OFFERING CIRCULAR

3,000,000 Shares

5.25% Non-Cumulative Preferred Stock, Series D

(stated value $50 per share)

Dividends on the 5.25% Non-Cumulative Preferred Stock, Series D (stated value $50 per share) (the ""Preferred

Stock'') of the Federal National Mortgage Association (the ""Corporation'' or ""Fannie Mae'') will accrue from and

including September 30, 1998 and will be payable quarterly on March 31, June 30, September 30 and December 31 of

each year, commencing December 31, 1998, at the annual rate of $2.625 per share. Such dividends will be payable when,

as and if declared by the Board of Directors of the Corporation in its sole discretion out of funds legally available for such

payment.

Dividends on the Preferred Stock will not be cumulative. Because dividends on the Preferred Stock are noncumulative, if for any reason a dividend on the Preferred Stock is not declared for a dividend period, the Corporation will

have no obligation to pay a dividend for such period, whether or not dividends on the Preferred Stock are declared for any

future dividend period. If, however, dividends have not been paid or set aside for payment on the Preferred Stock in

respect of a dividend period, the Corporation may not pay dividends on its common stock in respect of such period.

On or after September 30, 1999, the Preferred Stock will be redeemable, in whole or in part, at any time or from time

to time, at the option of the Corporation at the redemption price of $50.00 per share plus an amount equal to the

dividend for the then-current quarterly dividend period accrued to but excluding the date of such redemption (whether or

not declared, but without accumulation of any dividends for prior dividend periods).

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

Voting Rights; Amendments.''

The Preferred Stock has not been listed on a stock exchange.

THE OBLIGATIONS OF THE CORPORATION UNDER THE TERMS OF THE PREFERRED STOCK

ARE OBLIGATIONS OF THE CORPORATION ONLY AND ARE NOT THOSE OF THE UNITED STATES

OR OF ANY INSTRUMENTALITY THEREOF OTHER THAN THE CORPORATION.

Price to Underwriting Proceeds to

Public(1) Discount(2) Corporation(1)(3)

Per Share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $50.00 $0.50 $49.50

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $150,000,000 $1,500,000 $148,500,000

(1) Plus accrued dividends, if any, from September 30, 1998.

(2) The Corporation has agreed to indemnify the Underwriter against certain liabilities. See ""Underwriting.''

(3) Before deducting expenses payable by the Corporation estimated at $100,000.

The Preferred Stock is oÅered by the Underwriter, subject to prior sale, when, as and if issued to and accepted by it

and subject to certain other conditions. The Underwriter reserves the right to withdraw, cancel or modify such oÅer and

to reject orders in whole or in part. It is expected that delivery of the Preferred Stock will be made in New York, New

York, on or about September 30, 1998 against payment therefor in immediately available funds.

Bear, Stearns & Co. Inc.

August 20, 1998
THE UNDERWRITER PARTICIPATING IN THIS OFFERING MAY ENGAGE IN

TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE

PRICE OF THE PREFERRED STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF PREFERRED STOCK TO COVER SHORT POSITIONS OF THE UNDERWRITER. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE

""UNDERWRITING.''

The shares of Preferred Stock are exempt from the registration requirements of the

Securities Act of 1933 and are ""exempted securities'' within the meaning of the Securities

Exchange Act of 1934. Accordingly, no registration statement has been Ñled with the

Securities and Exchange Commission. The Preferred Stock has not been approved or

disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission or any state securities commission

passed upon the accuracy or adequacy of this OÅering Circular. Any representation to the

contrary is a criminal oÅense.

The distribution of this OÅering Circular and the oÅer, sale and delivery of the

Preferred Stock in certain jurisdictions may be restricted by law. Persons into whose

possession this OÅering Circular comes are required by the Corporation and the Underwriter to inform themselves about and to observe any such restrictions.

DOCUMENTS INCORPORATED BY REFERENCE

This OÅering Circular should be read only in conjunction with the Corporation's Information

Statement dated March 31, 1998 and the Supplements thereto dated May 15, 1998 and August 13,

1998 (collectively, the ""Information Statement''), which are attached hereto and incorporated herein

by this reference. This OÅering Circular, together with the Information Statement and any documents

incorporated herein by reference, are referred to herein as the ""OÅering Circular.'' Any Information

Statement, supplement thereto, or proxy statement published by the Corporation subsequent to the

date of this OÅering Circular and prior to the termination of the oÅering of the Preferred Stock shall

be deemed to be incorporated herein by this reference. Any statement contained herein or in a

document incorporated or deemed to be incorporated by reference herein shall be deemed to be

modiÑed or superseded for purposes of this OÅering Circular to the extent that a statement contained

herein or in any other subsequent document that also is or is deemed to be incorporated by reference

herein modiÑes or supersedes such statement. Any such statement so modiÑed or superseded shall not

be deemed, except as so modiÑed or superseded, to constitute a part of this OÅering Circular.

AVAILABLE INFORMATION

Copies of any or all documents incorporated herein by reference may be obtained without charge

from the OÇce of Investor Relations, Fannie Mae, 3900 Wisconsin Avenue N.W., Washington, D.C.

20016 (telephone: (202) 752-7115). The Information Statement, proxy statements and other

information concerning the Corporation also may be inspected at the oÇces of the New York Stock

Exchange, the Chicago Stock Exchange and the PaciÑc Stock Exchange.

The Corporation is not subject to the periodic reporting requirements of the Securities Exchange

Act of 1934 and does not Ñle reports or other information with the Securities and Exchange

Commission.

2
SUMMARY OF THE OFFERING

The following summary is qualiÑed in its entirety by, and should be read in conjunction with, the

more detailed information and Ñnancial data appearing elsewhere in this OÅering Circular, the

Information Statement and the CertiÑcate of Designation (as deÑned under ""Description of Preferred

Stock'').

The Corporation

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

under the Federal National Mortgage Association Charter Act (the ""Charter Act''). It is the largest

investor in home mortgage loans in the United States. The Corporation provides funds to the

mortgage market by purchasing mortgage loans from lenders, thereby replenishing their funds for

additional lending. The Corporation acquires funds to purchase loans from many capital market

investors that ordinarily may not invest in mortgage loans, thereby expanding the total amount of

funds available for housing. The Corporation also issues mortgage-backed securities (""MBS''). The

Corporation receives guaranty fees for its guarantee of timely payment of principal and interest on

MBS certiÑcates.

The OÅering

Issuer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fannie Mae.

Securities OÅered ÏÏÏÏÏÏÏÏÏÏ 3,000,000 shares of 5.25% Non-Cumulative Preferred Stock, Series D, no par value, stated value and liquidation preference

$50.00 per share (the ""Preferred Stock'').

Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Holders of Preferred Stock will be entitled to receive non-cumulative, quarterly cash dividends which will accrue from and including September 30, 1998 and will be payable on March 31,

June 30, September 30 and December 31 of each year, commencing December 31, 1998, at the annual rate of $2.625 per share,

when, as and if declared by the Board of Directors.

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

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

other junior stock) of the Corporation.

Optional RedemptionÏÏÏÏÏÏÏ On or after September 30, 1999, the Preferred Stock will be

redeemable, in whole or in part, at any time or from time to time,

at the option of the Corporation at the redemption price of

$50.00 per share plus an amount equal to the dividend for the

then-current quarterly dividend period accrued to but excluding

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

without accumulation of any dividends for prior dividend periods). Holders of Preferred Stock will have no right to require

redemption of Preferred Stock.

Liquidation Rights ÏÏÏÏÏÏÏÏÏ Upon any dissolution, liquidation or winding up of the Corporation,

record holders of the outstanding shares of Preferred Stock will

be entitled to receive, out of the assets of the Corporation available

for distribution to stockholders, before any payment or distribution

is made on the common stock (or any other junior stock) of the

Corporation, $50.00 per share plus an amount equal to the

dividend for the then-current quarterly dividend period accrued

to but excluding the date of such liquidation payment (whether

or not declared, but without accumulation of any dividends for

prior dividend periods).

3
Voting Rights ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ None, except as to certain amendments relating to the terms of the

Preferred Stock.

Preemptive and Conversion

RightsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ None.

Use of Proceeds ÏÏÏÏÏÏÏÏÏÏÏÏ To be added to the working capital of the Corporation and used for

general corporate purposes and may be used to repurchase common stock of the Corporation.

Listing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The Preferred Stock has not been listed on a stock exchange.

Summary Selected Financial Data

(Unaudited)

(Dollars in millions)

June 30, December 31,

1998 1997 1997 1996 1995 1994 1993

Balance Sheet Data:

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $349,282 $296,799 $316,316 $286,259 $252,588 $220,525 $189,892

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 429,448 365,997 391,673 351,041 316,550 272,508 216,979

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 415,263 352,733 377,880 338,268 305,591 262,967 208,927

Stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,185 13,264 13,793 12,773 10,959 9,541 8,052

Capital(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,973 14,019 14,575 13,520 11,703 10,367 8,893

Six Months Ended

June 30, Year Ended December 31,

1998 1997 1997 1996 1995 1994 1993

Income Statement Data:

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,067 $ 1,920 $ 3,949 $ 3,592 $ 3,047 $ 2,823 $ 2,533

Guaranty fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 644 630 1,274 1,196 1,086 1,083 961

Fee and other income, net ÏÏÏÏÏÏÏÏÏÏÏ 135 62 125 86 93 143 259

Special contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ÌÌÌÌ (350) Ì Ì

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,672 1,487 3,056 2,725 2,144 2,132 1,873

Six Months Ended

June 30, Year Ended December 31,

1998 1997 1997 1996 1995 1994 1993

Other Data:

Average net interest marginÏÏÏÏÏÏÏÏÏÏ 1.10% 1.17% 1.17% 1.18% 1.16% 1.24% 1.38%

Ratio of earnings to combined Ñxed

charges and preferred stock

dividends(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.19:1 1.19:1 1.19:1 1.19:1 1.17:1 1.22:1 1.22:1

Mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 72,379 $ 27,421 $ 70,465 $ 68,618 $ 56,598 $ 62,389 $ 92,037

MBS issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 142,139 61,327 149,429 149,869 110,456 130,622 221,444

MBS outstanding at period end(3) ÏÏÏ 761,359 673,931 709,582 650,780 582,959 530,343 495,525

(1) Stockholders' equity plus general allowance for losses at period end.

(2) ""Earnings'' consists of (i) income before federal income taxes and extraordinary item and (ii) Ñxed charges. ""Fixed

charges'' consists of interest expense. There was no preferred stock outstanding for the years 1993 through 1995.

(3) Includes MBS in portfolio of $156 billion and $116 billion at June 30, 1998 and 1997, respectively, and $130 billion,

$103 billion, $70 billion, $44 billion, and $24 billion at December 31, 1997, 1996, 1995, 1994, and 1993, respectively.

4
THE CORPORATION

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

under the Federal National Mortgage Association Charter Act, 12 U.S.C. Û 1716 et seq. (the ""Charter

Act''). See ""Government Regulation and Charter Act'' in the Information Statement. It is the largest

investor in home mortgage loans in the United States. The Corporation originally was established in

1938 as a United States government agency to provide supplemental liquidity to the mortgage market

and was transformed into a stockholder-owned and privately managed corporation by legislation

enacted in 1968.

The Corporation provides funds to the mortgage market by purchasing mortgage loans from

lenders, thereby replenishing their funds for additional lending. The Corporation acquires funds to

purchase loans from many capital market investors that ordinarily may not invest in mortgage loans,

thereby expanding the total amount of funds available for housing. Operating nationwide, the

Corporation helps to redistribute mortgage funds from capital-surplus to capital-short areas.

The Corporation also issues mortgage-backed securities (""MBS''), receiving guaranty fees for its

guarantee of timely payment of principal and interest on MBS certiÑcates. The Corporation issues

MBS primarily in exchange for pools of mortgage loans from lenders. The issuance of MBS enables

the Corporation to further its statutory purpose of increasing the liquidity of residential mortgage

loans.

In addition, the Corporation oÅers various services to lenders and others for a fee. These include

issuing certain types of MBS and providing technology services in support of originating and

underwriting mortgage loans. See ""Business'' in the Information Statement.

The Corporation's principal oÇce is located at 3900 Wisconsin Avenue, N.W., Washington, D.C.

20016 (telephone: (202) 752-7000).

USE OF PROCEEDS

The net proceeds from the sale of the Preferred Stock (as deÑned under ""Description of Preferred

Stock'') will be added to the working capital of the Corporation and used for general corporate

purposes and may be used to repurchase common stock of the Corporation.

The Corporation anticipates that additional Ñnancing, including Ñnancing through various types

of equity and debt securities, will be required from time to time. The amount and nature of the

Corporation's Ñnancing activities are dependent upon a number of factors, including the volume of the

Corporation's maturing debt obligations, the volume of mortgage loan prepayments, the volume and

type of mortgage loans purchased by the Corporation, and general market conditions.

5
CAPITALIZATION

The following table sets forth the capitalization of the Corporation as of June 30, 1998, and as

adjusted to give eÅect to the issuance of the Preferred Stock oÅered hereby (before giving eÅect to the

payment of estimated oÅering expenses and underwriting discount): 

Average Average Actual Outstanding As

Maturity Cost(1) at June 30, 1998 Adjusted

(Dollars in millions)

Debentures, notes, and bonds, net:

Due within one year:

Short-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 mos. 5.57% $100,691 $100,691

DebenturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 mos. 5.82 13,575 13,575

Medium-term notes(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 mos. 5.6059,745 59,745

Other(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 5.83 931 931

Total due within one year ÏÏÏÏÏÏÏ 174,942 174,942

Due after one year:

DebenturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 yrs. 5 mos. 6.62 74,784 74,784

Medium-term notes(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 yrs. 1 mos. 6.42 153,649 153,649

OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 yrs. 6 mos. 8.14 2,787 2,787

Total due after one yearÏÏÏÏÏÏÏÏÏ 231,220231,220

Total debentures, notes, and bonds ÏÏÏÏÏÏÏ $406,162 $406,162

Stockholders' equity:

Preferred stock, $50.00 stated value,

100,000,000 shares authorizedÌ

23,000,000 shares issued

Series A, 7,500,000 shares issued ÏÏÏÏÏ $ 375 $ 375

Series B, 7,500,000 shares issued ÏÏÏÏÏ 375 375

Series C, 5,000,000 shares issued ÏÏÏÏÏ 250 250

Series D, 3,000,000 shares issuedÏÏÏÏÏ Ì 150

Common stock, $.525 stated value, no

maximum authorizationÌ1,129 million

shares issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 593 593

Additional paid-in capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,537 1,537

Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,469 14,469

Accumulated other comprehensive

income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 1

17,600 17,750

Less treasury stock, at costÌ103 million

shares(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,415 3,415

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14,185 $ 14,335

(1) Represents weighted-average cost, which includes the amortization of discounts, premiums,

issuance costs, hedging results, and the eÅects of currency and debt swaps.

(2) Medium-term notes may have maturities of one day or longer.

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

(4) Does not reÖect any repurchases of the Corporation's common stock that may be made using

proceeds from the sale of the Preferred Stock, Series D. See ""Use of Proceeds.''

The Corporation issues debentures, notes and other debt obligations frequently. The amount of

debentures, notes, and other debt obligations outstanding on any date subsequent to June 30, 1998

may diÅer from that shown in the table above.

6
SELECTED FINANCIAL INFORMATION

The following selected Ñnancial data for the six-month periods ended June 30, 1998 and 1997 and

the years 1993 through 1997 (which data are not covered by the independent auditors' report) have

been summarized or derived from the Corporation's audited Ñnancial statements and other Ñnancial

information for such periods. These data are unaudited and include, in the opinion of management, all

adjustments (consisting of normal recurring accruals) necessary for a fair presentation. These data

should be read in conjunction with the audited Ñnancial statements and notes to the Ñnancial

statements contained in the Information Statement.

(Dollars in millions, except per common share amounts)

Six Months Ended

June 30, Year Ended December 31,

1998 1997 1997 1996 1995 1994 1993 Income Statement Data:

Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14,376 $ 12,843 $ 26,378 $ 23,772 $ 21,071 $ 17,347 $ 14,833

Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,309 10,923 22,429 20,180 18,024 14,524 12,300

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,067 1,920 3,949 3,592 3,047 2,823 2,533

Guaranty fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 644 630 1,274 1,196 1,086 1,083 961

Fee and other income, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 135 62 125 86 93 143 259

Credit-related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (146) (207) (375) (409) (335) (378) (305)

Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (344) (309) (636) (560) (546) (525) (443)

Special contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (350) Ì Ì

Income before federal income taxes and

extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,356 2,096 4,337 3,905 2,995 3,146 3,005

Provision for federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏ (673) (610) (1,269) (1,151) (840) (1,005) (963)

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,683 1,486 3,068 2,754 2,155 2,141 2,042

Extraordinary gain/(loss), net of tax eÅect ÏÏÏÏ (11) 1 (12) (29) (11) (9) (169)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,672 $ 1,487 $ 3,056 $ 2,725 $ 2,144 $ 2,132 $ 1,873

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (32) (32) (65) (42) Ì Ì Ì

Net income available to common stockholdersÏÏÏÏ $ 1,640$ 1,455 $ 2,991 $ 2,683 $ 2,144 $ 2,132 $ 1,873

Basic earnings per common share(1):

Earnings before extraordinary item ÏÏÏÏÏÏÏ $ 1.60$ 1.38 $ 2.87 $ 2.53 $ 1.98 $ 1.96 $ 1.87

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.01) Ì (.02) (.03) (.01) (.01) (.16)

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.59 $ 1.38 $ 2.85 $ 2.50$ 1.97 $ 1.95 $ 1.71

Diluted earnings per common share(1):

Earnings before extraordinary item ÏÏÏÏÏÏÏ $ 1.59 $ 1.37 $ 2.84 $ 2.51 $ 1.96 $ 1.95 $ 1.86

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.01) Ì (.01) (.03) (.01) (.01) (.15)

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.58 $ 1.37 $ 2.83 $ 2.48 $ 1.95 $ 1.94 $ 1.71

June 30, December 31,

1998 1997 1997 1996 1995 1994 1993 Balance Sheet Data:

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $349,282 $296,799 $316,316 $286,259 $252,588 $220,525 $189,892

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,643 59,282 64,596 56,606 57,273 46,335 21,396

Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 429,448 365,997 391,673 351,041 316,550 272,508 216,979

Borrowings:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 174,942 167,682 175,400 159,900 146,153 112,602 71,950

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 231,220177,780194,374 171,370153,021 144,628 129,162

Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 415,263 352,733 377,880 338,268 305,591 262,967 208,927

Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,185 13,264 13,793 12,773 10,959 9,541 8,052

Capital(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,973 14,019 14,575 13,520 11,703 10,367 8,893

Six Months Ended

June 30, Year Ended December 31,

1998 1997 1997 1996 1995 1994 1993 Other Data:

Average net interest margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.10% 1.17% 1.17% 1.18% 1.16% 1.24% 1.38%

Return on average common equity ÏÏÏÏÏÏÏÏÏÏÏÏ 25.3 24.3 24.6 24.1 20.9 24.3 25.3

Dividend payout ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30.3 30.5 29.4 30.4 34.6 30.8 26.9

Average eÅective guaranty fee rate ÏÏÏÏÏÏÏÏÏÏÏÏ .217 .227 .227 .224 .220.225 .213

Credit loss ratio(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .032 .046 .041 .053 .050 .057 .040

Ratio of earnings to combined Ñxed charges

and preferred stock dividends(4) ÏÏÏÏÏÏÏÏÏÏÏ 1.19:1 1.19:1 1.19:1 1.19:1 1.17:1 1.22:1 1.22:1

Mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 72,379 $ 27,421 $ 70,465 $ 68,618 $ 56,598 $ 62,389 $ 92,037

MBS issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 142,139 61,327 149,429 149,869 110,456 130,622 221,444

MBS outstanding at period end(5) ÏÏÏÏÏÏÏÏÏÏÏÏ 761,359 673,931 709,582 650,780 582,959 530,343 495,525

Weighted-average diluted common shares

outstanding, in millions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,041 1,064 1,056 1,080 1,098 1,098 1,098

(1) Earnings per common share amounts for 1997, 1996, 1995, 1994 and 1993 have been restated to comply with

Statement of Financial Accounting Standards No. 128, Earnings per Share.

(2) Stockholders' equity plus general allowance for losses at period end.

(3) Charge-oÅs and foreclosure expense as a percentage of average net portfolio and net MBS outstanding.

(4) ""Earnings'' consists of (i) income before federal income taxes and extraordinary item and (ii) Ñxed charges. ""Fixed

charges'' consists of interest expense. There was no preferred stock outstanding for the years 1993 through 1995.

(5) Includes MBS in portfolio of $156 billion and $116 billion at June 30, 1998 and 1997, respectively, and $130 billion,

$103 billion, $70 billion, $44 billion, and $24 billion at December 31, 1997, 1996, 1995, 1994 and 1993, respectively.

7
GOVERNMENT REGULATION AND CHARTER ACT

The Corporation is a federally chartered and stockholder-owned corporation organized and

existing under the Charter Act (12 U.S.C. Û 1716 et seq.) whose purpose is to (1) provide stability in

the secondary market for residential mortgages, (2) respond appropriately to the private capital

market, (3) provide ongoing assistance to the secondary market for residential mortgages (including

activities relating to mortgages on housing for low- and moderate-income families involving a

reasonable economic return that may be less than the return earned on other activities) by increasing

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

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

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

investments and improving the distribution of investment capital available for residential mortgage

Ñnancing.

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

as a wholly owned government corporation and in 1954, under a revised Title III called the Federal

National Mortgage Association Charter Act, became a mixed-ownership corporate instrumentality of

the United States. From 1950 to 1968, it operated in the Housing and Home Finance Agency, which

was succeeded by the Department of Housing and Urban Development (""HUD''). Pursuant to

amendments to the Charter Act enacted in the Housing and Urban Development Act of 1968 (the

""1968 Act''), the then Federal National Mortgage Association was divided into two separate

institutions, the present Corporation and the Government National Mortgage Association, a wholly

owned corporate instrumentality of the United States within HUD, which carried on certain special

Ñnancing assistance and management and liquidation functions. Under the 1968 Act, the Corporation

was constituted as a federally chartered corporation and the entire equity interest in the Corporation

became stockholder-owned.

Although the 1968 Act eliminated all federal ownership interest in the Corporation, it did not

terminate government regulation of the Corporation. Under the Charter Act, approval of the

Secretary of the Treasury is required for the Corporation's issuance of its debt obligations and MBS.

In addition, the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the ""1992

Act'') established an independent OÇce of Federal Housing Enterprise Oversight (""OFHEO'') within

HUD under the management of a Director (the ""Director'') who is responsible for ensuring that the

Corporation is adequately capitalized and operating safely in accordance with the 1992 Act. The 1992

Act established risk-based capital, minimum capital and critical capital levels for the Corporation and

required the Director to establish, by regulation, a risk-based capital test to be used to determine the

amount of total capital the Corporation must have to exceed the risk-based capital level from time to

time. OFHEO issued a Ñnal rule (the ""Rule'') in 1996 related to the minimum capital levels for

Fannie Mae and Federal Home Loan Mortgage Corporation (""Freddie Mac'') that sets forth how

minimum capital requirements for both entities are to be calculated, reported and classiÑed on a

quarterly basis. The Rule, which Ñnalized an original proposal dated June 1995, formalized the

interim capital standards applied by OFHEO, with which the Corporation has been in compliance

since their inception. See also ""Management's Discussion and Analysis of Financial Condition and

Results of OperationsÌBalance Sheet AnalysisÌRegulatory Capital Requirements'' in the Information Statement.

In 1996, OFHEO released for comment part one (""Part I'') of the proposed regulations to

establish the risk-based capital test. Part I speciÑes the ""benchmark loss experience'' that will be

combined with other yet to be determined assumptions and applied each quarter to the Corporation's

book of business to establish credit losses under the risk-based capital standard for the Corporation.

Part I also speciÑes the house price index that OFHEO will use in connection with the risk-based

capital standard. The Corporation submitted comments to OFHEO in October 1996 stating that

several aspects of the initial proposal require adjustments or amendment, because it does not

accurately capture the Corporation's credit history and derives credit loss rates that are signiÑcantly

worse than any reasonable representation of Fannie Mae's and Freddie Mac's loss experience.

8
OFHEO has indicated that it plans to release a proposed second part of the risk-based capital

regulation, which will specify, among other matters, remaining aspects of the stress test and how the

stress test will be used to determine the Corporation's risk-based capital requirements. Management

understands that OFHEO expects to publish this second part in January 1999. Management is

optimistic that the Ñnal regulations will permit the Corporation to manage its business in a reasonably

eÇcient manner.

If the Corporation fails to meet one or more of these capital standards under the 1992 Act, the

Director is required to take certain remedial measures and may take others, depending on the

standards the Corporation fails to meet. The Director is given enforcement powers that include the

power to impose temporary and Ñnal cease-and-desist orders and civil penalties on the Corporation

and on a director or executive oÇcer of the Corporation. If the Director determines that the

Corporation is engaging in conduct not approved by the Director that could result in a rapid depletion

of core capital or that the value of the property subject to mortgages held or securitized by the

Corporation has decreased signiÑcantly, the Director is authorized to treat the Corporation as not

meeting one of the capital standards that the Corporation otherwise meets. In addition, the

Corporation is required to submit a capital restoration plan if it fails to meet any of the capital

standards. If the Director does not approve the plan or determines that the Corporation has failed to

make reasonable eÅorts to comply with the plan, then the Director may treat the Corporation as not

meeting one of the capital standards that it otherwise meets. Also, if the Corporation fails to meet or is

treated by the Director as not meeting one of the capital standards and the Director has reasonable

cause to believe that the Corporation or any executive oÇcer or director of the Corporation is engaging

in or about to engage in any conduct that threatens to result in a signiÑcant depletion of the

Corporation's core capital, then the Director is authorized to commence proceedings pursuant to

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

Director could issue such an order without a hearing, which would be eÅective until completion of the

cease-and-desist proceedings, if the Director determined that the conduct in question was likely to

cause a signiÑcant depletion of core capital. Prior approval of the Director is required for the

Corporation to pay a dividend if the dividend would decrease the Corporation's capital below riskbased capital or minimum capital levels established under the 1992 Act. The Director is authorized to

levy, pursuant to annual Congressional appropriations, annual assessments on the Corporation and

Freddie Mac to cover reasonable expenses of OFHEO.

The 1992 Act also gives the Director the authority to conduct annually an on-site examination of

the Corporation for purposes of ensuring the Corporation's Ñnancial safety and soundness. The

Director also has the discretion to conduct more frequent examinations if deemed necessary for safety

and soundness. In addition, the Corporation is required to submit annual and quarterly reports of the

Ñnancial condition and operations of the Corporation to the Director. Moreover, the Charter Act, as

amended by the 1992 Act, authorizes the General Accounting OÇce (""GAO'') to audit the programs,

activities, receipts, expenditures and Ñnancial transactions of the Corporation. The Corporation also

is required to submit an annual report to the House and Senate Banking Committees and the

Secretary of HUD regarding the Corporation's performance in meeting housing goals relating to the

purchase of mortgages on housing for low- and moderate-income families, mortgages on rental and

owner-occupied housing for low-income families in low-income areas or for very-low-income families,

and mortgages on housing located in rural or other underserved areas.

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

rules and regulations to carry out the purposes of the Charter Act, excluding authority over matters

granted exclusively to the Director in the 1992 Act. The Secretary of HUD also must approve any new

conventional mortgage program that is signiÑcantly diÅerent from those approved or engaged in prior

to the 1992 Act. The Secretary of HUD is required to approve any new program unless it is not

authorized by the Charter Act or the Secretary of HUD Ñnds that the new program is not in the public

interest. Until one year after the Ñnal regulations establishing the risk-based capital test are in eÅect,

however, the Secretary of HUD must disapprove a new program if the Director determines that the

9
program would risk signiÑcant deterioration of the Ñnancial condition of the Corporation. The

Secretary of HUD has adopted regulations related to the program approval requirement.

Thirteen members of the Corporation's eighteen-member Board of Directors (the ""Board of

Directors'') are elected by the holders of the Corporation's common stock, and the remaining Ñve

members are appointed by the President of the United States. The appointed directors must include

one person from the home building industry, one person from the mortgage lending industry, and one

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

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

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

households. Any member of the Board of Directors who is appointed by the President of the United

States may be removed by the President for good cause.

In addition to placing the Corporation under federal regulation, the Charter Act also grants to the

Corporation certain privileges. For instance, securities issued by the Corporation are deemed to be

""exempt securities'' under laws administered by the Securities and Exchange Commission (""SEC'') to

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

United States. Registration statements with respect to the Corporation's securities are not Ñled with

the SEC. The Corporation also is not required to Ñle periodic reports with the SEC.

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

obligations of the Corporation up to a maximum of $2.25 billion outstanding at any one time. This

facility has not been used since the Corporation's transition from government ownership in 1968.

Neither the United States nor any agency thereof is obligated to Ñnance the Corporation's operations

or to assist the Corporation in any other manner.

The Corporation is exempt from all taxation by any state or by any county, municipality, or local

taxing authority except for real property taxes. The Corporation is not exempt from payment of

federal income taxes. Also, the Corporation may conduct its business without regard to any

qualiÑcations or similar statute in any state of the United States or the District of Columbia.

The Federal Reserve Banks are authorized to act as depositaries, custodians, and Ñscal agents for

the Corporation, for its own account, or as Ñduciary.

DESCRIPTION OF PREFERRED STOCK

The Corporation is authorized by the Charter Act to have preferred stock on such terms and

conditions as the Board of Directors of the Corporation may prescribe. On December 27, 1995, the

Board of Directors of the Corporation amended the bylaws of the Corporation to authorize the

Corporation to issue up to 100,000,000 shares of preferred stock. On March 1, 1996, the Corporation

issued 7,500,000 shares of its 6.41% Non-Cumulative Preferred Stock, Series A (stated value $50 per

share) (the ""Preferred Stock, Series A''), on April 12, 1996, the Corporation issued 7,500,000 shares

of its 6.50% Non-Cumulative, Preferred Stock, Series B (stated value $50 per share) (the ""Preferred

Stock, Series B'') and on September 20, 1996, the Corporation issued 5,000,000 shares of its 6.45%

Non-Cumulative Preferred Stock, Series C (stated value $50 per share) (the ""Preferred Stock,

Series C'').

The terms of the Preferred Stock, Series D (the ""Preferred Stock'') will be established by a

CertiÑcate of Designation of Terms of 5.25% Non-Cumulative Preferred Stock, Series D (the

""CertiÑcate of Designation''), adopted by a duly authorized committee of the Board of Directors of

the Corporation, which will be substantially in the form attached as Appendix A to this OÅering

Circular. The following is a brief description of the terms of the Preferred Stock which does not

purport to be complete and is subject to and qualiÑed by reference to the CertiÑcate of Designation.

10
General

The Corporation will have the right to create and issue additional shares of the Preferred Stock

and to create and issue additional classes or series of stock ranking, as to dividends, liquidation or

otherwise, prior to, on a parity with or junior to the Preferred Stock without the consent of holders of

the Preferred Stock. As of the date hereof, the shares of Preferred Stock, Series A, Preferred Stock,

Series B and Preferred Stock, Series C were the only shares of preferred stock of the Corporation

outstanding. The Preferred Stock will rank on a parity, as to the payment of dividends and the

distribution of assets upon dissolution, liquidation or winding up of the Corporation, with the

Preferred Stock, Series A, the Preferred Stock, Series B and the Preferred Stock, Series C.

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

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

nonassessable.

The Preferred Stock will not be convertible into any other stock or obligations of the Corporation

and will have no preemptive rights.

First Chicago Trust Company of New York will be the transfer agent, dividend disbursing agent

and registrar for shares of Preferred Stock.

The obligations of the Corporation under the terms of the Preferred Stock are obligations of the Corporation only and are not those of the United States or of any instrumentality thereof other than the Corporation.

Dividends

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

Stock as they appear on the books and records of the Corporation (the ""Holders'') will be entitled to

receive, when, as and if declared by the Board of Directors of the Corporation, or a duly authorized

committee thereof, in its sole discretion out of funds legally available therefor, non-cumulative,

quarterly cash dividends which will accrue from and including September 30, 1998 and will be payable

on March 31, June 30, September 30 and December 31 of each year (each, a ""Dividend Payment

Date''), commencing December 31, 1998, at the annual rate of $2.625 per share. Dividends on the

Preferred Stock will be payable to the Holders on the relevant record date Ñxed by the Board of

Directors, or a duly authorized committee thereof, which may not be earlier than 45 days or later than

10 days prior to the applicable Dividend Payment Date. If declared, the initial dividend, which will be

for the period from and including September 30, 1998 to but excluding December 31, 1998, will be

$0.65625 per share. Thereafter, the dividend period relating to a Dividend Payment Date will be the

period from and including the preceding Dividend Payment Date to but excluding such Dividend

Payment Date. If a Dividend Payment Date is not a Business Day, dividends (if declared) on the

Preferred Stock will be paid on the succeeding business day, without interest. A ""Business Day'' shall

mean any day other than a Saturday, Sunday or other day on which banking institutions in New York,

New York are authorized or required by law to close. Dividends payable on the Preferred Stock for any

period greater or less than a full dividend period will be computed on the basis of a 360-day year

consisting of twelve 30-day months and the actual number of days elapsed in any period of less than

one month. Dividends payable on the Preferred Stock for each full dividend period will be computed

by dividing the per annum dividend rate by four.

The Preferred Stock will rank prior to the common stock of the Corporation with respect to the

payment of dividends to the extent provided in the CertiÑcate of Designation. No dividend (other

than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or

purchase shares of, the common stock of the Corporation or any other stock of the Corporation

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

upon dissolution, liquidation or winding up of the Corporation) may be declared or paid or set apart

for payment on the Corporation's common stock (or on any other stock of the Corporation ranking, as

11
to the payment of dividends, junior to the Preferred Stock) unless dividends have been declared and

paid or set apart (or ordered to be set apart) on the Preferred Stock for the then-current quarterly

dividend period. When dividends are not paid in full upon the Preferred Stock and all other classes or

series of stock of the Corporation, if any, ranking on a parity as to the payment of dividends with the

Preferred Stock, all dividends declared upon shares of Preferred Stock and all such other stock of the

Corporation will be declared pro rata so that the amount of dividends declared per share on the

Preferred Stock and all such other stock will in all cases bear to each other the same ratio that accrued

dividends per share on the shares of Preferred Stock (but without accumulation of unpaid dividends

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

Dividends on the Preferred Stock will not be cumulative. If a dividend is not declared and paid on

the Preferred Stock, the Holders of Preferred Stock will have no claim in respect of such non-payment

so long as no dividend (other than those referred to in the preceding paragraph) is declared or paid on

the Corporation's common stock (or any other stock of the Corporation ranking, as to the payment of

dividends, junior to the Preferred Stock) for the then-current quarterly dividend period.

