 30,275 (673) 75,380 4,043 — —

Interest rate caps . . . . . . . . . . . . . . . . . 7,000 24 — — 7,000 128 — —

Futures . . . . . . . . . . . . . . . . . . . . . . . . 220 3 25 (1) — — — —

Other(1) . . . . . . . . . . . . . . . . . . . . . . . . 689 72 — — 740 84 8 —

Total gross risk management

derivatives . . . . . . . . . . . . . . . . . . 345,417 14,071 341,731 (17,191) 412,145 16,107 433,062 (20,644)

Collateral receivable (payable)(2) . . . . . — 3,452 — (604) — 5,437 — (1,023)

Accrued interest receivable (payable) . . — 1,288 — (1,805) — 2,596 — (2,813)

Total net risk management

derivatives . . . . . . . . . . . . . . . . . $345,417 $18,811 $341,731 $(19,600) $412,145 $24,140 $433,062 $(24,480)

Mortgage commitment derivatives:

Mortgage commitments to purchase

whole loans. . . . . . . . . . . . . . . . . . $ 2,880 $ 19 $ 4,435 $ (105) $ 273 $ — $ 4,453 $ (66)

Forward contracts to purchase

mortgage-related securities . . . . . . . 19,535 123 27,697 (468) 3,403 7 23,287 (283)

Forward contracts to sell mortgagerelated securities . . . . . . . . . . . . . . 40,761 811 24,562 (169) 83,299 1,141 7,232 (14)

Total mortgage commitment

derivatives . . . . . . . . . . . . . . . . . $ 63,176 $ 953 $ 56,694 $ (742) $ 86,975 $ 1,148 $ 34,972 $ (363)

Derivatives at fair value . . . . . . . . . $408,593 $19,764 $398,425 $(20,342) $499,120 $25,288 $468,034 $(24,843)

(1) Includes swap credit enhancements and mortgage insurance contracts that we account for as derivatives. The mortgage

insurance contracts have payment provisions that are not based on a notional amount.

(2) Collateral receivable represents cash collateral posted by us for derivatives in a loss position. Collateral payable

represents cash collateral posted by counterparties to reduce our exposure for derivatives in a gain position.

A majority of our derivative instruments contain provisions that require our senior unsecured debt to maintain

a minimum credit rating from each of the major credit rating agencies. If our senior unsecured debt were to

fall below established thresholds in our governing agreements, which range from A- to BBB+, we would be in

F-78

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
violation of these provisions, and the counterparties to the derivative instruments could request immediate

payment or demand immediate collateralization on derivative instruments in net liability positions. The

aggregate fair value of all derivatives with credit-risk-related contingent features that were in a net liability

position as of December 31, 2010 was $4.4 billion for which we posted collateral of $3.5 billion in the normal

course of business. If the credit-risk-related contingency features underlying these agreements were triggered

as of December 31, 2010, we would be required to post an additional $891 million of collateral to our

counterparties.

The following table displays, by type of derivative instrument, the fair value gains and losses, net on our

derivatives for the years ended December 31, 2010, 2009 and 2008.

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Risk management derivatives:

Swaps:

Pay-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(17,573) $ 15,012 $(64,764)

Receive-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,382 (11,737) 44,553

Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 96 (102)

Foreign currency(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 166 (130)

Swaptions:

Pay-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,026) 453 (666)

Receive-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,327 (8,706) 6,153

Interest rate caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (104) 11 (1)

Futures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 — —

Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 9 (6)

Total risk management derivatives fair value losses, net . . . . . . . . . . . . . . (1,807) (4,696) (14,963)

Mortgage commitment derivatives fair value losses, net . . . . . . . . . . . . . . . . (1,193) (1,654) (453)

Total derivatives fair value losses, net. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,000) $ (6,350) $(15,416)

(1) Includes the effect of net contractual interest income of approximately $47 million, $38 million and $9 million for

2010, 2009 and 2008, respectively.

(2) Includes swap credit enhancements and mortgage insurance contracts.

F-79

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Volume and Activity of our Derivatives

Risk Management Derivatives

The following table displays, by derivative instrument type, our risk management derivative activity for the

years ended December 31, 2010 and 2009.

PayFixedReceiveFixed BasisForeign

Currency(1) PayFixed

ReceiveFixedInterest

Rate Caps Futures Other(2) Total

Interest Rate Swaps

Interest Rate

Swaptions

For the Year Ended December 31, 2010

(Dollars in millions)

Beginning notional

balance . . . . . . . . . . $ 382,600 $ 275,417 $ 3,225 $1,537 $ 99,300 $ 75,380 $7,000 $ — $748 $ 845,207

Additions . . . . . . . . . 212,214 250,417 55 636 51,700 51,025 — 598 — 566,645

Terminations(3) . . . . . (317,587) (301,657) (2,795) (613) (53,850) (47,790) — (353) (59) (724,704)

Ending notional

balance . . . . . . . . . . $ 277,227 $ 224,177 $ 485 $1,560 $ 97,150 $ 78,615 $7,000 $ 245 $689 $ 687,148

PayFixedReceiveFixed BasisForeign

Currency(1) PayFixed

ReceiveFixedInterest

Rate Caps Futures Other(2) Total

Interest Rate Swaps

Interest Rate

Swaptions

For the Year Ended December 31, 2009

(Dollars in millions)

Beginning notional

balance . . . . . . . . . $ 546,916 $ 451,081 $ 24,560 $1,652 $ 79,500 $ 93,560 $ 500 $— $827 $1,198,596

Additions . . . . . . . 297,379 279,854 2,765 577 32,825 19,175 6,500 — 13 639,088

Terminations(3) . . . . (461,695) (455,518) (24,100) (692) (13,025) (37,355) — — (92) (992,477)

Ending notional

balance . . . . . . . . . $ 382,600 $ 275,417 $ 3,225 $1,537 $ 99,300 $ 75,380 $7,000 $— $748 $ 845,207

(1) Exchange rate adjustments to foreign currency swaps existing at both the beginning and the end of the period are

included in terminations. Exchange rate adjustments to foreign currency swaps that are added or terminated during the

period are reflected in the respective categories.

(2) Includes swap credit enhancements and mortgage insurance contracts.

(3) Includes matured, called, exercised, assigned and terminated amounts.

F-80

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Mortgage Commitment Derivatives

The following table displays, by commitment type, our mortgage commitment derivative activity for the years

ended December 31, 2010 and 2009.

Purchase

Commitments

Sale

Commitments

Purchase

Commitments

Sale

Commitments

2010 2009

For the Year Ended December 31,

(Dollars in millions)

Beginning of period notional balance . . . . . . . . $ 31,416 $ 90,531 $ 35,004 $ 36,232

Mortgage related securities:

Open commitments . . . . . . . . . . . . . . . . . . 660,037 841,997 833,221 1,089,500

Settled commitments . . . . . . . . . . . . . . . . . (639,495) (867,205) (832,279) (1,035,201)

Loans:

Open commitments . . . . . . . . . . . . . . . . . . 90,043 — 114,054 —

Settled commitments . . . . . . . . . . . . . . . . . (87,454) — (118,584) —

End of period notional balance . . . . . . . . . . . . $ 54,547 $ 65,323 $ 31,416 $ 90,531

Derivative Counterparty Credit Exposure

Our derivative counterparty credit exposure relates principally to interest rate and foreign currency derivative

contracts. We are exposed to the risk that a counterparty in a derivative transaction will default on payments

due to us. If there is a default, we may need to acquire a replacement derivative from a different counterparty

at a higher cost or may be unable to find a suitable replacement. Typically, we seek to manage credit exposure

by contracting with experienced counterparties that are rated A- (or its equivalent) or better. We also manage

our exposure by requiring counterparties to post collateral. The collateral includes cash, U.S. Treasury

securities, agency debt and agency mortgage-related securities.

The table below displays our credit exposure on outstanding risk management derivative instruments in a gain

position by counterparty credit ratings, as well as the notional amount outstanding and the number of

counterparties for all risk management derivatives as of December 31, 2010 and 2009.

AA+/AA/AA- A+/A Subtotal Other(2) Total

Credit Rating(1)

As of December 31, 2010

(Dollars in millions)

Credit loss exposure(3). . . . . . . . . . . . . . . . . . . . . $ 350 $ 325 $ 675 $ 75 $ 750

Less: Collateral held(4) . . . . . . . . . . . . . . . . . . . . 273 325 598 — 598

Exposure net of collateral . . . . . . . . . . . . . . . . . . $ 77 $ — $ 77 $ 75 $ 152

Additional information:

Notional amount(5) . . . . . . . . . . . . . . . . . . . . . $208,898 $476,766 $685,664 $1,484 $687,148

Number of counterparties(5) . . . . . . . . . . . . . . . 7 8 15

F-81

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
AA+/AA/AA- A+/A Subtotal Other(2) Total

Credit Rating(1)

As of December 31, 2009

(Dollars in millions)

Credit loss exposure(3) . . . . . . . . . . . . . . . . . . . . . $ 658 $ 583 $ 1,241 $ 84 $ 1,325

Less: Collateral held(4) . . . . . . . . . . . . . . . . . . . . 580 507 1,087 — 1,087

Exposure net of collateral . . . . . . . . . . . . . . . . . . $ 78 $ 76 $ 154 $ 84 $ 238

Additional information:

Notional amount(5) . . . . . . . . . . . . . . . . . . . . . $220,791 $623,668 $844,459 $748 $845,207

Number of counterparties(5) . . . . . . . . . . . . . . . 7 9 16

(1) We manage collateral requirements based on the lower credit rating of the legal entity, as issued by Standard & Poor’s

and Moody’s. The credit rating reflects the equivalent Standard & Poor’s rating for any ratings based on Moody’s

scale.

(2) Includes defined benefit mortgage insurance contracts and swap credit enhancements accounted for as derivatives

where the right of legal offset does not exist. Also includes exchange-traded derivatives, such as futures and interest

rate swaps, which are settled daily through a clearinghouse.

(3) Represents the exposure to credit loss on derivative instruments, which we estimate using the fair value of all

outstanding derivative contracts in a gain position. We net derivative gains and losses with the same counterparty

where a legal right of offset exists under an enforceable master netting agreement. This table excludes mortgage

commitments accounted for as derivatives.

(4) Represents both cash and non-cash collateral posted by our counterparties to us. Does not include collateral held in

excess of exposure. We reduce the value of non-cash collateral in accordance with the counterparty agreements to help

ensure recovery of any loss through the disposition of the collateral. We posted cash collateral of $3.4 billion and

$5.4 billion related to our counterparties’ credit exposure to us as of December 31, 2010 and 2009, respectively.

(5) We had exposure to 3 and 6 interest rate and foreign currency derivative counterparties in a net gain position as of

December 31, 2010 and 2009, respectively. Those interest rate and foreign currency derivatives had notional balances

of $106.5 billion and $310.0 billion as of December 31, 2010 and 2009, respectively.

Hedging Activities

In 2008, we began to employ fair value hedge accounting for some of our interest rate risk management

activities by designating hedging relationships between certain of our interest rate derivatives and mortgage

assets. We achieved hedge accounting by designating all or a fixed percentage of a pay-fixed receive variable

interest rate swap as a hedge of the changes in the fair value attributable to the changes in LIBOR for a

specific mortgage asset. Because we discontinued hedge accounting during 2008, we did not have any

derivatives designated as hedges during 2010 or 2009.

For the year ended December 31, 2008, we recorded a $2.2 billion increase in the carrying value of the

hedged assets before related amortization due to hedge accounting. This gain on the hedged assets was offset

by fair value losses of $2.2 billion, which excluded valuation changes due to the passage of time, on the payfixed swaps designated as hedging instruments.

In addition, in 2008 we recorded a loss for the ineffective portion of our hedged assets of $94 million, which

excluded a loss of $81 million that was not related to changes in the benchmark interest rate.

F-82

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
11. Income Taxes

Provision (Benefit) for Income Taxes

We operate as a government-sponsored enterprise. We are subject to federal income tax, but we are exempt

from state and local income taxes. The following table displays the components of our provision (benefit) for

federal income taxes for the years ended December 31, 2010, 2009 and 2008.

2010 2009 2008

For the Year Ended

December 31,

(Dollars in millions)

Current income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(82) $(999) $ 403

Deferred income tax expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 14 13,346

Provision (benefit) for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(82) $(985) $13,749

(1) Amount excludes the income tax effect of items recognized directly in “Fannie Mae stockholders’ equity (deficit)”

where we did not establish a valuation allowance.

In January 2011, we received a refund of $1.1 billion from the IRS related to the carryback of our 2009

operating loss to the 2008 and 2007 tax years.

The following table displays the difference between our effective tax rates and the statutory federal tax rates

for the years ended December 31, 2010, 2009 and 2008, respectively.

2010 2009 2008

For the Year Ended

December 31,

Statutory corporate tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0%

Tax-exempt interest and dividends-received deductions . . . . . . . . . . . . . . . . . . . . . . . . 1.3 0.3 0.5

Equity investments in affordable housing projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 1.3 2.1

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 — —

Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (42.1) (35.2) (68.2)

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6% 1.4% (30.6)%

Our effective tax rate is the provision (benefit) for federal income taxes, excluding the tax effect of

extraordinary items, expressed as a percentage of income or loss before federal income taxes. Our effective tax

rates were different from the federal statutory rate of 35% for the years ended December 31, 2010, 2009 and

2008 due primarily to the increase to our valuation allowance for our net deferred tax assets that resulted in

the recognition of $5.9 billion, $25.7 billion and $30.8 billion, respectively, in our provision for income taxes.

In addition, our effective tax rate for the year ended December 31, 2010, was also impacted by the reversal of

a portion of the valuation allowance for deferred tax assets resulting from a settlement agreement reached with

the IRS for our unrecognized tax benefits for the tax years 1999 through 2004. Our effective tax rates for the

years ended December 31, 2010, 2009 and 2008 were impacted by the benefits of our holdings of tax-exempt

investments, investments in housing projects eligible for the low-income housing tax credit and other equity

investments that provide tax credits.

F-83

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred Tax Assets and Liabilities

The following table displays our deferred tax assets, deferred tax liabilities, and valuation allowance as of

December 31, 2010 and 2009.

2010 2009

As of December 31,

(Dollars in millions)

Deferred tax assets:(1)

Allowance for loan losses and basis in acquired property, net . . . . . . . . . . . . . . . . . . . $ 27,063 $ 23,615

Mortgage and mortgage-related assets, including acquired credit-impaired loans . . . . . . 10,825 10,547

Debt and derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,627 8,255

Partnership credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500 3,587

Partnership and other equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,175 2,411

Unrealized losses on AFS securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 772 927

Net operating loss and alternative minimum tax credit carryforwards. . . . . . . . . . . . . . 3,341 688

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,818 3,661

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,121 53,691

Deferred tax liabilities:

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 45

Total deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 45

Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56,314) (52,737)

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 754 $ 909

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

We recognize deferred tax assets and liabilities for the future tax consequences related to differences between

the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for

net operating loss and tax credit carryforwards. We recorded an increase in our valuation allowance in 2010

that resulted in the recognition of $5.9 billion in our provision for income taxes. This amount represented the

tax effect associated with a portion of our pre-tax loss. The change in our 2010 valuation allowance also

includes a $2.4 billion reduction primarily due to our adoption of the new accounting standards for amounts

originally recognized in “Accumulated deficit.” Our deferred tax assets, net of a valuation allowance, totaled

$754 million and $909 million as of December 31, 2010 and 2009, respectively. We evaluate our deferred tax

assets for recoverability using a consistent approach which considers the relative impact of both negative and

positive evidence, including our historical profitability and projections of future taxable income. We are

required to establish a valuation allowance for deferred tax assets and record a charge in our consolidated

statements of operations or in “Fannie Mae stockholders’ deficit” if we determine, based on available evidence

at the time the determination is made, that it is more likely than not that some portion or all of the deferred

tax assets will not be realized. In evaluating the need for a valuation allowance, we estimate future taxable

income or loss based on management-approved business plans and ongoing tax planning strategies. This

process involves significant management judgment about assumptions that are subject to change from period

to period based on changes in tax laws or variances between our projected operating performance, our actual

results and other factors.

We are in a cumulative book taxable loss position and have been for more than a three-year period. For

purposes of establishing a deferred tax valuation allowance, this cumulative book taxable loss position is

considered significant, objective evidence that we may not be able to realize some portion of our deferred tax

F-84

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
assets in the future. Our cumulative book taxable loss position was caused by the negative impact on our

results from the weak housing and credit market conditions that deteriorated dramatically during 2008 and

continued through 2009 and 2010. These conditions caused an increase in our pre-tax loss, due in part to

credit losses, and downward revisions to our projections of future results. Because of the volatile economic

conditions, our projections of future credit losses are uncertain.

During 2008, we concluded that it was more likely than not that we would not generate sufficient future

taxable income in the foreseeable future to realize all of our deferred tax assets. Our conclusion was based on

our consideration of the relative weight of the available evidence, including the rapid deterioration of market

conditions discussed above, the uncertainty of future market conditions on our results of operations, and

significant uncertainty surrounding our future business model as a result of the placement of the company into

conservatorship by FHFA. As a result, we recorded a valuation allowance on our net deferred tax asset for the

portion of the future tax benefit that more likely than not will not be utilized in the future. We did not,

however, establish a valuation allowance for the deferred tax asset amount that is related to unrealized losses

recorded through AOCI for certain available-for-sale securities. We believe this deferred tax amount is

recoverable because we have the intent and ability to hold these securities until recovery of the unrealized loss

amounts. There have been no changes to our conclusion as of December 31, 2010.

As a result of adopting the new accounting standard for assessing other-than-temporary impairments, we

recorded a cumulative-effect adjustment at April 1, 2009 of $8.5 billion on a pre-tax basis ($5.6 billion after

tax) to reclassify the noncredit portion of previously recognized other-than-temporary impairments from

“Accumulated deficit” to AOCI. We also reduced the “Accumulated deficit” and valuation allowance by

$3.0 billion for the deferred tax asset related to the amounts previously recognized as other-than-temporary

impairments in our consolidated statements of operations based upon the assertion of our intent and ability to

hold certain AFS securities until recovery.

As of December 31, 2010, we had $11.3 billion of net operating loss carryforwards that expire in 2029 and

2030, $1.4 billion of capital loss carryforwards that expire in 2013 through 2015, $4.5 billion of partnership

tax credit carryforwards that expire in various years through 2030, and $126 million of alternative minimum

tax credit carryforwards that have an indefinite carryforward period.

Unrecognized Tax Benefits

We had $864 million, $911 million, and $1.7 billion of unrecognized tax benefits as of December 31, 2010,

2009 and 2008, respectively. Of these amounts, we had $29 million as of December 31, 2009, which was

resolved favorably in 2010 and reduced our effective tax rate in 2010. There are no unrecognized tax benefits

as of December 31, 2010 that would reduce our effective tax rate in future periods. As of December 31, 2010

and 2009, we had accrued interest payable related to unrecognized tax benefits of $5 million and $41 million,

respectively, and did not recognize any tax penalty payable. For the years ended December 31, 2010, 2009 and

2008, we had total interest expense related to unrecognized tax benefits of $2 million, $32 million and

$223 million, respectively, and did not have any tax expense related to tax penalties.

During 2010, we and the IRS appeals division reached an agreement for all issues related to the tax years

1999 through 2004, which resulted in a $99 million reduction in our gross balance of unrecognized tax

benefits for the tax years 1999 through 2004. Similarly, during 2009, we reached an agreement of $1.2 billion,

net of tax credits, with the IRS on the audits of our 2005 and 2006 federal income tax returns. The decrease in

our unrecognized tax benefits during the year ended December 31, 2009 is due to our settlement reached with

the IRS regarding certain tax positions related to fair market value losses and the settlement of tax years 2005

through 2006. The decrease in our unrecognized tax benefits represents a temporary difference, and therefore

does not result in a change to our effective tax rate, except to the extent of the reversal of a portion of the

valuation allowance for deferred tax assets resulting from an agreement reached with the IRS for our

F-85

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
unrecognized tax benefits for the tax years 1999 through 2004. The IRS is currently examining our federal

income tax returns for the tax years 2007 and 2008. We expect to reach a settlement agreement with the IRS

for all issues related to the 2007 and 2008 tax years. As a result of this conclusion, it is reasonably possible

that a $105 million reduction in our gross balance of unrecognized tax benefits may occur within the next

12 months for the 2007 and 2008 tax years.

The following table displays the changes in our unrecognized tax benefits for the years ended December 31,

2010, 2009 and 2008, respectively.

2010 2009 2008

For the Year Ended

December 31,

(Dollars in millions)

Unrecognized tax benefits as of January 1 .............................. $911 $ 1,745 $ 124

Gross increases—tax positions in prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 38 49

Gross decreases—tax positions in prior years ............................ (31) (1) (6)

Gross increases—tax positions in current year . . . . . . . . . . . . . . . . . . . . . . . . . . . — 761 —

Settlements ..................................................... (99) (1,632) 1,578

Unrecognized tax benefits as of December 31(1) .......................... $864 $ 911 $1,745

(1) Amounts exclude tax credits of $804 million, $716 million and $456 million as of December 31, 2010, 2009 and

2008, respectively.