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

pay dividends on the Preferred Stock without the payment of any dividends on the Corporation's

common stock (or any other stock of the Corporation ranking, as to the payment of dividends, junior

to the Preferred Stock).

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

Stock if at the same time any arrears exist or default exists in the payment of dividends on any

outstanding class or series of stock of the Corporation ranking prior to the Preferred Stock with

respect to the payment of dividends. At the time of issuance of the Preferred Stock, no class or series

of stock of the Corporation ranking prior to the Preferred Stock with respect to the payment of

dividends will exist.

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

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

interest, in respect of any dividend payment.

See ""Regulatory Matters'' for a description of certain regulatory restrictions on the Corporation's

payment of dividends.

Optional Redemption

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

provisions. On or after September 30, 1999, the Corporation, at its option, may redeem the Preferred

Stock, in whole or in part, at any time or from time to time, out of funds legally available therefor, at

the redemption price of $50.00 per share plus an amount equal to the dividend (whether or not

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

redemption, but without accumulation of unpaid dividends on the Preferred Stock for prior dividend

periods. If less than all of the outstanding shares of the Preferred Stock are to be redeemed, the

Corporation will select shares to be redeemed from the outstanding shares not previously called for

redemption by lot or pro rata (as nearly as possible) or by any other method that the Board of

Directors, or a duly authorized committee thereof, in its sole discretion deems equitable.

The Corporation will give notice of any such redemption by mail to Holders of Preferred Stock

not less than 30 days prior to the date Ñxed by the Board of Directors, or duly authorized committee

thereof, for such redemption. Each such notice will state the number of shares of Preferred Stock to

be redeemed and, if fewer than all of the shares of Preferred Stock held by the applicable Holder are to

be redeemed, the number of shares to be redeemed from such Holder, the redemption price, the

redemption date and the place at which such Holder's certiÑcate(s) representing shares of the

Preferred Stock must be presented upon such redemption.

12
Under certain circumstances, the Corporation may need the approval of the Director prior to

exercising its right to redeem shares of Preferred Stock. See ""Regulatory Matters.''

Holders of Preferred Stock will have no right to require redemption of Preferred Stock.

Notice having been given as aforesaid, from and after the redemption date, dividends on the

Preferred Stock called for redemption will cease to accrue and such Preferred Stock called for

redemption will no longer be deemed outstanding, and all rights of the Holders thereof as registered

holders of the Preferred Stock will cease.

Liquidation Rights

Upon any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, after

payment or provision for the liabilities of the Corporation and the expenses of such dissolution,

liquidation or winding up, the Holders of the outstanding shares of the Preferred Stock will be entitled

to receive out of the assets of the Corporation or proceeds thereof available for distribution to

stockholders, before any payment or distribution of assets is made to holders of the Corporation's

common stock (or any other stock of the Corporation ranking, as to the distribution of assets upon

dissolution, liquidation or winding up of the Corporation, junior to the Preferred Stock), the amount

of $50.00 per share plus an amount equal to the dividend (whether or not declared) for the thencurrent quarterly dividend period accrued to but excluding the date of such liquidation payment, but

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

assets of the Corporation available for distribution in such event are insuÇcient to pay in full the

aggregate amount payable to Holders of the Preferred Stock and holders of all other classes or series of

stock of the Corporation, if any, ranking, as to the distribution of assets upon dissolution, liquidation

or winding up of the Corporation, on a parity with the Preferred Stock, the assets will be distributed to

the Holders of Preferred Stock and holders of such other stock pro rata, based on the full respective

preferential amounts to which they are entitled, but without accumulation of unpaid dividends on the

Preferred Stock for prior dividend periods. After payment of the full amount of the distribution of

assets upon dissolution, liquidation or winding up of the Corporation to which they are entitled, the

Holders of Preferred Stock will not be entitled to any further participation in any distribution of assets

by the Corporation.

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

amount in respect of a dissolution, liquidation or winding up of the Corporation until holders of any

classes or series of stock of the Corporation ranking, as to the distribution of assets upon dissolution,

liquidation or winding up of the Corporation, prior to the Preferred Stock have been paid all amounts

to which such classes or series are entitled. At the time of issuance of the Preferred Stock, no class or

series of stock of the Corporation ranking prior to the Preferred Stock with respect to the distribution

of assets upon dissolution, liquidation or winding up of the Corporation will exist.

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

all or substantially all of the property and assets of the Corporation, nor the merger, consolidation or

combination of the Corporation into or with any other corporation or the merger, consolidation or

combination of any other corporation into or with the Corporation, shall be deemed to be a

dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of these provisions

on liquidation rights.

Regulatory Matters

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

of Directors, or a duly authorized committee thereof. However, certain provisions of the 1992 Act may

operate to restrict the ability of the Board of Directors to declare dividends in certain circumstances.

The 1992 Act established risk-based capital, minimum capital, and critical capital levels for the

Corporation, and required the Director of OFHEO to establish, by regulation, a risk-based capital test

to be used to determine the amount of total capital the Corporation must have to exceed the risk13
based capital level from time to time. (See ""Government Regulation and Charter Act'' herein and the

Information Statement for the current status of the required regulations.) Until one year after the

Ñnal regulations establishing the risk-based capital test are in eÅect, a dividend may be paid without

the prior approval of the Director if the Corporation meets the minimum capital level established

under the 1992 Act and the dividend payment would not decrease the Corporation's base capital below

such level.

One year after Ñnal regulations establishing the risk-based capital test take eÅect, a dividend may

be paid without the prior approval of the Director if the Corporation meets both the risk-based capital

and minimum capital levels and the dividend payment would not decrease the Corporation's total

capital below the risk-based capital level or its core capital below the minimum capital level. If the

Corporation meets either the risk-based capital standard or the minimum capital standard, it may

make a dividend payment without obtaining the approval of the Director only if the dividend payment

would not cause the Corporation to fail to meet another capital standard. At any time when the

Corporation does not meet the risk-based capital standard but meets the minimum capital standard,

the Corporation is prohibited from making a dividend payment that would cause the Corporation to

fail to meet the minimum capital standard. If the Corporation meets neither the risk-based capital

standard nor the minimum capital standard but does meet the critical capital standard established

under the 1992 Act, it may make a dividend payment only if the Corporation would not fail to meet

the critical capital standard as a result of such payment and the Director approves the payment after

Ñnding that it satisÑes certain statutory conditions. The Director has the authority to require the

Corporation to submit a report to the Director regarding any capital distribution (including any

dividend) declared by the Corporation before the Corporation makes the distribution. See also

""Government Regulation and Charter Act'' herein and ""Management's Discussion and Analysis of

Financial Condition and Results of OperationsÌBalance Sheet AnalysisÌRegulatory Capital Requirements'' in the Information Statement regarding the capital standards applicable to the

Corporation.

Voting Rights; Amendments

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

Without the consent of the Holders of Preferred Stock, the Corporation will have the right to

amend, alter, supplement or repeal any terms of the Preferred Stock (i) to cure any ambiguity, or to

cure, correct or supplement any defective provision contained in the CertiÑcate of Designation or

(ii) to make any other provision with respect to matters or questions arising with respect to the

Preferred Stock that is not inconsistent with the provisions of the CertiÑcate of Designation so long as

such action does not materially and adversely aÅect the interests of the Holders of Preferred Stock;

provided, however, that any increase in the amount of authorized or issued Preferred Stock or the

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

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

to dividends or liquidation or otherwise will not be deemed to materially and adversely aÅect the

interests of the Holders of Preferred Stock. Otherwise, the terms of the Preferred Stock may be

amended, altered, supplemented or repealed only with the consent of the Holders of at least two-thirds

of the outstanding shares of Preferred Stock. On matters requiring their consent, Holders of Preferred

Stock will be entitled to one vote per share.

Absence of Trading Market

The Corporation has not applied for listing of the Preferred Stock on any stock exchange and the

Corporation does not expect an active trading market to develop with respect to the Preferred Stock.

Accordingly, the ability of a Holder to dispose of the Preferred Stock may be limited.

14
LEGALITY OF INVESTMENT

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

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

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

Federal savings associations and federal savings banks may invest in the shares of Preferred Stock

without regard to limitations generally applicable to investments. Preferred Stock held by a federal

savings association or federal savings bank would be subject to a 100% risk weighting for capital

adequacy purposes.

Federally insured state-chartered banks, state-chartered savings banks and state-chartered savings and loan associations may invest in the shares of Preferred Stock to the extent permitted by the

Secondary Mortgage Market Enhancement Act of 1984 (""SMMEA'') and by applicable state law,

after complying with any procedures imposed by the state. Preferred Stock held by such an institution

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

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

generally applicable to investments.

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

United States'' within the meaning of Û 7701(a)(19)(C)(ii) of the Internal Revenue Code of 1986, as

amended to the date hereof (""Code''), for purposes of the 60 percent of assets limitation applicable to

domestic building and loan associations.

In addition to the speciÑc authorizations discussed above, Û 106(a)(1) of SMMEA provides that

any person, trust, corporation, partnership, association, business trust or business entity created

pursuant to or existing under the laws of the United States or any state (including the District of

Columbia and Puerto Rico) (an ""investor'') is authorized to purchase, hold and invest in securities

issued or guaranteed by the Corporation (including the shares of Preferred Stock) to the same extent

that such investor is authorized to purchase, hold or invest in obligations issued or guaranteed as to

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

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

limited an investor's authority to purchase, hold or invest in securities issued or guaranteed by the

Corporation. To the best of the Corporation's knowledge, 18 states currently have legislation limiting

to varying extents the ability of certain entities (in most cases, insurance companies) to invest in

securities issued or guaranteed by the Corporation, including the shares of Preferred Stock.

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

and to what extent the shares of Preferred Stock constitute legal investments for such investors or are

eligible to be used as security for borrowings. The foregoing does not take into consideration the

application of statutes, regulations, orders, guidelines or agreements generally governing investments

made by a particular investor, including but not limited to ""prudent investor'' provisions, safety and

soundness conditions and percentage-of-assets limits. The regulatory authorities that administer the

legal provisions referred to above generally reserve discretion as to whether securities, such as the

Preferred Stock, that are otherwise acceptable for investment may be purchased or pledged by the

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

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

Corporation, the OÇce of Thrift Supervision, the National Credit Union Administration, or any other

federal or state agency with similar authority should review any applicable regulations, policy

statements and guidelines before purchasing the Preferred Stock.

15
UNITED STATES TAXATION

The Preferred Stock and payments thereon are not generally exempt from taxation by the United

States or other U.S. or non-U.S. taxing jurisdictions.

In the opinion of Arnold & Porter, special tax counsel to the Corporation, the following discussion

correctly describes the principal U.S. federal income tax treatment of U.S. Persons (as deÑned below)

that are beneÑcial owners (""Owners'') of the Preferred Stock. This discussion does not address the

U.S. federal income tax treatment of Owners that are not U.S. Persons. This discussion is based on

the Code, existing and proposed Treasury regulations, revenue rulings and judicial decisions, changes

to any of which subsequent to the date of this OÅering Circular may aÅect the tax consequences

described herein.

This summary discusses only preferred stock held as a capital asset (within the meaning of

section 1221 of the Code). This discussion does not purport to address all of the U.S. federal income

tax consequences that may be applicable to particular investors in light of their individual circumstances or to Owners subject to special rules, such as dealers in securities, certain Ñnancial institutions

and certain securities traders. In all cases, investors are advised to consult their own tax advisors

regarding the U.S. federal tax consequences to them of holding, owning and disposing of Preferred

Stock, as well as any tax consequences arising under the laws of any state or other taxing jurisdiction.

For purposes of this discussion, ""U.S. Person'' generally means (i) a citizen or individual resident

of the United States, (ii) a corporation or partnership created or organized in or under the laws of the

United States or any political subdivision thereof, (iii) an estate the income of which is includible in

its gross income for U.S. federal income tax purposes without regard to its source, or (iv) a trust if a

court within the United States is able to exercise primary supervision over its administration and at

least one United States person has the authority to control all substantial decisions of the trust.

Dividends

Dividends declared and paid on the Preferred Stock will be dividends for U.S. federal income tax

purposes to the extent paid out of the Corporation's current or accumulated earnings and proÑts, as

determined for federal income tax purposes, and will be taxable as ordinary income. Although the

Corporation expects that its current and accumulated earnings and proÑts will be such that all

dividends paid with respect to the Preferred Stock will qualify as dividends for federal income tax

purposes, it cannot guarantee that result. The Corporation's accumulated earnings and proÑts or its

current earnings and proÑts in future years will depend in signiÑcant part on its future proÑts or

losses, which the Corporation cannot accurately predict. To the extent that the amount of any

dividend paid on a share of Preferred Stock exceeds the Corporation's current or accumulated

earnings and proÑts for federal income tax purposes attributable to that share, such dividend will be

treated Ñrst as a return of capital (rather than as ordinary income) and will be applied against and

reduce the Owner's adjusted tax basis in that share of Preferred Stock. The amount of any such

dividend in excess of the Owner's adjusted tax basis will then be taxed as capital gain. For purposes of

the remainder of this discussion, it is assumed that dividends paid with respect to the Preferred Stock

will constitute dividends for U.S. federal income tax purposes.

Dividends received by Owners that are corporations generally will be eligible for the 70-percent

dividends-received deduction under section 243 of the Code. The 70-percent dividends-received

deduction will not be available with respect to a dividend received on Preferred Stock that an Owner

has held for 45 days or less (including the day of disposition, but excluding the day of acquisition)

during the 90-day period beginning on the day which is 45 days before the date on which the Preferred

Stock becomes ex-dividend with respect to that dividend. If the dividend is attributable to a period or

periods aggregating more than 366 days, the dividend received deduction will be available only if the

Owner has held the Preferred Stock for more than 90 days (including the day of disposition, but

excluding the day of acquisition) during the 180-day period beginning 90 days before the date on

which the Preferred Stock becomes ex-dividend. The length of time that a corporate shareholder is

16
deemed to have held stock for these purposes is reduced for periods during which the shareholder's

risk of loss with respect to the stock is diminished by reason of the existence of certain options,

contracts to sell, short sales or other similar transactions. The aggregate dividends-received deduction

allowed a corporate shareholder cannot exceed 70 percent of its taxable income (with certain

adjustments). Moreover, the dividends-received deduction is reduced if a corporate shareholder

incurs indebtedness ""directly attributable'' to a ""portfolio stock'' investment in another company,

which would include an investment in the Preferred Stock.

Dispositions, Including Redemptions

Any sale, exchange, redemption (except as discussed below) or other disposition of the Preferred

Stock generally will result in taxable gain or loss equal to the diÅerence between the amount of cash

received and the shareholder's adjusted tax basis in the Preferred Stock. Such gain or loss will be

capital gain or loss and will be long-term capital gain or loss if the holding period for the Preferred

Stock exceeds one year. Tax rates on capital gain for individual Owners vary depending on each

Owner's income and holding period for the Preferred Stock. Owners that are individuals should

contact their own tax advisors for more information or for the capital gains tax rate applicable to

speciÑc shares of Preferred Stock. The deduction of capital losses is subject to certain limitations.

A redemption of Preferred Stock may be treated as a dividend, rather than as payment in

exchange for the Preferred Stock, unless the redemption is ""not essentially equivalent to a dividend''

with respect to the Owner within the meaning of section 302(b)(1) of the Code, ""is in complete

redemption of all of the stock'' of the Corporation held by the Owner as described in section 302(b)(3) of the Code or otherwise meets the requirements of one of the other exceptions from

dividend treatment provided in section 302(b) of the Code. In applying these rules, the Owner must

take into account not only the Preferred Stock and other stock of the Corporation that it owns

directly, but also the Preferred Stock and other stock in the Corporation that it constructively owns

within the meaning of section 318 of the Code. Because of the complex nature of these rules, each

Owner should consult its tax advisor to determine whether a redemption of Preferred Stock will be

treated as a dividend or as payment in exchange for the Preferred Stock. If the redemption payment is

treated as a dividend, the rules discussed above under ""Dividends'' apply.

Information Reporting and Backup Withholding

Payments of dividends on shares of Preferred Stock held of record by U.S. persons other than

corporations and other exempt holders are required to be reported to the IRS.

Backup withholding of U.S. federal income tax at a rate of 31 percent may apply to payments

made with respect to shares of Preferred Stock, as well as payments of proceeds from the sale of shares

of Preferred Stock, to holders or Owners that are not ""exempt recipients'' and that fail to provide

certain identifying information (such as the taxpayer identiÑcation number of the holder or Owner) in

the manner required. Individuals generally are not exempt recipients, whereas corporations and

certain other entities generally are exempt recipients.

THE U.S. FEDERAL TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR

GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING

UPON AN OWNER'S PARTICULAR SITUATION. EACH OWNER SHOULD CONSULT

ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO IT OF

THE OWNERSHIP AND DISPOSITION OF THE PREFERRED STOCK, INCLUDING

THE TAX CONSEQUENCES UNDER THE TAX LAWS OF THE UNITED STATES,

STATES, LOCALITIES, COUNTRIES OTHER THAN THE UNITED STATES AND ANY

OTHER TAXING JURISDICTION AND THE POSSIBLE EFFECTS OF CHANGES IN

SUCH TAX LAWS.

17
UNDERWRITING

Subject to the terms and conditions set forth in the underwriting agreement (the ""Underwriting

Agreement''), the Corporation has agreed to sell to Bear, Stearns & Co. Inc. (the ""Underwriter''), and

the Underwriter has agreed to purchase, 1,500,000 shares of Preferred Stock. 

In the Underwriting Agreement, the Underwriter has agreed, subject to the terms and conditions

set forth therein, to purchase all the Preferred Stock oÅered hereby if any is purchased.

The Underwriter has advised the Corporation that the Underwriter proposes initially to oÅer the

Preferred Stock to the public at the price set forth on the cover page of this OÅering Circular.

Prior to this oÅering, there has been no public market for the Preferred Stock. The Preferred

Stock has not been listed on any stock exchange.

In the Underwriting Agreement, the Corporation and the Underwriter have agreed to indemnify

each other against and contribute toward certain liabilities.

The Underwriter and certain aÇliates thereof engage in transactions with and perform services

for the Corporation in the ordinary course of business.

The Underwriter may engage in certain transactions that stabilize the price of such Preferred

Stock. Such transactions may include entering stabilizing bids, which means the placing of a bid or

the eÅecting of a purchase for the purpose of pegging, Ñxing or maintaining the price of the Preferred

Stock. Neither the Corporation nor the Underwriter makes any representation or prediction as to the

direction or magnitude of any eÅect that the transactions described above may have on the price of the

Preferred Stock. The Underwriter is not required to engage in any of these transactions. When so

doing, the Underwriter acts on its own behalf and not as a representative of the Corporation. Any

such transactions, if commenced, may be discontinued at any time.

VALIDITY OF THE PREFERRED STOCK

The validity of the Preferred Stock will be passed upon for the Corporation by Wilmer, Cutler &

Pickering, Washington, D.C., and for the Underwriter by Sullivan & Cromwell, Washington, D.C.

Certain U.S. federal income tax matters will be passed upon for the Corporation by Arnold & Porter,

Washington, D.C.

18
APPENDIX A

CERTIFICATE OF DESIGNATION OF TERMS OF

5.25% NON-CUMULATIVE PREFERRED STOCK, SERIES D

1. Designation, Par Value and Number of Shares.

The designation of the series of preferred stock of the Federal National Mortgage Association

(the ""Corporation'') created by this resolution shall be ""5.25% Non-Cumulative Preferred Stock,

Series D'' (the ""Series D Preferred Stock''), and the number of shares constituting the Series D

Preferred Stock is Three Million (3,000,000). Shares of Series D Preferred Stock will have no par

value and a stated value and liquidation preference of $50 per share. The Board of Directors of the

Corporation, or a duly authorized committee thereof, in its sole discretion, may increase the number of

shares of Series D Preferred Stock and may reduce the number of shares of Series D Preferred Stock,

provided such reduction is not below the number of shares of Series D Preferred Stock then

outstanding.

2. Dividends.

(a) Holders of record of Series D Preferred Stock (each individually a ""Holder'', or collectively

the ""Holders'') will be entitled to receive, when, as and if declared by the Board of Directors of the

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

therefor, non-cumulative, quarterly cash dividends which will accrue from and including September 30, 1998, and will be payable on March 31, June 30, September 30 and December 31 of each year

(each, a ""Dividend Payment Date''), commencing December 31, 1998, at the annual rate of $2.625

per share or 5.25% of the stated value and liquidation preference of $50 per share (without taking into

account any adjustments referred to in clause (b) below). Dividends on the Series D Preferred Stock

will be payable to the Holders as they appear on the books and records of the Corporation on the

relevant record date Ñxed by the Board of Directors, or a duly authorized committee thereof, which

may not be earlier than 45 days or later than 10 days prior to the applicable Dividend Payment Date.

If declared, the initial dividend, which will be for the period from and including September 30, 1998 to

but excluding December 31, 1998, will be $0.65625 per share. Thereafter, the dividend period relating

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

Date to but excluding such Dividend Payment Date. If a Dividend Payment Date is not a Business

Day, dividends (if declared) on the Series D Preferred Stock will be paid on the succeeding Business

Day, without interest. A ""Business Day'' shall mean any day other than a Saturday, Sunday or other

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

Dividends payable on the Series D Preferred Stock for any period greater or less than a full dividend

period will be computed on the basis of a 360-day year consisting of twelve 30-day months and the

actual number of days elapsed in any period of less than one month. Dividends payable on the Series D

Preferred Stock for each full dividend period will be computed by dividing the per annum dividend

rate by four.

(b) No dividend (other than dividends or distributions paid in shares of, or options, warrants or

rights to subscribe for or purchase shares of, the common stock of the Corporation or any other stock

of the Corporation ranking, as to the payment of dividends and the distribution of assets upon

dissolution, liquidation or winding up of the Corporation, junior to the Series D Preferred Stock) may

be declared or paid or set apart for payment on the Corporation's common stock (or on any other

stock of the Corporation ranking, as to the payment of dividends, junior to the Series D Preferred

Stock) unless dividends have been declared and paid or set apart (or ordered to be set apart) on the

Series D Preferred Stock for the then-current quarterly dividend period; provided, however, that the

foregoing dividend preference shall not be cumulative and shall not in any way create any claim or

right in favor of the Holders of Series D Preferred Stock in the event that dividends have not been

declared or paid or set apart (or ordered to be set apart) on the Series D Preferred Stock in respect of

A-1
any prior dividend period. If the full dividend on the Series D Preferred Stock is not paid for any

quarterly dividend period, the Holders of Series D Preferred Stock will have no claim in respect of the

unpaid amount so long as no dividend (other than those referred to above) is paid on the

Corporation's common stock (or any other stock of the Corporation ranking, as to the payment of

dividends, junior to the Series D Preferred Stock) for such dividend period.

(c) The Board of Directors of the Corporation, or a duly authorized committee thereof, may, in

its discretion, choose to pay dividends on the Series D Preferred Stock without the payment of any

dividends on the Corporation's common stock (or any other stock of the Corporation ranking, as to

the payment of dividends, junior to the Series D Preferred Stock).

(d) No full dividends shall be declared or paid or set apart for payment on any stock of the

Corporation ranking, as to the payment of dividends, on a parity with the Series D Preferred Stock for

any period unless full dividends have been declared and paid or set apart for payment on the Series D

Preferred Stock for the then-current quarterly dividend period. When dividends are not paid in full

upon the Series D Preferred Stock and all other classes or series of stock of the Corporation, if any,

ranking, as to the payment of dividends, on a parity with the Series D Preferred Stock, all dividends

declared upon shares of Series D Preferred Stock and all such other stock of the Corporation will be

declared pro rata so that the amount of dividends declared per share of Series D Preferred Stock and

all such other stock will in all cases bear to each other the same ratio that accrued dividends per share

of Series D Preferred Stock (but without accumulation of unpaid dividends on the Series D Preferred

Stock for prior dividend periods) and such other stock bear to each other.

(e) No dividends may be declared or paid or set apart for payment on any shares of Series D

Preferred Stock if at the same time any arrears exist or default exists in the payment of dividends on

any outstanding class or series of stock of the Corporation ranking, as to the payment of dividends,

prior to the Series D Preferred Stock.

(f) Holders of Series D Preferred Stock will not be entitled to any dividends, whether payable in

cash or property, other than as herein provided and will not be entitled to interest, or any sum in lieu

of interest, in respect of any dividend payment.

3. Optional Redemption.

(a) On or after September 30, 1999, the Corporation, at its option, may redeem the Series D

Preferred Stock, in whole or in part, at any time or from time to time, out of funds legally available

therefor, at the redemption price of $50.00 per share plus an amount equal to the dividend (whether

or not declared) for the then-current quarterly dividend period accrued to but excluding the date of

such redemption, but without accumulation of unpaid dividends on the Series D Preferred Stock for

prior dividend periods. If less than all of the outstanding shares of Series D Preferred Stock are to be

redeemed, the Corporation will select the shares to be redeemed from the outstanding shares not

previously called for redemption by lot or pro rata (as nearly as possible) or by any other method that

the Board of Directors of the Corporation, or a duly authorized committee thereof, in its sole

discretion deems equitable.

(b) In the event the Corporation shall redeem any or all of the Series D Preferred Stock as

aforesaid, the Corporation will give notice of any such redemption to Holders of Series D Preferred

Stock not less than 30 days prior to the date Ñxed by the Board of Directors of the Corporation, or

duly authorized committee thereof, for such redemption. Each such notice will state: (1) the number

of shares of Series D Preferred Stock to be redeemed and, if fewer than all of the shares of Series D

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

Holder; (2) the redemption price; (3) the redemption date; and (4) the place at which a Holder's

certiÑcate(s) representing shares of Series D Preferred Stock must be presented upon such redemption. Failure to give notice, or any defect in the notice, to any Holder of Series D Preferred Stock shall

not aÅect the validity of the proceedings for the redemption of shares of any other Holder of Series D

Preferred Stock being redeemed.

A-2
(c) Notice having been given as herein provided, from and after the redemption date, dividends

on the Series D Preferred Stock called for redemption shall cease to accrue and such Series D

Preferred Stock called for redemption will no longer be deemed outstanding, and all rights of the

Holders thereof as registered holders of such shares of Series D Preferred Stock will cease. Upon

surrender in accordance with said notice of the certiÑcate(s) representing shares of Series D Preferred

Stock so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the

Corporation, or a duly authorized committee thereof, shall so require and the notice shall so state),

such shares shall be redeemed by the Corporation at the redemption price aforesaid. Any shares of

Series D Preferred Stock that shall at any time have been redeemed shall, after such redemption, be

cancelled and not reissued. In case fewer than all the shares represented by any such certiÑcate are

redeemed, a new certiÑcate shall be issued representing the unredeemed shares without cost to the

Holder thereof.

(d) The Series D Preferred Stock will not be subject to any mandatory redemption, sinking fund

or other similar provisions. In addition, Holders of Series D Preferred Stock will have no right to

require redemption of any shares of Series D Preferred Stock.

4. Liquidation Rights.

(a) Upon any voluntary or involuntary dissolution, liquidation or winding up of the Corporation,

after payment or provision for the liabilities of the Corporation and the expenses of such dissolution,

liquidation or winding up, the Holders of outstanding shares of the Series D Preferred Stock will be

entitled to receive out of the assets of the Corporation or proceeds thereof available for distribution to

stockholders, before any payment or distribution of assets is made to holders of the Corporation's

common stock (or any other stock of the Corporation ranking, as to the distribution of assets upon

dissolution, liquidation or winding up of the Corporation, junior to the Series D Preferred Stock), the

amount of $50.00 per share plus an amount equal to the dividend (whether or not declared) for the

then-current quarterly dividend period accrued to but excluding the date of such liquidation payment,

but without accumulation of unpaid dividends on the Series D Preferred Stock for prior dividend

periods.

(b) If the assets of the Corporation available for distribution in such event are insuÇcient to pay

in full the aggregate amount payable to Holders of Series D Preferred Stock and holders of all other

classes or series of stock of the Corporation, if any, ranking, as to the distribution of assets upon

dissolution, liquidation or winding up of the Corporation, on a parity with the Series D Preferred

Stock, the assets will be distributed to the Holders of Series D Preferred Stock and holders of all such

other stock pro rata, based on the full respective preferential amounts to which they are entitled, but

without accumulation of unpaid dividends on the Series D Preferred Stock for prior dividend periods.

(c) Notwithstanding the foregoing, Holders of Series D Preferred Stock will not be entitled to be

paid any amount in respect of a dissolution, liquidation or winding up of the Corporation until holders

of any classes or series of stock of the Corporation ranking, as to the distribution of assets upon

dissolution, liquidation or winding up of the Corporation, prior to the Series D Preferred Stock have

been paid all amounts to which such classes or series are entitled.

(d) Neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation, nor the merger,

consolidation or combination of the Corporation into or with any other corporation or the merger,

consolidation or combination of any other corporation into or with the Corporation, shall be deemed

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

Section 4.

(e) After payment of the full amount of the distribution of assets upon dissolution, liquidation or

winding up of the Corporation to which they are entitled pursuant to paragraphs (a), (b) and (c) of

this Section 4, the Holders of Series D Preferred Stock will not be entitled to any further participation

in any distribution of assets by the Corporation.

A-3
5. No Conversion or Exchange Rights.

The Holders of shares of Series D Preferred Stock will not have any rights to convert such shares

into or exchange such shares for shares of any other class or classes, or of any other series of any class

or classes, of stock or obligations of the Corporation.

6. No Pre-emptive Rights.

No Holder of Series D Preferred Stock shall be entitled as a matter of right to subscribe for or

purchase, or have any pre-emptive right with respect to, any part of any new or additional issue of

stock of any class whatsoever, or of securities convertible into any stock of any class whatsoever,

whether now or hereafter authorized and whether issued for cash or other consideration or by way of

dividend.

7. Voting Rights; Amendments.

(a) Except as provided below, the Holders of Series D Preferred Stock will not be entitled to any

voting rights, either general or special.

(b) Without the consent of the Holders of Series D Preferred Stock, the Corporation will have

the right to amend, alter, supplement or repeal any terms of the Series D Preferred Stock (i) to cure

any ambiguity, or to cure, correct or supplement any defective provision contained in this CertiÑcate

of Designation or (ii) to make any other provision with respect to matters or questions arising with

respect to the Series D Preferred Stock that is not inconsistent with the provisions of this CertiÑcate

of Designation so long as such action does not materially and adversely aÅect the interests of the

Holders of Series D Preferred Stock; provided, however, that any increase in the amount of authorized

or issued Series D Preferred Stock or the creation and issuance, or an increase in the authorized or

issued amount, of any other class or series of stock of the Corporation, whether ranking prior to, on a

parity with or junior to the Series D Preferred Stock, as to the payment of dividends or the

distribution of assets upon dissolution, liquidation or winding up of the Corporation, or otherwise, will

not be deemed to materially and adversely aÅect the interests of the Holders of Series D Preferred

Stock.

(c) Except as set forth in paragraph (b) of this Section 7, the terms of the Series D Preferred

Stock may be amended, altered, supplemented or repealed only with the consent of the Holders of at

least two-thirds of the shares of Series D Preferred Stock then outstanding, given in person or by

proxy, either in writing or at a meeting of stockholders at which the Holders of Series D Preferred

Stock shall vote separately as a class. On matters requiring their consent, Holders of Series D

Preferred Stock will be entitled to one vote per share.

(d) The rules and procedures for calling and conducting any meeting of Holders (including,

without limitation, the Ñxing of a record date in connection therewith), the solicitation and use of

proxies at such a meeting, the obtaining of written consents, and any other aspect or matter with

regard to such a meeting or such consents shall be governed by any rules that the Board of Directors of

the Corporation, or a duly authorized committee thereof, in its discretion, may adopt from time to

time, which rules and procedures shall conform to the requirements of any national securities

exchange on which the shares of the Series D Preferred Stock are listed at the time.

8. Additional Classes or Series of Stock.

The Board of Directors of the Corporation, or a duly authorized committee thereof, shall have the

right at any time in the future to authorize, create and issue, by resolution or resolutions, one or more

additional classes or series of stock of the Corporation, and to determine and Ñx the distinguishing

characteristics and the relative rights, preferences, privileges and other terms of the shares thereof.

Any such class or series of stock may rank prior to, on a parity with or junior to the Series D Preferred

A-4
Stock as to the payment of dividends or the distribution of assets upon dissolution, liquidation or

winding up of the Corporation, or otherwise.

9. Priority.

For purposes of this CertiÑcate of Designation, any stock of any class or series of the Corporation

shall be deemed to rank:

(a) Prior to the shares of Series D Preferred Stock, either as to the payment of dividends or the

distribution of assets upon dissolution, liquidation or winding up of the Corporation, if the holders of

such class or series shall be entitled to the receipt of dividends or of amounts distributable upon

dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority

to the Holders of shares of Series D Preferred Stock.

(b) On a parity with shares of Series D Preferred Stock, either as to the payment of dividends or

the distribution of assets upon dissolution, liquidation or winding up of the Corporation, whether or

not the dividend rates or amounts, dividend payment dates or redemption or liquidation prices per

share, if any, be diÅerent from those of the Series D Preferred Stock, if the holders of such class or

series shall be entitled to the receipt of dividends or of amounts distributable upon dissolution,

liquidation or winding up of the Corporation, as the case may be, in proportion to their respective

dividend rates or amounts or liquidation prices, without preference or priority, one over the other, as

between the holders of such class or series and the Holders of shares of Series D Preferred Stock.

(c) Junior to shares of Series D Preferred Stock, either as to the payment of dividends or the

distribution of assets upon dissolution, liquidation or winding up of the Corporation, if such class shall

be common stock of the Corporation or if the Holders of shares of Series D Preferred Stock shall be

entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or

winding up of the Corporation, as the case may be, in preference or priority over the holders of such

class or series.

(d) The shares of Preferred Stock of the Corporation designated ""6.41% Non-Cumulative

Preferred Stock, Series A'' (the ""Series A Preferred Stock''), ""6.50% Non-Cumulative Preferred

Stock, Series B'' (the ""Series B Preferred Stock'') and ""6.45% Non-Cumulative Preferred Stock,

Series C'' (""the Series C Preferred Stock'') shall be deemed to rank on a parity with shares of Series D

Preferred Stock as to the payment of dividends and the distribution of assets upon dissolution,

liquidation or winding up of the Corporation. Accordingly, the holders of record of Series A Preferred

Stock, the holders of record of Series B Preferred Stock, the holders of record of Series C Preferred

Stock and the Holders of Series D Preferred Stock shall be entitled to the receipt of dividends and of

amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may

be, in proportion to their respective dividend rates or amounts or liquidation prices, without

preference or priority, one over the other.

10. Transfer Agent, Dividend Disbursing Agent and Registrar.

The Corporation hereby appoints First Chicago Trust Company of New York as its initial

transfer agent, dividend disbursing agent and registrar for the Series D Preferred Stock. The

Corporation may at any time designate an additional or substitute transfer agent, dividend disbursing

agent and registrar for the Series D Preferred Stock.

11. Notices.

Any notice provided or permitted by this CertiÑcate of Designation to be made upon, or given or

furnished to, the Holders of Series D Preferred Stock by the Corporation shall be made by Ñrst-class

mail, postage prepaid, to the addresses of such Holders as they appear on the books and records of the

Corporation. Such notice shall be deemed to have been suÇciently made upon deposit thereof in the

United States mail. Notwithstanding anything to the contrary contained herein, in the case of the

A-5
suspension of regular mail service or by reason of any other cause it shall be impracticable, in the

Corporation's judgment, to give notice by mail, then such notiÑcation may be made, in the

Corporation's discretion, by publication in a newspaper of general circulation in The City of New York

or by hand delivery to the addresses of Holders as they appear on the books and records of the

Corporation.

RECEIPT AND ACCEPTANCE OF A SHARE OR SHARES OF THE SERIES D PREFERRED STOCK BY OR ON BEHALF OF A HOLDER SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE BY SUCH HOLDER (AND ALL OTHERS HAVING BENEFICIAL

OWNERSHIP OF SUCH SHARE OR SHARES) OF ALL OF THE TERMS AND PROVISIONS

OF THIS CERTIFICATE OF DESIGNATION. NO SIGNATURE OR OTHER FURTHER MANIFESTATION OF ASSENT TO THE TERMS AND PROVISIONS OF THIS CERTIFICATE OF

DESIGNATION SHALL BE NECESSARY FOR ITS OPERATION OR EFFECT AS BETWEEN

THE CORPORATION AND THE HOLDER (AND ALL SUCH OTHERS).

A-6
No dealer, salesperson, or other person has

been authorized to give any information or

to make any representation not contained

in this OÅering Circular and, if given or

made, such information or representation

must not be relied upon as having been 3,000,000 Shares authorized by the Corporation or the Underwriter. Neither delivery of this OÅering Circular nor any sale of Preferred

Stock shall under any circumstances create an implication that there has been no

change in the aÅairs of the Corporation

since the date of this OÅering Circular or

that the information contained herein is

correct as of any time subsequent to the

date of such information. This OÅering

Circular does not constitute an oÅer to sell

or a solicitation of an oÅer to buy any 5.25% Non-Cumulative

securities other than the Preferred Stock Preferred Stock, Series D oÅered hereby or an oÅer to sell or a solici- (stated value $50 per share)

tation of an oÅer to buy such Preferred

Stock by or to any person in any jurisdiction or in any circumstance in which such

oÅer or solicitation would be unlawful or

not authorized.

TABLE OF CONTENTS OFFERING CIRCULAR

Page

Documents Incorporated by Reference 2

Available Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2

Summary of the OÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

The CorporationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5

Use of Proceeds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5

Capitalization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6

Selected Financial Information ÏÏÏÏÏÏÏÏ 7

Government Regulation and Charter

Act ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8

Description of Preferred Stock ÏÏÏÏÏÏÏÏ 10 Bear, Stearns & Co. Inc.

Legality of Investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15

United States TaxationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16

Underwriting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18

Validity of the Preferred Stock ÏÏÏÏÏÏÏÏ 18

Appendix AÌ CertiÑcate of

Designation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A-1

Appendix BÌ Information Statement

dated March 31, 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ B-1

Appendix CÌ Supplement to August 20, 1998

Information Statement dated

May 15, 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ C-1

Appendix DÌ Supplement to

Information Statement dated

August 13, 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ D-1
APPENDIX B

Information Statement

This Information Statement describes the business and operations of the Federal National

Mortgage Association (""Fannie Mae'' or the ""Corporation'') as of March 31, 1998 and its Ñnancial

condition as of December 31, 1997.

In connection with oÅerings of securities, the Corporation distributes OÅering Circulars or

Prospectuses that describe securities oÅered, their selling arrangements and other information.

Although typically incorporated by reference into such selling documents, the Information Statement

does not oÅer any securities for sale. Any incorporation of this Information Statement by reference

includes all supplements hereto. You may obtain copies of the Corporation's current Information

Statement, any supplements thereto and other available information from the oÇce listed on page 2.

This Information Statement contains Fannie Mae's audited Ñnancial statements for the year

ended December 31, 1997. Fannie Mae updates its Information Statement quarterly.

Fannie Mae is a federally chartered corporation. Its principal oÇce is located at 3900 Wisconsin

Avenue, NW, Washington, DC 20016 (202/752-7000). Its Internal Revenue Service employer

identiÑcation number is 52-0883107.

The Corporation's securities are not required to be registered under the Securities Act of 1933. At

the close of business on February 28, 1998, approximately 1,037 million shares of the Corporation's

common stock (without par value) were outstanding.

The delivery of this Information Statement at any time shall not under any circumstances create an implication that there has been no change in the aÅairs of the Corporation since the date hereof or that the information contained herein is correct as of any time

subsequent to its date.

March 31, 1998

B-1
TABLE OF CONTENTS

Caption Page

Documents Incorporated by Reference ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2

Available Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2

Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

General ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

Mortgage Loan Portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

Mortgage-Backed SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7

AÅordable Housing Initiatives and Goals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8

Delinquencies and REO ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9

Fee-Based ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9

Competition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10

Facilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11

Employees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11

Government Regulation and Charter Act ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12

Legal ProceedingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14

Common Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15

Forward-Looking InformationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16

Selected Financial Information: 1993-1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18

Management's Discussion and Analysis of Financial Condition and Results of OperationsÏÏÏ 19

Index to Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39

Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73

Accountants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 77

DOCUMENTS INCORPORATED BY REFERENCE

Fannie Mae's Proxy Statement for the 1997 Annual Meeting of Shareholders is incorporated by

reference herein under ""ManagementÌAdditional Information.'' Any later proxy statement published by Fannie Mae prior to the publication of a new Information Statement is incorporated herein

by this reference. Fannie Mae will supplement this Information Statement to reÖect its quarterly

Ñnancial results and other events and information as Fannie Mae determines. References to the

""Information Statement'' include any documents incorporated herein by reference and any applicable

amendments or supplements hereto. If Fannie Mae modiÑes or updates information in the Information Statement in a later supplement or in a document incorporated by reference in this Information

Statement, the information as modiÑed or updated replaces the information initially reported by the

Corporation in this Information Statement.

AVAILABLE INFORMATION

The Corporation periodically makes available statistical information on its mortgage purchase

and mortgage-backed securities volumes as well as other relevant information about the Corporation.

You may obtain copies of this Information Statement, any supplements relating hereto, as well as the

Corporation's annual and quarterly reports to stockholders, the Federal National Mortgage Association Charter Act, the Corporation's bylaws and other information regarding the Corporation without

charge from the OÇce of Investor Relations, Fannie Mae, 3900 Wisconsin Avenue, NW, Washington,

DC 20016 (telephone: (202/752-7115)). You may inspect reports and other information concerning

the Corporation at the oÇces of the New York Stock Exchange, the Chicago Stock Exchange and the

PaciÑc Stock Exchange. Fannie Mae does not Ñle reports or other information with the Securities and

Exchange Commission.

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BUSINESS

General

Fannie Mae is a federally chartered and stockholder-owned corporation and is the largest investor

in home mortgage loans in the United States. The Corporation was established in 1938 as a United

States government agency to provide supplemental liquidity to the mortgage market and was

transformed into a stockholder-owned and privately managed corporation by legislation enacted in

1968.

The Corporation provides funds to the mortgage market by purchasing mortgage loans from

lenders, thereby replenishing their funds for additional lending. The Corporation acquires funds to

purchase these loans by issuing debt securities to capital market investors, many of whom ordinarily

would not invest in mortgages. In this manner, the Corporation is able to expand the total amount of

funds available for housing.

The Corporation also issues Mortgage-Backed Securities (""MBS''), receiving guaranty fees for

its guarantee of timely payment of principal and interest on MBS certiÑcates. The Corporation issues

MBS primarily in exchange for pools of mortgage loans from lenders. The issuance of MBS enables

the Corporation to further its statutory purpose of increasing the liquidity of residential mortgage

loans.

In addition, the Corporation oÅers various services to lenders and others for a fee. These services

include issuing certain types of MBS and providing technology services for originating and underwriting loans.

For information regarding the Corporation's mortgage loan, MBS and other activities in 1997, see

""Management's Discussion and Analysis of Financial Condition and Results of Operations.''

In this document, both whole loans and participation interests in loans are referred to as ""loans,''

""mortgage loans'' and ""mortgages.'' (The Corporation purchases participation interests that range

from 50 to 99 percent.) The term ""mortgage'' also is used to refer to the security instrument securing

a loan rather than the loan itself, and when so used also refers to a deed of trust. Mortgage loans

secured by four or fewer dwelling units are referred to as ""single-family'' mortgage loans, and mortgage

loans secured by more than four dwelling units are referred to as ""multifamily'' mortgage loans.

Mortgage Loan Portfolio

Mortgage Loans Purchased

The Corporation purchases primarily single-family, conventional (i.e., not federally insured or

guaranteed), Ñxed- or adjustable-rate, Ñrst mortgage loans, but it also purchases other types of

residential mortgage loans for its loan portfolio, including mortgage loans insured by the Federal

Housing Administration (""FHA''), mortgage loans guaranteed by the Department of Veterans AÅairs

(""VA''), mortgage loans guaranteed by the Rural Housing Service, multifamily mortgage loans and

second mortgage loans (i.e., loans secured by second liens). The Corporation's purchases have a

variety of maturities. The Corporation's purchases of adjustable-rate mortgage loans (""ARMs''),

Ñxed-rate loans with intermediate terms of 20 years or less and second mortgage loans are designed to

provide a secondary market for a variety of loans that may be attractive to potential homeowners.

The composition of the Corporation's loan portfolio at the end of each of the last Ñve years is

shown in the table in ""Portfolio Composition.'' The composition of its purchases during the last three

years is shown in ""Management's Discussion and Analysis of Financial Condition and Results of

OperationsÌBalance Sheet AnalysisÌMortgage Portfolio.'' Of the single-family and multifamily

mortgage loans that the Corporation purchased in 1997, including mortgage-backed securities,

approximately 69 percent (measured by unpaid principal balance (""UPB'')) were from investment

banking companies, 10 percent were from mortgage banking companies, 7 percent were from

commercial and mutual savings banks, 6 percent were from savings and loan associations and

8 percent were from other institutions. All of the Corporation's mortgage loan purchases from

investment banking companies were through purchases of mortgage-backed securities.

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Principal Balance Limits. Maximum principal balance limits apply to the Corporation's mortgage loan purchases. For 1997, the Corporation could not purchase conventional mortgage loans on

one-family dwellings if the loan's original principal balance exceeded $214,600, except for loans

secured by properties in Alaska, Hawaii and the Virgin Islands. Higher principal balance limits apply

to loans secured by properties in those areas or secured by two- to four-family dwelling units. The

maximum principal balance limits applicable to such conventional mortgage loans secured by one- to

four-family dwellings can be adjusted by the Corporation annually based on the national average price

of a one-family dwelling as surveyed by the Federal Housing Finance Board. In January 1998, the

Corporation increased its maximum principal balance limit to $227,150.

Under the Charter Act, maximum principal balance limits also apply to the Corporation's

purchases of conventional multifamily mortgage loans. Such limits are aÅected by the location of the

property and other factors.

Mortgage loans insured by the FHA or guaranteed by the Rural Housing Service are subject to

statutory maximum amount limitations. The Corporation will not purchase VA-guaranteed mortgage

loans that have principal amounts in excess of amounts that the Corporation speciÑes from time to

time.

Fixed-Rate/Adjustable-Rate. Substantially all Ñxed-rate mortgage loans purchased by the Corporation provide for level monthly installments of principal and interest. Some of these loans

(1 percent of the single-family portfolio at December 31, 1997) have balloon payments due 5, 7 or

10 years after origination, but with monthly payments based on longer (in many cases 30-year)

amortization schedules. Many of the 7-year balloon single-family mortgage loans permit the borrower

to reÑnance the balloon payment at maturity with a 23-year Ñxed-rate mortgage loan if certain

requirements are satisÑed. Many of the multifamily mortgage loans have balloon payments due 5, 7,

10 or 15 years after origination, but with payments based on 25- or 30-year amortization schedules.

The interest rates on ARMs are determined by formulas providing for automatic adjustment, up

or down, at speciÑed intervals in accordance with changes in speciÑed indices. Substantially all ARMs

also provide for monthly installments of principal and/or interest with the total amount of monthly

installments adjusted (up or down) after the interest rate on the loan is adjusted because of changes in

the applicable index. The Corporation currently purchases ARMs only if the ARMs have a cap on the

amount the interest rate may change over the life of the loan. A substantial number of the ARMs

purchased by the Corporation provide the mortgagor with the option, at speciÑed times or during

speciÑed periods of time, to convert the ARM to a Ñxed-rate mortgage loan with payment of a small

fee.

The Corporation also purchases certain ARMs, called reverse mortgages, that provide for

monthly installments of principal to be paid to the borrower. Over the life of the loan, interest and

certain other fees accrue on the balance of the payments made to the borrower. As described above,

the Corporation currently purchases reverse mortgages only if the reverse mortgages are subject to a

cap on the amount the interest rate may change over the life of the loan. Generally, the loan is due

when the borrower no longer occupies the property.

Maturity. The Corporation currently purchases conventional, single-family Ñxed- and adjustable-rate mortgage loans with original maturities of up to 30 years and 40 years, respectively. Only a

small portion of such ARMs purchased have maturities of more than 30 years. The multifamily

mortgage loans that the Corporation currently purchases for its portfolio generally are conventional

Ñxed-rate loans that have maturities of up to 30 years.

Repayments

The majority of the single-family mortgage loans in the Corporation's portfolio are prepayable by

the borrower. Therefore, the Corporation bears the risk that prepayments may increase when interest

rates decline signiÑcantly or as a result of other factors. The Corporation manages this risk as

B-4
described in ""Management's Discussion and Analysis of Financial Condition and Results of OperationsÌRisk ManagementÌInterest Rate Risk Management.'' Most multifamily loans in the Corporation's portfolio provide for a prepayment premium that is calculated under a formula that is

intended to protect the Corporation from loss of yield on its investment in the mortgage loan being

prepaid.

Portfolio Composition

The following table shows the composition of the Corporation's mortgage loan portfolio and the

weighted-average yield (net of servicing) on the mortgage loan portfolio. The table includes mortgage

loans that back MBS held in the Corporation's mortgage loan portfolio.

Mortgage Loan Portfolio Composition

(Dollars in millions)

December 31,

1997 1996 1995 1994 1993

Single-family:

Government insured or guaranteedÏÏÏÏÏÏÏÏÏÏÏÏ $ 19,478 $ 15,912 $ 13,102 $ 11,659 $ 8,525

Conventional:

Long-term, Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211,541 177,070 140,466 109,079 82,170

Intermediate-term, Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,571 66,284 68,752 68,166 64,623

Adjustable-rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,373 12,783 15,108 16,718 19,439

Second ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 268 323 423 536 772

MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,447 14,68015,66015,899 15,332

Total UPB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $316,678 $287,052 $253,511 $222,057 $190,861

YieldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.60% 7.69% 7.80% 7.80% 7.79%

Commitments

The Corporation issues commitments to purchase, during the term of the commitment, a

speciÑed dollar amount of mortgage loans. The Corporation purchases mortgage loans through

standard product commitments with posted yields and through negotiated commitments.

The Corporation purchases most of its mortgage loans pursuant to mandatory delivery commitments. Under such commitments, lenders are obligated to sell loans to the Corporation at the

commitment yield. Mandatory delivery commitments are available for standard product and

negotiated transactions. If a lender is not able to deliver the mortgage loans required under a

mandatory delivery commitment during its term, the lender may buy back the commitment at any

time during the commitment term for a fee.

The Corporation issues master commitments to lenders to facilitate the delivery of mortgages into

MBS pools or portfolio. In order to deliver under a master commitment, a lender must either deliver

mortgages in exchange for MBS or enter into a mandatory delivery portfolio commitment with the

yield established upon execution of the portfolio commitment.

The Corporation also issues to lenders negotiated standby commitments that commit the

Corporation to purchase a designated dollar amount of single-family mortgage loans from the lenders

if they convert their standby commitments to mandatory delivery commitments. Standby commitments do not obligate the lenders to sell the loans to the Corporation; they are obligated to do so only

after such commitments are converted to mandatory delivery commitments. The yield on the

mortgage loans is established at the time of the conversion in the case of standby commitments. See

""Management's Discussion and Analysis of Financial Condition and Results of OperationsÌBalance

Sheet AnalysisÌLiquidity and Capital Resources.''

B-5
Underwriting Guidelines

The Corporation has established certain underwriting guidelines for purchases of conventional

mortgage loans in an eÅort to reduce the risk of loss from mortgagor defaults. These guidelines are

designed to assess the creditworthiness of the mortgagor as well as the value of the mortgaged property

relative to the amount of the mortgage loan. The Corporation, in its discretion, accepts deviations

from the guidelines. The Corporation also reviews and changes its guidelines from time to time. As

part of its aÅordable housing initiatives, the Corporation continues to introduce new underwriting

criteria that could make the mortgage Ñnance system more accessible to minorities, low-and moderate-income families, underserved and rural residents and people with special housing needs. In

addition, the Corporation is continuing its community-based experiments involving alternative

methods of assessing the creditworthiness of potential borrowers, among other factors. See ""AÅordable Housing Initiatives and Goals.''

The Corporation generally relies on lender representations to ensure that the mortgage loans it

purchases conform to its underwriting guidelines. The Corporation also performs quality control

reviews of selected loans to monitor compliance with the guidelines. In the event that a lender is found

to have breached its representations with respect to a loan's compliance with the guidelines, the

Corporation can demand that the lender repurchase the loan.

In 1996 and 1997, the Corporation enhanced Desktop Underwriter», its automated underwriting

system, to assist lenders in meeting its underwriting standards. Desktop Underwriter is designed to

help lenders process mortgage applications in a more eÇcient and accurate manner and to apply

Fannie Mae's underwriting criteria consistently and objectively to all prospective borrowers. If

Desktop Underwriter provides an ""approved'' recommendation to a loan application, the Corporation

waives certain representations as long as the loan is originated in accordance with the information

that was submitted to Desktop Underwriter.

The Corporation generally requires that the UPB of each conventional single-family Ñrst

mortgage loan it purchases not be greater than 80 percent of the value of the mortgaged property

unless the excess over a speciÑed level is insured by a mortgage insurance company acceptable to the

Corporation. If mortgage insurance is required initially, it must be maintained as long as the UPB is

greater than 80 percent of the original value (or of the appraised value as determined by a subsequent

appraisal). The Corporation does not require mortgage insurance on conventional single-family loans

with LTV ratios greater than 80 percent if the mortgage loan seller provides other acceptable credit

enhancement. The Corporation bears the risk that in some cases parties assuming credit enhancement obligations may be unable to meet their contractual obligations to the Corporation. Fannie Mae

regularly monitors this risk and follows speciÑc criteria in evaluating and accepting credit enhancement arrangements in order to minimize its exposure to credit loss.

The Corporation has required credit enhancement for a majority of the mortgage loans in its

multifamily loan portfolio. See ""Management's Discussion and Analysis of Financial Condition and

Results of OperationsÌRisk ManagementÌCredit Risk ManagementÌMultifamily.''

Servicing

The Corporation does not service mortgage loans held in the portfolio or backing MBS, except for

government-insured multifamily loans, for which the primary servicing functions are performed by a

major servicing entity under a subservicing arrangement. However, the Corporation generally

manages and markets properties acquired through foreclosure. Fannie Mae mortgage loans can be

serviced only by a servicer approved by the Corporation, and must be serviced subject to the

Corporation's guidelines. Lenders who sell single-family mortgage loans and conventional multifamily

loans to the Corporation often are such servicers. Servicing includes the collection and remittance of

principal and interest payments, administration of escrow accounts, evaluation of transfers of

ownership interests, responding to requests for partial releases of security, granting of easements,

handling proceeds from casualty losses, problem loan workouts and, if necessary, processing of

B-6
foreclosures. In the case of multifamily loans, servicing also includes performing property inspections,

evaluating the Ñnancial condition of owners and administration of various types of agreements

(including agreements regarding replacement reserves, completion/repair and operations and maintenance). The Corporation compensates servicers by permitting them to retain a speciÑed portion of

each interest payment on a serviced mortgage loan. The Corporation reserves the right to remove

servicing responsibility from a lender.

Mortgage-Backed Securities

MBS are mortgage pass-through trust certiÑcates issued and guaranteed by the Corporation that

represent beneÑcial interests in pools of mortgage loans or other MBS. The Corporation serves as

trustee for each trust.

MBS are backed by loans from one of three sources: a single lender, multiple lenders or the

Corporation's portfolio. Single-lender MBS generally are issued through lender swap transactions in

which a lender exchanges pools of mortgage loans for MBS. Multiple-lender MBS allow several

lenders to pool mortgage loans together and, in return, receive MBS representing a proportionate

share of a larger pool (called Fannie Majors»). MBS may back other securities, including Fannie

Megas» (""Megas''), Stripped MBS (""SMBS''), real estate mortgage investment conduit securities

(""REMICs'') and other mortgage securities utilizing a ""grantor trust'' structure.

MBS are not assets of the Corporation, except when acquired for investment purposes, nor are

MBS recorded as liabilities. The Corporation, however, is liable under its guarantee to make timely

payments to investors of principal and interest on the mortgage loans in the pools, even if the

Corporation has not received payments of principal or interest on the mortgage loans in the

underlying pools. MBS enable the Corporation to further its statutory purpose of increasing the

liquidity of residential mortgage loans and create a source of guaranty fee income to the Corporation

without assuming any debt reÑnancing risk on the underlying pooled mortgages. Because of the

Corporation's guarantees, it assumes the ultimate credit risk of borrowers' defaults on all mortgage

loans underlying MBS, as it does for portfolio mortgage loans. See ""Management's Discussion and

Analysis of Financial Condition and Results of OperationsÌRisk ManagementÌCredit Risk

Management.''

The Corporation issues MBS backed by single-family or multifamily Ñrst or second mortgage

loans, with Ñxed or adjustable rates. Generally, the mortgage loans are either conventional, FHA, VA

or Rural Housing Service-guaranteed mortgage loans. The conventional mortgage loans are subject to

the maximum principal balance limits applicable to the Corporation's purchases as described under

""Mortgage Loan PortfolioÌMortgage Loans PurchasedÌPrincipal Balance Limits.'' The mortgage

loans also are subject to the same underwriting guidelines as those for mortgage loans purchased for

portfolio as described under ""Mortgage Loan PortfolioÌUnderwriting Guidelines.'' The substantial

majority of the Corporation's MBS outstanding represents beneÑcial interests in conventional Ñxedrate mortgage loans on single-family dwellings.

The Corporation issues and guarantees several forms of MBS, including Fannie Majors, that

involve only a single class of certiÑcates with each investor receiving a portion of the payments of

principal and interest on the underlying mortgage loans equal to its undivided interest in the pool.

With a standard MBS, an investor has an undivided interest in a pool of underlying mortgage loans

that generally are provided either by one lender or by the Corporation out of the Corporation's

mortgage loan portfolio. Megas represent undivided interests in a pool of MBS, REMIC tranches or

pass-through certiÑcates guaranteed by the Government National Mortgage Association (""Ginnie

Mae certiÑcates'') of the same type. In addition, the Corporation issues and guarantees MBS in the

form of single-class ""grantor trust'' securities representing an undivided interest in a pool of MBS,

Ginnie Mae certiÑcates, other mortgage-backed securities or mortgage loans.

The Corporation also issues and guarantees MBS that involve more than one class of certiÑcates

and, therefore, require special allocations of cash Öows. SMBS are issued in series, with one or more

B-7
classes that are each entitled to diÅerent cash Öows and may represent (a) an undivided interest solely

in the principal payments, (b) an undivided interest solely in the interest payments or (c) diÅerent

percentage interests in principal and interest payments, to be made on a pool of mortgage loans, MBS,

REMICs, other SMBS and/or Ginnie Mae certiÑcates. REMICs represent beneÑcial interests in a

trust having multiple classes of certiÑcates entitled to diÅerent cash Öows from the underlying

mortgage loans, MBS, SMBS, Ginnie Mae certiÑcates and/or certiÑcates from other REMICs.

Pursuant to its guarantee of REMICs and SMBS, the Corporation is obligated to make timely

distribution of required installments of principal and/or interest and, in the case of REMICs, to

distribute the principal balance in full by a speciÑed date, whether or not suÇcient funds are available

in the related REMIC trust (the Corporation has issued a limited amount of subordinated REMIC

classes that are not guaranteed by the Corporation).

The Corporation receives guaranty fees for a signiÑcant portion of its MBS (principally its

standard MBS and Fannie Majors). Such fees are paid monthly until the underlying mortgage loans

have been repaid or otherwise liquidated from the pool (generally as a result of delinquency). The

aggregate amount of guaranty fees received by the Corporation depends upon the amount of MBS

outstanding and on the guaranty fee rate. The amount of MBS outstanding is inÖuenced by the

repayment rates on the underlying mortgage loans and by the rate at which the Corporation issues

new MBS. In general, when the level of interest rates declines signiÑcantly below the interest rates on

loans underlying MBS, the rate of prepayments is likely to increase; conversely, when interest rates

rise above the interest rates on loans underlying MBS, the rate of prepayments is likely to slow. In

addition to interest rate changes, the rate of principal payments is inÖuenced by a variety of economic,

demographic and other factors. The Corporation also generally receives one-time fees for swapping

SMBS, REMICs, Megas and grantor trust securities for MBS, mortgage loans, Ginnie Mae certiÑcates, SMBS, REMIC certiÑcates or other mortgage-backed securities.

In many instances, the lender or lenders that originated the loans in an MBS pool created from

the Corporation's portfolio or the lender or lenders that exchanged the loans for the MBS (in the case

of a ""swap'' transaction) initially service the loans. The Corporation, however, reserves the right to

remove the servicing responsibility from a lender at any time if it considers such removal to be in the

best interest of MBS certiÑcate holders. In such event, the Corporation Ñnds a replacement lender

that will service the loans. Generally, the Corporation ultimately is responsible to MBS holders for

the administration and servicing of mortgage loans underlying MBS, including the collection and

receipt of payments from lenders, and the remittance of distributions and certain reports to holders of

MBS certiÑcates.

AÅordable Housing Initiatives and Goals

In 1994, the Chairman of the Corporation announced that for the seven years from 1994 through

the year 2000 the Corporation would commit $1 trillion to help Ñnance over 10 million homes for

families and communities most in need (the ""Trillion Dollar Commitment''). As part of the Trillion

Dollar Commitment announcement, the Chairman laid out 11 initiatives targeting speciÑc areas of the

mortgage Ñnance system for improvement. (In early 1996, the Fannie Mae Foundation undertook

three of the initiatives.) By the end of 1997, the Corporation was able to report the following progress

with respect to each of the eleven initiatives (including progress on the three Foundation initiatives

that were supported by the Corporation): (i) established 28 Partnership OÇces around the country

and announced plans to open Ñve additional oÇces in 1998 (initiative: Fannie Mae Partnership

OÇces); (ii) integrated research on credit scoring and loan performance with the Corporation's

automated underwriting, oÅering lenders a tool that allows them to use the most Öexible loan criteria

to extend full consideration for each borrower's unique credit proÑle (initiative: Underwriting

Flexibilities); (iii) issued $7.3 billion of total commitments to speciÑc underwriting experiments

intended to lower barriers to homeownership (initiative: Underwriting Experiments); (iv) addressed

emerging markets with products designed to meet home improvement renovation Ñnancing needs and

targeted those most in need with products designed for seniors, disabled people and their families, and

Native Americans (initiative: Innovations for Change); (v) originated $25.7 billion in multifamily

B-8
Ñnancing (initiative: Multifamily Housing Finance); (vi) identiÑed potential savings of approximately $800 per mortgage related to the origination costs of mortgages through the use of Fannie Mae

technology (initiative: Technology to Reduce Costs); (vii) approved more than $38.2 million of

investments in community development Ñnancial institutions and increased the percentage of lending

to minority borrowers to over 17 percent of the Corporation's total loan volume (initiative: Fighting

Discrimination); (viii) together with 29 for-proÑt, nonproÑt and governmental organizations, created

the American Homeowner Education and Counseling Institute, an independent nonproÑt organization

committed to increased professionalism in homeowner counseling and to identifying more eÅective

ways to Ñnance home buyer education (initiative: HomePath Initiative); (ix) exceeded its original

commitment to increase giving to the Fannie Mae Foundation (initiative: Increased Foundation

Giving); (x) handled nearly 1.5 million consumers' requests for homeownership information (initiative: Opening Doors for Every American campaign); and (xi) provided 1.3 million immigrants with

home-buying information, using multilingual media and community organizations supportive of

immigrants (initiative: New Americans Campaign).

Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the ""1992

Act''), the Corporation has certain goals to promote aÅordable housing for moderate-, low- and very

low-income families and to serve the housing needs of those in underserved areas. In 1997, the

Corporation exceeded the applicable goals. See ""Management's Discussion and Analysis of Financial

Condition and Results of OperationsÌHousing Goals.''

Delinquencies and REO

When a mortgage loan for which Fannie Mae bears the default risk is liquidated by foreclosure,

the Corporation generally acquires the underlying property (such real estate owned is called ""REO'')

and holds it for sale. The level of delinquencies and number of REO are aÅected by economic

conditions, loss mitigation eÅorts (which include contacting delinquent borrowers to oÅer the options

of a preforeclosure sale or modiÑcation) and a variety of other factors. The Corporation manages the

risk of delinquencies and REO as described in ""Management's Discussion and Analysis of Financial

Condition and Results of OperationsÌRisk ManagementÌCredit Risk Management.''

Fee-Based Services

The Corporation oÅers certain services to lenders and other customers in return for a fee. These

include issuing REMICs, SMBS, Fannie Megas», and grantor trust securities, technology services for

originating and underwriting loans, and the facilitation of securities transactions.

The Corporation receives fee income from dealers in exchange for creating and issuing REMICs,

SMBS, grantor trust securities and Megas. In addition to issuing these securities, the Corporation is

responsible for all tax reporting and administration costs associated with these securities.

The Corporation also receives fee income in return for providing technology related services such

as Desktop Underwriter», Desktop Originator», Desktop Trader», and other on-line services. These

services provide lenders the ability to underwrite mortgage loans electronically, communicate with

third-party originators, access Fannie Mae loan pricing schedules, and enter into sale commitments

with the Corporation on a real-time basis.

The Corporation also simultaneously purchases and sells MBS and certain other mortgage-related

securities, such as Ginnie Mae certiÑcates, with the intention of earning a spread on such trades or as

a service to customers. In addition, the Corporation receives fee income through other activities, such

as repurchase transactions, and by providing other investment alternatives for customers.

Competition

The Corporation competes, within the limits prescribed by its Charter Act, for the purchase of

mortgage loans for portfolio and the issuance of mortgage-backed securities in the secondary mortgage

market. For single-family products, the Corporation competes primarily with the Federal Home Loan

B-9
Mortgage Corporation (""Freddie Mac''), another government-sponsored enterprise regulated by the

Department of Housing and Urban Development (""HUD'') and the OÇce of Federal Housing

Enterprise Oversight with a mission and authority that is virtually identical to that of Fannie Mae.

Fannie Mae competes to a lesser extent with savings and loan associations, savings banks, commercial

banks, other government-sponsored entities, and companies that purchase for their own portfolio or

pool single-family mortgage loans for sale to investors as whole loans or mortgage-backed securities.

Fannie Mae competes with the Federal Housing Administration (""FHA'') insurance program, a HUD

program, for the business of guaranteeing the credit performance of mortgage loans and, due to the

eligibility of such FHA-insured loans for securitization by the Government National Mortgage

Association (""Ginnie Mae''), with Ginnie Mae as well. The proposed Ñscal year 1999 federal budget

calls for an increase in the maximum principal balance for loans eligible for the FHA insurance

program to equal Fannie Mae's loan limits. Currently, Fannie Mae is limited to purchasing and

guaranteeing the credit performance of mortgage loans with a maximum principal balance of $227,150

(or more depending upon geographical area and number of dwelling units) while the FHA is limited to

insuring mortgage loans with a range of maximum principal balances from $86,317 to $170,362. Such

an increase for the FHA would require legislation and, if enacted into law, likely result in expanded

competition for the Corporation's guaranty business. (For additional information on the maximum

principal balances for loans purchased by the Corporation, see ""Mortgage Loan PortfolioÌMortgage

Loans PurchasedÌPrincipal Balance Limits.'')

In the case of multifamily products, the Corporation generally competes with government housing

programs and with the same kinds of entities as in the case of single-family products, but Freddie Mac

is just one among many competitors that vigorously compete in this market. Competition for

multifamily mortgage loans is intense from certain entities typically sponsored by investment banks

who purchase such loans and pool them for sale to investors in the commercial mortgage-backed

securities market. Such entities are referred to as ""conduits,'' and their role in the multifamily

mortgage market increased signiÑcantly in 1997.

The Corporation's market share of loans purchased for cash or swapped for MBS is aÅected by

the volume of mortgage loans oÅered for sale in the secondary market by loan originators and other

market participants and the amount purchased by other market participants that compete with the

Corporation.

The Corporation competes primarily on the basis of price, products, and services oÅered.

Competition based on advances in technology-related and other fee-based services continues to

increase, as do the types and nature of the products oÅered by the Corporation and Freddie Mac and

other market participants.

Competition is particularly intense for multifamily mortgage loans eligible for government

subsidies, which have low-income rent and occupancy restrictions. As a prerequisite to expansion or

merger plans, commercial banks must fund such loans to meet certain housing goals under the

Community Reinvestment Act, and they often are willing to do so at or below their own cost of funds.

Fannie Mae competes for these same investment opportunities to meet its housing goals.