12. Loss Per Share

The following table displays the computation of basic and diluted loss per share of common stock for the

years ended December 31, 2010, 2009 and 2008.

2010 2009 2008

For the Year Ended

December 31,

(Dollars and shares in millions,

except per share amounts)

Loss before extraordinary losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(14,018) $(72,022) $(58,319)

Extraordinary losses, net of tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (409)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,018) (72,022) (58,728)

Less: Net loss attributable to the noncontrolling interest . . . . . . . . . . . . . . 4 53 21

Net loss attributable to Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,014) (71,969) (58,707)

Preferred stock dividends and issuance costs at redemption . . . . . . . . . . . . . (7,704) (2,474) (1,069)

Net loss attributable to common stockholders-basic and diluted . . . . . . . . . . $(21,718) $(74,443) $(59,776)

Weighted-average common shares outstanding-basic and diluted(1) . . . . . . . . 5,694 5,680 2,487

Basic and diluted loss per share:

Loss before extraordinary losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3.81) $ (13.11) $ (23.88)

Extraordinary losses, net of tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (0.16)

Basic and diluted loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3.81) $ (13.11) $ (24.04)

(1) Amounts include 4.6 billion for both the years ended December 31, 2010 and 2009 and 1.4 billion for the year ended

December 31, 2008 of weighted-average shares of common stock, that would be issued upon the full exercise of the

warrant issued to Treasury from the date the warrant was issued through December 31, 2010, 2009 and 2008,

respectively.

F-86

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Weighted-average options and performance awards to purchase approximately 8 million, 14 million and

22 million shares of common stock were outstanding for the years ended December 31, 2010, 2009 and 2008,

respectively, and were excluded from the computation of diluted EPS in the table above as they would have

been anti-dilutive.

13. Stock-Based Compensation

We have two stock-based compensation plans, the 1985 Employee Stock Purchase Plan and the Stock

Compensation Plan of 2003. Under these plans, we previously offered various stock-based compensation

programs where we provided employees an opportunity to purchase Fannie Mae common stock or periodically

made stock awards to certain employees in the form of nonqualified stock options, performance share awards,

restricted stock awards, restricted stock units or stock bonus awards. Under the senior preferred stock purchase

agreement with Treasury, we may not issue Fannie Mae equity securities without the consent of Treasury,

other than the senior preferred stock, the Treasury warrant, common stock issuable upon exercise of the

warrant, or as required by the terms of any binding agreement in effect on the date of the senior preferred

stock purchase agreement. As such, we currently do not intend to grant equity compensation to employees

under these plans.

In connection with our stock-based compensation plans for shares or awards issued prior to conservatorship,

we recorded compensation expense of $39 million, $52 million and $97 million for 2010, 2009 and 2008,

respectively.

Stock-Based Compensation Plans

The 1985 Employee Stock Purchase Plan (the “1985 Purchase Plan”) provided employees an opportunity to

purchase shares of Fannie Mae common stock at a discount to the fair market value of the stock during

specified purchase periods. Our Board of Directors sets the terms and conditions of offerings under the 1985

Purchase Plan, including the number of available shares and the size of the discount. There were no offerings

under the 1985 Purchase Plan in any year presented. The aggregate maximum number of shares of common

stock available for employee purchase is 50 million. Since inception, we have made available

38,039,742 shares for purchase by employees under this plan.

The Stock Compensation Plan of 2003 (the “2003 Plan”) is the successor to the Stock Compensation Plan of

1993 (the “1993 Plan”). The 2003 Plan enabled us to make stock awards in various forms and combinations,

including stock options, stock appreciation rights, restricted stock, restricted stock units, performance share

awards and stock bonus awards. The aggregate maximum number of shares of common stock available for

award to employees and non-management directors under the 2003 Plan is 40 million. Including the effects of

share cancellations, we have awarded 10,970,345 shares under this plan since its inception. The shares

awarded under the 2003 Plan were authorized and unissued shares, treasury shares or shares purchased on the

open market.

Restricted Stock Program

Under the 1993 and 2003 Plans, prior to conservatorship, employees could have received restricted stock

awards (“RSAs”) and, under the 2003 Plan, employees may have received restricted stock units (“RSUs”). The

type of award employees received under the 2003 Plan generally depended upon years of service and age at

the time of grant. Each RSU represented the right to receive a share of common stock at the time of vesting.

As a result, RSUs are generally similar to restricted stock, except that RSUs do not confer voting rights on

their holders. By contrast, holders of the RSAs do have voting rights. Vesting of the grants is based on

continued employment. In general, grants vest in equal annual installments over three or four years beginning

on the first anniversary of the date of grant. Based on the fair value of our common stock on the respective

F-87

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
grant dates, the fair value of restricted stock that vested in 2010, 2009 and 2008 was $51 million, $83 million,

and $103 million, respectively. The compensation expense related to restricted stock is based on the grant date

fair value of our common stock. We recorded compensation expense for these restricted stock grants of

$39 million, $52 million, and $97 million for 2010, 2009 and 2008, respectively.

The following table displays restricted stock activity for 2010, 2009 and 2008.

Number of

Shares

Weighted

Average

Fair

Value at

Grant Date

Number of

Shares

Weighted

Average

Fair

Value at

Grant Date

Number of

Shares

Weighted

Average

Fair

Value at

Grant Date

2010 2009 2008

For the Year Ended December 31,

(Shares in thousands)

Nonvested as of January 1 . . . . . . . . . . 2,873 $39.53 5,934 $41.19 4,375 $57.67

Granted . . . . . . . . . . . . . . . . . . . . . . . — — — — 4,518 31.96

Vested . . . . . . . . . . . . . . . . . . . . . . . . (1,199) 42.58 (1,858) 44.78 (1,768) 58.25

Forfeited . . . . . . . . . . . . . . . . . . . . . . (164) 37.34 (1,203) 39.61 (1,191) 41.58

Nonvested as of December 31 . . . . . . . 1,510 $37.34 2,873 $39.53 5,934 $41.19

The following table displays information related to unvested restricted stock as of December 31, 2010, 2009

and 2008.

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Unrecognized compensation cost . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19 $ 56 $ 148

Expected weighted-average life of unvested restricted stock . . . . . . . 1.0 years 1.6 years 2.4 years

Nonqualified Stock Options

Under the 2003 Plan and prior to conservatorship, we could have granted stock options. Generally, these

options may not be exercised until at least one year subsequent to the grant date, and the options expire ten

years from the date of grant. Typically, options vest 25% per year beginning on the first anniversary of the

date of grant. The exercise price of each option is equal to the fair market value of our common stock on the

date we grant the option.

The following table displays nonqualified stock option activity for 2010, 2009 and 2008.

Options

WeightedAverage

Exercise

Price

WeightedAverage

Fair

Value at

Grant Date Options

WeightedAverage

Exercise

Price

WeightedAverage

Fair

Value at

Grant Date Options

WeightedAverage

Exercise

Price

WeightedAverage

Fair

Value at

Grant Date

2010 2009 2008

For the Year Ended December 31,

Beginning balance, January 1 . . . . . . 8,759 $72.39 $23.60 12,293 $72.12 $23.62 17,031 $71.90 $23.49

Forfeited and/or expired . . . . . . . . . . (3,960) 69.15 25.26 (3,534) 71.45 23.66 (4,738) 71.19 23.13

Ending balance, December 31(1) . . . . 4,799 $75.07 $23.01 8,759 $72.39 $23.60 12,293 $72.12 $23.62

Options exercisable, December 31 . . . 4,799 $75.07 $23.01 8,759 $72.39 $23.60 12,291 $72.12 $23.62

(1) All options outstanding are fully vested.

F-88

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
14. Employee Retirement Benefits

We sponsor both defined benefit plans and defined contribution plans for our employees, as well as a

healthcare plan that provides certain health benefits for retired employees and their dependents. Net periodic

benefit costs for defined benefit and healthcare plans, which are determined on an actuarial basis, and

expenses for our defined contribution plans, are included in “Salaries and employee benefits expense” in our

consolidated statements of operations. For the years ended December 31, 2010, 2009 and 2008, we recognized

net periodic benefit costs for our defined benefit and healthcare plans and expenses for our defined

contributions plans of $112 million, $131 million, and $95 million, respectively.

Defined Benefit Pension Plans and Postretirement Health Care Plan

Our defined benefit pension plans include qualified and nonqualified noncontributory plans. Pension plan

benefits are based on years of credited service and a percentage of eligible compensation. In 2007, the defined

benefit pension plans were amended to cease benefits accruals for employees that did not meet certain criteria

to be grandfathered under the plan and to vest those employees in their frozen accruals.

We fund our qualified pension plan through employer contributions to a qualified irrevocable trust that is

maintained for the sole benefit of plan participants and their beneficiaries. Contributions to our qualified

pension plan are subject to a minimum funding requirement and a maximum funding limit under the

Employee Retirement Income Security Act of 1974 (“ERISA”) and IRS regulations.

Our nonqualified defined benefit pension plans consist of an Executive Pension Plan, Supplemental Pension

Plan and the Supplemental Pension Plan of 2003, which is a bonus-based plan. These plans cover certain

employees and supplement the benefits payable under the qualified pension plan. The Executive Pension Plan

was frozen in 2009. Benefits under the Executive Pension Plan are paid through a rabbi trust.

The Supplemental Pension Plan provides retirement benefits to employees who participate in our qualified

pension plan and do not receive a benefit from the Executive Pension Plan, and whose salary exceeds the

statutory compensation cap applicable to the qualified plan or whose benefit is limited by the statutory benefit

cap. Similarly, the Supplemental Pension Plan of 2003 provides additional benefits to our officers based on

eligible incentive compensation, if any, received by an officer, but the amount of incentive compensation

considered is limited to 50% of the officer’s base salary. We pay benefits for our unfunded defined benefit

Supplemental Pension Plans from our cash and cash equivalents.

We also sponsor a contributory postretirement Health Care Plan that covers substantially all regular full-time

employees who meet the applicable age and service requirements. We subsidize premium costs for medical

coverage for some employees who meet the age and service requirements. Employees hired after 2007 receive

access to our retiree medical plan, when eligible, but they do not qualify for the subsidy. We accrue and pay

the benefits for our unfunded postretirement Health Care Plan from our cash and cash equivalents.

F-89

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table displays components of our net periodic benefit cost for our qualified and nonqualified

pension plans and other postretirement plan for the years ended December 31, 2010, 2009 and 2008. The net

periodic benefit cost for each period is calculated based on assumptions at the end of the prior year.

Pension

Plans

Other PostRetirement

Plan

Pension

Plans

Other PostRetirement

Plan

Pension

Plans

Other PostRetirement

Plan

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Service cost. . . . . . . . . . . . . . . . . . . . . . . . . . $ 37 $ 6 $ 37 $ 5 $ 46 $ 5

Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . 66 9 62 9 58 9

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (51) (2) (22) (2) (59) 1

Net periodic benefit cost . . . . . . . . . . . . . . . $ 52 $13 $ 77 $12 $ 45 $15

Prior service costs, which are changes in benefit obligations due to plan amendments, are amortized over the

average remaining service period for active employees for our pension plans and prior to the full eligibility

date for the other postretirement Health Care Plan.

The following table displays amounts recorded in AOCI that have not been recognized as a component of net

periodic benefit cost for the years ended December 31, 2010 and 2009.

Pension

Plans

Other PostRetirement

Plan

Pension

Plans

Other PostRetirement

Plan

2010 2009

As of December 31,

(Dollars in millions)

Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $218 $ 42 $162 $ 39

Net prior service cost (credit) . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (56) 7 (61)

Net transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 4 — 5

Pre-tax amount recorded in AOCI . . . . . . . . . . . . . . . . . . . . . . . $224 $(10) $169 $(17)

After-tax amount recorded in AOCI(1) . . . . . . . . . . . . . . . . . . . . $224 $(10) $169 $(17)

(1) During 2008, we established a valuation allowance for our deferred tax assets, which has resulted in the reversal of the

tax benefit amounts recorded in AOCI for our pension and other postretirement plans. Refer to “Note 11, Income

Taxes” for additional information.

F-90

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table displays the changes in the pre-tax amounts recognized in AOCI for the years ended

December 31, 2010 and 2009.

Pension

Plans

Other PostRetirement

Plan

Pension

Plans

Other PostRetirement

Plan

2010 2009

For the Year Ended December 31,

(Dollars in millions)

Actuarial (Gain) Loss

Beginning balance, January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $162 $ 39 $276 $ 32

Current year actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 4 (92) 8

Actuarial gain due to curtailments . . . . . . . . . . . . . . . . . . . . . . . . . . — — (1) —

Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) (1) (21) (1)

Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $218 $ 42 $162 $ 39

Prior Service Cost (Credit)

Beginning balance, January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7 $(61) $ 10 $(66)

Prior service credit due to curtailments . . . . . . . . . . . . . . . . . . . . . . . — — (1) —

Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 5 (2) 5

Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6 $(56) $ 7 $(61)

The following table displays pre-tax amounts in AOCI as of December 31, 2010 that are expected to be

recognized as components of net periodic benefit cost in 2011.

Pension

Plans

Other PostRetirement

Plan

As of December 31, 2010

(Dollars in millions)

Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11 $ 2

Net prior service cost (credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (5)

Net transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12 $(2)

F-91

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table displays the status of our pension and other postretirement plans as of December 31, 2010

and 2009.

Pension

Plans

Other PostRetirement

Plan

Pension

Plans

Other PostRetirement

Plan

2010 2009

As of December 31,

(Dollars in millions)

Change in Benefit Obligation

Benefit obligation at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . $1,055 $ 166 $ 959 $ 151

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 6 37 5

Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 9 62 9

Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2 — 2

Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 4 29 8

Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (4) —

Benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31) (7) (28) (9)

Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,257 180 1,055 166

Change in Plan Assets

Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . 799 — 579 —

Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 — 166 —

Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 6 82 8

Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2 — 2

Benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31) (8) (28) (10)

Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . 942 — 799 —

Funded status at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (315) $(180) $ (256) $(166)

Amounts Recognized in our Consolidated Balance Sheets

Accrued benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (315) $(180) $ (256) $(166)

Accumulated other comprehensive (income) loss . . . . . . . . . . . . . . . . . . . . 224 (10) 169 (17)

Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (91) $(190) $ (87) $(183)

Actuarial gains or losses reflect annual changes in the amount of either the benefit obligation or the fair value

of plan assets that result from the difference between actual experience and projected amounts or from

changes in assumptions.

The following table displays the amount of the projected benefit obligation, accumulated benefit obligation

and fair value of plan assets for our pension plans as of December 31, 2010 and 2009.

2010 2009

As of December 31,

(Dollars in millions)

Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,257 $1,055

Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,111 926

Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 942 799

Contributions

Contributions to the qualified pension plan increase the plan assets while contributions to the unfunded plans

are made to fund current period benefit payments or to fulfill annual funding requirements. We were not

required to make minimum contributions to our qualified pension plan for each of the years in the three-year

period ended December 31, 2010 since we met the minimum funding requirements as prescribed by ERISA.

F-92

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
However, we did make a discretionary contribution to our qualified pension plan of $42 million, $76 million

and $80 million during 2010, 2009 and 2008, respectively.

During 2010, we contributed $42 million to our qualified pension plan, $7 million to our nonqualified pension

plans and $6 million to our other postretirement benefit plan. During 2011, we anticipate contributing

$56 million to our benefit plans, consisting of $41 million to our qualified pension plan, $7 million to our

nonqualified pension plans and $8 million to our other postretirement plan.

The fair value of plan assets of our funded qualified pension plan was less than our accumulated benefit

obligation by $5 million as of December 31, 2010 and greater than our accumulated benefit obligation by

$14 million as of December 31, 2009. There were no plan assets returned to us as of February 24, 2011 and

we do not expect any plan assets to be returned to us during the remainder of 2011.

Assumptions

Pension and other postretirement benefit amounts recognized in our consolidated financial statements are

determined on an actuarial basis using several different assumptions that are measured as of December 31,

2010, 2009 and 2008. The following table displays the actuarial assumptions for our plans used in determining

the net periodic benefit costs and the projected accumulated benefit obligations as of December 31, 2010,

2009 and 2008.

2010 2009 2008 2010 2009 2008

Pension Benefits Postretirement Benefits

As of December 31,

Weighted-average assumptions used to determine net periodic

benefit costs:

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.10% 6.15% 6.40% 5.75% 6.15% 6.40%

Average rate of increase in future compensation . . . . . . . . . . . . . . . . . 4.00 4.00 5.00

Expected long-term weighted-average rate of return on plan assets . . . . 7.50 7.50 7.50

Weighted-average assumptions used to determine benefit obligation

at year-end:

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.65% 6.10% 6.15% 5.40% 5.75% 6.15%

Average rate of increase in future compensation . . . . . . . . . . . . . . . . . 4.00 4.00 4.00

Health care cost trend rate assumed for next year:

Pre-65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.00% 8.00% 8.00%

Post-65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.00 8.00 8.00

Rate that cost trend rate gradually declines to and remains at:. . . . 5.00 5.00 5.00

Year that rate reaches the ultimate trend rate . . . . . . . . . . . . . . . . . . . 2018 2018 2015

As of December 31, 2010, the effect of a 1% increase or decrease in the assumed health care cost trend rate

would change the accumulated postretirement benefit obligation by $1 million.

We review our pension and other postretirement benefit plan assumptions on an annual basis. We calculate the

net periodic benefit cost each year based on assumptions established at the end of the previous calendar year,

unless we remeasure as a result of a curtailment. In determining our net periodic benefit costs, we assess the

discount rate to be used in the annual actuarial valuation of our pension and other postretirement benefit

obligations at year-end. We consider the current yields on high-quality, corporate fixed-income debt

instruments with maturities corresponding to the expected duration of our benefit obligations and supported by

cash flow matching analysis based on expected cash flows specific to the characteristics of our plan

participants, such as age and gender. As of December 31, 2010, the discount rate used to determine our

obligation decreased by 45 basis points for pension and 35 basis points for postretirement, reflecting a

F-93

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
corresponding rate decrease in corporate-fixed income debt instruments during 2010. We also assess the longterm rate of return on plan assets for our qualified pension plan. The return on asset assumption reflects our

expectations for plan-level returns over a term of approximately seven to ten years. Given the longer-term

nature of the assumption and a stable investment policy, it may or may not change from year to year.

However, if longer-term market cycles or other economic developments impact the global investment

environment, or asset allocation changes are made, we may adjust our assumption accordingly. The expected

long-term weighted-average rate of return on plan assets for 2010 remained unchanged from the 2009 rate of

7.5%. Changes in assumptions used in determining pension and other postretirement benefit plan expense

resulted in an increase in expense of $4 million for the years ended December 31, 2010 and a decrease in

expense of $4 million and $15 million in our consolidated statements of operations for the years ended

December 31, 2009 and 2008, respectively.

Qualified Pension Plan Assets

The following table displays our qualified pension plan assets by asset category at their fair value as of

December 31, 2010 and 2009. The fair value of assets in Level 1 have been determined based on quoted

prices of identical assets in active markets as of year end, while the fair value of assets in Level 2 have been

determined based on the net asset value per share of the investments as of year end. None of the fair values

for plan assets were determined by using significant unobservable inputs, or Level 3.

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2) Total

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2) Total

2010 2009

Fair Value Measurements as of December 31,

(Dollars in millions)

Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 13 $ 13 $ — $ 14 $ 14

Equity securities:

U.S. large-cap(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 329 — 329 408 — 408

U.S. mid/small cap(2) . . . . . . . . . . . . . . . . . . . . . . . 83 — 83 116 — 116

International(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . — 255 255 — 115 115

Fixed income securities:

Investment grade credit(4) . . . . . . . . . . . . . . . . . . . . — 262 262 — 146 146

Total plan assets at fair value . . . ................ $412 $530 $942 $524 $275 $799

(1) Consists of a publicly traded equity index fund that tracks the S&P 500.

(2) Consists of a publicly traded equity index fund that tracks all regularly traded U.S. stocks except those in the S&P

500.

(3) Consists of an international equity fund that tracks an index that consists of approximately 6,500 and 4,000 securities

for 2010 and 2009, respectively, across over 40 countries. Japan has the largest share with 15% in 2010.

(4) Consists of a bond fund that tracks a broadly diversified investment grade index that consists of approximately 2,700

issuances of investment grade bonds from diverse industries. International markets represent 19% of the fund.

Our investment strategy is to diversify our plan assets in order to reduce our concentration risk, reflect the

plan’s profile over time, and maintain an asset allocation that allows us to meet current and future benefit

obligations. The assets of the qualified pension plan consist primarily of exchange-listed stocks, held in

broadly diversified index funds. We also invest in a broadly diversified indexed fixed income account. In

addition, the plan holds liquid short-term investments that provide for monthly pension payments, plan

F-94

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
expenses and, from time to time, may represent uninvested contributions or reallocation of plan assets. The

target allocations for plan assets are from 70% to 80% for equity securities, 25% to 30% for fixed income

securities and 0% to 5% for all other types of investments. The plan fiduciary periodically assesses our asset

allocation to assure it is consistent with our plan objective.