Since 1993, Freddie Mac has been adding to its mortgage portfolio signiÑcantly, which has

increased the competition between the Corporation and Freddie Mac for mortgage loans. In addition,

beginning in 1993, Freddie Mac, other traditional lenders, and new lenders began to acquire, or

recommenced acquiring, multifamily mortgage loans. In 1994, Ginnie Mae became a competitor in the

market for REMICs backed by Ginnie Mae certiÑcates. In addition, both Fannie Mae and Ginnie Mae

issued pooled mortgage-backed securities (Megas and Platinums, respectively) backed by Ginnie Mae

certiÑcates. However, because the Ginnie Mae guaranty is directly backed by the full faith and credit

of the United States, dealers are more likely to exchange their Ginnie Mae certiÑcates for Ginnie Mae

Platinums than for Fannie Mae Megas, except in limited situations. Fannie Mae continues to issue

REMICs backed by Ginnie Mae certiÑcates.

B-10
Competition also is a consideration in connection with the issuance of the Corporation's debt

securities. The Corporation competes with Freddie Mac, the Student Loan Marketing Association, the

Federal Home Loan Bank (""FHLB'') system and other government-sponsored entities for funds

raised through the issuance of unsecured debt in the ""agency'' debt market. Increases in the issuance

of unsecured debt by other government-sponsored entities generally, and in the issuance of callable

debt in particular, may have an adverse eÅect on the issuance of the Corporation's unsecured debt, or

result in the issuance of such debt at higher interest rates than would otherwise be the case. In

addition, the availability and cost of funds raised through the issuance of certain types of unsecured

debt may be aÅected adversely by regulatory initiatives that tend to reduce investments by certain

depository institutions in unsecured debt with greater than normal volatility or interest-rate

sensitivity.

Under the 1992 Act, the Secretary of HUD must approve any new Fannie Mae or Freddie Mac

program that is signiÑcantly diÅerent from those approved or engaged in prior to that Act's

enactment. The ability of Fannie Mae and Freddie Mac to compete with other competitors possibly

could be aÅected by this requirement. See ""Government Regulation and Charter Act.''

Facilities

The Corporation owns its principal oÇce, which is located at 3900 Wisconsin Avenue, NW,

Washington, DC, an oÇce at 3939 Wisconsin Avenue, NW, Washington, DC, and two facilities in

Herndon, Virginia. In addition, the Corporation leases approximately 379,000 square feet of oÇce

space at 4000 Wisconsin Avenue, NW, which is adjacent to the Corporation's principal oÇce, and

approximately 64,000 square feet of oÇce space at 2115 Wisconsin Avenue, NW. The present lease

for 4000 Wisconsin Avenue expires in 2003, but the Corporation has options to extend the lease for up

to 15 additional years, in 5-year increments. The lease for 2115 Wisconsin expires in 2002. The

Corporation also maintains regional oÇces in leased premises in Pasadena, California; Atlanta,

Georgia; Chicago, Illinois; Philadelphia, Pennsylvania; and Dallas, Texas. The regional oÇces

negotiate mortgage loan and MBS business with lenders, assist in supervising the servicing of the

Corporation's mortgage loan portfolio by lenders, assist in supervising or managing the handling and

disposition of REO and provide training to the staÅs of lenders. In addition to the regional oÇces, the

Corporation has opened 30 ""Fannie Mae Partnership OÇces'' to date in leased premises around the

country which will work with cities, rural areas and other underserved communities. The Corporation

also plans to establish three additional Partnership OÇces in 1998. There currently are Fannie Mae

Partnership OÇces in Phoenix, Arizona; Los Angeles, California; Denver, Colorado; Hartford,

Connecticut; Washington, D.C.; Miami, Florida; Orlando, Florida; Atlanta, Georgia; Chicago, Illinois;

Des Moines, Iowa; Kansas City, Kansas; New Orleans, Louisiana; Baltimore, Maryland; Boston,

Massachusetts; Detroit, Michigan; St. Paul, Minnesota; Jackson, Mississippi; St. Louis, Missouri;

Lincoln, Nebraska; Albuquerque, New Mexico; Las Vegas, Nevada; New York, New York; Charlotte,

North Carolina; Cleveland, Ohio; Columbus, Ohio; Portland, Oregon; Houston, Texas; San Antonio,

Texas (two oÇces, one of which is responsible for border region issues); and Seattle, Washington.

Employees

At December 31, 1997, the Corporation employed approximately 3,500 full-time personnel.

B-11
GOVERNMENT REGULATION AND CHARTER ACT

The Corporation is a federally chartered and stockholder-owned Corporation organized and

existing under the Charter Act (12 U.S.C. Û 1716 et seq.) whose purpose is to (1) provide stability in

the secondary market for residential mortgages, (2) respond appropriately to the private capital

market, (3) provide ongoing assistance to the secondary market for residential mortgages (including

activities relating to mortgages on housing for low- and moderate-income families involving a

reasonable economic return that may be less than the return earned on other activities) by increasing

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

for residential mortgage Ñnancing and (4) promote access to mortgage credit throughout the nation

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

investments and improving the distribution of investment capital available for residential mortgage

Ñnancing.

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

as a wholly owned government corporation and in 1954, under a revised Title III called the Federal

National Mortgage Association Charter Act, became a mixed-ownership corporate instrumentality of

the United States. From 1950 to 1968, it operated in the Housing and Home Finance Agency, which

was succeeded by the Department of Housing and Urban Development (""HUD''). Pursuant to

amendments to the Charter Act enacted in the Housing and Urban Development Act of 1968 (the

""1968 Act''), the then Federal National Mortgage Association was divided into two separate

institutions, the present Corporation and the Government National Mortgage Association, a wholly

owned corporate instrumentality of the United States within HUD, which carried on certain special

Ñnancing assistance and management and liquidation functions. Under the 1968 Act, the Corporation

was constituted as a federally chartered corporation and the entire equity interest in the Corporation

became stockholder-owned.

Although the 1968 Act eliminated all federal ownership interest in the Corporation, it did not

terminate government regulation of the Corporation. Under the Charter Act, approval of the

Secretary of the Treasury is required for the Corporation's issuance of its debt obligations and MBS.

In addition, the 1992 Act established an independent OÇce of Federal Housing Enterprise Oversight

(""OFHEO'') within HUD under the management of a Director (the ""Director'') who is responsible

for ensuring that the Corporation is adequately capitalized and operating safely in accordance with the

1992 Act. The 1992 Act established minimum capital, risk-based capital and critical capital levels for

the Corporation and required the Director to establish, by regulation, a risk-based capital test to be

used to determine the amount of total capital the Corporation must have to exceed the risk-based

capital level from time to time. OFHEO issued a Ñnal rule (the ""Rule'') in 1996 related to the

minimum capital levels for Fannie Mae and Freddie Mac that sets forth how minimum capital

requirements for both entities are to be calculated, reported and classiÑed on a quarterly basis. The

Rule, which Ñnalized an original proposal dated June 1995, formalized the interim capital standards

applied by OFHEO, with which the Corporation has been in compliance since their inception. See also

""Management's Discussion and Analysis of Financial Condition and Results of OperationsÌBalance

Sheet AnalysisÌRegulatory Capital Requirements.''

In 1996, OFHEO also released for comment part one (""Part I'') of the proposed regulations to

establish the risk-based capital test. Part I speciÑes that ""benchmark loss experience'' will be

combined with other yet to be determined assumptions and applied each quarter to the Corporation's

book of business to establish credit losses under the risk-based capital standard for the Corporation.

Part I also speciÑes the house price index that OFHEO will use in connection with the risk-based

capital standard. The Corporation submitted comments to OFHEO in October 1996 stating that

several aspects of the initial proposal require adjustments or amendment, because it does not

accurately capture the Corporation's credit history and derives credit loss rates that are signiÑcantly

worse than any reasonable representation of Fannie Mae's and Freddie Mac's loss experience.

OFHEO has indicated that it plans to release a proposed second part of the risk-based capital

regulation, which will specify, among other matters, remaining aspects of the stress test and how the

B-12
stress test will be used to determine Fannie Mae's and Freddie Mac's risk-based capital requirements.

Management understands that OFHEO expects to publish this second part in January 1999.

Management is optimistic that the Ñnal regulations will permit the Corporation to manage its business

in a reasonably eÇcient manner.

If the Corporation fails to meet one or more of the capital standards under the 1992 Act, the

Director is required to take certain remedial measures and may take others, depending on the

standards the Corporation fails to meet. The Director's enforcement powers include the power to

impose temporary and Ñnal cease-and-desist orders and civil penalties on the Corporation and on

directors or executive oÇcers of the Corporation. If the Director determines that the Corporation is

engaging in conduct not approved by the Director that could result in a rapid depletion of core capital

or that the value of the property subject to mortgages held or securitized by the Corporation has

decreased signiÑcantly, the Director is authorized to treat the Corporation as not meeting one of the

capital standards that it otherwise meets. In addition, the Corporation is required to submit a capital

restoration plan if it fails to meet any of the capital standards. If the Director does not approve the

plan or determines that the Corporation has failed to make reasonable eÅorts to comply with the plan,

then the Director may treat the Corporation as not meeting one of the capital standards that it

otherwise meets. Also, if the Corporation fails to meet or is treated by the Director as not meeting one

of the capital standards and the Director has reasonable cause to believe that the Corporation or any

executive oÇcer or director of the Corporation is engaging in or about to engage in any conduct that

threatens to result in a signiÑcant depletion of the Corporation's core capital, then the Director is

authorized to commence proceedings pursuant to which, after a hearing, the Director could issue a

cease and desist order prohibiting such conduct. The Director could issue such an order without a

hearing, which would be eÅective until completion of the cease-and-desist proceedings, if the Director

determined that the conduct in question was likely to cause a signiÑcant depletion of core capital.

Prior approval of the Director is required for the Corporation to pay a dividend if the dividend would

decrease the Corporation's capital below risk-based capital or minimum capital levels established

under the 1992 Act. See ""Common Stock.'' The Director is authorized to levy, pursuant to annual

Congressional appropriations, annual assessments on Fannie Mae and Freddie Mac to cover reasonable expenses of OFHEO.

The 1992 Act also gives the Director the authority to conduct on-site examinations of the

Corporation for purposes of ensuring the Corporation's Ñnancial safety and soundness. In addition,

the Corporation is required to submit annual and quarterly reports of the Ñnancial condition and

operations of the Corporation to the Director. Moreover, the Charter Act, as amended by the 1992

Act, authorizes the General Accounting OÇce to audit the programs, activities, receipts, expenditures

and Ñnancial transactions of the Corporation. The Corporation also is required to submit an annual

report to the House and Senate Banking Committees and the Secretary of HUD regarding the

Corporation's performance in meeting housing goals relating to the purchase of mortgages on housing

for low- and moderate-income families, mortgages on rental and owner-occupied housing for lowincome families in low-income areas or for very-low-income families, and mortgages on housing

located in rural or other underserved areas.

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

rules and regulations to carry out the purposes of the Charter Act, excluding authority over matters

granted exclusively to the Director in the 1992 Act. The Secretary of HUD also must approve any new

conventional mortgage program that is signiÑcantly diÅerent from those approved or engaged in prior

to the 1992 Act. The Secretary is required to approve any new program unless it is not authorized by

the Charter Act of the Corporation or the Secretary Ñnds that it is not in the public interest.

However, until one year after the Ñnal regulations establishing the risk-based capital test are in eÅect,

the Secretary must disapprove a new program if the Director determines that the program would risk

signiÑcant deterioration of the Ñnancial condition of the Corporation. The Secretary has adopted

regulations related to the program approval requirement.

B-13
Thirteen members of the Corporation's eighteen-member Board of Directors are elected by the

holders of the Corporation's common stock, and the remaining Ñve members are appointed by the

President of the United States. The appointed directors must include one person from the home

building industry, one person from the mortgage lending industry, and one person from the real estate

industry. Under the 1992 Act, one appointed director also must be from an organization that has

represented consumer or community interests for not less than two years or a person who has

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

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

removed by the President for good cause.

In addition to placing the Corporation under federal regulation, the Charter Act also grants to the

Corporation certain privileges. For instance, securities issued by the Corporation are deemed to be

""exempt securities'' under laws administered by the Securities and Exchange Commission (""SEC'') to

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

United States. Registration statements with respect to the Corporation's securities are not Ñled with

the SEC. The Corporation also is not required to Ñle periodic reports with the SEC.

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

obligations of the Corporation up to a maximum of $2.25 billion outstanding at any one time. This

facility has not been used since the Corporation's transition from government ownership in 1968.

Neither the United States nor any agency thereof is obligated to Ñnance the Corporation's operations

or to assist the Corporation in any other manner.

The Corporation is exempt from all taxation by any state or by any county, municipality, or local

taxing authority except for real property taxes. The Corporation is not exempt from payment of

federal corporate income taxes. Also, the Corporation may conduct its business without regard to any

qualiÑcations or similar statute in any state of the United States or the District of Columbia.

The Federal Reserve Banks are authorized to act as depositaries, custodians, and Ñscal agents for

the Corporation, for its own account, or as Ñduciary.

LEGAL PROCEEDINGS

In the ordinary course of business, the Corporation is involved in legal proceedings that arise in

connection with properties acquired by the Corporation, either through foreclosure on properties

securing delinquent mortgage loans owned by the Corporation or by receiving deeds to such properties

in lieu of foreclosure. For example, claims related to possible tort liability and compliance with

applicable environmental requirements arise from time to time, primarily in the case of single-family

REO.

The Corporation is a party to legal proceedings from time to time arising from its relationships

with its seller/servicers. Disputes with lenders concerning their loan origination or servicing

obligations to the Corporation, or disputes concerning termination by the Corporation (for any of a

variety of reasons) of a lender's authority to do business with the Corporation as a seller and/or

servicer, can result in litigation. Also, loan servicing issues have resulted from time to time in claims

against the Corporation brought as putative class actions for borrowers.

The Corporation also is a party to legal proceedings from time to time arising from other aspects

of its business and administrative policies.

Claims and proceedings of all types are subject to many uncertain factors that generally cannot be

predicted with assurance. However, in the case of the legal proceedings and claims that are currently

pending against the Corporation, management believes that their outcome will not have a material

adverse eÅect on the Corporation's Ñnancial condition or results of operations.

B-14
COMMON STOCK

Section 303(a) of the Charter Act provides that the Corporation shall have common stock,

without par value. The common stock is vested with all voting rights. Each share of common stock is

entitled to one vote at all elections of directors and on all other matters presented for common

stockholder vote. The holders of the common stock elect thirteen directors, and the President of the

United States appoints the remaining Ñve directors. Any member of the Board of Directors that is

appointed by the President of the United States may be removed by the President for good cause. The

Charter Act, the Corporation's governing instrument, cannot be amended by the stockholders, but

only by an Act of Congress.

The Corporation also is authorized by the Charter Act to have preferred stock on such terms and

conditions as the Board of Directors of the Corporation may prescribe. No common stockholder

approval is required to issue preferred stock. The Corporation issued $1 billion of non-cumulative

preferred stock in 1996 that is redeemable at the Corporation's option beginning in 2001. See ""Notes

to Financial Statements Ì Note 12'' for additional information on preferred stock.

The Charter Act contains no limitation on the amount of stock that may be issued, except that if

the Corporation fails to meet certain minimum capital standards, the Director could require that the

Director approve the Corporation's issuance of stock or securities convertible into stock. At

February 28, 1998, there were outstanding approximately 1,037 million shares of common stock,

which were held by approximately 21,000 stockholders of record. Based on the number of requests for

proxies and quarterly reports, the Corporation estimates that on February 28, 1998 there were

approximately 280,000 additional stockholders who held shares through banks, brokers and nominees.

Holders of the common stock are entitled to receive cash dividends if, as and when declared by the

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

the Board of Directors to declare dividends in certain circumstances. The 1992 Act established riskbased capital, minimum capital and critical capital levels for the Corporation, and required the

Director of OFHEO to establish, by regulation, a risk-based capital test to be used to determine the

amount of total capital the Corporation must have to exceed the risk-based capital level from time to

time. The Corporation submitted comments on Part I of OFHEO's proposed regulation for the riskbased capital test (released in 1996) and management understands that OFHEO expects to publish

for comment in January 1999 the second part of the proposed regulations. See ""Government

Regulation and Charter Act.'' Until one year after the Ñnal regulations establishing the risk-based

capital test are in eÅect, a dividend may be paid without the prior approval of the Director if the

Corporation meets the minimum capital level established under the 1992 Act and the dividend

payment would not decrease the Corporation's base capital below such level. See ""Government

Regulation and Charter Act'' regarding the Ñnal rule applicable to the minimum capital level.

One year after Ñnal regulations establishing the risk-based capital test take eÅect, a dividend may

be paid without the prior approval of the Director if the Corporation meets both the risk-based capital

and minimum capital levels and the dividend payment would not decrease the Corporation's total

capital below the risk-based capital level or its core capital below the minimum capital level. If the

Corporation meets either the risk-based capital standard or the minimum capital standard, it may

make a dividend payment without obtaining the approval of the Director only if the dividend payment

would not cause the Corporation to fail to meet another capital standard. At any time when the

Corporation does not meet the risk-based capital standard but meets the minimum capital standard,

the Corporation is prohibited from making a dividend payment that would cause the Corporation to

fail to meet the minimum capital standard. If the Corporation meets neither the risk-based capital

standard nor the minimum capital standard but does meet the critical capital standard established

under the 1992 Act, it may make a dividend payment only if the Corporation would not fail to meet

the critical capital standard as a result of such payment and the Director approves the payment after

Ñnding that it satisÑes certain statutory conditions. The Director has the authority to require the

Corporation to submit a report to the Director regarding any capital distribution (including any

B-15
dividend) declared by the Corporation before the Corporation makes the distribution. See ""Government Regulation and Charter Act'' and ""Management's Discussion and Analysis of Financial

Condition and Results of OperationsÌBalance Sheet AnalysisÌRegulatory Capital Requirements''

regarding the capital standards applicable to the Corporation.

The payment of dividends on common stock also is subject to the payment of dividends on any

preferred stock outstanding. Accordingly, no cash dividend may be declared or paid or set apart for

payment on common stock unless cash dividends have been declared and paid or set apart (or ordered

to be set apart) on preferred stock outstanding for the then-current dividend period.

Dividends on common stock have been declared and paid for each quarter during the Corporation's two most recent Ñscal years. See ""Quarterly Results of Operations'' on pages 69-70 for quarterly

dividends paid on common stock during 1997 and 1996.

In the event of liquidation of the Corporation, holders of common stock are entitled to share

ratably, in accordance with their holdings, in the remaining assets of the Corporation after payment of

all liabilities of the Corporation and amounts payable to the holders of preferred stock.

The common stock has no conversion or pre-emptive rights or redemption or sinking fund

provisions. The outstanding shares of common stock are fully paid and nonassessable. There is no

prohibition against the purchase by the Corporation of its own common stock, holding such common

stock in its treasury, and reselling such stock.

This description is summarized from the Charter Act, the 1992 Act, the bylaws and certain

resolutions of the Board of Directors and stockholders of the Corporation. This description does not

purport to be complete and is qualiÑed in its entirety by reference to the Charter Act, the 1992 Act,

the bylaws of the Corporation and such resolutions. Copies of the Charter Act, the bylaws of the

Corporation and any applicable resolutions may be obtained from the Corporation.

The Corporation's common stock is publicly traded on the New York, PaciÑc and Chicago stock

exchanges and is identiÑed by the ticker symbol ""FNM.'' The transfer agent and registrar for the

common stock is First Chicago Trust Company of New York, 525 Washington Boulevard, Jersey City,

New Jersey 07310.

The following table shows, for the periods indicated, the high and low prices per share of the

Corporation's common stock on the New York Stock Exchange Composite Transactions as reported

in the Bloomberg Financial Markets service.

Quarterly Common Stock Data

1997 1996

Quarter High Low High Low

1st ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $43.75 $36.13 $35.75 $28.75

2nd ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47.63 36.13 34.5027.50

3rdÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49.44 41.13 35.38 29.13

4thÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57.31 44.69 41.63 34.50

The closing price of the Corporation's common stock on March 27, 1998, as so reported, was

$63.63.

FORWARD-LOOKING INFORMATION

From time to time, the Corporation may make forward-looking statements relating to matters

such as the Corporation's anticipated Ñnancial performance, business prospects, future business plans,

Ñnancial condition or other matters. For example, ""Management's Discussion and Analysis of

Financial Condition and Results of Operations'' includes forward-looking statements, which are

B-16
statements therein that are not historical facts or explanations of historical data. The words

""believes,'' ""anticipates,'' ""expects'' and similar expressions generally identify forward-looking

statements.

Forward-looking statements reÖect management's expectations based on various assumptions

and management's estimates of trends and economic factors in the markets in which the Corporation

is active, as well as the Corporation's business plans. As such forward-looking statements are subject

to risks and uncertainties, the Corporation's actual results may diÅer (possibly signiÑcantly) from

those indicated in such statements. Among the factors that may aÅect the performance, development

or results of the Corporation's business, and thereby cause actual results to diÅer from management's

expressed expectations, are the following:

‚ signiÑcant changes in borrower preferences for Ñxed- or adjustable-rate mortgages, originator preferences for selling mortgages in the secondary market, investor preferences for the

Corporation's securities versus other investments, the availability of funding at attractive

spreads in the Ñnancial markets (in particular from callable debt), and other factors

aÅecting the overall mix of mortgage loans available for purchase, the Corporation's

funding opportunities or the Corporation's net interest margins;

‚ signiÑcant changes in employment rates, housing price appreciation or other factors

aÅecting delinquency or foreclosure levels and credit losses;

‚ signiÑcant changes in the Corporation's policies or strategies, such as its underwriting

requirements or its interest rate risk management, credit loss mitigation or investment

strategies;

‚ regulatory or legislative changes aÅecting the Corporation, its competitors or the markets

in which the Corporation is active, including changes in taxes or capital requirements

applicable to the Corporation or its activities (see ""Government Regulation and Charter

Act,'' ""Competition'' and ""Management's Discussion and Analysis of Financial Condition

and Results of OperationsÌBalance Sheet AnalysisÌRegulatory Capital Requirements''

regarding certain matters currently being considered by regulators, legislators or the

Administration);

‚ competitive developments in the markets for mortgage loan purchases and for the sale of

mortgage-backed and debt securities, or signiÑcant changes in the rate of growth in

conforming residential mortgage debt;

‚ signiÑcant changes in the amount and rate of growth of the Corporation's expenses, and

the costs (and eÅects) of legal or administrative proceedings (see ""Legal Proceedings'') or

changes in accounting policies or practices;

‚ signiÑcant changes in general economic conditions or the monetary or Ñscal policy of the

United States; and

‚ unanticipated, substantial changes in interest rates. While the Corporation has achieved

40 consecutive quarters of record operating earnings despite major Öuctuations in interest

rates during this period and employs a variety of interest rate risk management techniques,

it is possible that sudden, severe swings in interest rates could have at least a short-term

signiÑcant eÅect on the Corporation's results.

The Corporation does not undertake to update any forward-looking statement herein or that may

be made from time to time on behalf of the Corporation.

B-17
SELECTED FINANCIAL INFORMATION: 1993-1997

The following selected Ñnancial data for the years 1993 through 1997 (which data are not covered

by the independent auditors' report) have been summarized or derived from the audited Ñnancial

statements and other Ñnancial information. These data should be read in conjunction with the

audited Ñnancial statements and notes to the Ñnancial statements.

(Dollars in millions, except per common share amounts)

1997 1996 1995 1994 1993 Income Statement Data for the year ended December 31:

Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 26,378 $ 23,772 $ 21,071 $ 17,347 $ 14,833

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,429 20,180 18,024 14,524 12,300

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,949 3,592 3,047 2,823 2,533

Guaranty fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,274 1,196 1,086 1,083 961

Miscellaneous income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 125 86 93 143 259

Credit-related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (375) (409) (335) (378) (305)

Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (636) (560) (546) (525) (443)

Special contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (350) Ì Ì

Income before federal income taxes and

extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,337 3,905 2,995 3,146 3,005

Provision for federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,269) (1,151) (840) (1,005) (963)

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,068 2,754 2,155 2,141 2,042

Extraordinary lossÌearly extinguishment of

debt, net of tax eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12) (29) (11) (9) (169)

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,056 $ 2,725 $ 2,144 $ 2,132 $ 1,873

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (65) (42) Ì Ì Ì

Net income available to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,991 $ 2,683 $ 2,144 $ 2,132 $ 1,873

Basic earnings per common share(1):

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.87 $ 2.53 $ 1.98 $ 1.96 $ 1.87

Extraordinary itemÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.02) (.03) (.01) (.01) (.16)

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.85 $ 2.50$ 1.97 $ 1.95 $ 1.71

Diluted earnings per common share(1):

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.84 $ 2.51 $ 1.96 $ 1.95 $ 1.86

Extraordinary itemÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.01) (.03) (.01) (.01) (.15)

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.83 $ 2.48 $ 1.95 $ 1.94 $ 1.71

Cash dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .84 $ .76 $ .68 $ .60$ .46

Balance Sheet Data at December 31:

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $316,316 $286,259 $252,588 $220,525 $189,892

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64,596 56,606 57,273 46,335 21,396

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 391,673 351,041 316,550 272,508 216,979

Borrowings:

Due within one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 175,400 159,900 146,153 112,602 71,950

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 194,374 171,370153,021 144,628 129,162

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 377,880 338,268 305,591 262,967 208,927

Stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,793 12,773 10,959 9,541 8,052

Capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,575 13,520 11,703 10,367 8,893

Other Data for the year ended December 31:

Average net interest marginÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.17% 1.18% 1.16% 1.24% 1.38%

Return on average common equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24.6 24.1 20.9 24.3 25.3

Dividend payout ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29.4 30.4 34.6 30.8 26.9

Average eÅective guaranty fee rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .227 .224 .220.225 .213

Credit loss ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .041 .053 .050 .057 .040

Ratio of earnings to combined Ñxed charges

and preferred stock dividends(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.19:1 1.19:1 1.17:1 1.22:1 1.22:1

Mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 70,465 $ 68,618 $ 56,598 $ 62,389 $ 92,037

MBS issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 149,429 149,869 110,456 130,622 221,444

MBS outstanding at year-end(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 709,582 650,780 582,959 530,343 495,525

Weighted-average diluted common shares outstanding, in

millions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,056 1,080 1,098 1,098 1,098

(1) Earnings per common share amounts prior to 1997 have been restated to comply with Statement of Financial

Accounting Standards No. 128, Earnings per Share.

(2) Stockholders' equity plus general allowance for losses.

(3) ""Earnings'' consists of (i) income before federal income taxes and extraordinary item and (ii) Ñxed charges. ""Fixed

charges'' represents interest expense. There was no preferred stock outstanding in 1995, 1994 and 1993.

(4) Includes $130 billion, $103 billion, $70 billion, $44 billion, and $24 billion of MBS in portfolio at December 31, 1997,

1996, 1995, 1994, and 1993, respectively.

B-18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion highlights signiÑcant factors inÖuencing Fannie Mae's Ñnancial condition and

results of operations. It should be read in conjunction with the Ñnancial statements and related notes.

This discussion (and other sections of this Information Statement) includes certain forward-looking

statements based on management's estimates of trends and economic factors in markets in which the

Corporation is active, as well as the Corporation's business plans. In light of recent securities law

developments, including the ""safe harbor'' provisions of the Private Securities Litigation Reform Act of

1995, the Corporation notes that such forward-looking statements are subject to risks and uncertainties. Accordingly, the Corporation's actual results may diÅer from those set forth in such statements.

SigniÑcant changes in economic conditions; regulatory or legislative changes aÅecting Fannie Mae, its

competitors, or the markets in which it is active; or changes in other factors may cause future results to

vary from those expected by the Corporation. The ""Forward-Looking Information'' section in this

Information Statement discusses certain factors that may cause such diÅerences to occur.

Overview

Fannie Mae once again achieved record earnings in 1997, increasing its earnings per common

share (""EPS'') by 14 percent. The Corporation posted its eleventh consecutive year of double-digit

growth in operating earnings by growing the mortgage portfolio, eÅectively managing interest rate

risk, and improving credit performance. Net income increased to $3.056 billion, up 12 percent from

last year's total of $2.725 billion, while earnings per common share reached $2.83, compared with

$2.48 in 1996.

During the year, the Corporation's net mortgage portfolio grew by 10 percent. In addition, the

Corporation took advantage of lower interest rates to reduce its exposure to the eÅects of the

scheduled maturity of low-cost debt in 1998. The average net interest margin remained relatively

stable, declining .01 percentage point to 1.17 percent in 1997, compared with 1.18 percent in 1996.

The Corporation's credit risk management continued to improve during 1997. The decline in

credit-related expenses was a result of an improved housing market (particularly in California and the

Northeast), increased beneÑts of mortgage insurance, and continued loss mitigation activities. The

credit loss ratioÌcredit losses as a percentage of the average UPB of total mortgages in portfolio and

Fannie Mae MBS outstandingÌdeclined to .041 percent in 1997 from .053 percent in 1996.

The Corporation's core capital (stockholders' equity) grew 8 percent, to $13.8 billion at

December 31, 1997, in spite of the repurchase of $1.3 billion of common stock during the year. Core

capital exceeded regulatory capital standards by $1.1 billion at December 31, 1997. Management

expects that continued growth in retained earnings will ensure compliance with all applicable capital

standards in the future.

The remainder of Management's Discussion and Analysis includes detailed information on the

Corporation's results of operations, risk management, balance sheet analysis, MBS activity and

housing goals.

Results of Operations

Net Interest Income

Net interest income increased $357 million to $3.949 billion in 1997 as a result of a $30 billion, or

11 percent, increase in the average mortgage portfolio balance, which was partially oÅset by a

.01 percentage point decrease in the average net interest margin. For 1998, management expects that

net interest income will continue to increase because of continued growth in the average mortgage

portfolio, while the average net interest margin is expected to decline somewhat as a result of several

factors. These factors include the scheduled maturity of low-cost debt in 1998, as well as the continued

B-19
repurchase of common stock. The repurchase of common stock reduces net interest margin but has a

positive eÅect on earnings per common share.

Net interest income excludes interest receivable on nonperforming loans. Conventional singlefamily and multifamily loans are classiÑed as nonperforming and previously accrued interest is

removed from income when a payment is 90 days or more past due.

Guaranty Fee Income

Guaranty fees compensate the Corporation for its guarantee of the timely payment of principal

and interest to investors in MBS and for the assumption of credit risk on loans underlying MBS.

Guaranty fees on Fannie Mae MBS held in portfolio are included in interest income. Guaranty fee

income increased $78 million to $1.274 billion in 1997, compared with $1.196 billion in 1996. The

increase in guaranty fee income resulted from a $27 billion increase in average net Fannie Mae MBS

outstanding and an increase of .003 percentage points in the average eÅective guaranty fee rate.

The following table presents guaranty fee income as a percentage of the average balance of MBS

outstanding, net of MBS held in portfolio, in 1997, 1996, and 1995.

Guaranty Fee Data

1997 1996 1995

(Dollars in millions)

Guaranty fee income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,274 $ 1,196 $ 1,086

Average balance of net MBS outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 561,079 534,553 494,689

EÅective guaranty fee rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .227% .224% .220%

Additional information on the Corporation's MBS and guaranty fees is presented under ""Mortgage-Backed Securities.''

Miscellaneous Income

Miscellaneous income is composed of REMIC and other MBS-related fees, as well as other

miscellaneous items, and is net of operating losses from equity investments in aÅordable housing

projects. Miscellaneous income increased $39 million to $125 million in 1997, compared with

$86 million in 1996. The 45 percent increase was primarily due to an increased demand for REMICs

and an increase in other miscellaneous items. Additional information on REMIC activity is presented

under ""Mortgage-Backed Securities.''

Credit-Related Expenses

Credit-related expenses decreased $34 million to $375 million in 1997, compared with $409 million in 1996. The Corporation experienced lower expenses in 1997 despite an increase in the number of

acquired properties. The decrease in credit-related expenses was driven by a reduction in the provision

for losses, reÖecting a lower average loss per foreclosed property in 1997. A stronger national housing

market, the increased beneÑts of mortgage insurance, and continued loss mitigation eÅorts contributed to the lower average loss per foreclosed property.

Management anticipates that credit-related expenses will continue to decline in 1998, despite

growth in the mortgage portfolio and MBS outstanding. In 1998, Fannie Mae expects to continue to

beneÑt from a healthy housing market and the Corporation's loss mitigation programs.

Administrative Expenses

Administrative expenses grew 14 percent to $636 million in 1997, compared with $560 million in

1996. The increase in administrative expenses resulted primarily from additional investments in

B-20
systems development, which included eÅorts to make the Corporation's computer systems Year 2000

compliant, expenses associated with restructuring the Corporation's regional oÇces, and the eÅect of a

higher common share price on the Corporation's stock-based compensation plans. Compensation

expense was $394 million in 1997, compared with $344 million in 1996.

The Corporation has been actively addressing its Year 2000 problem, which is caused by

computer programs that currently use two digits instead of four digits to identify the year in a date

Ñeld. To correct this problem, the Corporation has undertaken a major eÅort to identify and modify

internal systems. In addition, the Corporation is coordinating with companies with which it electronically interacts to ensure that their systems are or will be Year 2000 compliant. If this problem is not

resolved, the Corporation's computer systems or those of its business counterparts may make

incorrect calculations or fail. The Corporation plans to complete its eÅorts related to the Year 2000

problem for its computer systems in early 1999.

The ratio of the Corporation's administrative expenses to the average net mortgage portfolio plus

average net MBS outstanding increased to .074 percent in 1997, compared with .070 percent in 1996.

The ratio of administrative expenses to revenues (net interest income, guaranty fees, and miscellaneous income) was 11.9 percent in 1997 and 11.5 percent in 1996.

Income Taxes

The provision for federal income taxes, net of the tax beneÑt from extraordinary losses, was

$1.262 billion in 1997, compared with $1.135 billion in 1996. The eÅective federal income tax rate was

29 percent in both 1997 and 1996.

Extraordinary Loss

The repurchase and call of debt and the call of certain interest rate swaps are part of the

Corporation's interest rate risk management strategy.

As a result of repurchase and call activity, the Corporation recognized net extraordinary losses of

$19 million ($12 million after tax) in 1997, compared with $45 million ($29 million after tax) in 1996.

The repurchase or call of high-coupon debt favorably aÅects the Corporation's future cost of funds.

During 1997, the amount of long-term debt called or repurchased and the notional principal

amount of interest rate swaps called was $31 billion, with a weighted-average cost of 7.22 percent. The

comparable amount in 1996 was $26 billion, with a weighted-average cost of 7.09 percent.

Risk Management

The Corporation is subject to two major risks: interest rate risk and credit risk. Active

management of these risks is an essential part of Fannie Mae's operations and a key determinant of its

ability to maintain steady earnings growth. The following discussion highlights the Corporation's

various strategies to diversify and mitigate these two risks.