Expected Benefit Payments

The following table displays the benefits we expect to pay in each of the next five years and in the aggregate

for the subsequent five years for our pension plans and other postretirement plan and are based on the same

assumptions used to measure our benefit obligation as of December 31, 2010.

Pension

Benefits

Before Medicare

Part D Subsidy

Medicare

Part D Subsidy

Other Postretirement Benefits

Expected Retirement Plan Benefit Payments

(Dollars in millions)

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33 $ 9 $1

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9 1

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 10 1

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 11 1

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 12 1

2016—2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348 73 8

Defined Contribution Plans

Retirement Savings Plan

The Retirement Savings Plan is a defined contribution plan that includes a 401(k) before-tax feature, a regular

after-tax feature and a Roth after-tax feature. Under the plan, eligible employees may allocate investment

balances to a variety of investment options.

We match employee contributions in cash up to 6% of eligible compensation (base salary, overtime pay and

eligible incentive compensation) for employees who are not active in our defined benefit pension plan and up

to 3% of eligible compensation (base salary only) for employees who are active in our defined benefit pension

plan. Matching contributions for employees who are not active in our defined benefit pension plan are 100%

vested and matching contributions for employees who are active in our defined benefit pension plan are fully

vested after five years of service.

All employees, with the exception of those who participated in the Executive Pension Plan, receive a 2%

contribution regardless of employee contributions to this plan. Participants are fully vested in this 2%

contribution after three years of service.

For the years ended December 31, 2010, 2009 and 2008, the maximum employee contribution as established

by the IRS was $16,500, $16,500 and $15,500, respectively, with additional “catch- up” contributions

permitted for participants aged 50 and older of $5,500, $5,500 and $5,000, respectively.

There was no option to invest directly in our common stock for the years ended December 31, 2010, 2009 and

2008. We recorded expense for this plan of $47 million, $42 million and $35 million for the years ended

December 31, 2010, 2009 and 2008, respectively.

F-95

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Supplemental Retirement Savings Plan

The Supplemental Retirement Savings Plan is an unfunded, nonqualified defined contribution plan. This plan

supplements our Retirement Savings Plan to provide benefits to employees who are not grandfathered under

our defined benefit pension plan and whose annual eligible earnings exceed the IRS annual limit on eligible

compensation for 401(k) plans.

We credit to the plan 8% of a participant’s eligible compensation that exceeds the IRS annual limit. Eligible

compensation consists of base salary plus eligible incentive compensation earned, if any, up to a combined

maximum of two times base salary. The 8% credit consists of (1) a 6% credit that vests immediately, and (2) a

2% credit that vests after three years of service.

For the years ended December 31, 2010, 2009 and 2008, we recognized expense related to this plan of less

than $1 million in each year.

Employee Stock Ownership Plan

During 2010, our Employee Stock Ownership Plan (“ESOP”) was terminated and amended to provide that all

distributions are to be made in cash. In addition, all Fannie Mae Common Stock in the ESOP was sold as part

of the plan termination. The assets of the ESOP will be distributed to participants following receipt of an IRS

determination letter regarding the tax qualification status of the ESOP.

15. Segment Reporting

Our three reportable segments are: Single-Family, Multifamily, and Capital Markets. In October 2010, we

began referring to our “HCD” business segment as our “Multifamily” business segment to better reflect the

segment’s focus on multifamily rental housing finance, especially affordable rentals, which is an increasingly

important part of our company’s mission. We use these three segments to generate revenue and manage

business risk, and each segment is based on the type of business activities it performs.

Segment Reporting for 2010

Our prospective adoption of the new accounting standards had a significant impact on the presentation and

comparability of our consolidated financial statements due to the consolidation of the substantial majority of

our single-class securitization trusts and the elimination of previously recorded deferred revenue from our

guaranty arrangements. We continue to manage Fannie Mae based on the same three business segments.

However, effective in 2010, we changed the presentation of segment financial information that is currently

evaluated by management.

Under the current segment reporting, the sum of the results for our three business segments does not equal our

consolidated statements of operations, as we separate the activity related to our consolidated trusts from the

results generated by our three segments. In addition, we include an eliminations/adjustments category to

reconcile our business segment results and the activity related to our consolidated trusts to our consolidated

statements of operations.

While some line items in our segment results were not impacted by either the change from the new accounting

standards or changes to our segment presentation, others were impacted significantly, which reduces the

comparability of our segment results with prior years. We have neither restated prior year results nor presented

current year results under the old presentation as we determined that it was impracticable to do so; therefore,

our segment results reported in the current period are not comparable with prior years.

F-96

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The section below provides a discussion of the three business segments and how each segment’s financial

information reconciles to our consolidated financial statements for those line items that were impacted

significantly as a result of changes to our segment presentation.

Single-Family

Revenue drivers for Single-Family did not change under our current method of segment reporting. Revenue for

our Single-Family business is from the guaranty fees the segment receives as compensation for assuming the

credit risk on the mortgage loans underlying single-family Fannie Mae MBS, most of which are held within

consolidated trusts, and on the single-family mortgage loans held in our mortgage portfolio. The primary

source of profit for the Single-Family segment is the difference between the guaranty fees earned and the costs

of providing the guaranty, including credit-related losses.

Our current segment reporting presentation differs from our consolidated balance sheets and statements of

operations in order to reflect the activities and results of the Single-Family segment. The significant

differences from the consolidated statements of operations are as follows:

• Guaranty fee income—Guaranty fee income reflects (1) the cash guaranty fees paid by MBS trusts to

Single-Family, (2) the amortization of deferred cash fees (both the previously recorded deferred cash fees

that were eliminated from our consolidated balance sheets at transition and deferred guaranty fees

received subsequent to transition that are currently recognized in our consolidated financial statements

through interest income), such as buy-ups, buy-downs, and risk-based pricing adjustments, and (3) the

guaranty fees from the Capital Markets group on single-family loans in our mortgage portfolio. To

reconcile to our consolidated statements of operations, we eliminate guaranty fees and the amortization of

deferred cash fees related to consolidated trusts as they are now reflected as a component of interest

income. However, such accounting continues to be reflected for the segment reporting presentation.

• Net interest income (expense)—Net interest expense within the Single-Family segment reflects interest

expense to reimburse Capital Markets and consolidated trusts for contractual interest not received on

mortgage loans, when interest income is no longer recognized in accordance with our nonaccrual

accounting policy in our consolidated statements of operations. Net interest income (expense), also

includes an allocated cost of capital charge among the three segments that is not included in net interest

income in the consolidated statement of operations.

Multifamily

Revenue drivers for Multifamily did not change under our current method of segment reporting. The primary

sources of revenue for our Multifamily business are (1) guaranty fees the segment receives as compensation

for assuming the credit risk on the mortgage loans underlying multifamily Fannie Mae MBS, most of which

are held within consolidated trusts, (2) guaranty fees on the multifamily mortgage loans held in our mortgage

portfolio, (3) transaction fees associated with the multifamily business and (4) bond credit enhancement fees.

Investments in rental and for-sale housing generate revenue and losses from operations and the eventual sale

of the assets. In the fourth quarter of 2009, we reduced the carrying value of our LIHTC investments to zero.

As a result, we no longer recognize net operating losses or other-than-temporary impairment on our LIHTC

investments. While the Multifamily guaranty business is similar to our Single-Family business, neither the

economic return nor the nature of the credit risk is similar to that of Single-Family.

F-97

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Our current segment reporting presentation differs from our consolidated balance sheets and statements of

operations in order to reflect the activities and results of the Multifamily segment. The significant differences

from the consolidated statements of operations are as follows:

• Guaranty fee income—Guaranty fee income reflects the cash guaranty fees paid by MBS trusts to

Multifamily and the guaranty fees from the Capital Markets group on multifamily loans in Fannie Mae’s

portfolio. To reconcile to our consolidated statements of operations, we eliminate guaranty fees related to

consolidated trusts.

• Income (losses) from partnership investments—Income (losses) from partnership investments primarily

reflect losses on investments in affordable rental and for-sale housing partnerships measured under the

equity method of accounting. To reconcile to our consolidated statements of operations, we adjust the

losses to reflect the consolidation of certain partnership investments.

Capital Markets Group

Revenue drivers for Capital Markets did not change under our current method of segment reporting. Our

Capital Markets group generates most of its revenue from the difference, or spread, between the interest we

earn on our mortgage assets and the interest we pay on the debt we issue to fund these assets. We refer to this

spread as our net interest yield. Changes in the fair value of the derivative instruments and trading securities

we hold impact the net income or loss reported by the Capital Markets group. The net income or loss reported

by our Capital Markets group is also affected by the impairment of AFS securities.

Our current segment reporting presentation differs from our consolidated balance sheets and statements of

operations in order to reflect the activities and results of the Capital Markets group. The significant differences

from the consolidated statements of operations are as follows:

• Net interest income—Net interest income reflects the interest income on mortgage loans and securities

owned by Fannie Mae and interest expense on funding debt issued by Fannie Mae, including accretion

and amortization of any cost basis adjustments. To reconcile to our consolidated statements of operations,

we adjust for the impact of consolidated trusts and intercompany eliminations as follows:

• Interest income: Interest income consists of interest on the segment’s interest-earning assets, which

differs from interest-earning assets in our consolidated balance sheets. We exclude loans and securities

that underlie the consolidated trusts from our Capital Markets group balance sheets. The net interest

income reported by the Capital Markets group excludes the interest income earned on assets held by

consolidated trusts. As a result, we report interest income and amortization of cost basis adjustments

only on securities and loans that are held in our portfolio. For mortgage loans held in our portfolio,

when interest income is no longer recognized in accordance with our nonaccrual accounting policy, the

Capital Markets group recognizes interest income for reimbursement from Single-Family and

Multifamily for the contractual interest due under the terms of our intracompany guaranty arrangement.

• Interest expense: Interest expense consists of contractual interest on the Capital Markets group’s

interest-bearing liabilities, including the accretion and amortization of any cost basis adjustments. It

excludes interest expense on debt issued by consolidated trusts. Therefore, the interest expense

recognized on the Capital Markets group income statement is limited to our funding debt, which is

reported as “Debt of Fannie Mae” in our consolidated balance sheets. Net interest expense also includes

an allocated cost of capital charge among the three business segments that is not included in net

interest income in our consolidated statements of operations.

• Investment gains or losses, net—Investment gains or losses, net reflects the gains and losses on

securitizations and sales of available-for-sale securities from our portfolio. To reconcile to our

F-98

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
consolidated statements of operations, we eliminate gains and losses on securities that have been

consolidated to loans.

• Fair value gains or losses, net—Fair value gains or losses, net for the Capital Markets group includes

derivative gains and losses, foreign exchange gains and losses, and the fair value gains and losses on

certain debt securities in our portfolio. To reconcile to our consolidated statements of operations, we

eliminate fair value gains or losses on Fannie Mae MBS that have been consolidated to loans.

• Other expenses, net—Debt extinguishment gains or losses recorded on the segment statements of

operations relate exclusively to our funding debt, which is reported as “Debt of Fannie Mae” on our

consolidated balance sheets. To reconcile to our consolidated statements of operations, we include debt

extinguishment gains or losses related to consolidated trusts to arrive at our total recognized debt

extinguishment gains or losses.

Segment Allocations and Results

Our segment financial results include directly attributable revenues and expenses. Additionally, we allocate to

each of our segments: (1) capital using FHFA minimum capital requirements adjusted for over- or undercapitalization; (2) indirect administrative costs; and (3) a provision or benefit for federal income taxes. In

addition, we allocate intracompany guaranty fee income as a charge from the Single-Family and Multifamily

segments to Capital Markets for managing the credit risk on mortgage loans held by the Capital Markets

group.

With the adoption of the new accounting standards, we have prospectively revised the presentation of our

results for these segments to better reflect how we operate and oversee these businesses.

F-99

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table displays our segment results under our current segment reporting presentation for the year

ended December 31, 2010.

SingleFamily MultifamilyCapital

Markets

Consolidated

Trusts(1)

Eliminations/

Adjustments(2)

Total

Results

Business Segments Other Activity/Reconciling Items

For the Year Ended December 31, 2010

(Dollars in millions)

Net interest income (expense)(3) ...... $ (5,386) $ 3 $14,321 $ 5,073 $ 2,398 $ 16,409

Provision for loan losses........... (24,503) (199) — — — (24,702)

Net interest income (expense) after

provision for loan losses . . ....... (29,889) (196) 14,321 5,073 2,398 (8,293)

Guaranty fee income (expense)(4) . . . . . 7,206 791 (1,440) (4,525) (1,830) 202

Investment gains (losses), net ....... 9 6 4,047 (418) (3,298) 346

Net other-than-temporary impairments . . — — (720) (2) — (722)

Fair value gains (losses), net . . . . . . . . — — 239 (155) (595) (511)

Debt extinguishment losses, net ...... — — (459) (109) — (568)

Losses from partnership investments . . . — (70) — — (4) (74)

Fee and other income (expense)(5) . . . . 306 146 519 (88) (1) 882

Administrative expenses ........... (1,628) (384) (585) — — (2,597)

Benefit (provision) for guaranty losses. . (237) 43 — — — (194)

Foreclosed property expense . ....... (1,680) (38) — — — (1,718)

Other income (expenses) . . . ....... (836) (68) 125 — (74) (853)

Income (loss) before federal income

taxes ...................... (26,749) 230 16,047 (224) (3,404) (14,100)

Benefit (provision) for federal income

taxes . . . . . . . . . . . . . . . . . . . . . . 69 (14) 27 — — 82

Net income (loss) . ............ (26,680) 216 16,074 (224) (3,404) (14,018)

Less: Net loss attributable to

noncontrolling interests . ....... — — — — 4 4

Net income (loss) attributable to

Fannie Mae ................ $(26,680) $ 216 $16,074 $ (224) $(3,400) $(14,014)

(1) Column represents activity of consolidated trusts and it also includes the issuances and extinguishment of debt due to

sales and purchases of our MBS.

(2) Column represents adjustments during the period used to reconcile segment results to consolidated results which

include the elimination of intersegment transactions occurring between the three operating segments and our

consolidated trusts.

(3) Includes cost of capital charge among our three business segments.

(4) The charge to Capital Markets represents an intracompany guaranty fee expense allocated to Capital Markets from

Single-Family and Multifamily for absorbing the credit risk on mortgage loans held in our portfolio.

(5) Fee and other income for Single-Family and Multifamily segments include trust management income.

F-100

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following tables display our segment results under our previous segment reporting presentation for the

years ended December 31, 2009 and 2008.

SingleFamily MultifamilyCapital

Markets Total

For the Year Ended December 31, 2009

(Dollars in millions)

Net interest income (expense)(1) . . . . . . . . . . . . . . . . . . . . . . $ 428 $ (193) $14,275 $ 14,510

Guaranty fee income (expense)(2) . . . . . . . . . . . . . . . . . . . . . 8,002 675 (1,466) 7,211

Investment gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . (2) — 1,460 1,458

Net other-than-temporary impairments . . . . . . . . . . . . . . . . . . — — (9,861) (9,861)

Fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (2,811) (2,811)

Debt extinguishment losses, net . . . . . . . . . . . . . . . . . . . . . . . — — (325) (325)

Losses from partnership investments . . . . . . . . . . . . . . . . . . . — (6,735) — (6,735)

Fee and other income(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354 100 319 773

Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,419) (363) (425) (2,207)

Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . (70,463) (2,163) — (72,626)

Foreclosed property expense . . . . . . . . . . . . . . . . . . . . . . . . . (857) (53) — (910)

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,216) (38) (230) (1,484)

Income (loss) before federal income taxes . . . . . . . . . . . . . . . (65,173) (8,770) 936 (73,007)

Benefit (provision) for federal income taxes . . . . . . . . . . . . . . 1,375 (311) (79) 985

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (63,798) (9,081) 857 (72,022)

Less: Net loss attributable to noncontrolling interest . . . . . . . — 53 — 53

Net income (loss) attributable to Fannie Mae . . . . . . . . . . . . $(63,798) $(9,028) $ 857 $(71,969)

(1) Includes cost of capital charge.

(2) The charge to Capital Markets represents an intercompany guaranty fee expense allocated to Capital Markets from

Single-Family and Multifamily for absorbing the credit risk on mortgage loans held in our portfolio.

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

F-101

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SingleFamily Multifamily

Capital

Markets Total

For the Year Ended December 31, 2008

(Dollars in millions)

Net interest income (expense) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 461 $ (343) $ 8,664 $ 8,782

Guaranty fee income (expense)(2) ............................. 8,390 633 (1,402) 7,621

Investment losses, net . ................................... (72) — (174) (246)

Net other-than-temporary impairments ......................... — — (6,974) (6,974)

Fair value losses, net . . ................................... — — (20,129) (20,129)

Debt extinguishment losses, net .............................. — — (222) (222)

Losses from partnership investments . . ......................... — (1,554) — (1,554)

Fee and other income (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583 186 264 1,033

Administrative expenses................................... (1,127) (404) (448) (1,979)

Provision for credit losses.................................. (27,881) (70) — (27,951)

Foreclosed property expense . . .............................. (1,844) (14) — (1,858)

Other expenses . ........................................ (823) (133) (137) (1,093)

Loss before federal income taxes and extraordinary losses. . . .......... (22,313) (1,699) (20,558) (44,570)

Provision for federal income taxes . . . ......................... (4,788) (511) (8,450) (13,749)

Loss before extraordinary losses ............................. (27,101) (2,210) (29,008) (58,319)

Extraordinary losses, net of tax effect . ......................... — — (409) (409)

Net loss............................................ (27,101) (2,210) (29,417) (58,728)

Less: Net loss attributable to the noncontrolling interest . . . . . . . . . . . . — 21 — 21

Net loss attributable to Fannie Mae . ......................... $(27,101) $(2,189) $(29,417) $(58,707)

(1) Includes cost of capital charge.

(2) The charge to Capital Markets represents an intercompany guaranty fee expense allocated to Capital Markets from

Single-Family and Multifamily for absorbing the credit risk on mortgage loans held in our portfolio.

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

The following table displays total assets by segment as of December 31, 2010 and 2009.

2010 2009

As of December 31,

(Dollars in millions)

Single-Family(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,843 $ 19,991

Multifamily(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,881 5,698

Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 873,052 843,452

Consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,673,937 —

Eliminations/adjustments(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (344,741) —

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,221,972 $869,141

(1) Beginning in 2010, the allowance for loan losses, allowance for accrued interest receivable and fair value losses

previously recognized on acquired credit impaired loans are not treated as assets for Single-Family and Multifamily

segment reporting purposes because these allowances and losses relate to loan assets that are held by the Capital

Markets segment and consolidated trusts.

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

from and have no assets in geographic locations other than the United States and its territories.

F-102

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16. Equity (Deficit)

Common Stock

Shares of common stock outstanding, net of shares held as treasury stock, totaled 1.1 billion as of both

December 31, 2010 and 2009. In 2008, we received gross proceeds of $2.6 billion from the issuance of

94 million new shares of no par value common stock with a stated value of $0.5250 per share.

During the conservatorship, the rights and powers of shareholders are suspended. Accordingly, our common

shareholders have no ability to elect directors or to vote on other matters during the conservatorship unless

FHFA elects to delegate this authority to them. The senior preferred stock purchase agreement with Treasury

prohibits the payment of dividends on common stock without the prior written consent of Treasury. The

conservator also has eliminated common stock dividends. In addition, we issued a warrant to Treasury that

provides Treasury with the right to purchase for a nominal price shares of our common stock equal to 79.9%

of the total number of shares of common stock outstanding on a fully diluted basis on the date of exercise,

which would substantially dilute the ownership in Fannie Mae of our common stockholders at the time of

exercise. Refer to “Senior Preferred Stock and Common Stock Warrant” section below.

F-103

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Preferred Stock

The following table displays our senior preferred stock and preferred stock outstanding as of December 31,

2010 and 2009.

Title Issue Date Shares Amount Shares Amount

Stated

Value

per share

Annual

Dividend

Rate as of

December 31,

2010

Redeemable on

or After

2010 2009

Issued and Outstanding as of

December 31,

(Dollars and shares in millions, except per share amounts)

Senior Preferred Stock

Series 2008-2 . ........... September 8, 2008 1 $88,600 1 $60,900 $ 88,600(1) 10.000%(2) (3)

Total . ................ 1 $88,600 1 $60,900

Preferred Stock

Series D ............... September 30, 1998 3 $ 150 3 $ 150 $ 50 5.250% September 30, 1999

Series E ............... April 15, 1999 3 150 3 150 50 5.100 April 15, 2004

Series F ............... March 20, 2000 14 690 14 690 50 0.890(4) March 31, 2002(5)

Series G ............... August 8, 2000 6 288 6 288 50 0.270(6) September 30, 2002(5)

Series H ............... April 6, 2001 8 400 8 400 50 5.810 April 6, 2006

Series I ................ October 28, 2002 6 300 6 300 50 5.375 October 28, 2007

Series L ............... April 29, 2003 7 345 7 345 50 5.125 April 29, 2008

Series M ............... June 10, 2003 9 460 9 460 50 4.750 June 10, 2008

Series N ............... September 25, 2003 5 225 5 225 50 5.500 September 25, 2008

Series O ............... December 30, 2004 50 2,500 50 2,500 50 7.000(7) December 31, 2007

Convertible

Series 2004-1(8) ......... December 30, 2004 — 2,492 — 2,492 100,000 5.375 January 5, 2008

Series P ............... September 28, 2007 40 1,000 40 1,000 25 4.500(9) September 30, 2012

Series Q ............... October 4, 2007 15 375 15 375 25 6.750 September 30, 2010

Series R(10) ............. November 21, 2007 21 530 21 530 25 7.625 November 21, 2012

Series S ............... December 11, 2007 280 7,000 280 7,000 25 7.750(11) December 31, 2010(12)

Mandatory

Convertible

Series 2008-1 . . . . . . . . . . May 14, 2008 21 1,074 24 1,218 50 8.750 N/A

Series T(13) . . . . . . . . . . . . . May 19, 2008 89 2,225 89 2,225 25 8.250 May 20, 2013

Total . . . . . . . . . . . . . . . . 577 $20,204 580 $20,348

(1) Initial Stated Value per share was $1,000. Based on our draws of funds under the Senior Preferred Stock Variable

Liquidation Preference agreement with Treasury, the Stated Value per share on December 31, 2010 was $88,600.