Interest Rate Risk Management

Fannie Mae's management of interest rate risk involves analyses and actions that position the

Corporation to meet its objective of consistent earnings growth in a wide range of interest rate

environments. The Corporation's interest rate risk is concentrated primarily in the mortgage

portfolio, where exposure to changes in interest rates is managed to achieve stable earnings growth

and an acceptable return on equity over time. Central elements of Fannie Mae's approach to managing

interest rate risk include (1) investing in assets and issuing liabilities that perform similarly in

diÅerent interest rate environments, (2) assessing the sensitivity of portfolio proÑtability and risk to

changes in interest rates, and (3) taking actions in the context of a well-deÑned risk management

process.

B-21
The Ñrst element of interest rate risk management is the funding of mortgage assets with

liabilities that have similar durations, or average cash Öow patterns through time. To achieve the

desired liability durations, Fannie Mae issues debt across a broad spectrum of Ñnal maturities.

Because the durations of mortgage assets change as interest rates change, callable debt with similar

duration characteristics is frequently issued. The duration of callable debt, like that of a mortgage

asset, shortens when interest rates decrease and lengthens when interest rates increase. In addition to

callable debt, the Corporation utilizes oÅ-balance-sheet Ñnancial instruments, primarily interest rate

swaps, to achieve its desired liability structure and to better match the prepayment risk of the

mortgage portfolio. A high degree of diversiÑcation of the interest rate option characteristics

embedded in the assets and liabilities of the portfolio also serves to reduce interest rate risk.

Because the assets and the liabilities in Fannie Mae's portfolio are not perfectly matched, the

portfolio's projected performance changes to some degree with movements in interest rates. Accordingly, the second element of interest rate risk management involves regularly assessing the portfolio's

risk through a diverse set of analyses and measures. Portfolio net interest income is projected both

with speciÑc rising and falling interest rate paths and with interest rate simulations incorporating a

wide range of possible interest rate scenarios based on historical interest rate volatility. These analyses

generally include assumptions about new business activity in order to provide the most realistic

assessment of possible portfolio performance. The portfolio duration gapÌthe diÅerence between the

durations of portfolio assets and liabilitiesÌsummarizes for management the extent to which asset

and liability estimated cash Öows are matched, on average, through time. Unlike the net interest

income projections, the duration gap measures the risk of the existing portfolio only. Additional

information about interest rate risk is obtained by means of Ñnancial performance simulations in

which highly stressful interest rate scenarios are assumed. In analyzing performance measures,

management evaluates the sensitivity of results to changes in assumptions. The methods used by the

Corporation to assess projected portfolio performance are regularly reevaluated, and modeling tools

are changed as appropriate.

The third element of Fannie Mae's interest rate risk management is a framework that facilitates

the communication and attainment of corporate objectives. The Board of Directors oversees interest

rate risk management through the adoption of corporate goals and objectives, and the review of

regular reports on performance against these goals. Senior management attempts to ensure that the

appropriate long-term strategies are in place to achieve the corporate goals and objectives, and that

short-term strategies, tactics and the execution of transactions are consistent with the long-term

strategies. Management establishes reference points for key performance measures that are used to

signal material changes in risk and to assist in determining whether adjustments in portfolio strategy

are required to achieve long-term objectives. These measures and reference points are reported

regularly to the Board of Directors. By comparing the performance measures with the reference

points, management makes decisions about the necessity or desirability of portfolio rebalancing.

Examples of techniques that might be used to adjust the portfolio's performance proÑle include

restructuring portfolio assets or liabilities or using oÅ-balance-sheet Ñnancial instruments.

During 1997, portfolio interest rate risk, as measured by the duration gap, remained largely within

established reference points and required little increased focus on portfolio rebalancing. At December 31, 1997, the duration gap of Fannie Mae's mortgage portfolio was a negative four months,

compared with a positive duration gap of four months at the end of 1996. A negative duration gap

results when the duration of mortgage assets is shorter than the duration of the related liabilities; it

generally indicates that the Corporation has greater interest rate exposure to declining rates than to

rising rates over the long term. A goal of the Corporation is to maintain the duration gap close to zero

by managing the durations of its assets and liabilities. During 1997, the duration gap peaked in March

and declined gradually through the remainder of the year because of a combination of lower interest

rates and moderate portfolio rebalancing.

In contrast with the long-term interest rate exposure to declining interest rates indicated by the

portfolio duration gap at the end of 1997, the projected net interest income of the mortgage portfolio

B-22
over the next one to two years was evenly exposed to rising and declining interest rates. That is,

portfolio net interest income was projected to grow at a somewhat slower rate in both rising and

declining interest rate environments, relative to an environment in which interest rates remain

constant. Actual portfolio net interest income performance may diÅer from projections because of

interest rate movements, changing business conditions and management actions.

Another indicator of the interest rate exposure of the Corporation's existing business is the

sensitivity of the fair value of net assets (""net asset value'') to changes in interest rates. The table

below presents the Corporation's estimated net asset value as of December 31, 1997, and two

projections of the value 12 months later assuming hypothetical changes in interest rates over the

12-month period. The changes from the net asset value of the Corporation as of December 31, 1997 to

the 12-month projected net asset values, if negative, represent the potential loss in the net asset value

of the Corporation's existing business for the given changes in interest rates. These interest rate

movements represent the most extreme changes in rates that would be expected over this period

within a 95 percent conÑdence interval, based on a simulation of many hypothetical future interest

rate scenarios reÖecting historical interest rate volatility. The interest rate changes include an increase

in long-term U.S. Treasury yields of approximately 200 basis points and a decrease of approximately

150 basis points from December 31, 1997 levels.

Interest Rate Sensitivity of Net Asset Value

Percentage of

NetDecember 31, 1997

Asset Value Net Asset Value

(Dollars in millions)

December 31, 1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15,982 Ì

Assuming a 200 basis point increaseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,692 111%

Assuming a 150 basis point decrease ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,806 93

The net asset value of the Corporation on December 31, 1997, as presented in the above table is

the same as that disclosed in the Notes to Financial Statements, ""Disclosures of Fair Value of

Financial Instruments.'' The 12-month projected net asset values were derived in a manner consistent

with the estimation procedures described in the Notes to Financial Statements, ""Disclosures of Fair

Value of Financial Instruments.'' The interest rate sensitivities apply to the Corporation's year-end

1997 book of business only. The net asset value sensitivities do not necessarily represent the changes

in the Corporation's net asset value that would actually occur for the given interest rate scenarios,

because the sensitivities neither reÖect changes in the value of the Corporation as a going concern nor

consider prospective asset/liability rebalancing or other hedging actions the Corporation might take

over the 12-month period.

Changes in the net asset value take into account several factors, including changes in the values of

all mortgage assets and the debt funding these assets, changes in the value of net guaranty fee income

from oÅ-balance-sheet obligations, and changes in the value of swap obligations. As shown in the table

above, the Corporation's hypothetical net asset value increases if interest rates rise signiÑcantly over

the next 12 months and declines if rates fall. These sensitivities largely reÖect changes in the value of

the mortgage portfolio and net guaranty fee stream. In the rising interest rate scenario, the values of

both the mortgage portfolio and the net guaranty fee stream increased moderately, while in the falling

interest rate scenario, the value of each of these components declined to a small extent.

Additional information on interest rate risk management is presented under ""Balance Sheet

AnalysisÌFinancing Activities.''

B-23
Credit Risk Management

The Corporation's primary exposure to credit risk results from the possibility that it will not

recover amounts due from borrowers. Management's overall objective in managing credit risk is to

minimize losses by applying prudent underwriting guidelines and loan servicing requirements.

Furthermore, the Corporation and its servicers use analytical models to apply credit risk analysis

throughout the life of a loan.

The Corporation also is subject to the credit risk that counterparties to its transactions may be

unable to meet their contractual obligations to Fannie Mae. Additional information on this credit risk

exposure is presented under ""Balance Sheet AnalysisÌFinancing Activities'' and in the Notes to

Financial Statements, ""Financial Instruments with OÅ-Balance-Sheet Risk'' and ""Concentrations of

Credit Risk.'' The discussion that follows addresses the major elements of credit risk management as

they pertain to conventional single-family and multifamily mortgage loans.

Single-Family

The Corporation manages its single-family mortgage credit risk by focusing on two phases: loan

underwriting and loan servicing. If these are not managed eÅectively, the likelihood of credit loss

increases.

In the Ñrst phase, loan underwriting, the Corporation manages credit risk through its eÅorts to

develop sound underwriting policies that ensure loans sold to Fannie Mae meet the Corporation's

credit quality criteria.

Desktop Underwriter», Fannie Mae's automated underwriting model, was designed to help

lenders process mortgage applications in a more eÇcient, accurate, and consistent manner. It provides

beneÑts to lenders, borrowers and Fannie Mae by consistently and objectively applying the Corporation's underwriting standards to all prospective borrowers, as well as customizing Fannie Mae's

underwriting standards to a loan's unique combination of credit risk factors. Use of Desktop

Underwriter increased signiÑcantly in 1997. During December 1997, Desktop Underwriter evaluated

up to 6,000 loan submissions per day. Management expects the usage of Desktop Underwriter to

increase signiÑcantly in 1998.

Fannie Mae enhanced Desktop Underwriter in 1997 by providing more lenders with point-of-sale

credit and appraisal decisions on a full range of mortgage options. Desktop Underwriter is part of the

Corporation's strategy to increase homeownership opportunities by providing a broad array of desktop

products that enable lenders to process all of their business more eÇciently. Management expects to

continue investing in research and technology such as Desktop Underwriter to provide lenders and the

Corporation with additional quantitative information for evaluating and managing credit risk while

expanding homeownership opportunities.

In the second phase of credit risk management, loan servicing, the Corporation manages the risk

of credit loss by requiring its servicers to follow guidelines for servicing a loan owned or securitized by

Fannie Mae. The guidelines help ensure that loans are serviced consistently and eÇciently.

An important element in loan servicing is the servicer's responsibility to carry out loss mitigation

activities. A major component of loss mitigation is early intervention in a delinquency. To help keep

borrowers in their homes or reduce the costs incurred when a loan goes through the foreclosure

process, borrowers often are contacted early in a delinquency to determine whether their loan might be

worked out through a repayment plan, temporary forbearance, or modiÑcation of terms. If repayment

plans, forbearance, or modiÑcation are not appropriate, the loan servicer may attempt to arrange a

preforeclosure sale. The beneÑts of a preforeclosure sale include avoidance of the costs of foreclosure

and a tendency for the property to sell at a better price because the home generally is occupied. If a

preforeclosure sale is not possible, the Corporation's goal is to handle the foreclosure process

expeditiously to minimize the amount of time the Corporation retains a nonearning asset.

B-24
In 1997, Fannie Mae introduced two new initiatives that it believes will reduce future credit

losses. The Ñrst initiative, Risk ProÑlerTM, is a default prediction model that assists servicers in loss

mitigation activities. Risk ProÑler predicts the likelihood that a loan will go into foreclosure by using

updated borrower credit data, current property values, and loan characteristics, all of which are strong

predictors of mortgage risk. Servicers can integrate the results from Risk ProÑler into their automated

collection systems, enabling them to focus their eÅorts more directly on borrowers whose loans are

most likely to go into foreclosure.

The second initiative involves placing Fannie Mae employees on site with certain servicers to

facilitate loss mitigation eÅorts. The Corporation believes this arrangement will improve loss

mitigation eÅorts and increase the Öow of information between the Corporation and its servicers.

As shown in the table below, single-family credit-related losses declined by 15 percent, or

$62 million, in 1997, compared with 1996. The decrease in credit losses stemmed from a decline in the

average loss per foreclosed property, which was partially oÅset by an increase in the number of singlefamily foreclosed property acquisitions. The reduction in the average loss per foreclosed property

(from $16.8 thousand in 1996 to $12.8 thousand in 1997) was primarily due to a strong housing

market (especially in California and the Northeast), the increased beneÑts of mortgage insurance, the

Corporation's continuing eÅorts in loss mitigation, and the success of certain business initiatives, such

as centralizing the property disposition process. Single-family foreclosed property acquisitions increased to 22,222 in 1997, compared with 20,726 in 1996, primarily as a result of an increasing portion

of the Corporation's book of business reaching its peak default years and continued acquisitions in

California.

Single-Family Credit-Related Losses

Year Ended December 31,

1997 1996 1995

(Dollars in millions)

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 66 $191 $146

Foreclosed property expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 279 216 199

Credit-related losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $345 $407 $345

Credit loss ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .042% .053% .049%

The Corporation continued to experience a signiÑcant portion of credit-related losses from its

California book of business in 1997. At December 31, 1997, 20 percent of Fannie Mae's total book of

business was located in California, while 45 percent of the Corporation's acquired properties during

the year were from California. The comparable amounts in 1996 were 21 percent and 53 percent,

respectively. Moreover, 61 percent of total credit-related losses came from California loans in 1997,

compared with 67 percent in 1996. Although California represents a signiÑcant portion of the

Corporation's credit-related losses, management expects the improving real estate market in California and continued loss mitigation activities to reduce California's eÅect on total credit-related losses.

B-25
Fannie Mae's single-family credit loss ratioÌcredit-related losses as a percentage of the average

UPB of total mortgages in portfolio and underlying MBS outstandingÌdeclined to .042 percent in

1997, compared with .053 percent in 1996. Management expects the 1998 credit loss ratio to continue

to decline from the 1997 level.

The total number of single-family properties owned by Fannie Mae at December 31, 1997, was

9,481, compared with 9,631 at December 31, 1996. These properties had net carrying amounts of

$735 million and $820 million at December 31, 1997 and 1996, respectively.

In evaluating expected future credit performance, management analyzes the risk proÑle of the

conventional single-family loans in the Corporation's portfolio and underlying MBS. The loan-tovalue (""LTV'') ratio is an important factor in credit performance because the amount of equity a

borrower has in a home has proven to be a key determinant of both the incidence and severity of

default. The Corporation reduces its potential risk of loss by requiring mortgage insurance or other

credit protection on loans with LTV ratios over 80 percent.

Experience has shown that loan age is also a major factor aÅecting delinquency rates and that the

incidence of default for a group of mortgage loans peaks in the third through Ñfth years after

origination. Unless real estate values decline signiÑcantly, loans outstanding after Ñve years tend to

have lower default rates because borrowers have a history of being able to make their payments and

most likely have built up additional equity in their properties. Between 1992 and 1994, the

Corporation acquired a signiÑcant portion of the loans in its portfolio and underlying MBS outstanding (48 percent of total outstanding UPB at December 31, 1997), and in 1997, these loans were at the

stage when they were most likely to be delinquent or in foreclosure.

Product mix also inÖuences potential future credit losses because the credit risks associated with

each product type vary. Adjustable-rate mortgages generally have a higher incidence of default than

long-term, Ñxed-rate mortgages, while intermediate-term, Ñxed-rate mortgages tend to have a lower

incidence of default.

The following table presents data, by percentage of UPB, on conventional mortgage loans

outstanding for the Corporation's own portfolio or underlying its MBS issued at December 31, 1997

and 1996 by product distribution, original LTV ratio and current LTV ratio. In addition, the table

presents data by product distribution and original LTV ratio for conventional loans purchased in the

Corporation's portfolio or underlying its MBS in the years 1997, 1996 and 1995. Current LTV ratios

are derived by adjusting the value of a property by the estimated change in the price of the home since

the mortgage was originated and by comparing this adjusted value with the current UPB of the

mortgage at December 31, 1997 and 1996, respectively.

B-26
Distribution of Single-Family Loans

by Product Type and Loan-to-Value Ratio

Outstanding at Percentage of Business

December 31, Volumes

1997 1996 1997 1996 1995

Product:

Long-term, Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64% 62% 72% 70% 70%

Intermediate-term, Ñxed-rate(1) ÏÏÏÏÏÏÏÏ 26 28 17 22 19

Adjustable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1010 11 8 11

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100% 100% 100%

Original loan-to-value ratio:

Greater than 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14% 12% 16% 16% 19%

81% to 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 17 17 18 18

71% to 80% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38 38 40 38 36

61% to 70% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 14 13 13 12

Less than 61% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 19 14 15 15

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100% 100% 100%

Average original loan-to-value ratio ÏÏÏÏÏÏÏ 74% 74% 76% 76% 77%

Current loan-to-value ratio:

Greater than 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2% 5%

81% to 90% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 14

71% to 80% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 24

61% to 70% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 20

Less than 61% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41 37

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100%

Average current loan-to-value ratioÏÏÏÏÏÏÏÏ 62% 64%

Average loan amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $80,800 $83,200 $99,900 $99,900 $97,400

(Maximum $214,600 in 1997)

(1) Contractual maturities of 20 years or less at purchase for portfolio loans and 15 years or less

at issue date for MBS issuances.

The following table summarizes conventional single-family serious delinquencies by region as of

December 31, 1997, 1996, and 1995. Single-family serious delinquency rates are based on the number

of conventional loans in portfolio and underlying MBS for which the Corporation has primary risk of

loss and that are delinquent 90 days or more or in the process of foreclosure.

Single-Family Serious Delinquency Rates

December 31,

1997 1996 1995

Northeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .89% .87% .83%

Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .59 .51 .45

Midwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .40.33 .28

SouthwestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .45 .40.36

West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .71 .74 .82

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .62% .58% .56%

B-27
Multifamily

There are two primary risks involved in the underwriting and management of income-producing

multifamily properties: (1) that underlying property cash Öows will be insuÇcient to service the debt

over the life of the loan and (2) that proceeds from the sale or reÑnancing of a property will be

insuÇcient to repay the loan at maturity.

Fannie Mae manages the credit risk on its multifamily loan portfolio in several ways. First, the

Corporation maintains rigorous loan-underwriting guidelines coupled with extensive real estate due

diligence examinations for loan acquisitions. Because multifamily loans are primarily cash Öow

dependent and much larger than single-family loans, management monitors the ongoing performance

of individual loans by requiring servicers to submit annual operating information and property

condition reviews. This information, combined with other loan risk characteristics, is used to evaluate

the credit quality of the portfolio, identify potential problem loans, and initiate appropriate loss

mitigation activities.

In 1997, Fannie Mae further enhanced the credit risk management of its multifamily portfolio by

centralizing asset management, creating a dedicated portfolio monitoring team, and expanding the

quality control group. Quality control now includes a centralized group to review all large transactions

as well as a dedicated staÅ to review lenders.

The Corporation also manages its credit risk exposure through various forms of credit enhancement. For the majority of multifamily loans, the Corporation has shared risk arrangements with

lenders, full or partial recourse to lenders or third parties for loan losses (which may be secured by

letters of credit or pledged collateral), or government mortgage insurance. The following table

presents the risk proÑle, by UPB, of multifamily loans in portfolio and underlying MBS at December 31, 1997, 1996, and 1995.

Multifamily Risk ProÑle

December 31,

1997 1996 1995

Fannie Mae risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14% 15% 17%

Shared risk(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48 44 39

Recourse(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38 41 44

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

(1) Includes loans where the lender initially bears losses of up to 5 percent of UPB and shares

any remaining losses with Fannie Mae.

(2) Includes loans not included in ""shared risk'' that have government mortgage insurance, or

full or partial recourse to lenders or third parties.

Multifamily serious delinquencies at December 31, 1997, 1996, and 1995 were .37 percent,

.68 percent, and .81 percent, respectively. Multifamily serious delinquencies are those loans for which

the Corporation has primary risk of loss (including those with shared risk) that are two months or

more delinquent. Multifamily delinquency percentages are based on the UPB of such loans in portfolio

and underlying MBS.

As a result of strong underwriting standards and quality control processes, continued improvements in the multifamily rental market, declining interest rates, and continued emphasis on early loss

mitigation eÅorts, the level of serious delinquencies for multifamily loans has declined signiÑcantly

over the past several years.

Multifamily foreclosed property acquisitions, where Fannie Mae has the primary risk of loss,

totaled 28 properties and 54 properties during 1997 and 1996, respectively. At December 31, 1997 and

B-28
1996, the Corporation held 14 primary risk foreclosed properties with an aggregate carrying value of

$17 million, and 27 foreclosed properties with an aggregate carrying value of $34 million, respectively.

Credit-related losses and the ratio of credit losses to average UPB outstanding for multifamily

loans in portfolio and underlying MBS are summarized in the table below.

Multifamily Credit-Related Losses

Year Ended December 31,

1997 1996 1995

(Dollars in millions)

Charge-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11 $ 19 $ 26

Foreclosed property income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4) (3) (4)

Credit-related losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7 $ 16 $ 22

Credit loss ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .020% .054% .085%

In 1997, multifamily credit-related losses decreased as a result of lower charge-oÅs and an

increase in foreclosed property income. Despite increased business, credit-related losses have declined

over the past two years primarily because of aggressive management of delinquent multifamily assets

and a healthy multifamily rental market. Management views the current level of credit-related losses

as exceptionally low and anticipates that these losses will increase in 1998.

Allowance for Losses

In evaluating the risk of loss on portfolio loans and MBS outstanding, management considers

current delinquency levels, historical loss experience, current economic conditions, geographic concentrations, estimates of future losses, and other pertinent factors. The allowance for losses is established

by recording an expense for the provision for losses and is reduced through charge-oÅs. Changes in the

allowance for losses for the years 1993 through 1997 are presented in the following table.

Allowance for Losses

Total

(Dollars in millions)

Balance, January 1, 1993 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 780

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 175

Net foreclosure losses charged oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (114)

Balance, December 31, 1993 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 841

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 155

Net foreclosure losses charged oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (169)

Balance, December 31, 1994 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 827

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 140

Net foreclosure losses charged oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (172)

Balance, December 31, 1995 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 795

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 195

Net foreclosure losses charged oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (210)

Balance, December 31, 1996 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 780

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100

Net foreclosure losses charged oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (77)

Balance, December 31, 1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 803

B-29
Balance Sheet Analysis

This section discusses the Corporation's mortgage portfolio and other investments, as well as

related Ñnancing activities. Information regarding liquidity and capital resources, and regulatory

capital requirements also are included.

Mortgage Portfolio

As of December 31, 1997, the net mortgage portfolio totaled $316 billion, compared with

$286 billion at December 31, 1996. The yield on the net mortgage portfolio was 7.60 percent at

December 31, 1997, compared with 7.69 percent at December 31, 1996. The yield on the net mortgage

portfolio averaged 7.67 percent in 1997, compared with 7.71 percent in 1996. The decline in both the

ending yield and average yield for the year was largely due to lower purchase yields relative to the

yields on liquidations in 1997.

The following table summarizes mortgage purchases, sales, and repayments for the years 1995

through 1997.

Mortgage Portfolio Activity

Purchases Sales Repayments(1)

1997 1996 1995 1997 1996 1995 1997 1996 1995

(Dollars in millions)

Single-family:

Government insured or

guaranteed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,539 $ 4,461 $ 2,669 $ Ì $ Ì $ Ì $ 1,973 $ 1,650$ 1,226

Conventional:

Long-term, Ñxed-rate ÏÏÏÏÏÏÏÏÏ 55,925 54,021 42,659 563 105 281 20,995 17,554 10,972

Intermediate-term, Ñxed-rate ÏÏ 6,001 8,139 9,235 26 44 126 10,688 10,564 8,545

Adjustable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,977 706 1,017 476 Ì Ì 2,807 2,789 2,624

Second ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29 17 11 Ì Ì Ì 84 117 125

Total single-family ÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,471 67,344 55,591 1,065 149 407 36,547 32,674 23,492

MultifamilyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 994 1,274 1,007 23 Ì 11 3,204 2,254 1,235

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $70,465 $68,618 $56,598 $1,088 $149 $418 $39,751 $34,928 $24,727

Average net yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.40% 7.57% 7.75% 7.70% 7.81% 7.90%

Repayments as a percentage of

average mortgage portfolio ÏÏÏÏÏÏ 13.2% 12.9% 10.6%

(1) Includes mortgage loan prepayments, scheduled amortization, and foreclosures.

Investments

The Corporation maintains an investment portfolio consisting of high-quality, short-term

nonmortgage investments, such as federal funds, commercial paper, repurchase agreements, assetbacked securities, and other investments. The objectives of the investment portfolio are to serve as a

source of liquidity and to provide a return on the excess capital of the Corporation. As of December 31,

1997, the balance in the Corporation's investment portfolio was $65 billion, compared with $57 billion

at December 31, 1996. The weighted-average rate earned on investment securities in 1997 was

5.82 percent, compared with 5.68 percent in 1996.

Additional information on these investments is presented in Note 4 to the Financial Statements,

""Investments.''

Financing Activities

The following table sets forth the amount and average cost of debt issued and repaid in 1997,

1996, and 1995, and the debt outstanding at the end of each year. The average cost of debt outstanding

B-30
at December 31, 1997 was 6.46 percent, compared with 6.49 percent at December 31, 1996. The

average cost of debt outstanding at December 31, 1997 declined primarily because of lower interest

rates in late 1997, the call and refunding of higher cost debt, and an increase in short-term debt issued

to support short-term investments. The weighted-average maturity of eÅective long-term, Ñxed-rate

debt outstanding at December 31, 1997 and 1996 was 66 months and 64 months, respectively.

Short-Term and Long-Term Debt Activity

1997 1996 1995

(Dollars in millions)

Issued during the year:

Short-term(1):

Amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $755,281 $635,595 $699,311

Average cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.53% 5.36% 5.87%

Long-term(1):

Amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 86,325 $ 80,302 $ 49,922

Average cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.37% 6.17% 6.55%

Repaid during the year:

Short-term(1):

Amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $738,552 $636,768 $678,989

Average cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.49% 5.41% 5.86%

Long-term(1):

Amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 63,690$ 46,937 $ 28,391

Average cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.65% 6.93% 7.50%

Outstanding at year end:

Due within one year:

Net amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $175,400 $159,900 $146,153

Average cost(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.76% 5.66% 5.90%

Due after one year:

Net amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $194,374 $171,370$153,021

Average cost(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.67% 6.66% 6.83%

Total debt:

Net amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $369,774 $331,270$299,174

Average cost(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.46% 6.49% 6.55%

(1) ""Short-term'' refers to the face amount of debt issued with an original term of one year or

less. ""Long-term'' is the face amount of debt issued with an original term greater than one

year.

(2) Average cost includes the amortization of premiums, discounts, issuance costs, hedging

results, and the eÅects of currency and debt swaps.

(3) Average cost includes the amortization of premiums, discounts, issuance costs, hedging

results, and the eÅects of currency, debt, and interest rate swaps.

The Corporation also utilizes a Global Debt Facility through which it can issue debt securities in

global markets. During 1997, the Corporation issued debt securities totaling $9 billion under its Global

Debt Facility, compared with $7 billion in 1996. The Corporation continued to expand its investor

base by issuing securities denominated in foreign currencies. In 1997, Fannie Mae issued its Ñrst global

B-31
debt in pounds sterling, Hong Kong dollars, Australian dollars and New Zealand dollars. Concurrently

with issuing foreign denominated debt securities, the Corporation enters into currency swaps that

convert the proceeds of certain borrowings into dollars or provide for scheduled exchanges of

currencies to eliminate the Corporation's foreign currency exposure.

As described under ""Risk ManagementÌInterest Rate Risk Management,'' matching the duration of mortgage assets with the duration of liabilities funding those assets is accomplished through

the use of diÅerent debt maturities and embedded option characteristics, as well as the use of oÅbalance-sheet Ñnancial instruments, primarily interest rate swaps.

The following table presents the amount of callable debt combined with the notional amount of

callable interest rate swaps issued and outstanding for each of the past two years. The percentage of

callable debt supporting the mortgage portfolio is a function of the characteristics of the speciÑc

callable debt structures employed, the prepayment sensitivity of the mortgages in the portfolio, and

economic and Ñnancial market conditions.

Callable Debt

1997 1996

(Dollars in billions)

Issued during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 36 $ 44

Percentage of total long-term debt issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46% 52%

Outstanding at year-endÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $136 $127

Percentage of total long-term debt outstanding(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46% 48%

(1) Includes the notional amount of callable swaps and excludes long-term debt with a repricing

frequency of one year or less.

Interest rate swaps increase the Öexibility of the Corporation's funding alternatives by providing

the speciÑc cash Öows or characteristics that the portfolio requires but that might not be as readily

available or cost-eÅective if obtained in the standard debt market. Fannie Mae does not speculate

using derivatives and does not engage in derivatives trading. The Corporation primarily uses two types

of interest rate swaps: (1) generic swaps, which involve the exchange of Ñxed and variable interest

payments based on contractual notional principal amounts and may include callable swaps (which

give the counterparties the right to terminate the interest rate swap agreement before its stated Ñnal

maturity), and (2) basis swaps, whereby the Corporation exchanges variable payments that have

maturities similar to the underlying debt but rates based on diÅerent indices.

B-32
The following table summarizes the Corporation's interest rate swap activity, the notional

amount of, and weighted-average interest rates to be received and paid on, interest rate swaps

outstanding for the years ended December 31, 1996 and 1997, together with the expected maturities

for the interest rate swaps outstanding at December 31, 1997.

Interest Rate Swap Activity and Maturity Data

Generic-pay Generic-pay

Ñxed/receive variable(1) variable/receive Ñxed

Pay Receive Pay Receive Basis

Notional(2) Rate(3) Rate(3) Notional(2) Rate(3) Rate(3) Swaps Total

(Dollars in millions)

Balance at January 1, 1996 ÏÏÏÏÏÏÏÏÏÏÏ $ 75,536 6.68% 5.87% $13,538 5.76% 6.97% $34,106 $123,180

AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,516 6.82 5.56 12,4205.38 6.33 26,649 70,585

Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,941 6.59 5.50 10,334 5.67 6.90 20,677 37,952

Balance at December 31, 1996ÏÏÏÏÏÏÏÏÏ 100,111 6.73 5.59 15,624 5.43 6.50 40,078 155,813

AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,557 6.56 5.71 24,685 5.56 6.27 15,234 52,476

Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,955 6.36 5.69 10,656 5.56 6.54 32,929 59,540

Balance at December 31, 1997ÏÏÏÏÏÏÏÏÏ $ 96,713 6.77% 5.82% $29,653 5.63% 6.30% $22,383 $148,749

Future Maturities(4)

1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,740 5.32% 5.79% $11,784 5.60% 5.87% $15,207 $ 35,731

1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,125 6.705.49 4,935 5.706.09 4,666 15,726

2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,367 6.09 5.80 5,875 5.67 6.34 1,020 11,262

2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,850 6.67 5.82 650 5.66 6.28 Ì 8,500

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,675 6.30 5.82 1,275 5.66 6.83 79 6,029

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64,956 7.06 5.86 5,134 5.58 7.44 1,411 71,501

$ 96,713 6.77% 5.82% $29,653 5.63% 6.30% $22,383 $148,749

(1) Included in the notional amounts are callable swaps of $23 billion and $28 billion with

weighted-average pay rates of 6.58 percent and 6.68 percent and weighted-average receive

rates of 5.89 percent and 5.62 percent, as of December 31, 1997 and 1996, respectively.

(2) The notional value indicates only the amount on which swap payments are being calculated

and does not represent the amount at risk of loss.

(3) The weighted-average interest rate receivable and payable is as of the date indicated. Where

the pay rate or receive rate is variable, the rate may change as prevailing interest rates

change.

(4) Based on the swap's stated maturity. Assumes that variable interest rates remain constant at

December 31, 1997 levels.

The Corporation's interest rate swaps had a weighted-average term of 72 months at year-end

1997 and 71 months at year-end 1996. Long-term debt outstanding, including the eÅect of swaps but

excluding eÅective variable-rate debt (i.e., long-term debt that reprices within one year), totaled

$294 billion at December 31, 1997, and $267 billion at December 31, 1996. Interest rate swaps

eÅectively lengthened the Ñnal maturity of the Corporation's liabilities by 18 months at December 31,

1997, and 20 months at December 31, 1996.

The primary risk posed by the Corporation's interest rate swaps is credit risk or the risk that a

counterparty will fail to meet its contractual obligations on a swap transaction, causing the Corporation to have to replace the swap at market prices. The Corporation manages this risk by dealing with

experienced swap counterparties with high credit quality, diversifying its swaps across many

counterparties, and entering into swaps under master agreements that require counterparties to post

collateral if the Corporation is exposed to credit loss on the related swaps exceeding an agreed-upon

threshold. In addition, master agreements provide for netting of certain amounts payable by each

party. Fannie Mae regularly monitors the exposures on its interest rate swaps by determining the

B-33
market value of positions via dealer quotes and internal pricing models. The Corporation held

$4 million of collateral for interest rate swaps at December 31, 1997.

The Corporation's oÅ-balance-sheet exposure on interest rate swaps (taking into account master

agreements that allow for netting of payments) was $26 million at December 31, 1997, compared with

$8 million at December 31, 1996.

The Corporation also hedges against Öuctuations in interest rates on planned debt issuances using

derivative instruments that simulate the short sale of Treasury securities and deferred rate setting

agreements. Gains and losses on these instruments are deferred and reÖected as basis adjustments to

the cost of the debt when issued. The hedging of anticipated debt issuances enables the Corporation to

maintain an orderly and cost-eÅective debt issuance schedule so that it can make daily loan purchase

commitments without signiÑcantly increasing its interest rate exposure.

Additional information on interest rate swaps and other oÅ-balance-sheet Ñnancial instruments

are presented in the Notes to Financial Statements, ""Financial Instruments with OÅ-Balance-Sheet

Risk'' and ""Disclosures of Fair Value of Financial Instruments.''

Liquidity and Capital Resources

Fannie Mae's statutory mission requires that it provide ongoing assistance to the secondary

market for mortgage loans. The Corporation therefore must raise funds continually to support its

mortgage purchase activity. The capital markets traditionally have treated the Corporation's obligations as ""federal agency'' debt. As a result, even though the U.S. government does not guarantee

Fannie Mae's debt, the Corporation has had ready access to funding at relatively favorable spreads.

Fannie Mae's primary sources of cash are issuances of debt obligations, mortgage loan repayments, interest income, and MBS guaranty fees. In addition, at December 31, 1997, Fannie Mae had

cash and cash equivalents and short-term investments totaling $67 billion, compared with $57 billion

at December 31, 1996. Primary uses of cash include the purchase of mortgages and other securities,

repayment of debt, interest payments, administrative expenses, and taxes.

At December 31, 1997, the Corporation had mandatory delivery commitments and lender-option

commitments outstanding to purchase $3.6 billion and $1.6 billion of mortgage loans, respectively,

compared with $1.9 billion and $1.2 billion, respectively, outstanding at December 31, 1996.

The Corporation's capital base (stockholders' equity plus general allowance for losses) grew to

$14.6 billion at December 31, 1997, compared with $13.5 billion at the end of 1996. At year-end 1997,

there were 1.037 billion shares of common stock outstanding. In January 1998, the Board of Directors

approved a quarterly dividend rate for 1998 of 24 cents per common share, and dividends of 80.125

cents per Series A preferred share, 81.250 cents per Series B preferred share, and 80.625 cents per

Series C preferred share for the period from and including December 31, 1997 to but excluding

March 31, 1998. In 1997, the quarterly dividend rate was 21 cents per common share.

During 1997, the Corporation continued implementing its capital restructuring program, approved by the Board of Directors in December 1995, by repurchasing 31 million shares of common

stock. The shares were repurchased pursuant to the Board's approval for the repurchase up to an

additional 6 percent of outstanding common shares as of December 27, 1995 (adjusted for the stock

split), and to oÅset the dilutive eÅect of common shares issued or expected to be issued in conjunction

with various stock compensation plans. In 1996, the Corporation repurchased 48 million shares of

common stock in order to fund the contribution to the Fannie Mae Foundation, fully utilize the

proceeds of the issuance of $1 billion in preferred stock, and oÅset the eÅect of shares issued in

conjunction with various stock compensation plans.

B-34
Regulatory Capital Requirements

The Corporation is subject to capital adequacy and risk-based standards established by the 1992

Act. The capital adequacy standards require that the Corporation's core capital equal or exceed a

minimum capital standard and a critical capital standard. The following table shows the Corporation's

core capital compared with the requirement.

Capital Requirements

December 31,

1997 1996

(Dollars in millions)

Core capital(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13,793 $12,773

Required minimum capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,703 11,466

Required critical capital(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,528 5,890

Excess of core capital over minimum capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,090 $ 1,307

(1) The sum of (a) the par value of outstanding common stock; (b) the par value of outstanding

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

(2) The sum of (a) 2.50 percent of on-balance-sheet assets; (b) .45 percent of outstanding MBS;

and (c) .45 percent of other oÅ-balance-sheet obligations, except as adjusted by the Director

of OFHEO.

(3) The sum of (a) 1.25 percent of on-balance-sheet assets; (b) .25 percent of outstanding MBS;

and (c) .25 percent of other oÅ-balance-sheet obligations, except as adjusted by the Director

of OFHEO.

The Director of OFHEO also is developing a risk-based standard consistent with the parameters

speciÑed in the 1992 Act. The risk-based standard includes credit and interest rate risk components

along with an additional amount of capital for management and operations risk. To meet that

standard, the Corporation must hold total capital equal to the amount necessary to meet the combined

occurrence of highly stressful credit and interest rate conditions over a ten-year period, plus an

additional 30 percent of this amount for management and operations risk.

The Director of OFHEO released Part I of the proposed regulations for the risk-based standard in

1996. Part I creates benchmarks for credit stress testing and speciÑes the housing price index that will

be used in connection with this standard. See ""Government Regulation and Charter Act'' for

additional information regarding Part I. The second part of the proposed risk-based capital regulation,

which OFHEO has indicated it will issue for public comment in 1999, is expected to propose the

remaining credit risk criteria and the interest rate risk criteria. The 1992 Act provides that the Ñnal

regulations will be enforceable one year after issuance.

Mortgage-Backed Securities

MBS outstanding grew to $710 billion at December 31, 1997, compared with $651 billion at

December 31, 1996. MBS are backed by loans from a single lender, from multiple lenders, or from the

Corporation's mortgage loan portfolio. Single-lender MBS are issued through lender swap transactions in which a lender exchanges pools of mortgage loans for MBS. Multiple-lender MBS allow

several lenders to pool mortgage loans and receive, in return, MBS (called Fannie Majors») representing a proportionate share of a larger pool. In some instances, the Corporation buys

loans, and at the same time, enters into a forward sale commitment. These loans are designated as

held for sale and sold from the portfolio as MBS.

B-35
MBS are not assets of the Corporation, except when acquired for investment purposes, nor are

they recorded as liabilities. However, the Corporation is liable under its guarantee to make timely

payment of principal and interest to investors. The issuance of MBS creates guaranty fee income for

Fannie Mae. Sellers of pools of mortgage loans may retain or transfer to one or more third parties the

primary default risk on loans constituting the MBS pools or they may elect to transfer this credit risk

to Fannie Mae. The guaranty fee paid by the lender varies, depending on the risk proÑle of the loans

securitized as well as the level of credit risk assumed by Fannie Mae. The Corporation, however,

assumes the ultimate risk of loss on all MBS.

The following table summarizes MBS issued and outstanding for the years ended December 31,

1997, 1996, and 1995. The increase in the percentage of total MBS issued in the lender risk category in

1997, compared with 1996 was primarily due to an increase in lenders' acquisition of pool insurance

policies, which reduces the lender's and Fannie Mae's risk of loss.

MBS Risk Distribution

Issued Outstanding(1)

Lender Originated(1)

Lender Fannie Mae Fannie Mae Lender Fannie Mae

Risk Risk Originated Total Risk(2) Risk Total(3)

(Dollars in millions)

1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $35,740$111,413 $2,276 $149,429 $94,262 $615,320$709,582

1996 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,389 135,677 803 149,869 70,642 580,138 650,780

1995 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,681 93,359 416 110,456 67,080 515,879 582,959

(1) Based on primary default risk category. MBS outstanding includes MBS that have been

pooled to back Megas, SMBS, or REMICs.

(2) Included in lender risk are $57 billion, $31 billion, and $30 billion at December 31, 1997,

1996, and 1995, respectively, on which the lender or a third party had agreed to bear default

risk limited to a certain portion or percentage of the loans delivered and, in some cases, the

lender had pledged collateral to secure that obligation.

(3) Included are $130 billion, $103 billion, and $70 billion at December 31, 1997, 1996, and 1995,

respectively, of MBS in Fannie Mae's portfolio.

Fannie Mae issues REMICs backed by MBS, SMBS, Ginnie Mae mortgage-backed securities,

other REMIC securities, or whole loans. REMICs provide an additional source of fee income that does

not subject the Corporation to added credit risk, except for REMICs backed by whole loans. In 1997,

REMIC issuances increased to $75 billion, compared with $27 billion in 1996. The increase was

primarily due to increased investor demand. The outstanding balance of REMICs at December 31,

1997, was $329 billion, compared with $283 billion at December 31, 1996.

Housing Goals

The 1992 Act gives the Secretary of HUD authority to establish low- and moderate-income,

underserved areas, and special aÅordable housing goals for Fannie Mae. In December 1995, the

Secretary of HUD issued Ñnal regulations regarding the Corporation's housing goals for 1996 to 1999.

Under the new regulations, the Corporation's 1997 goal in low- and moderate-income housing

increased to 42 percent of the Corporation's conventional mortgage business from 40 percent in 1996.

The 1997 geographic goal, based on underserved census tracts in metropolitan statistical areas and

counties in rural areas, was 24 percent of the Corporation's conventional mortgage business, compared

with 21 percent in 1996. The special aÅordable housing goal, which serves very low-income families

and low-income families in low-income areas, was 14 percent of the Corporation's 1997 single-family

conventional mortgage business and multifamily business, compared with 12 percent in 1996. Under

this goal, the Corporation also must include mortgage purchases of multifamily units totaling no less

B-36
than $1.3 billion (.8 percent of the Corporation's 1994 total dollar volume of mortgage purchases). All

of these goals are measured as a percentage of dwelling units Ñnanced.

In 1997 and 1996, the Corporation exceeded its low- and moderate-income housing goal, with

45 percent of its conventional mortgage business counting toward this goal in both years. In 1997, the

Corporation exceeded its geographic goal, with 29 percent of its conventional mortgage business

counting toward this goal. The Corporation exceeded the 1996 geographic goal, with 28 percent of the

conventional mortgage business serving families in underserved areas. In addition, in 1997 the

Corporation exceeded its special aÅordable housing goal, with 19 percent of the conventional singlefamily and multifamily business counting toward this goal and with $3.2 billion of multifamily

business meeting the $1.3 billion multifamily requirement. In 1996, the Corporation exceeded the

special aÅordable housing goal, with 17 percent of single-family and multifamily business counting

toward this goal and with special aÅordable multifamily purchases of $2.4 billion.

Fannie Mae has built a solid foundation in aÅordable housing through signiÑcant community

outreach eÅorts, products directed at certain disadvantaged groups, and the introduction of products

with targeted underwriting Öexibilities, including an initiative to purchase loans with lower down

payments to help low-income households aÅord homes. In 1994, the Corporation introduced an

initiative to provide $1 trillion from 1994 through 2000 to Ñnance homes for families and communities

most in need. This targeted housing Ñnance will serve families with incomes below the median for

their areas, minorities and new immigrants, families who live in central cities and distressed

communities, and people with special housing needs. By the end of the decade, the initiative is

intended to show an additional ten million families a way to achieve the American dream of

homeownership.

New Accounting Standard

During 1997, the Financial Accounting Standards Board issued Financial Accounting Standard

No. 130, Reporting Comprehensive Income (""FAS 130'').

FAS 130 requires reporting of comprehensive income by its components and in total in the

Ñnancial statements. Comprehensive income is deÑned as the change in equity of a business enterprise

during a period from transactions and other events and circumstances from nonowner sources. It

includes all changes in equity during a period except those resulting from investments by owners and

distributions to owners. This standard is eÅective beginning in 1998. In management's opinion, this

standard will not have a material impact on the Corporation's Ñnancial results.

Comparison of 1996 versus 1995

The following discussion and analysis provides a comparison of the Corporation's results of

operations for the years ended December 31, 1996 and 1995.

Results of Operations

Net income increased to $2.725 billion in 1996 from $2.144 billion in 1995, and earnings per

common share were $2.48, up from $1.95 in 1995. Results for 1995 included the eÅect of a

commitment to contribute $350 million in Fannie Mae common stock to the Fannie Mae Foundation.

Without this special contribution, 1995 earnings would have been $2.372 billion, or $2.15 per common

share.

Net interest income increased $545 million to $3.592 billion in 1996, as a result of a $36 billion, or

16 percent, increase in the average mortgage portfolio balance and a .02 percentage point increase in

the average net interest margin. The increase in the average net interest margin to 1.18 percent in

1996 was caused, in part, by the Corporation's calling and refunding a substantial amount of higher

cost debt when interest rates declined in early 1996.

B-37
Guaranty fee income increased $110 million to $1.196 billion in 1996, compared with $1.086 billion in 1995. The increase in guaranty fee income resulted from a $40 billion increase in average net

MBS outstanding and an increase of .004 percentage points in the average eÅective guaranty fee rate.

The increase in the eÅective guaranty fee rate was largely a result of higher fee rates on new business

in 1996.

Miscellaneous income declined during 1996 as a result of lower REMIC fee income, which was

partially oÅset by an increase in other miscellaneous fees.

Credit-related expenses were $409 million in 1996, compared with $335 million in 1995. The

increase in credit-related expenses reÖected continued high levels of property acquisitions in California as well as the Corporation's eÅorts to shorten the period between delinquency and foreclosure,

which had the eÅect of accelerating future losses into 1996.

Administrative expenses were $560 million in 1996, compared with $546 million in 1995.

Compensation expense was $344 million in 1996, compared with $312 million in 1995. The ratio of

administrative expenses to the average net mortgage portfolio plus average net MBS outstanding

declined to .070 percent in 1996 from .075 percent in 1995. The ratio of administrative expenses to

revenues (net interest income, guaranty fees, and miscellaneous income) was 11.5 percent in 1996 and

12.9 percent in 1995.

The provision for federal income taxes, net of the tax beneÑt from extraordinary losses, was

$1.135 billion in 1996, compared with $834 million in 1995. The eÅective federal income tax rate

increased to 29 percent in 1996 from 28 percent in 1995. The increase from the previous year was due

to a favorable settlement with the Internal Revenue Service in 1995 of several items related to the

1986 and 1987 tax years.

During 1996, the amount of long-term debt called or repurchased and the notional principal

amount of interest rate swaps called was $26 billion, with a weighted-average cost of 7.09 percent. The

comparable amount in 1995 was $20 billion, with a weighted-average cost of 7.24 percent. As a result

of repurchase and call activity, the Corporation recognized net extraordinary losses of $45 million

($29 million after tax) in 1996, compared with $17 million ($11 million after tax) in 1995. The

repurchase or call of high-coupon debt favorably aÅects the Corporation's future cost of funds.

B-38
FANNIE MAE

INDEX TO FINANCIAL STATEMENTS

Page

Independent Auditors' Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40

Statements of Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41

Balance Sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42

Statements of Changes in Stockholders' EquityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43

Statements of Cash Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44

Notes to Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45

Quarterly Results of Operations (unaudited) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69

Net Interest Income and Average Balances (unaudited) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71

Rate/Volume Analysis (unaudited) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72

B-39
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Fannie Mae:

We have audited the accompanying balance sheets of Fannie Mae as of December 31, 1997 and

1996, and the related statements of income, changes in stockholders' equity, and cash Öows for each of

the years in the three-year period ended December 31, 1997. These Ñnancial statements are the

responsibility of Fannie Mae's management. Our responsibility is to express an opinion on these

Ñnancial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those

standards require that we plan and perform the audit to obtain reasonable assurance about whether

the Ñnancial statements are free of material misstatement. An audit includes examining, on a test

basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An audit also

includes assessing the accounting principles used and signiÑcant estimates made by management, as

well as evaluating the overall Ñnancial statement presentation. We believe that our audits provide a

reasonable basis for our opinion.

In our opinion, the Ñnancial statements referred to above present fairly, in all material respects,

the Ñnancial position of Fannie Mae as of December 31, 1997 and 1996, and the results of its

operations and its cash Öows for each of the years in the three-year period ended December 31, 1997,

in conformity with generally accepted accounting principles.

We also have audited in accordance with generally accepted auditing standards the supplemental

fair value balance sheets of Fannie Mae as of December 31, 1997 and 1996, included in Note 15 to the

Ñnancial statements. As described in Note 15, the supplemental fair value balance sheets have been

prepared by management to present relevant Ñnancial information that is not provided by the

Ñnancial statements and is not intended to be a presentation in conformity with generally accepted

accounting principles. In addition, the supplemental fair value balance sheets do not purport to

present the net realizable, liquidation, or market value of Fannie Mae as a whole. Furthermore,

amounts ultimately realized by Fannie Mae from the disposal of assets may vary signiÑcantly from the

fair values presented. In our opinion, the supplemental fair value balance sheets included in Note 15

present fairly, in all material respects, the information set forth therein.

KPMG Peat Marwick LLP

Washington, DC

January 14, 1998

B-40
FANNIE MAE

STATEMENTS OF INCOME

Year Ended December 31,

1997 1996 1995

(Dollars in millions,

except per common share amounts)

Interest income:

Mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $22,716 $20,560 $18,154

Investments and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,662 3,212 2,917

Total interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,378 23,772 21,071

Interest expense:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,659 3,395 3,994

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,77016,785 14,030

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,429 20,180 18,024

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,949 3,592 3,047

Other income:

Guaranty feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,274 1,196 1,086

Miscellaneous, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 125 86 93

Total other incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,399 1,282 1,179

Other expenses:

Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100 195 140

Foreclosed property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 275 214 195

AdministrativeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 636 560546

Special contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 350

Total other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,011 969 1,231

Income before federal income taxes and extraordinary item ÏÏÏÏÏÏÏ 4,337 3,905 2,995

Provision for federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,269 1,151 840

Income before extraordinary itemÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,068 2,754 2,155

Extraordinary lossÌearly extinguishment of debt (net of tax eÅect

of $7 million in 1997, $16 million in 1996, and $6 million in

1995) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12 29 11

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,056 $ 2,725 $ 2,144

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 65 42 Ì

Net income available to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,991 $ 2,683 $ 2,144

Basic earnings per common share (1):

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.87 $ 2.53 $ 1.98

Extraordinary itemÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .02 .03 .01

Net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.85 $ 2.50$ 1.97

Diluted earnings per common share (1):

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.84 $ 2.51 $ 1.96

Extraordinary itemÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .01 .03 .01

Net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.83 $ 2.48 $ 1.95

Cash dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .84 $ .76 $ .68

Weighted-average common shares outstanding (in millions):

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,049 1,071 1,091

DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,056 1,080 1,098

(1) Earnings per common share amounts prior to 1997 have been restated to comply with

Statement of Financial Accounting Standards No. 128, Earnings per Share.

See Notes to Financial Statements

B-41
FANNIE MAE

BALANCE SHEETS

Assets

December 31,

1997 1996

(Dollars in millions)

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $316,316 $286,259

Investments:

Held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58,69053,106

Available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,906 3,500

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,205 850

Accrued interest receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,864 2,419

Acquired property and foreclosure claims, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 919 954

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,773 3,953

Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $391,673 $351,041

Liabilities and Stockholders' Equity

Liabilities:

Debentures, notes and bonds, net:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $175,400 $159,900

Due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 194,374 171,370

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 369,774 331,270

Accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,611 4,236

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,495 2,762

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 377,880338,268

Stockholders' Equity:

Preferred stock, $50 stated value, 100 million shares authorizedÌ

20 million shares issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,000 1,000

Common stock, $.525 stated value, no maximum authorizationÌ

1,129 million shares issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 593 593

Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,495 1,451

Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,325 11,214

16,413 14,258

Less: Treasury stock, at cost, 92 million shares in 1997 and 68 million

shares in 1996 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,6201,485

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,793 12,773

Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $391,673 $351,041

See Notes to Financial Statements

B-42
FANNIE MAE

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Number of Additional Total

Shares Preferred Common Paid-in Retained Treasury Stockholders'

Outstanding(1) Stock Stock Capital Earnings Stock Equity

(Dollars and shares in millions)

Balance, January 1,

1995 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 273 $ Ì $593 $1,365 $ 7,933 $ (350) $ 9,541

Four-for-one stock split ÏÏ 818 Ì Ì Ì Ì Ì Ì

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 2,144 Ì 2,144

Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (741) Ì (741)

Shares repurchasedÏÏÏÏÏÏ (2) Ì Ì Ì Ì (46) (46)

Treasury stock issued for

stock options and

beneÑt plans ÏÏÏÏÏÏÏÏÏ 3 Ì Ì 24 Ì 25 49

Securities-available-forsale, market value

adjustment, net of tax

eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 12 Ì 12

Balance, December 31,

1995 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,092 Ì 593 1,389 9,348 (371) 10,959

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 2,725 Ì 2,725

Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (857) Ì (857)

Shares repurchasedÏÏÏÏÏÏ (48) Ì Ì Ì Ì (1,536) (1,536)

Preferred stock issued ÏÏÏ Ì 1,000 Ì (20) Ì Ì 980

Contribution to

Foundation ÏÏÏÏÏÏÏÏÏÏÏ 11 Ì Ì 12 Ì 338 350

Treasury stock issued for

stock options and

beneÑt plans ÏÏÏÏÏÏÏÏÏ 6 Ì Ì 70Ì 84 154

Securities-available-forsale, market value

adjustment, net of tax

eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (2) Ì (2)

Balance, December 31,

1996 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,061 1,000 593 1,451 11,214 (1,485) 12,773

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 3,056 Ì 3,056

Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (945) Ì (945)

Shares repurchasedÏÏÏÏÏÏ (31) Ì Ì Ì Ì (1,291) (1,291)

Treasury stock issued for

stock options and

beneÑt plans ÏÏÏÏÏÏÏÏÏ 7 Ì Ì 44 Ì 156 200

Balance, December 31,

1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,037 $1,000 $593 $1,495 $13,325 $(2,620) $13,793

(1) Number of shares at January 1, 1995 reÖect a pre-split basis.

See Notes to Financial Statements

B-43
FANNIE MAE

STATEMENTS OF CASH FLOWS

Year Ended December 31,

1997 1996 1995

(Dollars in millions)

Cash Öows from operating activities:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,056 $ 2,725 $ 2,144

Adjustments to reconcile net income to net cash provided by

operating activities:

Discount amortization on short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,012 4,338 5,070

Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100 195 140

Loss on early extinguishment of debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 45 17

Other decreases, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,691) (830) (922)

Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,496 6,473 6,449

Cash Öows from investing activities:

Purchases of mortgagesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (70,768) (68,471) (56,738)

Proceeds from sales of mortgagesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,082 102 408

Mortgage principal repaymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,714 32,853 23,062

Net proceeds from disposition of foreclosed propertiesÏÏÏÏÏ 3,085 2,448 1,968

Net (increase) decrease in investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7,990) 667 (10,937)

Net cash used in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (36,877) (32,401) (42,237)

Cash Öows from Ñnancing activities:

Proceeds from issuance of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86,079 79,189 50,039

Payments to redeem long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (63,716) (46,966) (28,620)

Proceeds from issuance of short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 737,054 606,427 694,962

Payments to redeem short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (725,584) (610,876) (679,754)

Net payments for stock activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,097) (1,314) (752)

Net cash provided by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,736 26,46035,875

Net increase in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,355 532 87

Cash and cash equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏ 850318 231

Cash and cash equivalents at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,205 $ 850 $ 318

Supplemental disclosures of cash Öow information:

Cash paid during the year for:

Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 21,622 $ 19,526 $ 16,076

Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,2401,053 666

See Notes to Financial Statements

B-44
FANNIE MAE

NOTES TO FINANCIAL STATEMENTS

1. Summary of SigniÑcant Accounting Policies

Fannie Mae is a federally chartered and stockholder-owned corporation operating in the residential mortgage Ñnance industry.

The accounting and reporting policies of the Corporation conform with generally accepted

accounting principles. Certain amounts in prior years' Ñnancial statements have been reclassiÑed to

conform with the current presentation.

The preparation of Ñnancial statements in conformity with generally accepted accounting

principles requires management to make estimates and assumptions that aÅect the reported amounts

of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Ñnancial

statements and the reported amounts of revenues and expenses during the reporting period. Actual

results could diÅer from those estimates.

Mortgage Portfolio

Mortgages and mortgage-backed securities that the Corporation has the ability and positive

intent to hold to maturity are classiÑed as held-to-maturity and are carried at their unpaid principal

balances (""UPB'') adjusted for unamortized purchase discount or premium and deferred loan fees.

Mortgage loans held for sale are carried at the lower of cost or fair value with any unrealized losses

included in current period earnings. Mortgage-backed securities that the Corporation intends to hold

for an undetermined period, but not necessarily to maturity, are classiÑed as available-for-sale and are

carried at fair value, with any valuation adjustments reported as an adjustment to equity, net of

deferred taxes.

The Corporation uses actual principal prepayment experience and estimates of future principal

prepayments in calculating the constant eÅective yield necessary to apply the interest method in the

amortization of loan fees and purchase discount or premium. In evaluating prepayments, loans are

aggregated by similar characteristics (e.g., loan type, acquisition date, and maturity). Factors used in

determining estimates of future prepayments include historical prepayment data and expected

prepayment performance under varying interest rate scenarios.

The accrual of interest on conventional mortgages (i.e., mortgages that are not federally insured

or guaranteed) is discontinued when the mortgages become 90 days or more delinquent. Any accrued

but uncollected interest on mortgages that are 90 days delinquent is reversed against current-period

interest income. Interest income on such mortgages is recognized only to the extent that cash

payments are received.

Investments

Nonmortgage investments are classiÑed as either available-for-sale or held-to-maturity. Investments that are classiÑed as available-for-sale are carried at fair value as of the balance sheet date, with

any valuation adjustments reported as an adjustment to equity, net of deferred taxes. Investments

that are classiÑed as held-to-maturity are carried at historical cost, adjusted for unamortized discount

or premium. Interest income is recognized on an accrual basis unless the collection of interest income

is considered doubtful, in which case interest income is recognized on a cash basis.

Guaranteed Mortgage-Backed Securities

The Corporation guarantees the timely payment of principal and interest on Fannie Mae

Mortgage-Backed Securities (""MBS''). These securities represent beneÑcial interests in pools of

B-45
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

mortgages or other mortgage-backed securities held in trust by the Corporation. The pools of

mortgages or mortgage-backed securities are not assets of the Corporation, except when acquired for

investment purposes, nor are the related outstanding securities liabilities; accordingly, neither is

reÖected on the accompanying balance sheets. The Corporation receives monthly guaranty fees for

each MBS pool based on a percentage of the pool's outstanding balance. Adjustments to the guaranty

fee rate eÅected through an upfront payment at securitization are deferred and amortized into

guaranty fee income over the estimated life of the underlying loans using the interest method. For

MBS pools held in the Corporation's portfolio, the guaranty fee is reÖected as interest income.

Allowance for Losses

The allowance for losses is based on an analysis of the mortgage portfolio and MBS outstanding,

and provides for future foreclosure losses. The analysis considers credit proÑle factors such as

mortgage characteristics, geographic concentrations, economic conditions, and actual and expected

loss experience. The allowance is increased by provisions charged as an expense in the income

statement and reduced by charge-oÅs, net of recoveries. In management's judgment, the allowance for

losses is adequate to provide for expected losses.

Acquired Property

Foreclosed assets are carried at the lower of cost or fair value less estimated costs to sell. Cost is

deÑned as fair value at foreclosure and represents the amount that a willing seller could reasonably

expect from a willing buyer in an arm's-length transaction. The diÅerence between estimated fair

value of the collateral at foreclosure and the principal owed on the underlying loan is recorded as a

charge-oÅ against the allowance for losses. Foreclosure, holding, and disposition costs are charged

directly to earnings.

Hedging Instruments

The Corporation utilizes certain Ñnancial instruments, such as interest rate swaps, derivative

instruments that simulate the short sale of Treasury securities, deferred rate setting agreements and

foreign currency swaps to achieve a speciÑc Ñnancing or investment objective at a desired cost or yield.

The Corporation does not engage in trading or other speculative use of these Ñnancial instruments.

SpeciÑc criteria must be met for Ñnancial instruments to qualify as a hedge on either an accrual or

deferred basis. Financial instruments not qualifying as hedges are marked to market through earnings.

Financial instruments used to hedge the anticipated issuance of debt must maintain a high correlation

between the hedging instrument and the item being hedged, both at inception and throughout the

hedge period.

Interest rate swaps are contractual agreements between two parties for the exchange of periodic

payments, generally based on a notional principal amount and agreed-upon Ñxed and variable rates.

The Corporation has long-term interest rate swap agreements with various parties to extend the

eÅective maturity of certain short-term debt obligations and to adjust the eÅective maturity of certain

long-term debt obligations. The Corporation also has interest rate swap agreements that are linked to

speciÑc debt issues (debt swaps) or speciÑc investments (asset swaps). These swaps achieve a speciÑc

Ñnancing or investment objective at a desired cost or yield. The costs and terms of the speciÑc debt

issues and yield of these speciÑc investments, as presented in the Ñnancial statements, include the

eÅects of these swaps. Interest rate swaps are accounted for on an accrual basis with the net payable or

receivable recognized as an adjustment to interest income or expense on the related assets or

liabilities. Gains or losses on terminated interest rate swaps are deferred and amortized over the

shorter of the remaining life of the hedged items or the term of the original swap. The fair value of the

B-46
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

interest rate swap agreements and changes in these fair values as a result of changes in market interest

rates are not recognized in the Ñnancial statements.

Derivative instruments that simulate the short sale of Treasury securities are used to hedge

interest rate risk on planned debt issuances. Gains and losses that result from the hedge positions are

deferred and recognized as adjustments to debt cost over the life of the hedged debt issuance.

The Corporation enters into deferred rate setting agreements at the same time it issues certain

Ñxed-rate debt. Under these agreements, the Corporation is able to set the eÅective interest rate on

the debt based on prevailing market conditions at one or more future dates. At settlement of all or a

portion of a deferred rate setting agreement, the Corporation pays or receives cash in an amount

representing the present value of the interest rate diÅerential between the Ñxed-rate debt and the

prevailing rate. Gains and losses that result from the hedge position are deferred and recognized as

adjustments to debt cost over the life of the debt issuance.

The Corporation issues debt securities in which principal, interest, or both are payable in a

foreign currency or are determined by reference to an index that includes one or more foreign

currencies. Concurrently, the Corporation enters into currency swaps that convert the proceeds of

certain borrowings into dollars or provide for scheduled exchanges of the currencies to insulate the

Corporation against foreign currency exchange risk. Foreign currency swaps are accounted for on an

accrual basis with the net diÅerential received or paid under such swaps recognized as an adjustment

to interest income or expense on the related asset or liability. Foreign currency borrowings and the

related net receivables and payables from currency swaps are translated at the market rates of

exchange as of the balance sheet date.

Cash and Cash Equivalents

The Corporation considers highly liquid investment instruments, generally with an original

maturity of three months or less, to be cash equivalents. Cash equivalents are carried at cost, which

approximates market value.

Income Taxes

Deferred federal income tax assets and liabilities are established for temporary diÅerences

between Ñnancial and taxable income and are measured using the current marginal statutory tax rate.

Investment and other tax credits are deferred and amortized over the lives of the related assets.

Earnings per Common Share

In 1997, the Financial Accounting Standards Board issued Statement No. 128 (""FAS 128''),

Earnings per Share. FAS 128 replaced the calculation of primary and fully diluted earnings per share

with basic and diluted earnings per share.

Basic earnings per share is computed by dividing income available to common stockholders by the

weighted-average number of common shares outstanding during the period. Diluted earnings per share

adjusts for the assumed conversion of all potentially dilutive securities. Potentially dilutive securities

are those that do not have a current right to participate fully in earnings but could do so in the future

by virtue of their option or conversion rights. The exercise of options or conversion of convertible

securities is not assumed if the result would be antidilutive for the period being calculated. All earnings

per common share amounts have been presented and, where appropriate, restated to conform to

FAS 128 requirements.

B-47
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

2. Mortgage Portfolio, Net

The mortgage portfolio consisted of the following at December 31, 1997 and 1996.

1997 1996

(Dollars in millions)

Single-family mortgages:

Government insured or guaranteed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 19,478 $ 15,912

Conventional:

Long-term, Ñxed-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211,541 177,070

Intermediate-term, Ñxed-rate(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,571 66,284

Adjustable-rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,373 12,783

Second ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 268 323

304,231 272,372

Multifamily mortgages:

Government insured ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,3603,673

Conventional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,087 11,007

12,447 14,680

Total unpaid principal balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 316,678 287,052

Less:

Unamortized discount and deferred loan fees, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86 524

Allowance for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 276 269

Net mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $316,316 $286,259

(1) Intermediate-term consists of portfolio loans with contractual maturities at purchase equal

to or less than 20 years and MBS held in portfolio with maturities of 15 years or less at issue

date.

Included in the mortgage portfolio are $157 billion and $119 billion of MBS and other mortgagerelated securities at December 31, 1997 and 1996, respectively, with fair values of $163 billion and

$120 billion, respectively. MBS held in portfolio at December 31, 1997 and 1996, included $35 billion

and $22 billion, respectively, of Real Estate Mortgage Investment Conduits (""REMICs'') and

Stripped MBS (""SMBS''). REMICs and SMBS backed by MBS do not subject the Corporation to

added credit risk but generally have diÅerent interest rate risks than MBS. At December 31, 1997,

these securities had aggregate gross unrealized losses of $175 million and gross unrealized gains of

$796 million. At December 31, 1996, the aggregate gross unrealized losses and gains were $218 million

and $669 million, respectively.

Mortgage assets held for sale were $.6 billion and $.1 billion at December 31, 1997 and 1996,

respectively.

The UPB of impaired loans at December 31, 1997 was $351 million, of which $161 million had a

speciÑc loss allowance, compared with $445 million and $221 million, respectively, at December 31,

1996. The average balance of impaired loans during 1997 and 1996 was $438 million and $421 million,

respectively.

B-48
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Nonperforming loans outstanding totaled $2.6 billion at the end of 1997, compared with

$2.1 billion at the end of 1996. If these nonperforming loans had been fully performing, they would

have contributed an additional $138 million to net interest income in 1997 and $147 million in 1996.

3. Allowance for Losses

Changes in the allowance for the years 1995 through 1997 are summarized below.

Total

(Dollars in millions)

Balance, January 1, 1995 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 827

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 140

Net foreclosure losses charged oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (172)

Balance, December 31, 1995 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 795

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 195

Net foreclosure losses charged oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (210)

Balance, December 31, 1996 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 780

Provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100

Net foreclosure losses charged oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (77)

Balance, December 31, 1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 803

At December 31, 1997, $276 million of the allowance for losses is included in the Balance Sheet

under ""Mortgage portfolio, net,'' which represents the allocation for portfolio loan losses; $523 million

is included in liabilities under ""Other'' for estimated losses on MBS; and the remainder, or $4 million,

which relates to unrecoverable losses on Federal Housing Administration loans, is included in

""Acquired property and foreclosure claims, net.'' The corresponding amounts at December 31, 1996

were $269 million, $507 million, and $4 million, respectively. Included in the allowance for losses at

December 31, 1997, is $21 million of speciÑc allowances for impaired loans, compared with $33 million

in 1996. During 1997, the Corporation established $29 million of speciÑc allowances for these loans,

compared with $20 million in 1996.

B-49
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

4. Investments

Presented below are the amortized cost and fair value of nonmortgage investments classiÑed as

held-to-maturity at December 31, 1997 and 1996.

1997 1996

Gross Gross Gross Gross

Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair

CostGains Losses Value CostGains Losses Value

(Dollars in millions)

Held-to-maturity

investments:

Asset-backed securities ÏÏÏ $13,034 $ 1 $Ì $13,035 $12,777 $15 $Ì $12,792

Eurodollar time deposits 12,828 1 Ì 12,829 13,956 Ì Ì 13,956

Commercial paper ÏÏÏÏÏÏÏ 11,745 4 Ì 11,749 6,191 1 Ì 6,192

Repurchase agreements ÏÏ 6,715 Ì Ì 6,715 4,667 Ì Ì 4,667

Federal funds ÏÏÏÏÏÏÏÏÏÏÏ 6,384 Ì Ì 6,384 7,778 Ì Ì 7,778

Auction rate preferred

stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,641 Ì Ì 1,641 2,064 Ì Ì 2,064

Other held-to-maturity

securities ÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,343 6 Ì 6,349 5,673 4 4 5,673

Total ÏÏÏÏÏÏÏÏÏÏÏ $58,690 $12 $Ì $58,702 $53,106 $20 $ 4 $53,122

Presented below are the amortized cost and fair value of nonmortgage investments classiÑed as

available-for-sale at December 31, 1997 and 1996.

1997 1996

Gross Gross Gross Gross

Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair

CostGains Losses Value CostGains Losses Value

(Dollars in millions)

Available-for-sale

securities:

Asset-backed

securities ÏÏÏÏ $3,607 $Ì $2 $3,605 $1,860 $Ì $2 $1,858

Other availablefor-sale

securities ÏÏÏÏ 2,301 Ì Ì 2,301 1,642 Ì Ì 1,642

Total ÏÏÏÏÏÏÏÏÏ $5,908 $Ì $2 $5,906 $3,502 $Ì $2 $3,500

The following table shows the amortized cost, fair value, and yield of nonmortgage investments at

December 31, 1997 and 1996, by remaining maturity.