(2) Rate effective September 9, 2008. If at any time we fail to pay cash dividends in a timely manner, then immediately

following such failure and for all dividend periods thereafter until the dividend period following the date on which

we have paid in cash full cumulative dividends (including any unpaid dividends added to the liquidation preference),

the dividend rate will be 12% per year.

(3) Any liquidation preference of our senior preferred stock in excess of $1.0 billion may be repaid through an issuance

of common or preferred stock. The initial $1.0 billion investment may be repaid only in conjunction with termination

of the senior preferred stock purchase agreement. The provisions for termination under the senior preferred stock

purchase agreement are very restrictive and cannot occur while we are in conservatorship.

(4) Rate effective March 31, 2010. Variable dividend rate resets every two years at a per annum rate equal to the twoyear Maturity U.S. Treasury Rate (“CMT”) minus 0.16% with a cap of 11% per year. As of December 31, 2010, the

annual dividend rate was 0.89%.

F-104

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(5) Represents initial call date. Redeemable every two years thereafter.

(6) Rate effective September 30, 2010. Variable dividend rate resets every two years at a per annum rate equal to the

two-year CMT rate minus 0.18% with a cap of 11% per year. As of December 31, 2010, the annual dividend rate was

0.27%.

(7) Rate effective December 31, 2010. Variable dividend rate resets quarterly thereafter at a per annum rate equal to the

greater of 7.00% and 10-year CMT rate plus 2.375%. As of December 31, 2010, the annual dividend rate was 7.00%.

(8) Issued and outstanding shares were 24,922 both as of December 31, 2010 and 2009, respectively.

(9) Rate effective December 31, 2010. Variable dividend rate resets quarterly thereafter at a per annum rate equal to the

greater of 4.50% and 3-Month LIBOR plus 0.75%. As of December 31, 2010, the annual dividend rate was 4.50%.

(10) On November 21, 2007, we issued 20 million shares of preferred stock in the amount of $500 million. Subsequent to

the initial issuance, we issued an additional 1.2 million shares in the amount of $30 million on December 14, 2007

under the same terms as the initial issuance.

(11) Rate effective December 31, 2010. Variable dividend rate resets quarterly thereafter at a per annum rate equal to the

greater of 7.75% and 3-Month LIBOR plus 4.23%. As of December 31, 2010, the annual dividend rate was 7.75%.

(12) Represents initial call date. Redeemable every five years thereafter.

(13) On May 19, 2008, we issued 80 million shares of preferred stock in the amount of $2.0 billion. Subsequent to the

initial issuance, we issued an additional 8 million shares in the amount of $200 million on May 22, 2008 and one

million shares in the amount of $25 million on June 4, 2008 under the same terms as the initial issuance.

As described under “Senior Preferred Stock and Common Stock Warrant” we issued senior preferred stock

that ranks senior to all other series of preferred stock as to both dividends and distributions upon dissolution,

liquidation or winding up of the company. During the conservatorship, the rights and powers of preferred

stockholders (other than holders of senior preferred stock) are suspended. The senior preferred stock purchase

agreement with Treasury also prohibits the payment of dividends on preferred stock (other than the senior

preferred stock) without the prior written consent of Treasury. The conservator also has eliminated preferred

stock dividends, other than dividends on the senior preferred stock.

Each series of our preferred stock has no par value, is non-participating, is non-voting and has a liquidation

preference equal to the stated value per share. None of our preferred stock is convertible into or exchangeable

for any of our other stock or obligations, with the exception of the Convertible Series 2004-1 and Noncumulative Mandatory Convertible Series 2008-1.

Shares of the Convertible Series 2004-1 Preferred Stock are convertible at any time, at the option of the

holders, into shares of Fannie Mae common stock at a conversion price of $94.31 per share of common stock

(equivalent to a conversion rate of 1,060.3329 shares of common stock for each share of Series 2004-1

Preferred Stock). The conversion price is adjustable, as necessary, to maintain the stated conversion rate into

common stock. Events which may trigger an adjustment to the conversion price include certain changes in our

common stock dividend rate, subdivisions of our outstanding common stock into a greater number of shares,

combinations of our outstanding common stock into a smaller number of shares and issuances of any shares

by reclassification of our common stock. No such events have occurred.

Holders of preferred stock (other than the senior preferred stock are entitled to receive non-cumulative,

quarterly dividends when, and if, declared by our Board of Directors, but have no right to require redemption

of any shares of preferred stock. Payment of dividends on preferred stock (other than the senior preferred

stock) is not mandatory, but has priority over payment of dividends on common stock, which are also declared

by the Board of Directors. If dividends on the preferred stock are not paid or set aside for payment for a given

dividend period, dividends may not be paid on our common stock for that period. For the year ended

December 31, 2008, dividends declared on preferred stock (excluding the senior preferred stock) were

$1.0 billion. There were no dividends declared or paid on preferred stock (other than the senior preferred

stock) for the year ended December 31, 2010 or 2009.

F-105

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
After a specified period, we have the option to redeem preferred stock (other than the senior preferred stock)

at its redemption price plus the dividend (whether or not declared) for the then-current period accrued to, but

excluding, the date of redemption. The redemption price is equal to the stated value for all issues of preferred

stock except Series O, which has a redemption price of $50 to $52.50 depending on the year of redemption,

Convertible Series 2004-1, which has a redemption price of $105,000 per share, and Mandatory Convertible

Series 2008-1 which is not redeemable.

Our preferred stock is traded in the over-the-counter market.

Issuance of Preferred Stock

On May 14, 2008, we received gross proceeds of $2.6 billion from the issuance of 52 million shares of 8.75%

Non-Cumulative Mandatory Convertible Preferred Stock, Series 2008-1, with a stated value of $50 per share.

Each share has a liquidation preference equal to its stated value of $50 per share plus an amount equal to the

dividend for the then-current quarterly dividend period. The Mandatory Convertible Series 2008-1 Preferred

Stock is not redeemable by us. On May 13, 2011, the mandatory conversion date, each share of the Preferred

Stock will automatically convert into between 1.5408 and 1.8182 shares of our common stock, subject to antidilution adjustments, depending on the average of the closing prices per share of our common stock for each

of the 20 consecutive trading days ending on the third trading day prior to such date. At any time prior to the

mandatory conversion date, holders may elect to convert each share of our Preferred Stock into a minimum of

1.5408 shares of common stock, subject to anti-dilution adjustments. The Mandatory Convertible

Series 2008-1 shares are considered participating securities for purposes of calculating earnings per share.

On May 19, 2008, we received gross proceeds of $2.0 billion from the issuance of 80 million shares of 8.25%

Non-Cumulative Preferred Stock, Series T, with a stated value of $25 per share. Subsequent to the initial

issuance, we received gross proceeds of $200 million from the additional issuance of 8 million shares on

May 22, 2008 and $25 million from the additional issuance of one million shares on June 4, 2008. Each share

has a liquidation preference equal to its stated value of $25 per share plus accrued dividends for the thencurrent quarterly dividend period. The Series T Preferred Stock may be redeemed, at our option, on or after

May 20, 2013. Pursuant to the covenants set forth in the senior preferred stock purchase agreement described

below, we must obtain the prior written consent of Treasury in order to exercise our option to redeem the

Series T Preferred Stock.

Conversions of Preferred Stock to Common Stock

For the year ended December 31, 2010, 2,867,318 shares of Mandatory Convertible Series 2008-1 were

converted to 4,417,947 shares of common stock. For the year ended December 31, 2009, 17,335,866 shares of

Mandatory Convertible Series 2008-1 were converted to 26,711,068 shares of common stock. Also 78 shares

of Mandatory Convertible Series 2004-1 were converted to 82,705 shares of common stock. For the year

ended December 31, 2008, 10,053,599 shares of Mandatory Convertible Series 2008-1 were converted to

15,490,568 shares of common stock.

Senior Preferred Stock and Common Stock Warrant

On September 8, 2008, we issued one million shares of Variable Liquidation Preference Senior Preferred

Stock, Series 2008-2 (“senior preferred stock”), with an aggregate stated value and initial liquidation

preference of $1.0 billion. On September 7, 2008, we issued a warrant to purchase common stock to Treasury.

The warrant gives Treasury the right to purchase shares of our common stock equal to 79.9% of the total

number of shares of common stock outstanding on a fully diluted basis on the date of exercise. The senior

preferred stock and the warrant were issued in consideration for the initial commitment from Treasury to

provide up to $100.0 billion in cash to us under the terms set forth in the senior preferred stock purchase

F-106

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
agreement prior to subsequent amendments. We did not receive any cash proceeds as a result of issuing these

shares or the warrant. We have assigned a value of $4.5 billion to Treasury’s commitment, which has been

recorded as a reduction to additional paid-in-capital and was partially offset by the aggregate fair value of the

warrant. There was no impact to the total balance of stockholders’ equity (deficit) as a result of the issuance

as reported in our consolidated statement of changes in stockholders’ equity (deficit).

Variable Liquidation Preference Senior Preferred Stock, Series 2008-2

Shares of the senior preferred stock have no par value and have a stated value and initial liquidation

preference equal to $1,000 per share. The liquidation preference of the senior preferred stock is subject to

adjustment. To the extent dividends are not paid in cash for any dividend period, the dividends will accrue and

be added to the liquidation preference of the senior preferred stock. In addition, any amounts paid by Treasury

to us pursuant to Treasury’s funding commitment provided in the senior preferred stock purchase agreement

and any quarterly commitment fee payable under the senior preferred stock purchase agreement that is not

paid in cash to or waived by Treasury will be added to the liquidation preference of the senior preferred stock.

As of February 24, 2011, we have received a total of $87.6 billion under Treasury’s funding commitment and

the Acting Director of FHFA has submitted a request for an additional $2.6 billion from Treasury to eliminate

our net worth deficit as of December 31, 2010.

Holders of the senior preferred stock are entitled to receive when, as and if declared by our Board of

Directors, out of legally available funds, cumulative quarterly cash dividends at an annual rate of 10% per year

based on the then-current liquidation preference of the senior preferred stock. As conservator and under our

Charter, FHFA also has authority to declare dividends on the senior preferred stock. If at any time we fail to

pay cash dividends in a timely manner, then immediately following such failure and for all dividend periods

thereafter until the dividend period following the date on which we have paid in cash full cumulative

dividends (including any unpaid dividends added to the liquidation preference), the dividend rate will be 12%

per year. Dividends declared and paid on our senior preferred stock were $7.7 billion, $2.5 billion and

$31 million for the years ended December 31, 2010, 2009 and 2008, respectively.

The senior preferred stock ranks prior to our common stock and all other outstanding series of our preferred

stock as to both dividends and rights upon liquidation. We may not declare or pay dividends on, make

distributions with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to,

any common stock or other securities ranking junior to the senior preferred stock without the prior written

consent of Treasury. Shares of the senior preferred stock are not convertible. Shares of the senior preferred

stock have no general or special voting rights, other than those set forth in the certificate of designation for the

senior preferred stock or otherwise required by law. The consent of holders of at least two-thirds of all

outstanding shares of senior preferred stock is generally required to amend the terms of the senior preferred

stock or to create any class or series of stock that ranks prior to or on parity with the senior preferred stock.

We are not permitted to redeem the senior preferred stock in full prior to the termination of Treasury’s funding

commitment under the senior preferred stock purchase agreement. However, we are permitted to pay down the

liquidation preference of the outstanding shares of senior preferred stock to the extent of (1) accrued and

unpaid dividends previously added to the liquidation preference and not previously paid down; and

(2) quarterly commitment fees previously added to the liquidation preference and not previously paid down. In

addition, to the extent we issue any shares of capital stock for cash at any time the senior preferred stock is

outstanding (which requires Treasury’s approval), we are required to use the net proceeds of the issuance to

pay down the liquidation preference of the senior preferred stock; however, the liquidation preference of each

share of senior preferred stock may not be paid down below $1,000 per share prior to the termination of

Treasury’s funding commitment. Following the termination of Treasury’s funding commitment, we may pay

down the liquidation preference of all outstanding shares of senior preferred stock at any time, in whole or in

F-107

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
part. If we pay down the liquidation preference of each outstanding share of senior preferred stock in full, the

shares will be considered redeemed as of the payment date.

Common Stock Warrant

The warrant gives Treasury the right to purchase shares of our common stock equal to 79.9% of the total

number of shares of common stock outstanding on a fully diluted basis on the date of exercise. The warrant

may be exercised in whole or in part at any time on or before September 7, 2028, by delivery to Fannie Mae

of: (a) a notice of exercise; (b) payment of the exercise price of $0.00001 per share; and (c) the warrant. If the

market price of one share of common stock is greater than the exercise price, in lieu of exercising the warrant

by payment of the exercise price, Treasury may elect to receive shares equal to the value of the warrant (or

portion thereof being canceled) pursuant to the formula specified in the warrant. Upon exercise of the warrant,

Treasury may assign the right to receive the shares of common stock issuable upon exercise to any other

person. We recorded the aggregate fair value of the warrant of $3.5 billion as a component of additional

paid-in-capital upon issuance of the warrant. If the warrant is exercised, the stated value of the common stock

issued will be reclassified as “Common stock” in our consolidated balance sheet. As of February 24, 2011,

Treasury had not exercised the warrant.

Senior Preferred Stock Purchase Agreement with Treasury

Commitment Fee

We were scheduled to begin paying Treasury a quarterly commitment fee beginning on March 31, 2011. On

December 29, 2010, FHFA was notified by Treasury that Treasury was waiving the commitment fee for the

first quarter of 2011 due to adverse conditions in the U.S. mortgage market and because Treasury believed that

imposing the commitment fee would not generate increased compensation for taxpayers. Treasury further

noted that it would reevaluate matters in the next calendar quarter. We may elect to pay the periodic

commitment fee in cash or add the amount of the fee to the liquidation preference of the senior preferred

stock.

Funding Commitment

Treasury’s funding commitment under the senior preferred stock purchase agreement is intended to ensure that

we maintain a positive net worth. Treasury’s maximum funding commitment to us prior to a December 2009

amendment of the senior preferred stock purchase agreement was $200 billion. The amendment to the

agreement stipulates that the cap on Treasury’s funding commitment to us under the senior preferred stock

purchase agreement will increase as necessary to accommodate any net worth deficits for calendar quarters in

2010 through 2012. For any net worth deficits as of December 31, 2012, Treasury’s remaining funding

commitment will be $124.8 billion ($200 billion less $75.2 billion cumulatively drawn through March 31,

2010) less the smaller of either (a) our positive net worth as of December 31, 2012 or (b) our cumulative

draws from Treasury for the calendar quarters in 2010 through 2012. The senior preferred stock purchase

agreement provides that the deficiency amount will be calculated differently if we become subject to

receivership or other liquidation process. The deficiency amount may be increased above the otherwise

applicable amount upon our mutual written agreement with Treasury. In addition, if the Director of FHFA

determines that the Director will be mandated by law to appoint a receiver for us unless our capital is

increased by receiving funds under the commitment in an amount up to the deficiency amount (subject to the

maximum amount that may be funded under the agreement), then FHFA, in its capacity as our conservator,

may request that Treasury provide funds to us in such amount. The senior preferred stock purchase agreement

also provides that, if we have a deficiency amount as of the date of completion of the liquidation of our assets,

we may request funds from Treasury in an amount up to the deficiency amount (subject to the maximum

F-108

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
amount that may be funded under the agreement). Any amounts that we draw under the senior preferred stock

purchase agreement will be added to the liquidation preference of the senior preferred stock. No additional

shares of senior preferred stock are required to be issued under the senior preferred stock purchase agreement.

Covenants

The senior preferred stock purchase agreement, as amended, provides that, until the senior preferred stock is

repaid or redeemed in full, we may not, without the prior written consent of Treasury:

• Declare or pay any dividend (preferred or otherwise) or make any other distribution with respect to any

Fannie Mae equity securities (other than with respect to the senior preferred stock or warrant);

• Redeem, purchase, retire or otherwise acquire any Fannie Mae equity securities (other than the senior

preferred stock or warrant);

• Sell or issue any Fannie Mae equity securities (other than the senior preferred stock, the warrant and the

common stock issuable upon exercise of the warrant and other than as required by the terms of any

binding agreement in effect on the date of the senior preferred stock purchase agreement);

• Terminate the conservatorship (other than in connection with a receivership);

• Sell, transfer, lease or otherwise dispose of any assets, other than dispositions for fair market value: (a) to

a limited life regulated entity (in the context of receivership); (b) of assets and properties in the ordinary

course of business, consistent with past practice; (c) in connection with a liquidation of Fannie Mae by a

receiver; (d) of cash or cash equivalents for cash or cash equivalents; or (e) to the extent necessary to

comply with the covenant described below relating to the reduction of our mortgage assets beginning in

2010;

• Incur indebtedness that would result in our aggregate indebtedness exceeding $1,080 billion through

December 31, 2010. Beginning in 2011 and each year thereafter, our debt cap will equal 120% of the

amount of mortgage assets we are allowed to hold on December 31 of the immediately preceding

calendar year;

• Issue any subordinated debt;

• Enter into a corporate reorganization, recapitalization, merger, acquisition or similar event; or

• Engage in transactions with affiliates unless the transaction is (a) pursuant to the senior preferred stock

purchase agreement, the senior preferred stock or the warrant, (b) upon arm’s-length terms or (c) a

transaction undertaken in the ordinary course or pursuant to a contractual obligation or customary

employment arrangement in existence on the date of the senior preferred stock purchase agreement.

The agreement also provides that we may not own mortgage assets in excess of $810 billion as of

December 31, 2010. We are also required to reduce our mortgage assets, beginning on December 31, 2010 and

each year thereafter, to 90% of the amount of the mortgage assets we were allowed to hold as of December 31

of the immediately preceding calendar year, until the amount of our mortgage assets reaches $250 billion.

Under the agreement, the effect of changes in generally accepted accounting principles that occurred

subsequent to the date of the agreement and that require us to recognize additional mortgage assets on our

consolidated balance sheets were not considered for purposes of evaluating our compliance with the limitation

on the amount of mortgage assets we may own. In addition, the definition of indebtedness in the agreement

was revised to clarify that it also does not give effect to any change that may be made in respect of the FASB

guidance on accounting for transfers of financial assets or any similar accounting standard.

F-109

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In addition, the agreement provides that we may not enter into any new compensation arrangements or

increase amounts or benefits payable under existing compensation arrangements with our named executive

officers (as defined by SEC rules) without the consent of the Director of FHFA, in consultation with the

Secretary of the Treasury. As of December 31, 2010, we were in compliance with the senior preferred stock

purchase agreement covenants.

Termination Provisions

The senior preferred stock purchase agreement provides that Treasury’s funding commitment will terminate

under any the following circumstances: (1) the completion of our liquidation and fulfillment of Treasury’s

obligations under its funding commitment at that time, (2) the payment in full of, or reasonable provision for,

all of our liabilities (whether or not contingent, including mortgage guaranty obligations), or (3) the funding

by Treasury of the maximum amount under the agreement. In addition, Treasury may terminate its funding

commitment and declare the senior preferred stock purchase agreement null and void if a court vacates,

modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of the conservator or

otherwise curtails the conservator’s powers. Treasury may not terminate its funding commitment solely by

reason of our being in conservatorship, receivership or other insolvency proceeding, or due to our financial

condition or any adverse change in our financial condition.

Waivers and Amendments

The senior preferred stock purchase agreement provides that most provisions of the agreement may be waived

or amended by mutual written agreement of the parties. No waiver or amendment of the agreement, however,

may decrease Treasury’s aggregate funding commitment or add conditions to Treasury’s funding commitment

if the waiver or amendment would adversely affect in any material respect the holders of our debt securities or

guaranteed Fannie Mae MBS.

Third-party Enforcement Rights

If we default on payments with respect to our debt securities or guaranteed Fannie Mae MBS and Treasury

fails to perform its obligations under its funding commitment, and if we and/or the conservator are not

diligently pursuing remedies in respect of that failure, the holders of these debt securities or Fannie Mae MBS

may file a claim for relief in the United States Court of Federal Claims. The relief, if granted, would require

Treasury to fund to us the lesser of (1) the amount necessary to cure the payment defaults on our debt and

Fannie Mae MBS and (2) the lesser of (a) the deficiency amount and (b) the maximum amount available

under the agreement less the aggregate amount of funding previously provided under the commitment. Any

payment that Treasury makes under those circumstances would be treated for all purposes as a draw under the

senior preferred stock purchase agreement that would increase the liquidation preference of the senior

preferred stock.

17. Regulatory Capital Requirements

In 2008, FHFA announced that our existing statutory and FHFA-directed regulatory capital requirements will

not be binding during the conservatorship, and that FHFA will not issue quarterly capital classifications during

the conservatorship. We submit capital reports to FHFA during the conservatorship and FHFA monitors our

capital levels. FHFA has stated that it does not intend to report our critical capital, risk-based capital or

subordinated debt levels during the conservatorship. As of December 31, 2010 and 2009, we had a minimum

capital deficiency of $123.2 billion and $107.6 billion, respectively. Our minimum capital deficiency as of

December 31, 2010 was determined based on guidance from FHFA, in which FHFA (1) directed us, for loans

backing Fannie Mae MBS held by third parties, to continue reporting our minimum capital requirements based

F-110

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
on 0.45% of the unpaid principal balance and critical capital based on 0.25% of the unpaid principal balance,

notwithstanding our transition date adoption of the new accounting standards, and (2) issued a regulatory

interpretation stating that our minimum capital requirements are not automatically affected by the new

accounting standards. Additionally, our minimum capital deficiency excludes the funds provided to us by

Treasury pursuant to the senior preferred stock purchase agreement, as the senior preferred stock does not

qualify as core capital due to its cumulative dividend provisions.

Pursuant to the GSE Act, if our total assets are less than our total obligations (a net worth deficit) for a period

of 60 days, FHFA is mandated by law to appoint a receiver for Fannie Mae. Treasury’s funding commitment

under the senior preferred stock purchase agreement is intended to ensure that we avoid a net worth deficit, in

order to avoid this mandatory trigger of receivership. In order to avoid a net worth deficit, our conservator

may request funds on our behalf from Treasury under the senior preferred stock purchase agreement.

FHFA has directed us, during the time we are under conservatorship, to focus on managing to a positive net

worth. As of December 31, 2010 and 2009, we had a net worth deficit of $2.5 billion and $15.3 billion,

respectively.

The following table displays our regulatory capital classification measures as of December 31, 2010 and 2009.

2010 (1) 2009 (1)

As of December 31,

(Dollars in millions)

Core capital(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (89,516) $ (74,540)

Statutory minimum capital requirement(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,676 33,057

Deficit of core capital over statutory minimum capital requirement . . . . . . . . . . . . . . . $(123,192) $(107,597)

Deficit of core capital percentage over statutory minimum capital requirement . . . . . . . (366)% (325)%

(1) Amounts as of December 31, 2010 and 2009 represent estimates that have been submitted to FHFA. As noted above,

FHFA is not issuing capital classifications during conservatorship.

(2) The sum of (a) the stated value of our outstanding common stock (common stock less treasury stock); (b) the stated

value of our outstanding non-cumulative perpetual preferred stock; (c) our paid-in capital; and (d) our retained

earnings (accumulated deficit). Core capital does not include: (a) accumulated other comprehensive income (loss) or

(b) senior preferred stock.

(3) Generally, the sum of (a) 2.50% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third

parties; (b) 0.45% of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and (c) up to

0.45% of other off-balance sheet obligations, which may be adjusted by the Director of FHFA under certain

circumstances (See 12 CFR 1750.4 for existing adjustments made by the Director).

Our critical capital requirement is generally equal to the sum of: (1) 1.25% of on-balance sheet assets;

(2) 0.25% of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and

(3) 0.25% of other off-balance sheet obligations, which may be adjusted by the Director of FHFA under

certain circumstances.

Restrictions on Capital Distributions and Dividends

Under the terms of the senior preferred stock purchase agreement, we are required to comply with certain

restrictions and covenants. Set forth below are additional restrictions related to our capital requirements:

Restrictions Under GSE Act. Under the GSE Act, FHFA has the authority to prohibit capital distributions,

including payment of dividends, if we fail to meet our capital requirements. If FHFA classifies us as

significantly undercapitalized, we must obtain the approval of the Director of FHFA for any dividend payment.

Under the GSE Act, we are not permitted to make a capital distribution if, after making the distribution, we

would be undercapitalized. The Director of FHFA, however, may permit us to repurchase shares if the

F-111

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
repurchase is made in connection with the issuance of additional shares or obligations in at least an equivalent

amount and will reduce our financial obligations or otherwise improve our financial condition.

Restrictions Relating to Subordinated Debt. During any period in which we defer payment of interest on

qualifying subordinated debt, we may not declare or pay dividends on, or redeem, purchase or acquire, our

common stock or preferred stock. Our qualifying subordinated debt provides for the deferral of the payment of

interest for up to five years if either: our core capital is below 125% of our critical capital requirement; or our

core capital is below our statutory minimum capital requirement, and the U.S. Secretary of the Treasury,

acting on our request, exercises his or her discretionary authority pursuant to Section 304(c) of the Charter Act

to purchase our debt obligations. As of December 31, 2010 and 2009, our core capital was below 125% of our

critical capital requirement; however, we have been directed by FHFA to continue paying principal and

interest on our outstanding subordinated debt during the conservatorship and thereafter until directed

otherwise, regardless of our existing capital levels.

Prior to conservatorship, we were subject to certain regulatory capital requirements, including minimum

capital requirements, under the terms of various agreements and consent orders with OFHEO. We were in

compliance with these regulatory capital requirements until they were suspended October 9, 2008 following

our entry into conservatorship.

18. Concentrations of Credit Risk

Concentrations of credit risk arise when a number of customers and counterparties engage in similar activities

or have similar economic characteristics that make them susceptible to similar changes in industry conditions,

which could affect their ability to meet their contractual obligations. Based on our assessment of business

conditions that could impact our financial results, including those conditions arising through February 24,

2011, we have determined that concentrations of credit risk exist among single-family and multifamily

borrowers (including geographic concentrations and loans with certain non-traditional features), mortgage

insurers, mortgage servicers, financial guarantors, lenders with risk sharing, derivative counterparties and

parties associated with our off-balance sheet transactions. Concentrations for each of these groups are

discussed below.

Single-Family Loan Borrowers

Regional economic conditions may affect a borrower’s ability to repay his or her mortgage loan and the

property value underlying the loan. Geographic concentrations increase the exposure of our portfolio to

changes in credit risk. Single-family borrowers are primarily affected by home prices and interest rates. The

geographic dispersion of our Single-Family business has been consistently diversified over both years ended

December 31, 2010 and 2009, with our largest exposures in the Western region of the United States, which

represented 27% of our single-family conventional guaranty book of business as of December 31, 2010.

Except for California, where 18% and 17% of the gross unpaid principal balance of our conventional singlefamily mortgage loans held or securitized in Fannie Mae MBS as of December 31, 2010 and 2009,

respectively, were located, no other significant concentrations existed in any state.

To manage credit risk and comply with legal requirements, we typically require primary mortgage insurance

or other credit enhancements if the current LTV ratio (i.e., the ratio of the unpaid principal balance of a loan

to the current value of the property that serves as collateral) of a single-family conventional mortgage loan is

greater than 80% when the loan is delivered to us. We may also require credit enhancements if the original

LTV ratio of a single-family conventional mortgage loan is less than 80%.

F-112

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Multifamily Loan Borrowers

Numerous factors affect a multifamily borrower’s ability to repay his or her loan and the value of the property

underlying the loan. The most significant factors affecting credit risk are rental vacancy rates and

capitalization rates for the mortgaged property. Vacancy rates vary among geographic regions of the United

States. The average mortgage amounts for multifamily loans are significantly larger than those for singlefamily borrowers and, therefore, individual defaults for multifamily borrowers can be more significant to us.

However, these loans, while individually large, represent a small percentage of our total loan portfolio. Our

multifamily geographic concentrations have been consistently diversified over both years ended December 31,

2010 and 2009, with our largest exposure in the Western region of the United States, which represented 34%

of our multifamily guaranty book of business. Except for California and New York, no other significant

concentrations existed in any states as of December 31, 2010 and 2009. As of December 31, 2010, 27% and

13% of the gross unpaid principal balance of our portfolio of multifamily mortgage loans held by us or

securitized in Fannie Mae MBS was located in California and New York, respectively. As of December 31,

2009, 27% and 14% of the gross unpaid principal balance of our portfolio of multifamily mortgage loans held

by us or securitized in Fannie Mae MBS was located in California and New York, respectively.

As part of our multifamily risk management activities, we perform detailed loan reviews that evaluate

borrower and geographic concentrations, lender qualifications, counterparty risk, property performance and

contract compliance. We generally require servicers to submit periodic property operating information and

condition reviews, allowing us to monitor the performance of individual loans. We use this information to

evaluate the credit quality of our portfolio, identify potential problem loans and initiate appropriate loss

mitigation activities.

The following table displays the regional geographic concentration of single-family and multifamily loans in

our mortgage portfolio and those loans held or securitized in Fannie Mae MBS as of December 31, 2010 and

2009.

2010 2009 2010 2009

As of December 31, As of December 31,

Percentage of

Conventional

Single-Family Guaranty

Book of Business(2)

Percentage of

Multifamily Guaranty

Book of Business(3)

Geographic Concentration(1)

Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15% 16% 8% 9%

Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 19 22 23

Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 24 20 19

Southwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 15 16 15

West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 26 34 34

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100%

(1) Midwest includes IL, IN, IA, MI, MN, NE, ND, OH, SD, WI; Northeast includes CT, DE, ME, MA, NH, NJ, NY, PA,

PR, RI, VT, VI; Southeast includes AL, DC, FL, GA, KY, MD, NC, MS, SC, TN, VA, WV; Southwest includes AZ,

AR, CO, KS, LA, MO, NM, OK, TX, UT; West include AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.

(2) Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan

level information, which constituted over 99% and 98% of our total single-family conventional guaranty book of

business as of December 31, 2010 and 2009, respectively.

(3) Consists of the portion of our multifamily guaranty book of business for which we have detailed loan level

information, which constituted 99% and 98% of our total multifamily guaranty book of business as of December 31,

2010 and 2009, respectively.

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Non-traditional Loans; Alt-A and Subprime Loans and Securities

We own and guarantee loans with non-traditional features, such as interest-only loans and negative-amortizing

loans. We also own and guarantee Alt-A and subprime mortgage loans and mortgage-related securities. An

Alt-A mortgage loan generally refers to a mortgage loan that has been underwritten with reduced or

alternative documentation than that required for a full documentation mortgage loan but may also include

other alternative product features. As a result, Alt-A mortgage loans generally have a higher risk of default

than non-Alt-A mortgage loans. In reporting our Alt-A exposure, we have classified mortgage loans as Alt-A

if the lenders that deliver the mortgage loans to us have classified the loans as Alt-A based on documentation

or other product features. We have classified private-label mortgage-related securities held in our investment

portfolio as Alt-A if the securities were labeled as such when issued. A subprime mortgage loan generally

refers to a mortgage loan made to a borrower with a weaker credit profile than that of a prime borrower. As a

result of the weaker credit profile, subprime borrowers have a higher likelihood of default than prime

borrowers. Subprime mortgage loans were typically originated by lenders specializing in this type of business

or by subprime divisions of large lenders, using processes unique to subprime loans. In reporting our subprime

exposure, we have classified mortgage loans as subprime if the mortgage loans were originated by one of

these specialty lenders or a subprime division of a large lender. We exclude loans originated by these lenders

if we acquired the loans in accordance with our standard underwriting criteria, which typically require

compliance by the seller with our Selling Guide (including standard representations and warranties) and/or

evaluation of the loans through our Desktop Underwriter system. We have classified private-label mortgagerelated securities held in our investment portfolio as subprime if the securities were labeled as such when

issued. We reduce our risk associated with some of these loans through credit enhancements, as described

below under “Mortgage Insurers.”

The following table displays the percentage of our conventional single-family guaranty book of business that

consists of interest-only loans, negative-amortizing ARMs and loans with an estimated mark-to-market LTV

ratios greater than 80% as of December 31, 2010 and 2009.

2010 2009

Percentage of

Single-Family

Conventional Guaranty

Book of Business

As of December 31,

Interest-only loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6% 7%

Negative-amortizing ARMs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * 1

80%+ mark-to-market LTV loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 37

* Represents less than 0.5% of our single-family conventional guaranty book of business

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FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table displays information regarding our Alt-A and subprime mortgage loans and mortgagerelated securities in our single-family mortgage credit book of business as of December 31, 2010 and 2009.

Unpaid

Principal

Balance

Percent of

Book of

Business(1)

Unpaid

Principal

Balance

Percent of

Book of

Business(1)

2010 2009

As of December 31,

(Dollars in millions)

Loans and Fannie Mae MBS:

Alt-A(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $213,597 7% $251,111 8%

Subprime(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,266 ** 16,268 **

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $228,863 8% $267,379 9%

Private-label securities:

Alt-A(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,283 ** $ 24,505 **

Subprime(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,410 ** 20,527 **

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,693 1% $ 45,032 2%

** Represent less than 1.0% of single-family mortgage credit book of business.

(1) Calculated based on total unpaid principal balance of our single-family mortgage credit book of business.

(2) Represents Alt-A mortgage loans held in our portfolio and Fannie Mae MBS backed by Alt-A mortgage loans.

(3) Represents subprime mortgage loans held in our portfolio and Fannie Mae MBS backed by subprime mortgage loans.

(4) Represents private-label mortgage-related securities backed by Alt-A mortgage loans.

(5) Represents private-label mortgage-related securities backed by subprime mortgage loans.

Other Concentrations

Mortgage Seller/Servicers. Mortgage servicers collect mortgage and escrow payments from borrowers, pay

taxes and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required

activities on our behalf. Our business with mortgage servicers is concentrated. Our ten largest single-family

mortgage servicers, including their affiliates, serviced 77% of our single-family guaranty book of business as

of December 31, 2010, compared to 80% as of December 31, 2009. Our ten largest multifamily mortgage

servicers, including their affiliates, serviced 70% of our multifamily guaranty book of business as of

December 31, 2010, compared with 75% as of December 31, 2009.

If one of our principal mortgage seller/servicers fails to meet its obligations to us, it could increase our creditrelated expenses and credit losses, result in financial losses to us and have a material adverse effect on our

earnings, liquidity, financial condition and net worth.

Mortgage Insurers. Mortgage insurance “risk in force” represents our maximum potential loss recovery

under the applicable mortgage insurance policies. We had total mortgage insurance coverage risk in force of

$95.9 billion on the single-family mortgage loans in our guaranty book of business as of December 31, 2010,

which represented approximately 3% of our single-family guaranty book of business. Our primary and pool

mortgage insurance coverage risk in force on single-family mortgage loans in our guaranty book of business

represented $91.2 billion and $4.7 billion, respectively, as of December 31, 2010, compared with $99.6 billion

and $6.9 billion, respectively, as of December 31, 2009. Eight mortgage insurance companies provided over

99% of our mortgage insurance as of both December 31, 2010 and 2009.

Increases in mortgage insurance claims due to higher defaults and credit losses in recent periods have

adversely affected the financial results and financial condition of many mortgage insurers. The current

F-115

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
weakened financial condition of our mortgage insurer counterparties creates an increased risk that these

counterparties will fail to fulfill their obligations to reimburse us for claims under insurance policies. If we

determine that it is probable that we will not collect all of our claims from one or more of these mortgage

insurer counterparties, it could result in an increase in our loss reserves, which could adversely affect our

earnings, liquidity, financial condition and net worth.

As of December 31, 2010, our allowance for loan losses of $61.6 billion, allowance for accrued interest

receivable of $3.4 billion and reserve for guaranty losses of $323 million incorporated an estimated recovery

amount of approximately $16.4 billion from mortgage insurance related both to loans that are individually

measured for impairment and those that are measured collectively for impairment. This amount is comprised

of the contractual recovery of approximately $17.5 billion as of December 31, 2010 and an adjustment of

$1.2 billion which reduces the contractual recovery for our assessment of our mortgage insurer counterparties’

inability to fully pay those claims.

We had outstanding receivables of $4.4 billion in “Other assets” in our consolidated balance sheet as of

December 31, 2010 and $2.5 billion as of December 31, 2009 related to amounts claimed on insured,

defaulted loans that we have not yet received, of which $648 million as of December 31, 2010 and

$301 million as of December 31, 2009 was due from our mortgage seller/servicers. We assessed the

receivables for collectibility, and they are recorded net of a valuation allowance of $317 million as of

December 31, 2010 and $51 million as of December 31, 2009 in “Other assets.” These mortgage insurance

receivables are short-term in nature, having a duration of approximately three to six months, and the valuation

allowance reduces our claim receivable to the amount which is considered probable of collection as of

December 31, 2010 and 2009. We received proceeds under our primary and pool mortgage insurance policies

for single-family loans of $6.4 billion for the year ended December 31, 2010 and $3.6 billion for the year

ended December 31, 2009. We negotiated the cancellation and restructurings of some of our mortgage

insurance coverage in exchange for a fee. The cash fees received of $796 million and $668 million for the

years ended December 31, 2010 and 2009, respectively, are included in our total insurance proceeds amount.

These fees represented an acceleration of, and discount on, claims to be paid pursuant to the coverage in order

to reduce future exposure to our mortgage insurers and were recorded as a reduction to our “Foreclosed

property expense.”

Financial Guarantors. We were the beneficiary of financial guarantees totaling $8.8 billion and $9.6 billion

as of December 31, 2010 and 2009, respectively, on securities held in our investment portfolio or on securities

that have been resecuritized to include a Fannie Mae guaranty and sold to third parties. The securities covered

by these guarantees consist primarily of private-label mortgage-related securities and mortgage revenue bonds.

In addition, we are the beneficiary of financial guarantees totaling $25.7 billion and $51.3 billion as of

December 31, 2010 and 2009, respectively, obtained from Freddie Mac, the federal government, and its

agencies. These financial guaranty contracts assure the collectibility of timely interest and ultimate principal

payments on the guaranteed securities if the cash flows generated by the underlying collateral are not

sufficient to fully support these payments.

If a financial guarantor fails to meet its obligations to us with respect to the securities for which we have

obtained financial guarantees, it could reduce the fair value of our mortgage-related securities and result in

financial losses to us, which could have a material adverse effect on our earnings, liquidity, financial condition

and net worth. We model our securities assuming the benefit of those external financial guarantees that are

deemed creditworthy.

Lenders with Risk Sharing. We enter into risk sharing agreements with lenders pursuant to which the lenders

agree to bear all or some portion of the credit losses on the covered loans. Our maximum potential loss

recovery from lenders under these risk sharing agreements on single-family loans was $15.6 billion as of

December 31, 2010 and $18.3 billion as of December 31, 2009. As of December 31, 2010, 56% of our

F-116

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
maximum potential loss recovery on single-family loans was from three lenders. As of December 31, 2009,

53% of our maximum potential loss recovery on single-family loans was from three lenders. Our maximum

potential loss recovery from lenders under these risk sharing agreements on multifamily loans was

$30.3 billion as of December 31, 2010 and $28.7 billion as of December 31, 2009. As of December 31, 2010,

41% of our maximum potential loss recovery on multifamily loans was from three lenders. As of

December 31, 2009, 51% of our maximum potential loss recovery on multifamily loans was from three

lenders.

Derivatives Counterparties. For information on credit risk associated with our derivatives transactions refer

to “Note 10, Derivative Instruments and Hedging Activities.”

Parties Associated with Our Off-Balance Sheet Transactions. We enter into financial instrument transactions

that create off-balance sheet credit risk in the normal course of our business. These transactions are designed

to meet the financial needs of our customers, and manage our credit, market or liquidity risks.

We have entered into guarantees for which we have not recognized a guaranty obligation in our consolidated

balance sheets relating to periods prior to 2003, the effective date of accounting pronouncements related to

guaranty accounting. Our maximum potential exposure under these guarantees is $10.3 billion as of

December 31, 2010 and $135.7 billion as of December 31, 2009. If we were required to make payments under

these guarantees, we would pursue recovery through our right to the collateral backing the underlying loans,

available credit enhancements and recourse with third parties that provide a maximum coverage of $3.9 billion

as of December 31, 2010 and $13.6 billion as of December 31, 2009.

The following table displays the contractual amount of off-balance sheet financial instruments as of

December 31, 2010 and 2009. Contractual or notional amounts do not necessarily represent the credit risk of

the positions.

2010 2009

As of December 31,

(Dollars in millions)

Fannie Mae MBS and other guarantees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,299 $135,697

Loan purchase commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 486

(1) Represents maximum exposure on guarantees not reflected in our consolidated balance sheets.

19. Fair Value

We use fair value measurements for the initial recording of certain assets and liabilities and periodic

remeasurement of certain assets and liabilities on a recurring or nonrecurring basis.