1997 1996

Amortized Fair Amortized Fair

CostValue Yield CostValue Yield

(Dollars in millions)

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $44,562 $44,567 5.93% $38,624 $38,623 5.84%

Due after one year through Ñve years ÏÏÏÏ 3,395 3,401 6.13 3,347 3,349 5.85

47,957 47,968 5.95 41,971 41,972 5.84

Asset-backed securities(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,641 16,6406.16 14,637 14,6505.90

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $64,598 $64,608 6.00% $56,608 $56,622 5.86%

(1) Contractual maturity of asset-backed securities is not a reliable indicator of their expected

life because borrowers have the right to repay their obligations at any time.

B-50
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

5. Debentures, Notes, and Bonds, Net

Borrowings Due Within One Year

Borrowings due within one year at December 31, 1997 and 1996 are summarized below. Amounts

are net of unamortized discount and premium.

1997 1996

Outstanding Average Outstanding Average Maximum Maximum at Outstanding at Outstanding Outstanding Outstanding December 31 During Year December 31 During Year at Any at Any

Amount Cost(1) Amount Cost(1) Month End Amount Cost(1) Amount Cost(1) Month End

(Dollars in millions)

Short-term notes ÏÏÏÏ $104,964 5.69% $91,535 5.57% $104,964 $ 90,166 5.48% $80,013 5.42% $90,166

Other short-term

debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,226 5.74 36,874 5.59 41,044 30,494 5.47 32,305 5.48 34,681

Current portion of

borrowings due

after one year(2):

Debentures ÏÏÏÏÏÏÏ 14,300 6.40 8,553 7.89

Medium-term

notesÏÏÏÏÏÏÏÏÏÏÏ 23,629 5.68 30,352 5.73

Other ÏÏÏÏÏÏÏÏÏÏÏÏ 281 6.50335 6.40

Total due within

one year ÏÏÏÏÏÏ $175,400 5.76% $159,900 5.65%

(1) Represents weighted-average cost, which includes the amortization of discounts, premiums,

issuance costs, hedging results, and the eÅects of currency and debt swaps.

(2) Information on average amount and cost of debt outstanding during the year and maximum

amount outstanding at any month end is not meaningful. See ""Borrowings Due After One

Year'' for additional information.

B-51
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Borrowings Due After One Year

Borrowings due after one year consisted of the following at December 31, 1997 and 1996.

1997 1996

Maturity Amount Average Amount Average

Date Outstanding Cost(1) Outstanding Cost(1)

(Dollars in millions)

Debentures, net of $99 million of

discount for 1997 ($127 million for

1996) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1998-2022 $ 35,170 7.36% $ 51,016 7.20%

Global debt, net of $28 million of

discount for 1997 ($34 million for

1996) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1998-2007 21,752 6.47 14,170 6.43

Medium-term notes, net of

$299 million of discount for 1997

($142 million for 1996) ÏÏÏÏÏÏÏÏÏÏ 1998-2027 135,453 6.48 104,618 6.37

Zero-coupon securities and

subordinated capital debentures,

net of $12,612 million of discount

for 1997 ($11,208 million for 1996) 1998-2019 2,671 8.96 1,557 10.65

Long-term other, net of $47 million

of discount for 1997 ($50 million

for 1996) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1998-2018 193 9.99 198 9.99

195,239 6.67% 171,559 6.66%

Adjustment for foreign currency

translation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (865) (189)

Total due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $194,374 $171,370

(1) Represents weighted-average cost, which includes the amortization of discounts, premiums,

issuance costs, hedging results, and the eÅects of currency and debt swaps.

Debentures, notes, and bonds at December 31, 1997 included $128 billion of callable debt, which

generally is redeemable in whole or in part (and, in certain cases, at a speciÑed premium), at the

option of the Corporation any time on or after a speciÑed date, and $.5 billion of other debt

instruments that are subject to mandatory redemptions tied to certain indices or rates after an initial

nonredemption period.

B-52
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

The following table summarizes the amounts and call periods of callable debt, the notional

amount of callable swaps, and other redeemable debt and swaps, including $14 billion of callable debt

which was swapped to variable rate debt. Medium-term notes and subordinated capital debentures

that are redeemable at the Corporation's option also are included in the table.

Year of AmountAverage

Call Date Maturity Outstanding Cost

(Dollars in millions)

Callable debt and callable swaps (notional

amount):

Currently callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1998-2001 $ 40,624 5.70%

1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1999-2022 47,740 6.58

1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2000-2024 29,814 7.08

2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001-2026 15,386 7.10

2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002-2026 9,265 7.31

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007-2027 5,600 6.91

2003 and later ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006-2014 1,624 6.28

150,053 6.55

Other redeemable debt and swaps ÏÏÏÏÏÏÏÏÏÏÏ 1998-2002 527 6.77

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $150,580 6.55%

Principal amounts at December 31, 1997 of total debt payable in the years 1999-2003, assuming

callable debt is paid at maturity and assuming callable debt is redeemed at the initial call date, are as

follows:

Assuming

Total Debt by Callable Debt

Year of Redeemed at Initial

Maturity(1) Call Date(1)

(Dollars in millions)

1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $32,485 $52,642

2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,675 30,661

2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,230 11,552

2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,764 18,294

2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,837 2,920

(1) Includes $14 billion of callable debt which was swapped to variable-rate debt.

In 1997 and 1996, the Corporation repurchased or called $31 billion of debt and swaps with an

average cost of 7.22 percent and $26 billion with an average cost of 7.09 percent, respectively. The

Corporation recorded extraordinary losses of $19 million ($12 million after tax) in 1997 and

$45 million ($29 million after tax) in 1996 on the early extinguishment of debt.

Pursuant to the Corporation's Charter Act, approval of the Secretary of the Treasury is required

for the Corporation's issuance of its debt obligations.

B-53
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

6. Income Taxes

Components of the provision for federal income taxes for the years ended December 31, 1997,

1996, and 1995, were as follows:

1997 1996 1995

(Dollars in millions)

Current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,247 $1,109 $819

Deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 42 21

1,269 1,151 840

Tax beneÑt of extraordinary loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7) (16) (6)

Net federal income tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,262 $1,135 $834

The tax eÅects of temporary diÅerences that gave rise to signiÑcant portions of the deferred tax

assets and deferred tax liabilities at December 31, 1997 and 1996 consisted of the following:

1997 1996

(Dollars in millions)

Deferred tax assets:

MBS guaranty and REMIC feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $404 $373

Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 339 311

Purchase discount and deferred fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì

Other items, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54 49

Deferred tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 798 733

Deferred tax liabilities:

BeneÑts from tax-advantaged investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 171 142

Purchase discount and deferred fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 20

Other items, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 26

Deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 194 188

Net deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $604 $545

Management anticipates that it is more likely than not that the results of future operations will

generate suÇcient taxable income to realize the entire balance of deferred tax assets.

The Corporation's eÅective tax rates diÅered from statutory federal rates for the years ended

December 31, 1997, 1996, and 1995, as follows:

1997 1996 1995

Statutory corporate rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35% 35% 35%

Tax-exempt interest and dividends received deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4) (4) (4)

Equity investments in aÅordable housing projects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) (2) (2)

Settlement of IRS issuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (1)

EÅective rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29% 29% 28%

The Corporation is exempt from state and local taxes, except for real estate taxes.

B-54
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

7. Earnings per Common Share

The following table sets forth the computation of basic and diluted earnings per common share:

1997 1996 1995

(Dollars and shares in millions,

except per common share

amounts)

Numerator:

Net income before extraordinary loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,068 $2,754 $2,155

Extraordinary loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12) (29) (11)

Preferred stock dividendsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (65) (42) Ì

Numerator for basic and diluted earnings per common shareÌ

income available to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,991 $2,683 $2,144

Denominator:

Denominator for basic earnings per common shareÌweightedaverage common shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,049 1,071 1,091

Dilutive potential common shares(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 9 7

Denominator for diluted earnings per common shareÌadjusted

weighted-average common sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,056 1,080 1,098

Basic earnings per common share:

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.87 $ 2.53 $ 1.98

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.85 2.501.97

Diluted earnings per common share:

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.84 $ 2.51 $ 1.96

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.83 2.48 1.95

(1) Dilutive potential common shares consist primarily of the dilutive eÅect from employee stock

options and other stock compensation plans.

For additional disclosures regarding the Corporation's stock compensation plans and the outstanding preferred stock, see Notes 8 and 12, respectively.

8. Stock Compensation Plans

At December 31, 1997, the Corporation had Ñve stock-based compensation plans. Financial

Accounting Standards No. 123 (""FAS 123''), Accounting for Stock-Based Compensation, gives

companies the option of either recording an expense for all stock compensation awards based on fair

value at grant date or continuing to follow Accounting Principles Board Opinion No. 25 (""APB

Opinion 25'') with the additional requirement that they disclose, in a footnote, pro forma net income

and earnings per share as if they had adopted the expense recognition provisions of FAS 123. Fannie

Mae elected to apply APB Opinion 25 and related interpretations in accounting for its plans. As a

result, no compensation expense has been recognized for the nonqualiÑed stock options and employee

stock purchase plan. Had compensation expense been recognized for beneÑts under all Ñve plans,

based on their fair value at grant date and consistent with FAS 123, the Corporation's net income and

diluted earnings per common share would have been $3.025 billion and $2.80, $2.701 billion and $2.46,

and $2.120 billion and $1.94 for the years ended December 31, 1997, 1996, and 1995, respectively.

B-55
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

The fair value of beneÑts under the Corporation's stock-based plans was determined using a

Black-Scholes pricing model. The following table summarizes the major assumptions used in the

model.

1997 1996 1995

Risk free rate(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.53 - 6.80% 6.45 - 7.74% 5.26 - 6.73%

Volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 - 25 21 - 22 21 - 22

Forfeiture ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15 15 15

Dividend(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $.84 $.76 $.68

Expected lifeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 - 5 yrs. 1 - 5 yrs. 1 - 5 yrs.

(1) The closing yield on the comparable weighted-average life U.S. Treasury on the day prior to

grant.

(2) Dividend rate on common stock at date of grant. Dividend rate assumed to remain constant

over the option life.

Employee Stock Purchase Plan

The Corporation has an Employee Stock Purchase Plan that allows issuance of up to 36 million

shares of common stock to qualiÑed employees at a price equal to 85 percent of the fair market value

on the date of issuance. In 1997, the Corporation granted each qualiÑed employee, excluding certain

oÇcers, the right to purchase in January 1998 up to 629 shares of common stock. Under the 1997

oÅering, 1,883,197 common shares were purchased at $33.73 per common share, compared with

2,348,048 common shares at $27.47 under the 1996 oÅering. The Board of Directors has approved a

1998 oÅering under the plan, granting each qualiÑed employee the right to purchase 393 common

shares at $54.03 per common share.

Employee Stock Ownership Plan

The Corporation has an Employee Stock Ownership Plan (""ESOP'') for qualiÑed employees. The

Corporation may contribute to the ESOP an amount based on deÑned earnings goals, not to exceed

4 percent of the aggregate base salary for all participants. The contribution is made in the subsequent

year either in shares of Fannie Mae common stock or in cash that is used to purchase such stock.

Performance Shares

Fannie Mae's Stock Compensation Plans authorize eligible employees to receive performance

awards, generally issued with an award period that can range from three to Ñve years. The

performance awards become actual awards only if the Corporation attains the goals set for the award

period. At the end of such time, the awards generally are payable in common stock, in three

installments over a two-year period. The outstanding contingent grants made for the 1998-2000,

1997-1999, and 1996-1998 periods were 311,580 common shares, 252,964 common shares, and

347,842 common shares, respectively.

NonqualiÑed Stock Options

Stock options may be granted to eligible employees and nonmanagement members of the Board of

Directors. The options generally do not become exercisable until at least one year after the grant date,

and generally expire ten years from the grant date. The purchase price of the common stock covered

by each option is equal to the fair value of the stock on the date the option is granted.

B-56
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

The following table summarizes stock option activity for the years 1995-1997:

1997 1996 1995

Weighted-average Weighted-average Weighted-average

Options Exercise Price Options Exercise Price Options Exercise Price

(options in thousands)

Balance, January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,910$22.24 24,249 $18.9022,095 $16.52

Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,373 50.16 3,418 38.67 5,021 26.95

ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,065) 17.46 (3,014) 14.31 (2,288) 13.71

Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (441) 26.16 (743) 21.01 (579) 18.25

Balance, December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,777 $27.15 23,910$22.24 24,249 $18.90

Options vested, December 31 ÏÏÏÏÏÏÏ 13,275 $20.30 11,767 $17.65 9,271 $15.05

The following table summarizes information about stock options outstanding at December 31,

1997:

Options Outstanding Options Exercisable

Weighted-average Number

Range of Number Remaining Weighted-average of Options Weighted-average

Exercise Prices of Options Contractual Life Exercise Price Exercisable Exercise Price

(options in thousands)

$ 3.94 - $16.06 ÏÏÏÏ 1,833 3.2 yrs. $11.37 1,833 $11.37

17.22 - 28.95 ÏÏÏÏ 14,329 6.7 21.15 10,542 20.28

30.13 - 41.00 ÏÏÏÏ 3,593 8.9 38.86 842 38.42

42.13 - 54.09 ÏÏÏÏ 3,022 9.9 51.28 58 42.79

Total ÏÏÏÏÏÏÏÏÏ 22,777 7.2 yrs. $27.15 13,275 $20.30

Restricted Stock

In 1997, 66,240 shares of restricted stock were awarded, issued, and placed in escrow under the

Stock Compensation Plans and Restricted Stock Plan for Directors (95,000 in 1996); 138,968 shares

were released as vesting of participants occurred (173,411 shares in 1996).

9. Employee Retirement BeneÑts

Retirement Savings Plan

All regular employees of the Corporation scheduled to work 1,000 hours or more in a calendar year

are eligible to participate in the Corporation's Retirement Savings Plan, which includes a

401(k) option. In 1997, employees could contribute up to the lesser of 12 percent of their base salary

or the current annual dollar cap established and revised annually by the IRS, with the Corporation

matching such contributions up to 3 percent of base salary.

Postretirement BeneÑt Plans

All regular employees of the Corporation scheduled to work 1,000 hours or more in a calendar year

are covered by a noncontributory corporate retirement plan or by the contributory Civil Service

Retirement Law. BeneÑts payable under the corporate plan are based on years of service and

compensation using the average pay during the 36 consecutive highest paid months of the last

120 months of employment. The Corporation's policy is to contribute an amount no less than the

B-57
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

minimum required employer contribution under the Employee Retirement Income Security Act of

1974. Contributions to the corporate plan reÖect beneÑts attributed to employees' service to date as

well as compensation expected to be paid in the future. A $10 million contribution was made to the

corporate plan in 1997. Corporate plan assets consist primarily of listed stocks, Ñxed-income

securities, and other liquid assets. At December 31, 1997 and 1996, the projected beneÑt obligations

for services rendered, were $185 million and $149 million, respectively, while the plan assets were

$190 million and $141 million, respectively. The pension liability (included in liabilities under

""Other'') at December 31, 1997 and 1996 was $36 million and $38 million, respectively, while net

periodic pension costs were $8 million and $11 million, respectively.

At December 31, 1997 and 1996, the weighted-average discount rates used in determining the

actuarial present value of the projected beneÑt obligation were 7.25 percent and 7.75 percent,

respectively; the average rates of increase in future compensation levels used in the calculation were

5.75 percent for both 1997 and 1996; and the expected long-term rates of return on assets were 9.25

percent and 9.50 percent, respectively. The Corporation uses the straight-line method of amortization

for prior service costs.

The Corporation also has an Executive Pension Plan and a Supplemental Pension Plan, which

supplement for key senior oÇcers the beneÑts payable under the retirement plan. Estimated beneÑts

under the supplemental plans are accrued as an expense over the period of employment. Accrued

beneÑts under the Executive Pension Plan generally are funded through a Rabbi trust.

Fannie Mae sponsors a postretirement health care plan that covers substantially all full-time

employees. The plan pays stated percentages of most necessary medical expenses incurred by retirees,

after subtracting payments by Medicare or other providers and after a stated deductible has been met.

Participants become eligible for the beneÑts if they retire from the Corporation after reaching age 55

with 5 or more years of service. The plan is contributory, with retiree contributions adjusted annually.

The expected cost of these postretirement beneÑts is charged to expense during the years that

employees render service. Cost-sharing percentages are based on length of service with the Corporation. Fannie Mae does not fund this plan.

The Corporation's accrued postretirement health care cost liability for the years ending December 31, 1997 and 1996 was $27 million and $22 million, respectively. The net periodic postretirement

health care costs were $6 million in 1997 and $7 million in both 1996 and 1995. In determining the net

postretirement health care cost for 1997, a 6.25 percent annual rate of increase in the per capita cost

of covered health care claims was assumed for 1997; the rate was assumed to decrease gradually to

4.5 percent over Ñve years and remain at that level thereafter. The health care cost trend rate

assumption has a signiÑcant eÅect on the amounts reported. In determining the net postretirement

health care cost for 1996, a 6.5 percent annual rate of increase in the per capita cost of covered health

care claims was assumed for 1996; the rate was assumed to decrease gradually to 4.5 percent over six

years and remain at that level thereafter. To illustrate, increasing the assumed health care cost trend

rates by one percentage point in each year would increase the accumulated postretirement beneÑt

obligation as of December 31, 1997 by $7 million and the aggregate of the service and interest cost

components of net postretirement health care cost for the year then ended by $1 million.

The weighted-average discount rates used in determining the health care cost and the year-end

accumulated postretirement beneÑt obligation were 7.25 percent at December 31, 1997 and 7.75 percent at December 31, 1996.

B-58
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

10. Line of Business Reporting

Management analyzes corporate performance on the basis of two lines of business: Portfolio

Investment and Credit Guaranty.

The Portfolio Investment business includes the management of asset purchases and funding

activities for the Corporation's mortgage and nonmortgage investment portfolios. Income is derived

primarily from the diÅerence, or spread, between the yield on mortgage loans and nonmortgage

investments, and the borrowing costs related to those loans and investments.

The Credit Guaranty business involves guaranteeing the credit performance of both single-family

and multifamily mortgage loans for a fee. Guaranty fees for MBS are based on a market rate of return

for the credit risk assumed. For mortgages held in portfolio, the Credit Guaranty business charges the

Portfolio Investment business a guaranty fee similar to what it would charge on an MBS. These

""notional'' guaranty fees are classiÑed as net interest income for the Credit Guaranty business. Net

interest income for the Credit Guaranty business also includes interest on capital invested in guaranty

activities and income from temporary investment of principal and interest payments on guaranteed

mortgages prior to remittance to investors, and is net of interest charges paid to the Portfolio

Investment business for delinquent loans.

The Corporation assigns actual direct revenues and expenses among its lines of business and uses

estimates to apportion overhead and other corporate items. For instance, administrative expenses are

allocated on the basis of direct expenses for the line of business or, where not assignable to a particular

associated business, are based on revenues, proÑts, or volumes, as applicable. Capital is allocated to

the separate businesses through an assessment of the interest rate and credit risk associated with each

business.

The following table sets forth the Corporation's Ñnancial performance by line of business for the

years ended December 31, 1997, 1996, and 1995.

1997 1996 1995

Portfolio Credit Portfolio Credit Portfolio Credit Special

Investment Guaranty Total Investment Guaranty Total Investment Guaranty Contribution(1) Total

(Dollars in millions)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏ $3,482 $ 467 $ 3,949 $3,180$ 412 $ 3,592 $2,640$ 407 $ Ì $3,047

Guaranty feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (771) 2,045 1,274 (730) 1,926 1,196 (630) 1,716 Ì 1,086

Miscellaneous, net ÏÏÏÏÏÏÏÏÏÏÏÏ 18 107 125 32 54 86 22 71 Ì 93

Credit-related expenses ÏÏÏÏÏÏÏÏ Ì (375) (375) Ì (409) (409) Ì (335) Ì (335)

Administrative expenses ÏÏÏÏÏÏÏ (151) (485) (636) (130) (430) (560) (132) (414) Ì (546)

Special contribution ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì Ì (350) (350)

Federal income taxes ÏÏÏÏÏÏÏÏÏÏ (719) (550) (1,269) (661) (490) (1,151) (520) (442) 122 (840)

Extraordinary itemÌearly

extinguishment of debt ÏÏÏÏÏÏ (12) Ì (12) (29) Ì (29) (11) Ì Ì (11)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,847 $1,209 $ 3,056 $1,662 $1,063 $ 2,725 $1,369 $1,003 $(228) $2,144

(1) In 1996 the Corporation completed the Ñrst phase of the capital restructuring program

announced at the end of 1995 which included a $350 million contribution in Fannie Mae

common stock to the Fannie Mae Foundation.

11. Dividend Restrictions

The Corporation's payment of dividends is subject to certain statutory restrictions, including

approval by the Director of the OÇce of Federal Housing Enterprise Oversight of any dividend

payment that would cause the Corporation's capital to fall below speciÑed capital levels.

B-59
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

The Corporation has exceeded the applicable capital standard since the adoption of these

restrictions in 1992, and, consequently, has been making dividend payments without the need for

Director approval.

Payment of dividends on common stock also is subject to payment of dividends on preferred stock

outstanding.

12. Preferred Stock

The following table presents the non-voting preferred stock outstanding as of December 31, 1997

and 1996.

Shares Issued Stated Annual

and Value Dividend Redeemable

Issue Date Outstanding Per Share Rate On or After

Series A ÏÏÏÏÏÏÏÏ March 1, 1996 7,500,000 $50 6.41% March 1, 2001

Series B ÏÏÏÏÏÏÏÏ April 12, 1996 7,500,000 50 6.50 April 12, 2001

Series C(1) ÏÏÏÏÏ September 20, 1996 5,000,000 50 6.45 September 20, 2001

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,000,000

(1) The amount of dividends payable is subject to adjustment in the event of a reduction in the

dividends received deduction prior to 18 months after the original issuance. The adjustment

to the preferred stock dividends will oÅset the eÅect of such reduction to the extent such

reduction is not to a deduction level below 50%; no adjustment will be made to the extent any

such reductions are to a level below 50%.

Holders of preferred stock are entitled to receive noncumulative, quarterly dividends when, and if,

declared by the Corporation's Board of Directors. Payment of dividends on preferred stock is not

mandatory but has priority over payment of dividends on common stock. After the speciÑed period,

preferred stock is redeemable at its stated value at the option of the Corporation.

13. Financial Instruments with OÅ-Balance-Sheet Risk

The Corporation is a party to transactions involving Ñnancial instruments with oÅ-balance-sheet

risk. The Corporation uses these instruments to fulÑll its statutory purpose of meeting the Ñnancing

needs of the secondary mortgage market and to reduce its own exposure to Öuctuations in interest

rates. These Ñnancial instruments include MBS, commitments to purchase mortgages or to issue and

guarantee MBS, credit enhancements, and certain hedge instruments. These instruments involve, to

varying degrees, elements of credit and market risk in excess of amounts recognized on the balance

sheet.

Guaranteed Mortgage-Backed Securities

As issuer and guarantor of MBS, the Corporation is obligated to disburse scheduled monthly

installments of principal and interest (at the certiÑcate rate) and the full unpaid principal balance of

any foreclosed mortgage to MBS investors, whether or not any such amounts have been received. The

Corporation also is obligated to disburse unscheduled principal payments received from borrowers.

The Corporation's credit risk is mitigated to the extent that sellers of pools of mortgages elect to

remain at risk for the loans sold to the Corporation or other credit enhancement was provided to

protect against the risk of loss from borrower default. Lenders have the option to retain the primary

B-60
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

default risk, in whole or in part, in exchange for a lower guaranty fee. Fannie Mae, however, bears the

ultimate risk of default.

Commitments

The Corporation enters into master delivery commitments with lenders on either a mandatory or

optional basis. Under a mandatory master commitment, a lender must either deliver loans under an

MBS contract at a speciÑed guaranty fee rate or enter into a mandatory portfolio commitment with

the yield established upon executing the portfolio commitment.

The Corporation also will accept mandatory or lender-option delivery commitments not issued

pursuant to a master commitment. These commitments may be for portfolio or MBS. The guaranty

fee rate on MBS lender-option commitments is speciÑed in the contract while the yield for portfolio

lender-option commitments is set at the date of conversion to a mandatory commitment.

The cost of funding future portfolio purchases generally is hedged upon issuance of, or conversion

to, a mandatory commitment. Therefore, the interest rate risk relating to loans purchased pursuant to

those commitments is largely mitigated.

Hedge Instruments

The Corporation typically uses derivative instruments that simulate the short sale of Treasury

securities, interest rate swaps, and deferred rate setting agreements to hedge against interest rate

movements. Changes in the value of these hedge instruments caused by Öuctuations in interest rates

are expected to oÅset changes in the value of the items hedged. Consequently, the primary risks

associated with these hedging instruments are (1) that changes in the value of the item hedged will

not substantially oÅset changes in the value of the hedge instrument, and (2) that the counterparty to

the agreement will be unable or unwilling to meet the terms of the agreement.

Credit risk on derivative instruments that simulate the short sale of Treasury securities arises

from the possible inability or unwillingness of the counterparty to pay any diÅerence between the

agreed-upon price and the current price for the referenced securities at settlement. This risk is reduced

through the evaluation of the creditworthiness of counterparties and continuous monitoring of hedge

positions. The amount of deferrable net unrealized losses on open hedge positions was $3 million at

December 31, 1997, compared with $2 million of gains at December 31, 1996. Total deferred gains and

losses on closed positions were $188 million and $231 million, respectively, at December 31, 1997,

compared with $203 million and $239 million, respectively, at December 31, 1996.

The Corporation reduces counterparty risk on interest rate swaps by dealing only with experienced swap counterparties with high credit quality, diversifying its swaps across many counterparties

and ensuring that swaps generally are executed under master agreements that provide for netting of

certain amounts payable by each party. In addition, counterparties are obligated to post collateral if

the Corporation is exposed to credit loss on the related swaps exceeding an agreed-upon threshold.

The amount of required collateral is based on credit ratings and the level of credit exposure.

The Corporation generally requires overcollateralization from counterparties whose credit ratings

have dropped below predetermined levels. Fannie Mae regularly monitors the exposures on its interest

rate swaps by valuing the positions via dealer quotes and internal pricing models. At December 31,

1997, 91 percent of the notional principal amount of Fannie Mae's outstanding interest rate swaps

were with counterparties rated A or better (67 percent with counterparties rated AA or better), and

100 percent of the notional principal of outstanding swaps were subject to collateral arrangements. At

December 31, 1997, Ñve swap counterparties represented approximately 63 percent of the total

B-61
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

notional principal amount of the outstanding interest rate swaps. These Ñve counterparties are subject

to master collateral agreements.

Counterparty risk on deferred rate setting arrangements is limited to the cash receivable, if any,

due under the deferred rate setting agreement. This risk is reduced through evaluating the

creditworthiness of counterparties.

Credit Enhancements

The Corporation provides credit enhancement for certain Ñnancings involving taxable or taxexempt housing bonds issued by state and local governmental entities to Ñnance multifamily housing

for low- and moderate-income families. In these transactions, Fannie Mae issues an MBS, pledges an

interest in certain mortgages it owns or otherwise provides contractual assurance of payment to a

trustee for the bonds. Fannie Mae's credit enhancement in a multifamily housing bond transaction

improves the rating on the bond, thus resulting in lower-cost Ñnancing for multifamily housing.

B-62
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Credit Exposure for OÅ-Balance-Sheet Financial Instruments

The following table presents the contract or notional amount of oÅ-balance-sheet Ñnancial

instruments at December 31, 1997 and 1996.

1997 1996

(Dollars in billions)

MBS outstanding(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 709.1 $ 650.3

MBS in portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (130.4) (102.6)

Net MBS outstanding(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 578.7 547.7

Master commitments:

Mandatory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38.2 24.3

Optional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45.9 37.2

Portfolio commitments:

Mandatory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.6 1.9

Optional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.6 1.2

MBS commitments:

Mandatory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1.1

Optional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .1 1.4

Short sales of Treasury securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.6 .4

Interest rate swaps (2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 96.1 97.9

Debt swaps (3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52.7 57.9

Asset swaps (4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.02.6

Credit enhancements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.3 4.4

Other guaranteesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.6 3.5

(1) Net of $523 million in allowance for losses in 1997 and $507 million in 1996. Includes

$94.3 billion and $70.6 billion of MBS with lender or third party recourse at December 31,

1997 and 1996, respectively.

(2) The weighted-average interest rate being received under these swaps was 5.85 percent and

the weighted-average interest rate being paid was 6.79 percent at December 31, 1997,

compared with 5.61 percent and 6.76 percent, respectively, at December 31, 1996.

(3) The weighted-average interest rate being received under these swaps was 5.94 percent and

the weighted-average interest rate being paid was 5.65 percent at December 31, 1997,

compared with 5.64 percent and 5.47 percent, respectively, at December 31, 1996.

(4) The weighted-average interest rate being received under these swaps was 6.03 percent and

the weighted-average interest rate being paid was 6.27 percent at December 31, 1997,

compared with 5.96 percent and 6.11 percent, respectively, at December 31, 1996.

Contract or notional amounts do not necessarily represent the market or credit risk of the oÅbalance-sheet positions. The notional amounts of the instruments are used to calculate contractual

cash Öows to be exchanged. In addition, any measurement of risk is meaningful only to the extent that

oÅsetting arrangements, such as master netting agreements and the value of related collateral, are

included.

The Corporation's exposure to credit loss for oÅ-balance-sheet Ñnancial instruments can be

estimated by calculating the cost, on a present value basis, to replace at current market rates all those

oÅ-balance-sheet Ñnancial instruments outstanding for which the Corporation was in a gain position.

B-63
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

The Corporation's net exposure (taking into account master netting agreements) was $26 million at

December 31, 1997 and $10 million at December 31, 1996. The Corporation expects the net credit

exposure to Öuctuate as interest rates change.

14. Concentrations of Credit Risk

Concentrations of credit risk exist when a signiÑcant number of counterparties (e.g., borrowers,

lenders, and mortgage insurers) engage in similar activities or are susceptible to similar changes in

economic conditions that could aÅect their ability to meet contractual obligations.

The following table presents UPB by primary default risk and the general geographic distribution

of properties underlying mortgages in the portfolio and backing MBS outstanding as of December 31,

1997 and 1996.

Geographic Distribution

1997 Gross UPB NortheastSoutheastMidwestSouthwestWestTotal

(Dollars in millions)

Fannie Mae risk ÏÏÏÏ $780,771 20% 21% 17% 15% 27% 100%

Lender risk ÏÏÏÏÏÏÏÏÏ 115,045 16 18 18 14 34 100

Total ÏÏÏÏÏÏ $895,816 20% 20% 17% 15% 28% 100%

Geographic Distribution

1996 Gross UPB NortheastSoutheastMidwestSouthwestWestTotal

(Dollars in millions)

Fannie Mae risk ÏÏÏÏ $747,394 21% 20% 17% 15% 27% 100%

Lender risk ÏÏÏÏÏÏÏÏÏ 87,831 2015 15 12 38 100

Total ÏÏÏÏÏÏ $835,225 21% 20% 17% 14% 28% 100%

No signiÑcant concentration exists at the state level except for California, where, at December 31,

1997, 20 percent of the gross UPB of mortgages in portfolio and backing MBS were located, compared

with 21 percent at December 31, 1996.

To minimize credit risk, the Corporation requires primary mortgage insurance or other credit

protection if the loan-to-value (""LTV'') ratio of a single-family conventional mortgage loan (UPB of

the loan divided by the value of the mortgaged property) when the loan is delivered to the Corporation

is greater than 80 percent.

The Corporation accepts conventional loans delivered with mortgage insurance from 14 insurance

organizations. At December 31, 1997, $236 billion in current UPB of single-family conventional

mortgage loans in portfolio and underlying MBS outstanding was covered by primary mortgage

insurance at acquisition. Five companies, all rated AA- or higher, represented approximately 84 percent of that insurance coverage. The Corporation monitors, on a regular basis, the performance and

Ñnancial strength of its mortgage insurers.

B-64
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

The following table presents the original LTV ratio distribution of single-family loans in portfolio

and backing MBS outstanding at December 31, 1997 and 1996.

Loan-to-Value Ratio

60% Over

1997 Gross UPB and Less 61Ó70% 71Ó75% 76Ó80% 81Ó90% 90% Total

(Dollars in millions)

Fannie Mae riskÏÏÏÏÏÏÏ $752,654 19% 15% 15% 23% 16% 12% 100%

Lender risk ÏÏÏÏÏÏÏÏÏÏÏ 86,195 9 1012 26 24 19 100

Total ÏÏÏÏÏÏÏÏÏ $838,849 18% 14% 15% 23% 17% 13% 100%

Loan-to-Value Ratio

60% Over

1996 Gross UPB and Less 61Ó70% 71Ó75% 76Ó80% 81Ó90% 90% Total

(Dollars in millions)

Fannie Mae riskÏÏÏÏÏÏÏ $720,503 19% 15% 15% 22% 17% 12% 100%

Lender risk ÏÏÏÏÏÏÏÏÏÏÏ 62,514 14 13 15 27 2011 100

Total ÏÏÏÏÏÏÏÏÏ $783,017 19% 14% 15% 23% 17% 12% 100%

The rate at which mortgage loans prepay tends to be sensitive to the level and direction of

prevailing market interest rates. In a declining interest rate environment, higher rate mortgage loans

will pay oÅ at a faster rate; conversely, in an increasing interest rate environment, lower interest rate

mortgages will prepay at a slower rate. The following table presents the distribution by note rate of

Ñxed-rate, single-family loans in the mortgage portfolio and underlying MBS at December 31, 1997

and 1996.

Fixed-Rate Loans by Note Rate(1)

7.00% 8.00% 9.00% 10.00% 11.00%

Under to to to to and

Gross UPB at December 31, 7.00% 7.99% 8.99% 9.99% 10.99% over Total

(Dollars in billions)

1997ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $83 $380$227 $45 $16 $4 $755

Percent of totalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11% 50% 30% 6% 2% 1% 100%

1996ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $87 $331 $212 $55 $19 $5 $709

Percent of totalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12% 46% 30% 8% 3% 1% 100%

(1) Excludes housing revenue bonds and non-Fannie Mae securities.

15. Disclosures of Fair Value of Financial Instruments

The basic assumptions used and the estimates disclosed in the Fair Value Balance Sheets

represent management's best judgment of appropriate valuation methods. These estimates are based

on pertinent information available to management as of December 31, 1997 and 1996. In certain cases,

fair values are not subject to precise quantiÑcation or veriÑcation and may change as economic and

market factors, and management's evaluation of those factors, change.