Fair Value Measurement

Fair value measurement guidance defines fair value, establishes a framework for measuring fair value and

expands disclosures around fair value measurements. This guidance applies whenever other accounting

standards require or permit assets or liabilities to be measured at fair value. The guidance establishes a threelevel fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value.

The fair value hierarchy gives the highest priority, Level 1, to measurements based on unadjusted quoted

prices in active markets for identical assets or liabilities. The next highest priority, Level 2, is given to

measurements of assets and liabilities based on limited observable inputs or observable inputs for similar

assets and liabilities. The lowest priority, Level 3, is given to measurements based on unobservable inputs.

Effective March 31, 2010, we prospectively adopted a new accounting standard that requires enhanced fair

value measurement disclosures.

F-117

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Recurring Changes in Fair Value

The following tables display our assets and liabilities measured in our consolidated balance sheets at fair value

on a recurring basis subsequent to initial recognition, including instruments for which we have elected the fair

value option as of December 31, 2010 and 2009. Specifically, total assets measured at fair value on a recurring

basis and classified as Level 3 were $39.0 billion, or 1% of “Total assets,” and $47.7 billion, or 5% of “Total

assets,” in our consolidated balance sheets as of December 31, 2010 and 2009, respectively.

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Netting

Adjustment(1)

Estimated

Fair Value

Fair Value Measurements as of December 31, 2010

(Dollars in millions)

Assets:

Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,049 $ 2,300 $ — $ — $ 6,349

Trading securities:

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 5,196 2,202 — 7,398

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,326 — — 1,326

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 590 — — 590

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . — 1,663 20 — 1,683

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . — — 1,581 — 1,581

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 10,764 — — 10,764

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . — — 609 — 609

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 152 — 152

Non-mortgage-related securities:

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . 27,432 — — — 27,432

Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . — 5,309 12 — 5,321

Total trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,432 24,848 4,576 — 56,856

Available-for-sale securities:

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 22,714 114 — 22,828

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 16,993 3 — 16,996

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,039 — — 1,039

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . — 6,841 7,049 — 13,890

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . — — 9,932 — 9,932

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 14,844 — — 14,844

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . — 11 11,030 — 11,041

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 16 3,806 — 3,822

Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . — 62,458 31,934 — 94,392

Mortgage loans of consolidated trusts . . . . . . . . . . . . . . . . . . . . — 755 2,207 — 2,962

Other assets:

Risk management derivatives:

Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 9,623 163 — 9,786

Swaptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 5,474 — — 5,474

Interest rate caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 24 — — 24

Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 — — — 3

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 72 — 72

Netting adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (15,175) (15,175)

Mortgage commitment derivatives . . . . . . . . . . . . . . . . . . . . — 941 12 — 953

Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 16,062 247 (15,175) 1,137

Total assets at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . $31,484 $106,423 $38,964 $(15,175) $161,696

F-118

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Netting

Adjustment(1)

Estimated

Fair Value

Fair Value Measurements as of December 31, 2010

(Dollars in millions)

Liabilities:

Long-term debt:

Of Fannie Mae:

Senior fixed . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ 472 $ — $ — $ 472

Senior floating . . . . . . . . . . . . . . . . . . . . . . . . — — 421 — 421

Total Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . — 472 421 — 893

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . — 1,644 627 — 2,271

Total long-term debt. . . . . . . . . . . . . . . . . . . . . . . . — 2,116 1,048 — 3,164

Other liabilities:

Risk management derivatives:

Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 16,436 113 — 16,549

Swaptions . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,446 — — 2,446

Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 — — — 1

Netting adjustment . . . . . . . . . . . . . . . . . . . . . — — — (18,023) (18,023)

Mortgage commitment derivatives . . . . . . . . . . . . — 712 30 — 742

Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . 1 19,594 143 (18,023) 1,715

Total liabilities at fair value . . . . . . . . . . . . . . . $ 1 $21,710 $1,191 $(18,023) $ 4,879

F-119

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Netting

Adjustment(1)

Estimated

Fair Value

Fair Value Measurements as of December 31, 2009

(Dollars in millions)

Assets:

Trading securities:

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ 69,094 $ 5,656 $ — $ 74,750

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 15,082 — — 15,082

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1 — — 1

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . — 791 564 — 1,355

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . — — 1,780 — 1,780

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 9,335 — — 9,335

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . — — 600 — 600

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 154 — 154

Non-mortgage-related securities:

Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . — 8,408 107 — 8,515

Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . — 364 — — 364

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . 3 — — — 3

Total trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 103,075 8,861 — 111,939

Available-for-sale securities:

Mortgage-related securities:

Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 153,823 596 — 154,419

Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 27,442 27 — 27,469

Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,230 123 — 1,353

Alt-A private-label securities . . . . . . . . . . . . . . . . . . . . . . — 5,838 8,312 — 14,150

Subprime private-label securities . . . . . . . . . . . . . . . . . . . . — — 10,746 — 10,746

CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 13,193 — — 13,193

Mortgage revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . — 26 12,820 — 12,846

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 22 3,530 — 3,552

Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . — 201,574 36,154 — 237,728

Other assets:

Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 19,724 150 (18,400) 1,474

Guaranty assets and buy-ups . . . . . . . . . . . . . . . . . . . . . . . . — — 2,577 — 2,577

Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 19,724 2,727 (18,400) 4,051

Total assets at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 $324,373 $47,742 $(18,400) $353,718

Liabilities:

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ 2,673 $ 601 $ — $ 3,274

Other liabilities:

Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 23,815 27 (22,813) 1,029

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 270 — — 270

Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 24,085 27 (22,813) 1,299

Total liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . $— $ 26,758 $ 628 $(22,813) $ 4,573

(1) Derivative contracts are reported on a gross basis by level. The netting adjustment represents the effect of the legal

right to offset under legally enforceable master netting agreements to settle with the same counterparty on a net basis,

as well as cash collateral.

F-120

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following tables display a reconciliation of all assets and liabilities measured at fair value on a recurring

basis using significant unobservable inputs (Level 3) for the years ended December 31, 2010, 2009 and 2008.

The tables also display gains and losses due to changes in fair value, including both realized and unrealized

gains and losses, recorded in our consolidated statements of operations for Level 3 assets and liabilities for the

years ended December 31, 2010, 2009 and 2008. When assets and liabilities are transferred between levels, we

recognize the transfer as of the end of the period transferred.

Balance,

December 31,

2009

Impact of

New

Accounting

Standards

Included

in Net

Loss

Included

in Other

Comprehensive

Loss

Purchases,

Sales,

Issuances,

and

Settlements,

Net

Transfers

Out of

Level 3(1)

Transfers

into

Level 3(1)

Balance,

December 31,

2010

Net Unrealized

Gains (Losses)

Included in Net

Loss Related to

Assets and

Liabilities Still

Held as of

December 31,

2010(2)

Total Gains or (Losses)

(Realized/Unrealized)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

For the Year Ended December 31, 2010

(Dollars in millions)

Trading securities:

Mortgage-related:

Fannie Mae ........... $ 5,656 $ (2) $ (1) $ — $ (223) $(5,551) $2,323 $ 2,202 $ 13

Freddie Mac . . . . . . . . . . — — — — (1) (3) 4 — —

Alt-A private-label

securities . . . . . . . . . . . 564 62 226 — (77) (1,069) 314 20 4

Subprime private-label

securities ........... 1,780 — 41 — (240) — — 1,581 41

Mortgage revenue bonds . . . 600 — 67 — (58) — — 609 66

Other . . . . . . . . . . . . . . . 154 — 6 — (8) — — 152 5

Non-mortgage-related:

Asset-backed securities . . . . 107 — 1 — (62) (47) 13 12 —

Total trading securities ....... 8,861 60 340 — (669) (6,670) 2,654 4,576 129

Available-for-sale securities:

Mortgage-related:

Fannie Mae . . . . . . . . . . . 596 (203) (1) 2 181 (580) 119 114 —

Freddie Mac . . . . . . . . . . 27 — — (1) (29) — 6 3 —

Ginnie Mae . . . . . . . . . . . 123 — — 2 (125) — — — —

Alt-A private-label

securities ........... 8,312 471 (54) 1,240 (1,322) (4,951) 3,353 7,049 —

Subprime private-label

securities ........... 10,746 (118) (70) 1,078 (1,704) — — 9,932 —

Mortgage revenue bonds . . . 12,820 21 11 82 (1,902) (2) — 11,030 —

Other ............... 3,530 366 (3) 402 (489) — — 3,806 —

Total available-for-sale

securities .............. 36,154 537 (117) 2,805 (5,390) (5,533) 3,478 31,934 —

Mortgage loans of consolidated

trusts................. — — (29) — 2,188 (11) 59 2,207 (29)

Guaranty assets and buy-ups.... 2,577 (2,568) 1 1 (11) — — — —

Net derivatives . . . . . . . . . . . . 123 — 61 — (74) (1) (5) 104 (33)

Long-term debt:

Of Fannie Mae:

Senior floating ......... (601) — 20 — 160 — — (421) 24

Of consolidated trusts ...... — (77) 19 — (631) 92 (30) (627) 2

Total long-term debt ......... $ (601) $ (77) $ 39 $ — $ (471) $ 92 $ (30) $ (1,048) $ 26

F-121

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Balance,

January 1,

2009

Included in

Net Loss

Included in

Other

Comprehensive

Loss

Purchases,

Sales,

Issuances,

and

Settlements,

Net

Transfers

in/out of

Level 3,

Net(3)

Balance,

December 31,

2009

Net Unrealized

Gains (Losses)

Included in Net

Loss Related to

Assets and

Liabilities Still

Held as of

December 31,

2009(2)

Total Gains or (Losses)

(Realized/Unrealized)

For the Year Ended December 31, 2009

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

(Dollars in millions)

Trading securities:

Mortgage-related:

Fannie Mae ................ $ 6,935 $ 278 $ — $(1,277) $ (280) $ 5,656 $274

Alt-A private-label securities. . . . . 1,118 57 — (154) (457) 564 (25)

Subprime private-label securities . . 2,318 (83) — (455) — 1,780 (74)

Mortgage revenue bonds . . . . . . . 695 (75) — (20) — 600 (75)

Other . . . . . . . . . . . . . . . . . . . . 167 (1) — (12) — 154 (1)

Non-mortgage-related:

Asset-backed securities . ....... 1,475 (38) — (108) (1,222) 107 2

Corporate debt securities . . . . . . . 57 3 — (116) 56 — —

Total trading securities............ $12,765 $ 141 $ — $(2,142) $(1,903) $ 8,861 $101

Available-for-sale securities:

Mortgage-related:

Fannie Mae ................ $ 5,609 $ (47) $ 191 $ (569) $(4,588) $ 596 $ —

Freddie Mac . . . . . . . . . . . . . . . 80 3 (6) (21) (29) 27 —

Ginnie Mae . . . . . . . . . . . . . . . . 190 — 1 (7) (61) 123 —

Alt-A private-label securities. . . . . 11,675 (1,717) 2,192 (1,554) (2,284) 8,312 —

Subprime private-label securities . . 14,318 (5,290) 4,862 (3,144) — 10,746 —

Mortgage revenue bonds ....... 12,456 (16) 1,349 (969) — 12,820 —

Other . . . ................. 3,509 (81) 651 (549) — 3,530 —

Total available-for-sale securities . . . . . $47,837 $(7,148) $9,240 $(6,813) $(6,962) $36,154 $ —

Guaranty assets and buy-ups . ....... 1,083 466 243 785 — 2,577 783

Net derivatives . . . . . . . . . . . . . . . . . 310 (42) — (48) (97) 123 3

Long-term debt ................ (2,898) (18) — 1,791 524 (601) (49)

F-122

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Trading

Securities

Available-for-sale

Securities

Net

Derivatives

Guaranty

Assets

and

Buy-ups

Long-Term

Debt

Fair Value Measurements Using Significant

Unobservable Inputs (Level 3)

For the Year Ended December 31, 2008

(Dollars in millions)

Beginning balance as of January 1, 2008 . . . . . . . $18,508 $20,920 $ 161 $1,568 $(7,888)

Realized/unrealized gains (losses) included in net

loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,881) (3,152) 282 (512) (73)

Unrealized losses included in other comprehensive

loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (4,136) — (342) —

Purchases, sales, issuances, and settlements, net . . (4,337) (3,640) (227) 369 5,396

Transfers in/out of Level 3, net(4). . . . . . . . . . . . . 475 37,845 94 — (333)

Ending balance as of December 31, 2008 . . . . . . . $12,765 $47,837 $ 310 $1,083 $(2,898)

Net unrealized gains (losses) included in net loss

related to assets and liabilities still held as of

December 31, 2008(2) . . . . . . . . . . . . . . . . . . . $ (1,293) $ — $ 159 $ (26) $ (18)

(1) For the year ended December 31, 2010, the transfers out of Level 3 consisted primarily of Fannie Mae guaranteed

mortgage-related securities and private-label mortgage-related securities backed by Alt-A loans. Prices for these

securities were obtained from multiple third-party vendors supported by market observable inputs. For the year ended

December 31, 2010, the transfers into Level 3 consisted primarily of private-label mortgage-related securities backed

by Alt-A loans as well as Fannie Mae guaranteed mortgage-related securities. Prices for these securities are based on

inputs from a single source or inputs that were not readily observable.

(2) Amount represents temporary changes in fair value. Amortization, accretion and other-than-temporary impairments are

not considered unrealized and are not included in this amount.

(3) For the year ended December 31, 2009, the net transfers to Level 2 from Level 3 consisted primarily of Fannie Mae

guaranteed mortgage-related securities, which include securities backed by jumbo conforming loans, and private-label

mortgage-related securities backed by non-fixed rate Alt-A loans. Price transparency improved as a result of increased

market activity, and we noted some convergence in prices obtained from third-party vendors. As a result, we

determined that our fair value estimates for these securities did not rely on significant unobservable inputs.

(4) During the year ended December 31, 2008, transfers into Level 3 consisted primarily of private-label mortgage-related

securities backed by Alt-A and subprime mortgage loans.

The following tables display unrealized gains and losses recorded in our consolidated statements of operations

for the years ended December 31, 2010, 2009 and 2008 for assets and liabilities transferred into Level 3 and

measured in our consolidated balance sheets at fair value on a recurring basis.

Trading

Securities

Available-For-Sale

Securities

Loans of

Consolidated

Trusts

Net

Derivatives

Long-Term

Debt

Fair Value Measurements Using Significant

Unobservable Inputs (Level 3)

For the Year Ended December 31, 2010

(Dollars in millions)

Realized and unrealized gains (losses)

included in net loss . . . . . . . . . . . . . . . . . . $ 126 $ (36) $(33) $(32) $ (3)

Unrealized losses included in other

comprehensive loss . . . . . . . . . . . . . . . . . . — (151) — — —

Total gains (losses). . . . . . . . . . . . . . . . . . . . $ 126 $ (187) $(33) $(32) $ (3)

Amount of Level 3 transfers in . . . . . . . . . . . $2,654 $3,478 $ 59 $ (5) $(30)

F-123

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Trading

Securities

Available-for-Sale

Securities

Net

Derivatives

Long-term

Debt

Fair Value Measurements Using Significant

Unobservable Inputs (Level 3)

For the Year Ended December 31, 2009

(Dollars in millions)

Realized and unrealized gains (losses) included in net loss . . . . $ (6) $ 62 $ (2) $—

Unrealized gains included in other comprehensive loss . . . . . . . — 174 — —

Total gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6) $ 236 $ (2) $—

Amount of Level 3 transfers in . . . . . . . . . . . . . . . . . . . . . . . $1,136 $7,877 $107 $—

Trading

Securities

Available-for-Sale

Securities

Net

Derivatives

Long-term

Debt

Fair Value Measurements Using Significant

Unobservable Inputs (Level 3)

For the Year Ended December 31, 2008

(Dollars in millions)

Realized and unrealized gains (losses) included in net loss . . . . $ (679) $ (2,014) $18 $ (35)

Unrealized losses included in other comprehensive loss . . . . . . — (2,261) — —

Total gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (679) $ (4,275) $18 $ (35)

Amount of Level 3 transfers in . . . . . . . . . . . . . . . . . . . . . . . $10,189 $55,621 $18 $(531)

The following tables display realized and unrealized gains and losses included in our consolidated statements

of operations for the years ended December 31, 2010, 2009 and 2008, for our Level 3 assets and liabilities

measured in our consolidated balance sheets at fair value on a recurring basis.

Interest

Income

Fair Value

Gains

(Losses), net

Net

Other-thanTemporary

Impairments Other Total

For the Year Ended December 31, 2010

(Dollars in millions)

Total realized and unrealized gains (losses) included in net

loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $319 $416 $(480) $40 $295

Net unrealized gains related to Level 3 assets and liabilities still

held as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . $ — $ 93 $ — $— $ 93

Interest

Income

Investments

in Securities

Guaranty

Fee

Income

Fair Value

Gain

(Losses), net

Net

Other-thanTemporary

Impairments Total

For the Year Ended December 31, 2009

(Dollars in millions)

Total realized and unrealized gains (losses) included

in net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $545 $466 $94 $(7,706) $(6,601)

Net unrealized gains related to Level 3 assets and

liabilities still held as of December 31, 2009 . . . . . $ — $783 $55 $ — $ 838

F-124

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Interest

Income

Investment

in Securities

Guaranty

Fee

Income

Investment

Gains

(Losses), Net

Fair

Value Gains

(Losses),

net

Other than

Temporary

Impairments,

net

Extraordinary

Losses Total

For the Year Ended December 31, 2008

(Dollars in millions)

Total realized and unrealized

gains (losses) included in

net loss . . . . . . . . . . . . . $90 $(915) $448 $(1,640) $(3,260) $(59) $(5,336)

Net unrealized losses related

to level 3 assets and

liabilities still held as of

December 31, 2008 . . . . . $— $ (26) $ — $(1,152) $ — $ — $(1,178)

We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable

inputs. The following is a description of the valuation techniques we use for assets and liabilities measured at

fair value on a recurring basis, as well as our basis for classifying these assets and liabilities as Level 1,

Level 2 or Level 3. These valuation techniques are also used to estimate the fair value of financial instruments

not carried at fair value but disclosed as part of the fair value of financial instruments.

Cash Equivalents, Trading Securities and Available-for-Sale Securities—These securities are recorded in our

consolidated balance sheets at fair value on a recurring basis. Fair value is measured using quoted market

prices in active markets for identical assets, when available. Securities, such as U.S. Treasuries, whose value is

based on quoted market prices in active markets for identical assets are classified as Level 1. If quoted market

prices in active markets for identical assets are not available, we use prices provided by up to four third-party

pricing services that are calibrated to the quoted market prices in active markets for similar securities, and

assets valued in this manner are classified as Level 2. In the absence of prices provided by third-party pricing

services supported by observable market data, fair values are estimated using quoted prices of securities with

similar characteristics or discounted cash flow models that use inputs such as spread, prepayment speed, yield,

and loss severity based on market assumptions where available. Such instruments are generally classified as

Level 2. Where there is limited activity or less transparency around inputs to the valuation, securities are

classified as Level 3.

Mortgage Loans Held for Investment “HFI”— The majority of HFI performing loans and nonperforming

loans that are not individually impaired are reported in our consolidated balance sheets at the principal amount

outstanding, net of cost basis adjustments and an allowance for loan losses. At the transition date, we recorded

consolidated trusts’ loans as HFI at their unpaid principal balance net of an allowance for loan losses. We

elected the fair value option for certain loans containing embedded derivatives that would otherwise require

bifurcation and consolidated loans of senior-subordinate trust structures, which are recorded in our

consolidated balance sheets at fair value on a recurring basis.

Fair value of performing loans represents an estimate of the prices we would receive if we were to securitize

those loans and is determined based on comparisons to Fannie Mae MBS with similar characteristics, either on

a pool or loan level. We use the observable market values of our Fannie Mae MBS determined from thirdparty pricing services and other observable market data as a base value, from which we add or subtract the

fair value of the associated guaranty asset, guaranty obligation and master servicing arrangement. We classify

these valuations primarily within Level 2 of the valuation hierarchy given that the market values of our Fannie

Mae MBS are calibrated to the quoted market prices in active markets for similar securities. To the extent that

significant inputs are not observable or determined by extrapolation of observable points, the loans are

classified within Level 3. Certain loans that do not qualify for Fannie Mae MBS securitization are valued

using market-based data including, for example, credit spreads, severities and prepayment speeds for similar

F-125

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
loans, through third-party pricing services or through a model approach incorporating both interest rate and

credit risk simulating a loan sale via a synthetic structure.

Fair value of single-family nonperforming loans represents an estimate of the prices we would receive if we

were to sell these loans in the nonperforming whole-loan market. We calculate the fair value of nonperforming

loans based on assumptions about key factors, including loan performance, collateral value, foreclosure related

expenses, disposition timeline, and mortgage insurance repayment. Using these assumptions, along with

indicative bids for a representative sample of nonperforming loans, we compute a market calibrated fair value.

The bids on sample loans are obtained from multiple active market participants. Fair value for loans that are

four or more months delinquent, in an open modification period, or in a closed modification and that have

performed for nine or fewer months, is estimated directly from a model calibrated to these indicative bids. Fair

value for loans that are one to three months delinquent is estimated by an interpolation method using three

inputs: (1) the fair value estimate as a performing loan; (2) the fair value estimate as a nonperforming loan;

and (3) the delinquency transition rate corresponding to the loan’s current delinquency status.

Fair value of a portion of our single-family nonperforming loans is measured using the value of the underlying

collateral. These valuations leverage our proprietary distressed home price model. The model assigns a value

using comparable transaction data. In determining what comparables to use in the calculations, the model

measures three key characteristics relative to the target property: (1) distance from target property, (2) time of

the transaction and (3) comparability of the nondistressed value. A portion of the nonperforming loans that are

impaired is measured at fair value in our consolidated balance sheets on a nonrecurring basis. These loans are

classified within Level 3 of the valuation hierarchy because significant inputs are unobservable.

Fair value of multifamily nonperforming loans is determined by external third-party valuations when available.

If third-party valuations are unavailable, we determine the value of the collateral based on a derived property

value estimation method using current net operating income of the property and capitalization rates.

Derivatives Assets and Liabilities (collectively “derivatives”)—Derivatives are recorded in our consolidated

balance sheets at fair value on a recurring basis. The valuation process for the majority of our risk

management derivatives uses observable market data provided by third-party sources, resulting in Level 2

classification. Interest rate swaps are valued by referencing yield curves derived from observable interest rates

and spreads to project and discount swap cash flows to present value. Option-based derivatives use a model

that projects the probability of various levels of interest rates by referencing swaption and caplet volatilities

provided by market makers/dealers. The projected cash flows of the underlying swaps of these option-based

derivatives are discounted to present value using yield curves derived from observable interest rates and

spreads. Exchange-traded futures are valued using market quoted prices, resulting in Level 1 classification.

Certain highly complex structured derivatives use only a single external source of price information due to

lack of transparency in the market and may be modeled using observable interest rates and volatility levels as

well as significant assumptions, resulting in Level 3 classification. Mortgage commitment derivatives use

observable market data, quotes and actual transaction price levels adjusted for market movement, and are

typically classified as Level 2. Adjustments for market movement based on internal model results that cannot

be corroborated by observable market data are classified as Level 3.

Guaranty Assets and Buy-ups—Guaranty assets related to our portfolio securitizations are recorded in our

consolidated balance sheets at fair value on a recurring basis and are classified within Level 3 of the valuation

hierarchy. Guaranty assets in lender swap transactions are recorded in our consolidated balance sheets at the

lower of cost or fair value. These assets, which are measured at fair value on a nonrecurring basis, are

classified within Level 3 of the fair value hierarchy.

We estimate the fair value of guaranty assets based on the present value of expected future cash flows of the

underlying mortgage assets using management’s best estimate of certain key assumptions, which include

F-126

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. These cash

flows are projected using proprietary prepayment, interest rate and credit risk models. Because guaranty assets

are like an interest-only income stream, the projected cash flows from our guaranty assets are discounted using

one-month LIBOR plus the option-adjusted spread (“OAS”) for interest-only trust securities. The interest-only

OAS is calibrated using prices of a representative sample of interest-only trust securities. We believe the

remitted fee income is less liquid than interest-only trust securities and more like an excess servicing strip. We

take a further haircut of the present value for liquidity considerations. The haircut is based on market quotes

from dealers.

The fair value of the guaranty assets include the fair value of any associated buy-ups, which is estimated in

the same manner as guaranty assets but is recorded separately as a component of “Other assets” in our

consolidated balance sheets. While the fair value of the guaranty assets reflect all guaranty arrangements, the

carrying value primarily reflects only those arrangements entered into subsequent to our adoption of the

accounting standard on guarantor’s accounting and disclosure requirements for guarantees.

Short-Term Debt and Long-Term Debt (collectively “debt”)—The majority of debt of Fannie Mae is recorded

in our consolidated balance sheets at the principal amount outstanding, net of cost basis adjustments. We

elected the fair value option for certain structured debt instruments, which are recorded in our consolidated

balance sheets at fair value on a recurring basis.

We use third-party pricing services that reference observable market data such as interest rates and spreads to

measure the fair value of debt, and thus classify that debt as Level 2. When third-party pricing is not

available, we use a discounted cash flow approach based on a yield curve derived from market prices observed

for Fannie Mae Benchmark Notes and adjusted to reflect fair values at the offer side of the market.

For structured debt instruments that are not valued by third-party pricing services, cash flows are evaluated

taking into consideration any structured derivatives through which we have swapped out of the structured

features of the notes. The resulting cash flows are discounted to present value using a yield curve derived from

market prices observed for Fannie Mae Benchmark Notes and adjusted to reflect fair values at the offer side of

the market. Market swaption volatilities are also referenced for the valuation of callable structured debt

instruments. Given that the derivatives considered in the valuations of these structured debt instruments are

classified as Level 3, the valuations of the structured debt instruments result in a Level 3 classification.

At the transition date, we recognized consolidated trusts’ debt held by third parties at their unpaid principal

balance in our consolidated balance sheets. Consolidated MBS debt is traded in the market as MBS assets.

Accordingly, we estimate the fair value of our consolidated MBS debt using quoted market prices in active

markets for similar liabilities when traded as assets. The valuation methodology and inputs used in estimating

the fair value of MBS assets are described under “Cash Equivalents, Trading Securities and Available-for-Sale

Securities.” Certain consolidated MBS debt with embedded derivatives is recorded in our consolidated balance

sheets at fair value on a recurring basis.

Other Liabilities—Represents dollar roll repurchase transactions that reflect prices for similar securities in the

market. They are recorded in our consolidated balance sheets at fair value on a recurring basis. Fair value is

based on observable market-based inputs, quoted market prices and actual transaction price levels adjusted for

market movement, and these liabilities are typically classified as Level 2. Adjustments for market movement

that require internal model results that cannot be corroborated by observable market data results in

classification as Level 3.

Nonrecurring Changes in Fair Value

The following tables display assets and liabilities measured in our consolidated balance sheets at fair value on

a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject

F-127

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
to fair value adjustments in certain circumstances (for example, when we evaluate for impairment), and the

gains or losses recognized for these assets and liabilities for the years ended December 31, 2010, 2009 and

2008, as a result of fair value measurements.

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Estimated

Fair

Value

Total

Losses

Fair Value Measurements

For the Year Ended December 31, 2010

For the Year

Ended

December 31, 2010

(Dollars in millions)

Assets:

Mortgage loans held for sale, at lower of cost or

fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $6,776 $ 535 $7,311(1)(2) $ (91)(2)

Single-family mortgage loans held for investment,

at amortized cost:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . — — 38,150 38,150(3) (2,244)

Of consolidated trusts . . . . . . . . . . . . . . . . . . — — 1,294 1,294(3) (235)

Multifamily mortgage loans held for investment, at

amortized cost:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . — — 1,836 1,836(3) (481)

Acquired property, net:

Single-family. . . . . . . . . . . . . . . . . . . . . . . . . . — — 20,248 20,248(4) (2,617)

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 206 206(4) (65)

Other assets

Guaranty assets . . . . . . . . . . . . . . . . . . . . . . . . — — 27 27 (6)

Partnership investments. . . . . . . . . . . . . . . . . . . — — 107 107 (145)(6)

Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . — — 597 597(5) (43)

Total assets at fair value . . . . . . . . . . . . . . . . . . $— $6,776 $63,000 $69,776 $(5,927)

F-128

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Estimated

Fair

Value

Total

Losses

Fair Value Measurements

For the Year Ended December 31, 2009

For the Year

Ended

December 31, 2009

(Dollars in millions)

Assets:

Mortgage loans held for sale, at lower of cost or

fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $22,238 $ 3,557 $25,795(1) $(1,210)

Mortgage loans held for investment, at amortized

cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 330 4,820 5,150(3) (1,173)

Acquired property, net . . . . . . . . . . . . . . . . . . . . . — — 10,132 10,132(4) (503)

Other assets:

Guaranty assets . . . . . . . . . . . . . . . . . . . . . . . . — — 2,327 2,327 (231)

Master servicing assets . . . . . . . . . . . . . . . . . . . — — 147 147 (546)

Partnership investments. . . . . . . . . . . . . . . . . . . — — 212 212 (5,943)(6)

Total assets at fair value . . . . . . . . . . . . . . . . . . $— $22,568 $21,195 $43,763 $(9,606)

Liabilities:

Master servicing liabilities . . . . . . . . . . . . . . . . . . $— $ — $ 254 $ 254 $ (200)

Total liabilities at fair value. . . . . . . . . . . . . . . . $— $ — $ 254 $ 254 $ (200)

F-129

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Estimated

Fair

Value

Total

Losses

Fair Value Measurements

For the Year Ended December 31, 2008

For the Year

Ended

December 31, 2008

(Dollars in millions)

Assets:

Mortgage loans held for sale, at lower of cost or

fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $26,303 $ 1,294 $27,597(1) $ (433)

Mortgage loans held for investment, at amortized

cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,838 1,838(3) (107)

Acquired property, net . . . . . . . . . . . . . . . . . . . . . — — 9,624 9,624(4) (1,533)

Other assets:

Guaranty assets . . . . . . . . . . . . . . . . . . . . . . . . — — 5,473 5,473 (2,967)

Master servicing assets . . . . . . . . . . . . . . . . . . . — — 547 547 (553)

Partnership investments. . . . . . . . . . . . . . . . . . . — — 4,877 4,877 (764)(6)

Total assets at fair value . . . . . . . . . . . . . . . . . . $— $26,303 $23,653 $49,956 $(6,357)

Liabilities:

Master servicing liabilities . . . . . . . . . . . . . . . . . . $— $ — $ 22 $ 22 $ (12)

Total liabilities at fair value. . . . . . . . . . . . . . . . $— $ — $ 22 $ 22 $ (12)

(1) Includes $7.1 billion, $15.1 billion, and $25.2 billion of mortgage loans held for sale that were sold, retained as a

mortgage-related security or redesignated to mortgage loans held for investment as of December 31, 2010, 2009, and

2008, respectively.

(2) Includes $7.1 billion of estimated fair value and $68 million in losses due to the adoption of the new accounting

standards.

(3) Includes $3.4 billion, $1.1 billion and $157 million of mortgage loans held for investment that were redesignated to

mortgage loans held for sale, liquidated or transferred to foreclosed properties as of December 31, 2010, 2009, and

2008, respectively.

(4) Includes $10.5 billion, $7.1 billion and $4.0 billion of acquired properties that were sold or transferred as of

December 31, 2010, 2009 and 2008, respectively.

(5) Includes $22 million of other assets that were sold or transferred as of December 31, 2010.

(6) Represents impairment charges related to LIHTC partnerships and other equity investments in multifamily properties.

We recognized other than temporary impairment losses of $16 million, $5.5 billion and $506 million related to LIHTC

partnerships for the years ended December 31, 2010, 2009 and 2008, respectively.

The following is a description of the fair valuation techniques we use for assets and liabilities measured at fair

value on a nonrecurring basis under the accounting standard for fair value measurements as well as our basis

for classifying these assets and liabilities as Level 1, Level 2 or Level 3. We also use these valuation

techniques to estimate the fair value of financial instruments not carried at fair value but disclosed as part of

the fair value of financial instruments.

Mortgage Loans Held for Sale “HFS”—HFS loans are reported at the lower of cost or fair value in our

consolidated balance sheets. At the transition date, we reclassified the majority of HFS loans to HFI, as the

trusts do not have the ability to sell mortgage loans and use of such loans is limited exclusively to the

settlement of obligations of the trust. The valuation methodology and inputs used in estimating the fair value

F-130

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
of HFS loans are described under “Mortgage Loans Held for Investment” and these loans are generally

classified as Level 2. To the extent that significant inputs are not observable or determined by extrapolation of

observable points, the loans are classified within Level 3.

Acquired Property, Net and Other Assets—Acquired property, net mainly represents foreclosed property

received in full satisfaction of a loan net of a valuation allowance. Acquired property is initially recorded in

our consolidated balance sheets at its fair value less its estimated cost to sell. The initial fair value of

foreclosed properties is determined using a hierarchy based on the reliability of available information. The fair

value estimate is based on the best information available at the time of valuation. The hierarchy includes

offers accepted, third-party interior appraisals, independent broker opinions, proprietary home price model

values, and exterior broker price opinions. Estimated cost to sell is based upon historical sales cost at a

geographic level.

Subsequent to initial measurement, the foreclosed properties that we intend to sell are reported at the lower of

the carrying amount or fair value less estimated cost to sell. Foreclosed properties classified as held for use,

included in other assets, are depreciated and are impaired when circumstances indicate that the carrying

amount of the property is no longer recoverable. Acquired property held for use is included in other assets in

our consolidated balance sheets. The fair value of our single-family foreclosed properties on an ongoing basis

is determined using the same information hierarchy used at the point of initial fair value. The fair value of our

multifamily properties is derived using third-party valuations. When third-party valuations are not available,

we estimate the fair value using current net operating income of the property and capitalization rates.

Acquired property is classified within Level 3 of the valuation hierarchy because significant inputs are

unobservable.

Master Servicing Assets and Liabilities—Master servicing assets and liabilities are reported at the lower of

cost or fair value in our consolidated balance sheets. We measure the fair value of master servicing assets and

liabilities based on the present value of expected cash flows of the underlying mortgage assets using

management’s best estimates of certain key assumptions, which include prepayment speeds, forward yield

curves, adequate compensation, and discount rates commensurate with the risks involved. Changes in

anticipated prepayment speeds, in particular, result in fluctuations in the estimated fair values of our master

servicing assets and liabilities. If actual prepayment experience differs from the anticipated rates used in our

model, this may result in a material change in the fair value. Master servicing assets and liabilities are

classified as Level 3.

Partnership Investments—Unconsolidated investments in limited partnerships are primarily accounted for

under the equity method of accounting. During 2009, we reduced the carrying value of our LIHTC

investments to zero. We previously determined the fair value of our LIHTC investments using internal models

that estimated the present value of the expected future tax benefits (tax credits and tax deductions for net

operating losses) expected to be generated from the properties underlying these investments. Our estimates

were based on assumptions that other market participants would use in valuing these investments. The key

assumptions used in our models, which required significant management judgment, included discount rates

and projections related to the amount and timing of tax benefits. We compared our model results to

independent third-party valuations to validate the reasonableness of our assumptions and valuation results. We

also compared our model results to the limited number of observed market transactions and made adjustments

to reflect differences between the risk profile of the observed market transactions and our LIHTC investments.

For our other equity method investments, we use a net present value approach to estimate the fair value. The

key assumptions used in our approach, which require significant management judgment, include discount rates

and projections related to the amount and timing of cash flows. Our equity investments in LIHTC limited

F-131

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
partnerships and other equity investments are classified as Level 3 because they trade in a market with limited

observable transactions.

Fair Value of Financial Instruments

The following table displays the carrying value and estimated fair value of our financial instruments as of

December 31, 2010 and 2009. The fair value of financial instruments we disclose, includes commitments to

purchase multifamily mortgage and single-family mortgage loans, which are off-balance sheet financial

instruments that we do not record in our consolidated balance sheets. The fair values of these commitments

are included as “Mortgage loans held for investment, net of allowance for loan losses.” The disclosure

excludes certain financial instruments, such as plan obligations for pension and postretirement health care

benefits, employee stock option and stock purchase plans, and also excludes all non-financial instruments. As

a result, the fair value of our financial assets and liabilities does not represent the underlying fair value of our

total consolidated assets and liabilities.

Carrying

Value

Estimated

Fair Value

Carrying

Value

Estimated

Fair Value

2010 2009(2)

As of December 31,

(Dollars in millions)

Financial assets:

Cash and cash equivalents(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,975 $ 80,975 $ 9,882 $ 9,882

Federal funds sold and securities purchased under agreements to

resell or similar arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . 11,751 11,751 53,684 53,656

Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,856 56,856 111,939 111,939

Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,392 94,392 237,728 237,728

Mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 915 915 18,462 18,615

Mortgage loans held for investment, net of allowance for loan

losses:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358,698 319,367 246,509 241,300

Of consolidated trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,564,107 2,610,145 129,590 129,545

Mortgage loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . 2,922,805 2,929,512 376,099 370,845

Advances to lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,215 6,990 5,449 5,144

Derivative assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,137 1,137 1,474 1,474

Guaranty assets and buy-ups. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458 814 9,520 14,624

Total financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,176,504 $3,183,342 $824,237 $823,907

Financial liabilities:

Federal funds purchased and securities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52 $ 51 $ — $ —

Short-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,884 151,974 200,437 200,493

Of consolidated trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,359 5,359 — —

Long-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 628,160 649,684 567,950 587,423

Of consolidated trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,411,597 2,514,929 6,167 6,310

Derivative liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . 1,715 1,715 1,029 1,029

Guaranty obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 769 3,854 13,996 138,582

Total financial liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,199,536 $3,327,566 $789,579 $933,837

(1) Includes restricted cash of $63.7 billion and $3.1 billion as of December 31, 2010 and 2009, respectively.

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

F-132

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following are valuation techniques for items not subject to the fair value hierarchy either because they are

not measured at fair value other than for the purpose of the above table or because they are only measured at

fair value at inception.

Financial Instruments for which fair value approximates carrying value—We hold certain financial instruments

that are not carried at fair value but for which the carrying value approximates fair value due to the short-term

nature and negligible credit risk inherent in them. These financial instruments include cash and cash

equivalents, federal funds and securities sold/purchased under agreements to repurchase/resell (exclusive of

dollar roll repurchase transactions) and the majority of advances to lenders.

Advances to Lenders—The carrying value for the majority of our advances to lenders approximates the fair

value due to the short-term nature of the specific instruments. Other instruments include loans for which the

carrying value does not approximate fair value. These loans are valued using collateral values of similar loans

as a proxy.

Guaranty Obligations—The fair value of all guaranty obligations (“GO”), measured subsequent to their initial

recognition, is our estimate of a hypothetical transaction price we would receive if we were to issue our

guaranty to an unrelated party in a standalone arm’s-length transaction at the measurement date. We estimate

the fair value of the GO using our internal GO valuation models, which calculate the present value of

expected cash flows based on management’s best estimate of certain key assumptions such as current

mark-to-market LTV ratios, future house prices, default rates, severity rates and required rate of return. We

further adjust the model values based on our current market pricing when such transactions reflect credit

characteristics that are similar to our outstanding GO. While the fair value of the GO reflects all guaranty

arrangements, the carrying value primarily reflects only those arrangements entered into subsequent to our

adoption of the accounting standard on guarantor’s accounting and disclosure requirements for guarantees.

Fair Value Option

We elected the fair value option for certain consolidated loans and debt instruments recorded in our

consolidated balance sheets as a result of consolidating VIEs. These instruments contain embedded derivatives

that would otherwise require bifurcation. Under the fair value option, we elected to carry these instruments at

fair value instead of bifurcating the embedded derivative from the respective loan or debt instrument.

We elected the fair value option for all long-term structured debt instruments that are issued in response to

specific investor demand and have interest rates that are based on a calculated index or formula and are

economically hedged with derivatives at the time of issuance. By electing the fair value option for these

instruments, we are able to eliminate the volatility in our results of operations that would otherwise result

from the accounting asymmetry created by recording these structured debt instruments at cost while recording

the related derivatives at fair value.

We elected the fair value option for the financial assets and liabilities of the senior-subordinate trust structures

we consolidated as a result of adopting the new consolidation accounting standard on January 1, 2010. By

electing the fair value option for these instruments, we are able to eliminate the volatility in our results of

operations that would otherwise result from different accounting treatment between loans at cost and debt at

cost.

Interest income for the mortgage loans is recorded in “Mortgage loans interest income” and interest expense

for the debt instruments is recorded in “Long-term debt interest expense” in our consolidated statements of

operations.

The following table displays the fair value and unpaid principal balance of the financial instruments for which

we have made fair value elections as of December 31, 2010 and 2009. For information about the related fair

F-133

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
value gains and losses associated with these instruments, refer to “Note 1, Summary of Significant Accounting

Policies.”

Loans of

Consolidated

Trusts(1)

Long-Term

Debt of

Fannie Mae

Long-Term

Debt of

Consolidated

Trusts(2)

Long-Term

Debt of

Fannie Mae

2010 2009

As of December 31,

(Dollars in millions)

Fair value . . . ...................................... $2,962 $(893) $(2,271) $(3,274)

Unpaid principal balance ................................ 3,456 (829) (2,572) (3,181)

(1) Includes nonaccrual loans with a fair value of $219 million and loans that are 90 or more days past due with a fair

value of $369 million as of December 31, 2010.

(2) Includes interest-only debt instruments with no unpaid principal balance and a fair value of $151 million as of

December 31, 2010.

Changes in Fair Value under the Fair Value Option Election

The following table displays fair value gains and losses, net, including changes attributable to instrumentspecific credit risk, for loans and debt for which the fair value election was made. Amounts are recorded as a

component of “Fair value gains and losses, net” in our consolidated statements of operations for the years

ended December 31, 2010, 2009 and 2008.

Loans

LongTerm

Debt

Total

Losses

LongTerm

Debt

Total

Gains

(Losses)

ShortTerm

Debt

LongTerm

Debt

Total

Gains

(Losses)

2010 2009 2008

For the Year Ended December 31,

(Dollars in millions)

Changes in instrument-specific credit risk ............... $ (58) $ (9) $ (67) $ 33 $ 33 $ 6 $ 94 $ 100

Other changes in fair value . . . ..................... (73) 14 (59) (64) (64) (6) (151) (157)

Fair value gains (losses), net . ..................... $(131) $ 5 $(126) $(31) $(31) $— $ (57) $ (57)

In determining the instrument-specific risk, the changes in Fannie Mae debt spreads to LIBOR that occurred

during the period were taken into consideration with the overall change in the fair value of the debt for which

we elected the fair value option for financial instruments. Specifically, cash flows are evaluated taking into

consideration any derivatives through which Fannie Mae has swapped out of the structured features of the

notes and thus created a floating-rate LIBOR-based debt instrument. The change in value of these LIBORbased cash flows based on the Fannie Mae yield curve at the beginning and end of the period represents the

instrument-specific risk.

20. Commitments and Contingencies

We are party to various types of legal actions and proceedings, including actions brought on behalf of various

classes of claimants. We also are subject to regulatory examinations, inquiries and investigations and other

information gathering requests. Litigation claims and proceedings of all types are subject to many uncertain

factors that generally cannot be predicted with assurance. The following describes our material legal

proceedings, investigations and other matters.

For certain legal actions and proceedings we have established a reserve against probable losses where we can

reasonably estimate such losses or ranges of losses; based on our current knowledge and after consultation

with counsel, we do not believe that such losses or ranges of losses will have a material adverse effect on our

F-134

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
financial condition. We note, however, that in light of the uncertainties involved in such actions and

proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the

reserves we have currently accrued. For certain other legal actions or proceedings, we cannot reasonably

estimate such losses or ranges of losses, particularly for proceedings that are in their early stages of

development, where plaintiffs seek substantial or indeterminate damages, or where there may be novel or

unsettled legal questions relevant to the proceedings. For these matters, we have not established a reserve.

Given the uncertainties involved in any action or proceeding, regardless of whether we have established a

reserve, the ultimate resolution of any matter may be material to our operating results for a particular period,

depending on, among other factors, the size of the loss or liability imposed and the level of our net income or

loss for that period. Based on our current knowledge with respect to the lawsuits described below, we believe

we have valid defenses to the claims in these lawsuits and intend to defend these lawsuits vigorously

regardless of whether or not we have recorded a loss reserve.

In addition to the matters specifically described below, we are involved in a number of legal and regulatory

proceedings that arise in the ordinary course of business that we do not expect will have a material impact on

our business. We have advanced fees and expenses of certain current and former officers and directors in

connection with various legal proceedings pursuant to indemnification agreements.

In re Fannie Mae Securities Litigation

Fannie Mae is a defendant in a consolidated class action lawsuit initially filed in 2004 and currently pending

in the U.S. District Court for the District of Columbia. In the consolidated complaint filed on March 4, 2005,

lead plaintiffs Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio

allege that we and certain former officers, as well as our former outside auditor, made materially false and

misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and

SEC Rule 10b-5 promulgated thereunder. Plaintiffs contend that Fannie Mae’s accounting statements were

inconsistent with GAAP requirements relating to hedge accounting and the amortization of premiums and

discounts, and seek unspecified compensatory damages, attorneys’ fees, and other fees and costs. On

January 7, 2008, the court defined the class as all purchasers of Fannie Mae common stock and call options

and all sellers of publicly traded Fannie Mae put options during the period from April 17, 2001 through

December 22, 2004. On October 17, 2008, FHFA, as conservator for Fannie Mae, intervened in this case.

2008 Class Action Lawsuits

Fannie Mae is a defendant in two consolidated class actions filed in 2008 and currently pending in the

U.S. District Court for the Southern District of New York—In re Fannie Mae 2008 Securities Litigation and In

re 2008 Fannie Mae ERISA Litigation. On February 11, 2009, the Judicial Panel on Multidistrict Litigation

ordered that the cases be coordinated for pretrial proceedings. On October 13, 2009, the Court entered an

order allowing FHFA to intervene in—In re Fannie Mae 2008 Securities Litigation.

In re Fannie Mae 2008 Securities Litigation

In a consolidated complaint filed on June 22, 2009, lead plaintiffs Massachusetts Pension Reserves Investment

Management Board and Boston Retirement Board (for common shareholders) and Tennessee Consolidated

Retirement System (for preferred shareholders) allege that we, certain of our former officers, and certain of

our underwriters violated Sections 12(a)(2) and 15 of the Securities Act of 1933. Lead plaintiffs also allege

that we, certain of our former officers, and our outside auditor, violated Sections 10(b) (and Rule 10b-5

promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934. Lead plaintiffs purport to represent

a class of persons who, between November 8, 2006 and September 5, 2008, inclusive, purchased or acquired

(a) Fannie Mae common stock and options or (b) Fannie Mae preferred stock. Lead plaintiffs seek various

F-135

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
forms of relief, including rescission, damages, interest, costs, attorneys’ and experts’ fees, and other equitable

and injunctive relief.

On November 24, 2009, the Court granted the defendants’ motion to dismiss the Securities Act claims as to

all defendants. On September 30, 2010, the Court granted in part and denied in part the defendants’ motions

to dismiss the Securities Exchange Act claims. As a result of the partial denial, some of the Securities

Exchange Act claims remain pending against us and certain of our former officers. On October 14, 2010, we

and certain other defendants filed motions for reconsideration of those portions of the Court’s September 30,

2010 order denying in part the defendants’ motions to dismiss. These motions are fully briefed and remain

pending. Fannie Mae filed its answer to the consolidated complaint on December 31, 2010.

In re 2008 Fannie Mae ERISA Litigation

In a consolidated complaint filed on September 11, 2009, plaintiffs allege that certain of our current and

former officers and directors, including former members of Fannie Mae’s Benefit Plans Committee and the

Compensation Committee of Fannie Mae’s Board of Directors, as fiduciaries of Fannie Mae’s Employee Stock

Ownership Plan (“ESOP”), breached their duties to ESOP participants and beneficiaries by investing ESOP

funds in Fannie Mae common stock when it was no longer prudent to continue to do so. Plaintiffs purport to

represent a class of participants and beneficiaries of the ESOP whose accounts invested in Fannie Mae

common stock beginning April 17, 2007. The plaintiffs seek unspecified damages, attorneys’ fees and other

fees and costs and injunctive and other equitable relief. On November 2, 2009, defendants filed motions to

dismiss these claims, which are now fully briefed and remain pending.

Comprehensive Investment Services v. Mudd, et al.

On May 13, 2009, Comprehensive Investment Services, Inc. filed an individual securities action against certain

of our former officers and directors, and certain of our underwriters in the Southern District of Texas. Plaintiff

alleges violations of Section 12(a)(2) of the Securities Act of 1933; violation of § 10(b) of the Securities

Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; violation of § 20(a) of the Securities

Exchange Act of 1934; and violations of the Texas Business and Commerce Code, common law fraud, and

negligent misrepresentation in connection with Fannie Mae’s May 2008 $2.0 billion offering of 8.25% noncumulative preferred Series T stock. The complaint seeks various forms of relief, including rescission,

damages, interest, costs, attorneys’ and experts’ fees, and other equitable and injunctive relief. On July 7,

2009, this case was transferred to the Southern District of New York for coordination with In re Fannie Mae

2008 Securities Litigation and In re 2008 Fannie Mae ERISA Litigation.

Smith v. Fannie Mae, et al.

On February 25, 2010, plaintiff Edward Smith filed an individual complaint against Fannie Mae and certain of

its former officers as well as several underwriters in the U.S. District Court for the Southern District of

California. Plaintiff alleges violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5

promulgated thereunder; violation of § 20(a) of the Securities Exchange Act of 1934; common law fraud and

negligence claims in connection with Fannie Mae’s December 2007 $7.0 billion offering of 7.75%

fixed-to-floating rate non-cumulative preferred Series S stock. Plaintiff seeks relief in the form of rescission,

actual damages (including interest), and exemplary and punitive damages. On March 26, 2010, this case was

transferred to the Southern District of New York for coordination with In re Fannie Mae 2008 Securities

Litigation.

F-136

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Investigation by the Securities and Exchange Commission

On September 26, 2008, we received notice of an ongoing investigation into Fannie Mae by the SEC

regarding certain accounting and disclosure matters. On January 8, 2009, the SEC issued a formal order of

investigation. We are cooperating with this investigation.

Investigation by the Department of Justice

On September 26, 2008, we received notice of an ongoing federal investigation by the U.S. Attorney for the

Southern District of New York into certain accounting, disclosure and corporate governance matters. In

connection with that investigation, Fannie Mae received a Grand Jury subpoena for documents. That subpoena

was subsequently withdrawn. However, we were informed that the Department of Justice was continuing an

investigation and on March 15, 2010, we received another Grand Jury subpoena for documents. We are

cooperating with this investigation.

Escrow Litigation

Casa Orlando Apartments, Ltd., et al. v. Federal National Mortgage Association (formerly known as Medlock

Southwest Management Corp., et al. v. Federal National Mortgage Association)

A complaint was filed against us in the U.S. District Court for the Eastern District of Texas (Texarkana

Division) on June 2, 2004, in which plaintiffs purport to represent a class of multifamily borrowers whose

mortgages are insured under Sections 221(d)(3), 236 and other sections of the National Housing Act and are

held or serviced by us. The complaint identified as a proposed class low- and moderate-income apartment

building developers who maintained uninvested escrow accounts with us or our servicer. Plaintiffs Casa

Orlando Apartments, Ltd., Jasper Housing Development Company and the Porkolab Family Trust No. 1 allege

that we violated fiduciary obligations that they contend we owed to borrowers with respect to certain escrow

accounts and that we were unjustly enriched. In particular, plaintiffs contend that, starting in 1969, we misused

these escrow funds and are therefore liable for any economic benefit we received from the use of these funds.

The plaintiffs seek a return of any profits, with accrued interest, earned by us related to the escrow accounts at

issue, as well as attorneys’ fees and costs. Our motions to dismiss and for summary judgment with respect to

the statute of limitations were denied. Plaintiffs filed an amended complaint on December 16, 2005. On

July 13, 2009, the Court denied plaintiffs’ motion for class certification. On October 14, 2010, the U.S. Court

of Appeals for the Fifth Circuit affirmed the District Court’s denial of class certification.

Unconditional Purchase and Lease Commitments

We have unconditional commitments related to the purchase of loans and mortgage-related securities. These

include both on- and off-balance sheet commitments wherein a portion of these have been recorded as

derivatives in our consolidated balance sheets. Unfunded lending represents off-balance sheet commitments for

the unutilized portion of lending agreements entered into with multifamily borrowers.

We lease certain premises and equipment under agreements that expire at various dates through 2029. Some of

these leases provide for payment by the lessee of property taxes, insurance premiums, cost of maintenance and

other costs. Rental expenses for operating leases were $35 million, $62 million and $50 million for the years

ended December 31, 2010, 2009 and 2008, respectively.

F-137

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes by remaining maturity, non cancelable future commitments related to loan

and mortgage purchases, unfunded lending, operating leases, and other agreements as of December 31, 2010.

Loans and MortgageRelated Securities(1) Unfunded Lending Operating Leases Other(2)

As of December 31, 2010

(Dollars in millions)

2011 .................................. $54,837 $ 72 $ 40 $34

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 92 36 19

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 42 25 10

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 17 2

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 3 14 —

Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 26 —

Total . . .............................. $54,858 $209 $158 $65

(1) Includes $54.5 billion, which have been accounted for as mortgage commitment derivatives.

(2) Includes purchase commitments for certain telecom services, computer software and services, and other agreements.

21. Selected Quarterly Financial Information (Unaudited)

The condensed consolidated statements of operations for the quarterly periods in 2010 and 2009 are unaudited

and in the opinion of management include all adjustments, consisting of normal recurring adjustments,

necessary for a fair presentation of our condensed consolidated statements of operations. The operating results

for the interim periods are not necessarily indicative of the operating results to be expected for a full year or

for other interim periods.

F-138

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31 June 30(1) September 30 December 31(2)

For the 2010 Quarter Ended

(Dollars and shares in millions, except per share amounts)

Interest income: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 315 $ 330 $ 310 $ 296

Available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,473 1,389 1,313 1,115

Mortgage loans:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,298 3,950 3,859 3,885

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,321 33,682 32,807 31,781

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 41 31 35

Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,446 39,392 38,320 37,112

Interest expense:

Short-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 164 190 149

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3 4 3

Long-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,081 4,975 4,472 4,329

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,458 30,043 28,878 27,994

Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,657 35,185 33,544 32,475

Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,789 4,207 4,776 4,637

Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,939) (4,295) (4,696) (3,772)

Net interest income (loss) after provision for loan losses . . . . . . . . . . . . (9,150) (88) 80 865

Guaranty fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 52 51 45

Investment gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 23 82 75

Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . (186) (48) (366) (94)

Noncredit portion of other-than-temporary impairments recognized in

other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50) (89) 40 71

Net other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . (236) (137) (326) (23)

Fair value gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,705) 303 525 366

Debt extinguishment losses, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (124) (159) (214) (71)

Income (losses) from partnership investments. . . . . . . . . . . . . . . . . . . . (58) (26) 47 (37)

Fee and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 242 253 208

Non-interest income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,724) 298 418 563

Administrative expenses: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 324 324 325 304

Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 260 305 183

Occupancy expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 40 43 46

Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 46 57 59

Total administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 605 670 730 592

Provision (benefit) for guaranty losses . . . . . . . . . . . . . . . . . . . . . . . . (36) 69 78 83

Foreclosed property expense (income) . . . . . . . . . . . . . . . . . . . . . . . . (19) 487 787 463

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 198 243 240

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 722 1,424 1,838 1,378

Income (loss) before federal income taxes . . . . . . . . . . . . . . . . . . . . . . (11,596) (1,214) (1,340) 50

Provision (benefit) for federal income taxes . . . . . . . . . . . . . . . . . . . . . (67) 9 (9) (15)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,529) (1,223) (1,331) 65

Less: Net (income) loss attributable to the noncontrolling interest . . . . . (1) 5 (8) 8

Net income (loss) attributable to Fannie Mae . . . . . . . . . . . . . . . . . . . . (11,530) (1,218) (1,339) 73

Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,527) (1,907) (2,116) (2,154)

Net loss attributable to common stockholders. . . . . . . . . . . . . . . . . . . . $(13,057) $ (3,125) $ (3,455) $ (2,081)

Loss per share—Basic and Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2.29) $ (0.55) $ (0.61) $ (0.37)

Weighted-average common shares outstanding—Basic and Diluted. . . . . . 5,692 5,694 5,695 5,696

(1) Includes out-of-period adjustment of $1.1 billion to provision for loan losses, reflecting our assessment of the

collectibility of the receivable from the borrowers for preforeclosure property taxes and insurance.

(2) Includes settlement from Bank of America Inc. related to repurchase requests for residential mortgage loans of

$1.3 billion.

F-139

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31 June 30 September 30 December 31

For the 2009 Quarter Ended

(Dollars and shares in millions, except per share amounts)

Interest income:

Trading securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 990 $ 923 $ 862 $ 1,084

Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . 3,721 3,307 3,475 3,115

Mortgage loans:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,707 4,392 3,229 3,050

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . 891 1,219 2,061 1,972

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 139 48 43

Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 10,436 9,980 9,675 9,264

Interest expense:

Short-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,107 600 390 209

Long-term debt:

Of Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,992 5,560 5,370 5,273

Of consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 85 85 85

Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 7,188 6,245 5,845 5,567

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,248 3,735 3,830 3,697

Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,509) (2,615) (2,546) (1,899)

Net interest income after provision for loan losses. . . . . . . . . . . 739 1,120 1,284 1,798

Guaranty fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,752 1,659 1,923 1,877

Investment gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . 223 (45) 785 495

Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . (5,653) (1,097) (1,018) (1,289)

Noncredit portion of other-than-temporary impairments

recognized in other comprehensive loss . . . . . . . . . . . . . . . . — 344 79 (1,227)

Net other-than-temporary impairments . . . . . . . . . . . . . . . . . . . (5,653) (753) (939) (2,516)

Fair value gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . (1,460) 823 (1,536) (638)

Debt extinguishment losses, net. . . . . . . . . . . . . . . . . . . . . . . . (79) (190) (11) (45)

Losses from partnership investments . . . . . . . . . . . . . . . . . . . . (357) (571) (520) (5,287)

Fee and other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 197 194 190

Non-interest income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . (5,382) 1,120 (104) (5,924)

Administrative expenses:

Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . 293 245 293 302

Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 180 178 183

Occupancy expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 46 47 64

Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 39 39 44 63

Total administrative expenses . . . . . . . . . . . . . . . . . . . . 523 510 562 612

Provision for guaranty losses . . . . . . . . . . . . . . . . . . . . . . . . . 17,825 15,610 19,350 10,272

Foreclosed property expense (income) . . . . . . . . . . . . . . . . . . . 538 559 64 (251)

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 318 231 656

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,165 16,997 20,207 11,289

Loss before federal income taxes and extraordinary losses . . . . . (23,808) (14,757) (19,027) (15,415)

Provision (benefit) for federal income taxes . . . . . . . . . . . . . . . (623) 23 (143) (242)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,185) (14,780) (18,884) (15,173)

Less: Net (income) loss attributable to the noncontrolling

interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 26 12 (2)

Net loss attributable to Fannie Mae . . . . . . . . . . . . . . . . . . . . . (23,168) (14,754) (18,872) (15,175)

Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29) (411) (883) (1,151)

Net loss attributable to common stockholders . . . . . . . . . . . . . . $(23,197) $(15,165) $(19,755) $(16,326)

Loss per share—Basic and Diluted . . . . . . . . . . . . . . . . . . . . . $ (4.09) $ (2.67) $ (3.47) $ (2.87)

Weighted-average common shares outstanding—Basic and

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,666 5,681 5,685 5,687

F-140

FANNIE MAE

(In conservatorship)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Exhibit 31.1

CERTIFICATION

PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)

I, Michael J. Williams, certify that:

1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2010 of Fannie Mae

(formally, the Federal National Mortgage Association);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to

state a material fact necessary to make the statements made, in light of the circumstances under which such

statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the

registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure

controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control

over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and

have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be designed under our supervision, to ensure that material information relating to the

registrant, including its consolidated subsidiaries, is made known to us by others within those entities,

particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over

financial reporting to be designed under our supervision, to provide reasonable assurance regarding the

reliability of financial reporting and the preparation of financial statements for external purposes in

accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in

this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end

of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that

occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case

of an annual report) that has materially affected, or is reasonably likely to materially affect, the

registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of

internal control over financial reporting, to the registrant’s auditors and the audit committee of the

registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control

over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,

process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: February 24, 2011

/s/ Michael J. Williams

Michael J. Williams

President and Chief Executive Officer
Exhibit 31.2

CERTIFICATION

PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)

I, David C. Hisey, certify that:

1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2010 of Fannie Mae

(formally, the Federal National Mortgage Association);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to

state a material fact necessary to make the statements made, in light of the circumstances under which such

statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the

registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure

controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control

over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and

have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be designed under our supervision, to ensure that material information relating to the

registrant, including its consolidated subsidiaries, is made known to us by others within those entities,

particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over

financial reporting to be designed under our supervision, to provide reasonable assurance regarding the

reliability of financial reporting and the preparation of financial statements for external purposes in

accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in

this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end

of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that

occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case

of an annual report) that has materially affected, or is reasonably likely to materially affect, the

registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of

internal control over financial reporting, to the registrant’s auditors and the audit committee of the

registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control

over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,

process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: February 24, 2011

/s/ David C. Hisey

David C. Hisey

Executive Vice President and

Deputy Chief Financial Officer
Exhibit 32.1

CERTIFICATION

In connection with the Annual Report on Form 10-K of Fannie Mae (formally, the Federal National Mortgage

Association) for the year ended December 31, 2010, as filed with the Securities and Exchange Commission on

the date hereof (the “Report”), I, Michael J. Williams, President and Chief Executive Officer of Fannie Mae,

certify, pursuant to 18 U.S.C. Section 1350 that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities

Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and

results of operations of Fannie Mae.

/s/ Michael J. Williams

Michael J. Williams

President and Chief Executive Officer

Dated: February 24, 2011

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed

as part of the Report or as a separate disclosure document.
Exhibit 32.2

CERTIFICATION

In connection with the Annual Report on Form 10-K of Fannie Mae (formally, the Federal National Mortgage

Association) for the year ended December 31, 2010, as filed with the Securities and Exchange Commission on

the date hereof (the “Report”), I, David C. Hisey, Executive Vice President and Deputy Chief Financial Officer

of Fannie Mae, certify, pursuant to 18 U.S.C. Section 1350, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities

Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and

results of operations of Fannie Mae.

/s/ David C. Hisey

David C. Hisey

Executive Vice President and

Deputy Chief Financial Officer

Dated: February 24, 2011

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed

as part of the Report or as a separate disclosure document.
FR005