Although management uses its best judgment in estimating the fair value of these Ñnancial

instruments, there are inherent limitations in any estimation technique. Therefore, these fair value

estimates are not necessarily indicative of the amounts that the Corporation would realize in a market

B-65
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

transaction. The accompanying Fair Value Balance Sheets do not represent an estimate of the overall

market value of the Corporation as a going concern, which would take into account future business

opportunities.

Fair Value Balance Sheets

Assets

December 31, 1997 December 31, 1996

CostFair Value CostFair Value

(Dollars in millions)

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $316,316 $325,500 $286,259 $290,254

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64,596 64,608 56,606 56,624

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,205 2,205 850 850

Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,556 6,489 7,326 4,604

391,673 398,802 351,041 352,332

OÅ-balance-sheet items:

Guaranty fee income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3,357 Ì 3,587

Swaps in gain position, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 4 Ì 6

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 8

Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 391,673 402,163 351,041 355,933

Liabilities and Net Assets

Liabilities:

Noncallable debt:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 156,725 158,526 156,854 156,346

Due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85,699 91,177 75,487 72,513

Callable debt:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,675 17,464 3,046 3,694

Due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 108,675 108,706 95,883 101,822

369,774 375,873 331,270334,375

Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,106 7,137 6,998 5,885

OÅ-balance-sheet items:

Swaps in loss position, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3,168 Ì 1,117

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3 Ì Ì

Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 377,880386,181 338,268 341,377

Net assets, net of tax eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 13,793 $ 15,982 $ 12,773 $ 14,556

See accompanying Notes to Fair Value Balance Sheets.

Notes to Fair Value Balance Sheets

The following discussion summarizes the signiÑcant methodologies and assumptions used in

estimating the fair values presented in the accompanying Fair Value Balance Sheets.

B-66
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

Mortgage Portfolio, Net

The fair value calculations of the Corporation's mortgage portfolio considered such variables as

interest rates, credit quality, and loan collateral. Because an active market does not exist for a large

portion of mortgage loans in the portfolio, the portfolio's unsecuritized mortgages were aggregated

into pools by product type, coupon, and maturity and converted into notional MBS. A normal

guaranty fee that Fannie Mae's credit guaranty business would charge for a pool of loans with similar

characteristics was subtracted from the weighted-average interest rate less servicing fees. The method

for estimating this guaranty fee and the credit risk associated with the mortgage portfolio is described

under ""Guaranty Fee Income, Net.''

The Corporation then employed an option-adjusted spread (""OAS'') approach to estimate fair

values for both notional MBS (the mortgage loan portfolio) and MBS held in portfolio. The OAS

represents the risk premium or incremental interest spread over Treasury rates that is included in a

security's yield to compensate an investor for the uncertain eÅects of embedded prepayment options

on mortgages. The OAS was calculated using quoted market values for selected benchmark securities

and provided a generally applicable return measure that considers the eÅect of prepayment risk and

interest rate volatility.

Investments

Fair values of the Corporation's investment portfolio were based on actual quoted prices or prices

quoted for similar Ñnancial instruments.

Cash and Cash Equivalents

The carrying amount of cash and cash equivalents was used as a reasonable estimate of their fair

value.

Other Assets

Other assets include accrued interest receivable, net currency swap receivables, and several other

smaller asset categories. The fair value of other assets, excluding certain deferred items that have no

fair value, approximates their carrying amount. Net currency swap receivables, which are included in

other assets at cost, are reclassiÑed as a component of the fair value of the related foreigndenominated debt.

Guaranty Fee Income, Net

MBS are not assets owned by the Corporation, except when acquired for investment purposes,

nor are MBS recorded as liabilities of the Corporation. On MBS outstanding, the Corporation receives

a guaranty fee calculated on the outstanding principal balance of the related mortgages. The guaranty

fee represents a future income stream for the Corporation. Under generally accepted accounting

principles, this guaranty fee is recognized as income over the life of the securities. The Fair Value

Balance Sheets reÖect the present value of guaranty fees, net of estimated future administrative costs

and credit losses and taking into account estimated prepayments.

The Corporation estimates the credit loss exposure attached to the notional MBS, MBS held in

portfolio, and oÅ-balance-sheet MBS where Fannie Mae has the primary risk of default. The

Corporation deducts estimated credit losses from the projected guaranty fee cash Öows to arrive at the

fair value. Estimated credit losses are calculated with an internal forecasting model based on actual

B-67
FANNIE MAE

NOTES TO FINANCIAL STATEMENTSÌ(Continued)

historical loss experience for the Corporation. The net guaranty fee cash Öows are then valued through

an OAS method similar to that described under ""Mortgage Portfolio, Net.''

Swap Obligations, Net

The Corporation enters into interest rate swaps, including callable swaps that, in general, extend

or adjust the eÅective maturity of certain debt obligations. Under these swaps, the Corporation

generally pays a Ñxed rate and receives a Öoating rate based on a notional principal amount. The

Corporation also enters into interest rate swaps that are linked to speciÑc investments (asset swaps)

or speciÑc debt issues (debt swaps). The fair values of interest rate swaps are estimated based on

either expected cash Öows or quoted market values of these instruments. The eÅect of master netting

agreements is included in determining swap obligations in a gain position or loss position.

Other OÅ-Balance-Sheet Items

The Corporation issues mandatory delivery commitments to purchase mortgages or issue MBS.

Under mandatory delivery commitments, lenders are obligated to sell mortgages to the Corporation at

the commitment yield. In certain instances, the Corporation enters into MBS sales commitments

related to the commitments to purchase mortgages.

Mandatory commitments to purchase mortgages have been valued on the basis of the yield

diÅerential between required mortgage yields at the balance sheet date and actual commitment yields,

discounted over the estimated life of the assets to be delivered, plus the estimated value of the

expected guaranty fee, calculated as described under ""Mortgage Portfolio, Net.'' MBS sales commitments have been valued on the basis of the diÅerential between MBS market prices at the balance

sheet date and the prices on MBS sales commitments. Mandatory commitments to issue MBS have

been valued on the basis of the expected guaranty fee stream, as described above.

Noncallable and Callable Debt

The fair value of the Corporation's noncallable debt was estimated by using quotes for selected

debt securities of the Corporation with similar terms. Similar to the valuation of the mortgage

portfolio, the fair value of callable debt was estimated with an OAS model.

Other Liabilities

Other liabilities include accrued interest payable, amounts payable to MBS holders, estimated

losses on MBS, net currency swap payables, and several other smaller liability categories. The fair

value of other liabilities, excluding certain deferred items that have no fair value, approximates their

carrying amount, except for net currency swap payables, which are included as a component of the fair

value of the related foreign-denominated debt, and credit loss exposure for MBS, which is included as

a component of the net MBS guaranty fee.

The fair value amount also includes the estimated eÅect on deferred income taxes of providing for

federal income taxes, at the statutory corporate tax rate of 35 percent, for the diÅerence between net

assets at fair value and at cost.

B-68
FANNIE MAE

QUARTERLY RESULTS OF OPERATIONS (Unaudited)

The following unaudited results of operations include, in the opinion of management, all

adjustments necessary for a fair presentation of the results of operations for such periods.

1997 Quarter Ended

December September June March

(Dollars in millions, except per common share amounts)

Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6,884 $6,651 $6,514 $6,329

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,848 5,658 5,544 5,379

Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,036 993 970 950

Guaranty fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 324 320317 313

Miscellaneous income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29 33 33 30

Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (20) (40) (40)

Foreclosed property expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (77) (71) (61) (66)

Administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (167) (159) (159) (151)

Income before federal income taxes and

extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,145 1,096 1,060 1,036

Provision for federal income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏ (339) (319) (309) (302)

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏ 806 777 751 734

Extraordinary itemÌearly extinguishment of

debt (net of tax eÅect) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12) (2) 2 Ì

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 794 $ 775 $ 753 $ 734

Preferred stock dividendsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16) (16) (17) (16)

Net income available to common stockholders ÏÏ $ 778 $ 759 $ 736 $ 718

Basic earnings per common share (1):

Earnings before extraordinary itemÏÏÏÏÏÏÏÏ $ .76 $ .73 $ .70$ .68

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.01) Ì Ì Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .75 $ .73 $ .70$ .68

Diluted earnings per common share (1):

Earnings before extraordinary itemÏÏÏÏÏÏÏÏ $ .75 $ .72 $ .69 $ .67

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.01) Ì Ì Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .74 $ .72 $ .69 $ .67

Cash dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏ $ .21 $ .21 $ .21 $ .21

(1) The total of the four quarters does not equal the amount for the year because the amount for

each period is calculated independently based on the weighted-average number of common

shares outstanding during the period. The earnings per common share amounts have been

restated to comply with Statement of Financial Accounting Standards No. 128, ""Earnings

per Share.''

B-69
FANNIE MAE

QUARTERLY RESULTS OF OPERATIONS (Unaudited)Ì(Continued)

1996 Quarter Ended

December September June March

(Dollars in millions, except per common share amounts)

Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6,190$5,993 $5,832 $5,757

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,267 5,093 4,948 4,872

Net interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 923 900 884 885

Guaranty fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 308 304 296 288

Miscellaneous income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28 2018 20

Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (50) (50) (50) (45)

Foreclosed property expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (56) (52) (53) (53)

Administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (145) (142) (138) (135)

Income before federal income taxes and

extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,008 980 957 960

Provision for federal income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏ (295) (289) (282) (285)

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏ 713 691 675 675

Extraordinary itemÌearly extinguishment of

debt (net of tax eÅect) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (8) (21)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 713 $ 691 $ 667 $ 654

Preferred stock dividendsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17) (12) (11) (2)

Net income available to common stockholders ÏÏ $ 696 $ 679 $ 656 $ 652

Basic earnings per common share (1):

Earnings before extraordinary itemÏÏÏÏÏÏÏÏ $ .66 $ .64 $ .62 $ .62

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (.01) (.02)

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .66 $ .64 $ .61 $ .60

Diluted earnings per common share (1):

Earnings before extraordinary itemÏÏÏÏÏÏÏÏ $ .65 $ .63 $ .61 $ .61

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì (.01)

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .65 $ .63 $ .61 $ .60

Cash dividends per common share ÏÏÏÏÏÏÏÏÏÏÏÏ $ .19 $ .19 $ .19 $ .19

(1) The total of the four quarters does not equal the amount for the year because the amount for

each period is calculated independently based on the weighted-average number of common

shares outstanding during the period. The earnings per common share amounts have been

restated to comply with Statement of Financial Accounting Standards No. 128, ""Earnings

per Share.''

B-70
FANNIE MAE

NET INTEREST INCOME AND AVERAGE BALANCES (Unaudited)

1997 1996 1995

(Dollars in millions)

Interest income:

Mortgage portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 22,716 $ 20,560 $ 18,154

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,662 3,212 2,917

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,378 23,772 21,071

Interest expense(1):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,659 3,395 3,994

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,77016,785 14,030

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,429 20,180 18,024

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,949 3,592 3,047

Tax equivalent adjustment (2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 283 247 211

Net interest income tax equivalent basis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,232 $ 3,839 $ 3,258

Average balances:

Interest-earning assets(3):

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $298,698 $268,629 $232,558

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63,441 57,161 48,143

Total interest-earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $362,139 $325,790 $280,701

Interest-bearing liabilities(1):

Short-term debt. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 68,691 $ 63,974 $ 67,886

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 277,129 246,733 199,497

Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 345,820 310,707 267,383

Interest-free fundsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,319 15,083 13,318

Total interest-bearing liabilities and interest-free funds ÏÏÏÏÏÏÏÏÏÏÏÏ $362,139 $325,790 $280,701

Average interest rates(2):

Interest-earning assets:

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.67% 7.71% 7.85%

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.82 5.68 6.15

Total interest-earning assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.34 7.36 7.56

Interest-bearing liabilities(1):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.29 5.22 5.85

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.77 6.82 7.06

Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.48 6.49 6.75

Investment spread(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .86 .87 .81

Interest-free return(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .31 .31 .35

Net interest margin(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.17% 1.18% 1.16%

(1) ClassiÑcation of interest expense and interest-bearing liabilities as short-term or long-term is

based on eÅective maturity or repricing date, taking into consideration the eÅect of interest

rate swaps.

(2) ReÖects pro forma adjustments to permit comparison of yields on tax-advantaged and

taxable assets.

(3) Includes average balance of nonperforming loans of $2.2 billion in 1997 and 1996, and

$2.0 billion 1995.

(4) Consists primarily of the diÅerence between the yield on interest-earning assets, adjusted for

tax beneÑts of nontaxable income, and the eÅective cost of funds on interest-bearing

liabilities.

(5) Consists primarily of the return on that portion of the investment portfolio funded by equity

and non-interest-bearing liabilities.

(6) Net interest income, on a tax equivalent basis, as a percentage of the average investment

portfolio.

B-71
FANNIE MAE

RATE/VOLUME ANALYSIS (Unaudited)

Attributable to

changes in(1) Increase

(Decrease) Volume Rate

(Dollars in millions)

1997 vs. 1996

Interest income:

Mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,156 $2,287 $(131)

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 450361 89

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,606 2,648 (42)

Interest expense(2):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 264 251 13

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,985 2,059 (74)

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,249 2,310(61)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 357 $ 338 $ 19

1996 vs. 1995

Interest income:

Mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,406 $2,767 $(361)

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 295 518 (223)

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,701 3,285 (584)

Interest expense(2):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (599) (222) (377)

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,755 3,227 (472)

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,156 3,005 (849)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 545 $ 280$ 265

(1) Combined rate/volume variances, a third element of the calculation, are allocated to the rate

and volume variances based on their relative size.

(2) ClassiÑcation of interest expense and interest-bearing liabilities as short-term or long-term is

based on the eÅective maturity or repricing date, taking into consideration the eÅect of

interest rate swaps.

B-72
MANAGEMENT

Directors

The age and background, as of March 31, 1998, of each of the members of the Board of Directors

of the Corporation are as follows:

First

Principal Occupation, Became Other

Name and Age Business Experience, and Residence Director Directorships(1)

Stephen B. Ashley, 58 Chairman and Chief Executive OÇcer, The 1995 The Genesee Corporation;

Ashley Group, a group of commercial and multi- Hahn Automotive Warehouse,

family real estate, brokerage and investment Inc.; Manning & Napiers Adcompanies, January 1997 to present; Chairman visors, Inc.

and Chief Executive OÇcer, Sibley Mortgage

Corporation, a mortgage banking company, 1985

to 1996; Chairman and Chief Executive OÇcer,

Sibley Real Estate Services, Inc., a property

management company, 1985 to 1996; Livonia,

New York

Roger E. Birk, 67 Former President and Chief Operating OÇcer of 1985 Golden Bear Golf; Mutual of

the Corporation, November 1987 until his retire- America Capital Corp.; Penske

ment in January 1992; Tequesta, Florida Transportation; WellPoint

Health Networks Inc.

Stephen Friedman, 60Senior Chairman and Limited Partner, Decem- 1996 Wal-Mart Stores, Inc.

ber 1994 to present, Co-Chairman or sole Chairman, December 1990 to November 1994,

Goldman, Sachs & Co., an investment banking

Ñrm; New York, NY

Thomas P. Dean of The Wharton School of the University 1991 CVS Corporation; Digital

Gerrity, 56 of Pennsylvania, an educational institution, July Equipment Corporation;

1990 to present; President of CSC Consulting, a Reliance Group Holdings, Inc.;

subsidiary of Computer Sciences Corporation, Sun Company, Inc.; Union

and Vice President of Computer Sciences Corpo- Carbide Corporation

ration, May 1989 to June 1990; Chairman and

Chief Executive OÇcer, Index Group, a technology-oriented consulting company, 1969 to April

1989; Haverford, Pennsylvania

Jamie S. Gorelick, 47 Vice Chair of the Corporation, May 1997 to 1997

present; Deputy Attorney General of the United

States, March 1994 to April 1997; General Counsel to the U.S. Department of Defense, May 1993

to March 1994; Partner, Miller, Cassidy, Larroca

& Lewin, a law Ñrm, January 1981 to April 1993;

Chevy Chase, Maryland

James A. Chairman of the Board of Directors and Chief 1990Dayton Hudson Corporation;

Johnson, 54 Executive OÇcer of the Corporation, Febru- Kaufman and Broad Home

ary 1991 to present; Vice Chairman of the Board Corporation; United

of the Corporation, January 1990 to Janu- HealthCare Corporation

ary 1991; Managing Director, Shearson Lehman

Brothers, Inc., an investment banking Ñrm,

April 1985 to December 1989; Washington, D.C.

Thomas A. Partner, Obermayer, Rebmann, Maxwell & Hip- 1993

Leonard(2), 51 pel, a law Ñrm, January 1992 to present; Philadelphia, Pennsylvania

Vincent A. President and Chief Executive OÇcer, AEA In- 1991

Mai, 57 vestors Inc., a private investment company, April

1989 to present; Managing Director, Shearson

Lehman Brothers, Inc., an investment banking

Ñrm, 1974 to April 1989; Port Washington, New

York

B-73
First

Principal Occupation, Became Other

Name and Age Business Experience, and Residence Director Directorships(1)

Ann McLaughlin, 56 Chairman, October 1996 to present, Vice Chair- 1994 AMR Corporation (and its

man, August 1993 to September 1996, The subsidiary, American AirAspen Institute, a nonproÑt organization; Presi- lines); Donna Karan Internadent, Federal City Council, May 1990 to Septem- tional Inc.; General Motors

ber 1995; President and Chief Executive OÇcer, Corporation; Harman InternaNew American Schools Development Corpora- tional Industries, Inc.; Host

tion, June 1992 to April 1993; Visiting Fellow, Marriott Corporation; Kellogg

Urban Institute, January 1989 to June 1992; Company; Nordstrom Inc.;

Chairman, President's Commission on Aviation Potomac Electric Power ComSecurity and Terrorism, September 1989 to May pany; Sedgwick Group, plc;

1990; U.S. Secretary of Labor, December 1987 to Union Camp Corporation;

December 1989; Washington, D.C. Vulcan Materials Company

Kevin M. O'Keefe(2), Partner, O'Keefe, Ashendon, Lyons & Ward, a 1997

50law Ñrm; Deputy Assistant to the President of

the United States in Intergovernmental AÅairs,

June 1994 to April 1997; Special Assistant to the

President of the United States for Presidential

Personnel, January 1993 to April 1994; Chicago,

Illinois

Richard D. President, Time Warner Inc., a media and en- 1989 Citicorp; Philip Morris ComParsons, 49 tertainment corporation, January 1995 to pre- panies, Inc.; Time Warner Inc.

sent; Chairman of the Board and Chief Executive

OÇcer, January 1991 to January 1995, President

and Chief Executive OÇcer, July 1990 to January 1991, and President and Chief Operating

OÇcer, July 1988 to June 1990, The Dime Savings Bank of New York, FSB, a Ñnancial institution; Pocantico Hills, New York

Joe K. Pickett, 52 Chairman and Chief Executive OÇcer, Home- 1996 Dal-Tile International Inc.

Side Lending, Inc. (successor entity to BancBoston Mortgage Corporation), a mortgage banking

company, April 1990 to present; Jacksonville,

Florida

Eli J. Segal(2), 54 President and Chief Executive OÇcer of The 1997

Welfare to Work Partnership, a non-proÑt organization, February 1997 to present; Assistant

to the President of the United States, January

1993 to February 1996; Washington, D.C.

Antonia Shusta, 48 Chief Executive OÇcer of Consumer Businesses, 1994

PaciÑc Financial Group, a group of Ñnancial

services companies, since January 1997; Group

Executive, Household International, a Ñnancial

services company, April 1988 to February 1995;

Chairman, President and Chief Executive OfÑcer, Household Bank, F.S.B., a wholly-owned

subsidiary of Household International, 1990 to

January 1995; Key Biscayne, Florida

Lawrence M. President and Chief Operating OÇcer of the 1991 The Chubb Corporation;

Small, 56 Corporation, February 1992 to present; Presi- Marriott International, Inc.

dent and Chief Operating OÇcer-Designate of

the Corporation, September 1991 to January

1992; Vice Chairman and Chairman of the Executive Committee, January 1990 to July 1991,

Sector Executive, January 1985 to December

1989, Citicorp/Citibank, a Ñnancial institution;

Washington, D.C.

Kathryn G. Thompson Chairman and Chief Executive OÇcer, Kathryn 1995

(2), 57 G. Thompson Construction Company, a building

and development company, 1967 to present;

Dana Point, California

B-74
First

Principal Occupation, Became Other

Name and Age Business Experience, and Residence Director Directorships(1)

Jose H. Partner, Akin, Gump, Strauss, Hauer & Feld, 1993 π

Villarreal(2), 44 L.L.P., a law Ñrm, August 1994 to present; Partner, McGinnis, Lochridge & Kilgore, L.L.P., a

law Ñrm, July 1993 to August 1994; Associate

Director, White House OÇce of Presidential Personnel, April 1993 to June 1993; Presidential

Transition Team, November 1992 to March

1993; Deputy Campaign Manager, Clinton Campaign, June 1992 to November 1992; Associate,

McGinnis, Lochridge & Kilgore, February 1991

to May 1992; San Antonio, Texas

Karen Hastie Partner, Crowell & Moring, a law Ñrm practicing 1988 Continental Airlines, Inc.;

Williams, 53 in the District of Columbia, 1982 to present; Crestar Financial

Washington, D.C. Corporation; SunAmerica Inc.;

Washington Gas Company

(1) Companies with a class of securities registered pursuant to Section 12 of the Securities

Exchange Act of 1934 or subject to the requirements of Section 15(d) of that Act or any

company registered as an investment company under the Investment Company Act of 1940.

Certain directorships of other companies are also noted in the occupation column.

(2) Appointed by the President of the United States, who has authority to appoint Ñve directors.

The term of each director will end on the date of the May 1998 annual meeting of stockholders,

except that the President of the United States may remove any director that the President appointed

for good cause.

Executive OÇcers

The age and business experience, as of March 31, 1998, of each of the executive oÇcers of the

Corporation, are as follows:

James A. Johnson, 54, has been Chairman of the Board of Directors and Chief Executive OÇcer

since February 1991. Mr. Johnson was Vice Chairman of the Board of Directors from January 1990 to

January 1991. Mr. Johnson was a Managing Director in Corporate Finance at Shearson Lehman

Brothers, Inc. from April 1985 to December 1989.

Lawrence M. Small, 56, has been President and Chief Operating OÇcer since February 1992.

Mr. Small was President and Chief Operating OÇcer-Designate of the Corporation from September

1991 to January 1992. Prior to his employment with the Corporation, Mr. Small was with Citicorp/

Citibank, where he was Vice Chairman and Chairman of the Executive Committee from January 1990

to July 1991.

Jamie S. Gorelick, 47, has been Vice Chair since May 1997. Ms. Gorelick was Deputy Attorney

General of the United States from March 1994 to April 1997. Ms. Gorelick served as General Counsel

to the United States Department of Defense from May 1993 to March 1994 and was a Partner with

Miller, Cassidy, Larroca & Lewin, a law Ñrm, from January 1981 to April 1993.

J. Timothy Howard, 49, has been Executive Vice President and Chief Financial OÇcer since

February 1990.

William E. Kelvie, 50, has been Executive Vice President and Chief Information OÇcer since

November 1992.

Robert J. Levin, 42, has been Executive Vice PresidentÌMarketing since June 1990.

Ann D. Logan, 43, has been Executive Vice President and Chief Credit OÇcer since May 1993.

Ms. Logan has been an Executive Vice President since January 1993 and was Senior Vice PresidentÌ

Northeastern Regional OÇce from June 1989 to January 1993.

B-75
Glenn T. Austin, Jr., 49, has been Senior Vice PresidentÌSoutheastern Regional OÇce since

May 1985.

Kenneth J. Bacon, 43, has been Senior Vice PresidentÌNortheastern Regional OÇce since

April 1993. Mr. Bacon was Director of the OÇce of Securitization at the Resolution Trust

Corporation (""RTC'') from February 1991 to April 1993.

John Buckley, 41, has been Senior Vice PresidentÌCommunications since November 1991.

Donna Callejon, 35, has been Senior Vice PresidentÌCorporate Development since July 1996.

Ms. Callejon was Senior Vice PresidentÌSingle-Family Marketing from November 1991 to July 1996.

William G. Ehrhorn, 49, has been Senior Vice PresidentÌMortgage Operations since May 1993.

Elizabeth S. HarshÑeld, 44, has been Senior Vice PresidentÌWestern Regional OÇce since

February 1996. Ms. HarshÑeld was Senior Vice PresidentÌInvestor Relations from April 1994 to

February 1996 and Vice President and Assistant to the Chairman of the Corporation from July 1992

to April 1994.

John R. Hayes, 59, has been Senior Vice PresidentÌMidwestern Regional OÇce since

November 1985.

Lynda C. Horvath, 45, has been Senior Vice PresidentÌCapital Markets since July 1996.

Ms. Horvath was Senior Vice PresidentÌCorporate Development from May 1993 to July 1996. Ms.

Horvath was Senior Vice PresidentÌMortgage Operations from February 1991 to May 1993.

Louis W. Hoyes, 49, has been Senior Vice PresidentÌMultifamily Lending and Investment since

July 1995. Prior to his employment with the Corporation, Mr. Hoyes was Managing Director of the

residential segment of Citicorp's Real Estate business in North America, where he held a number of

other positions after joining Citicorp/Citibank in 1973.

Anastasia D. Kelly, 48, has been Senior Vice President and General Counsel since November

1996. She was Senior Vice President and Deputy General Counsel from April 1995 to November 1996.

Prior to her employment with the Corporation, Ms. Kelly was a partner in the law Ñrm of Wilmer,

Cutler & Pickering in Washington, D.C., which she joined in 1985.

Linda K. Knight, 48, has been Senior Vice President and Treasurer since February 1993.

Ms. Knight was Vice President and Assistant Treasurer from November 1986 to February 1993.

Thomas A. Lawler, 45, has been Senior Vice PresidentÌPortfolio Management since

November 1989.

Thomas A. Lund, 39, has been Senior Vice PresidentÌSouthwestern Regional OÇce since July

1996. Mr. Lund was Vice PresidentÌMarketing in the Southwestern Regional OÇce from January

1995 to July 1996. Prior to his employment with the Corporation, Mr. Lund was Senior Vice

President and General Manager for Negotiated Transactions for the GE Capital Mortgage Corporation from 1990 to 1994.

William R. Maloni, 53, has been Senior Vice PresidentÌGovernment and Industry Relations

since November 1995. Mr. Maloni was Senior Vice PresidentÌPolicy and Public AÅairs from

March 1989 to November 1995.

Adolfo Marzol, 37, has been Senior Vice PresidentÌSingle-Family Business Management since

July 1996. Mr. Marzol was Senior Vice PresidentÌCapital Markets from February 1996 to July 1996.

Mr. Marzol was Executive Vice President and Chief Financial OÇcer of Chase Manhattan Mortgage

Corporation, a mortgage company, from July 1993 to January 1996 and Senior Vice PresidentÌInterest Rate Risk of that Ñrm from February 1991 to June 1993.

Thomas R. Nides, 37, has been Senior Vice PresidentÌHuman Resources since November 1997

and was Vice PresidentÌHuman Resources from May 1997 to November 1997. Mr. Nides was a

B-76
Principal with Morgan Stanley from April 1996 to April 1997. Mr. Nides was the Corporation's Vice

PresidentÌHousing Impact from January 1995 to April 1996. He was Chief of StaÅ to the United

States Trade Representative from May 1993 to December 1994 and Executive Assistant to the

Speaker of the House from May 1989 to May 1993.

Michael A. Quinn, 43, has been Senior Vice PresidentÌCredit Loss Management since April

1994. Mr. Quinn was Senior Vice President and Controller from March 1991 to April 1994.

Sampath Rajappa, 52, has been Senior Vice President and Controller since April 1994.

Mr. Rajappa joined the Corporation in March 1994 as Corporate Controller. Prior thereto,

Mr. Rajappa was Senior Vice President and Controller for ITT Residential Capital Corporation, a

mortgage banking company, from August 1993 to February 1994.

Jayne J. Shontell, 43, has been Senior Vice PresidentÌInvestor Relations since February 1996.

Ms. Shontell was Senior Vice PresidentÌFinancial and Information Services from November 1992 to

February 1996.

Michael Williams, 40, has been Senior Vice PresidentÌCustomer Technology Services since

February 1996. Mr. Williams was Senior Vice PresidentÌCustomer Applications and Technology

Integration from November 1993 to January 1996.

Barry Zigas, 46, has been Senior Vice President and Executive DirectorÌNational Housing

Impact Division since February 1996. Mr. Zigas was Senior Vice PresidentÌHousing Impact Policy

from November 1995 to January 1996, and Vice PresidentÌHousing Impact from June 1993 to

October 1995.

Additional Information

For information concerning executive compensation, stock ownership of management and

directors, certain transactions of executive oÇcers, and any person or group owning more than Ñve

percent of the voting stock of the Corporation, reference is made to the Corporation's proxy

statement, dated March 24, 1997 for the Corporation's 1997 annual meeting of stockholders and any

later proxy statement published prior to the Corporation's publication of a new Information

Statement, which are incorporated herein by this reference. The proxy statement for the Corporation's 1998 annual meeting of stockholders will be available in April 1998.

The Corporation will provide without charge a copy of the Corporation's most recent proxy

statement to each person to whom this Information Statement has been delivered, upon the written or

oral request of such person. Requests for such copies should be directed to the oÇce speciÑed on

page 2 of this Information Statement.

ACCOUNTANTS

The Ñnancial statements of the Corporation as of December 31, 1997 and 1996 and for each of the

years in the three-year period ended December 31, 1997, included herein, have been included in

reliance upon the report of KPMG Peat Marwick LLP, independent certiÑed public accountants, and

upon the authority of that Ñrm as experts in accounting and auditing.

B-77
®THIS PAGE INTENTIONALLY LEFT BLANK©
APPENDIX C

Supplement dated May 15, 1998 to

Information Statement dated March 31, 1998

This Supplement describes the Ñnancial condition of the Federal National Mortgage Association (""Fannie Mae'' or the ""Corporation'') as of March 31, 1998 and contains unaudited

Ñnancial statements with respect to the Corporation for the quarter ended March 31, 1998. This

Supplement should be read in conjunction with the Corporation's Information Statement dated

March 31, 1998 (the ""Information Statement''), which is hereby incorporated by reference. The

Information Statement describes the business and operations of the Corporation and contains

Ñnancial data as of December 31, 1997. Fannie Mae also periodically makes available statistical

information on its mortgage purchase and mortgage-backed securities volumes as well as other

relevant information about Fannie Mae. Copies of the Corporation's current Information

Statement, any supplements thereto and other available information, including the Corporation's

Proxy Statement dated March 30, 1998, can be obtained without charge from the OÇce of

Investor Relations, Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016

(telephone: 202/752-7115).

In connection with its oÅerings of securities, the Corporation may incorporate this Supplement by reference in one or more other documents describing the securities oÅered thereby, the

selling arrangements therefor and other relevant information. Such other documents may be

called an OÅering Circular, a Prospectus or otherwise. This Supplement does not oÅer any

securities for sale.

Fannie Mae is a federally chartered corporation. Its principal oÇce is located at 3900

Wisconsin Avenue, N.W., Washington, D.C. 20016 (202/752-7000). Its Internal Revenue

Service employer identiÑcation number is 52-0883107.

The Corporation's securities are not required to be registered under the Securities Act of

1933. At the close of business on April 30, 1998, approximately 1,030 million shares of the

Corporation's common stock (without par value) were outstanding.

The delivery of this Supplement at any time shall not under any circumstances

create an implication that there has been no change in the aÅairs of the Corporation

since the date hereof or that the information contained herein is correct as of any time

subsequent to its date.

C-1
TABLE OF CONTENTS

Caption Page

Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

Management's Discussion and Analysis of Financial Condition and Results of Operations

for the Three Months Ended March 31, 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4

Independent Accountants' Review Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10

Interim Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11

Notes to Interim Financial StatementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13

Computation of Earnings Per Common Share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15

Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15

C-2
SELECTED FINANCIAL DATA

The following selected Ñnancial data for the three months ended March 31, 1998 and 1997 are

unaudited and include, in the opinion of management, all adjustments (consisting of normal recurring

accruals) necessary for a fair presentation. Certain amounts in 1997 have been reclassiÑed to conform

with current presentation. Operating results for the three months ended March 31, 1998 are not

necessarily indicative of the results expected for the entire year.

(Dollars and shares in millions, except per share amounts)

1998 1997 Income Statement Data for the three months ended March 31:

Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,025 $ 6,329

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,989 5,379

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,036 950

Guaranty fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 321 313

Miscellaneous income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56 30

Credit-related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (77) (106)

Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (170) (151)

Income before federal income taxes and extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,166 1,036

Provision for federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (334) (302)

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 832 734

Extraordinary lossÌearly extinguishment of debt, net of tax eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏ (8) Ì

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 824 $ 734

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16) (16)

Net income available to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 808 $ 718

Basic earnings per common share(1):

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .79 $ .68

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.01) Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .78 $ .68

Diluted earnings per common share(1):

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .78 $ .67

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.01) Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .77 $ .67

Balance Sheet Data at March 31:

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $326,909 $291,441

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67,209 57,117

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 403,993 357,010

Borrowings:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 168,919 159,071

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 212,174 177,103

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 389,922 343,832

Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,071 13,178

Capital(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,854 13,926

Other Data for the three months ended March 31:

Average net interest marginÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.14% 1.17%

Return on average common equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25.024.0

Dividend payout ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30.8 31.1

Average eÅective guaranty fee rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .219 .227

Credit loss ratio(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .034 .046

Ratio of earnings to combined Ñxed charges and preferred stock dividends(4) ÏÏÏ 1.19:1 1.19:1

Mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 28,372 $ 12,996

MBS issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58,259 30,881

MBS outstanding at period end(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 730,832 663,668

Weighted-average diluted common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,045 1,069

(1) Earnings per common share amounts for 1997 have been restated to comply with Statement of Financial Accounting

Standards No. 128, Earnings per Share.

(2) Stockholders' equity plus general allowance for losses.

(3) Charge-oÅs and foreclosure expense as a percentage of average net portfolio and net MBS outstanding.

(4) ""Earnings'' consists of (i) income before federal income taxes and extraordinary item and (ii) Ñxed charges. ""Fixed

charges'' represents interest expense.

(5) Includes $138 billion and $110 billion of MBS in portfolio at March 31, 1998 and 1997, respectively.

C-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998

Results of Operations

In the Ñrst quarter of 1998, Fannie Mae reported record earnings of $824 million, compared with

$734 million in the Ñrst quarter of 1997. The 12 percent increase in earnings was primarily due to

increases in net interest income and miscellaneous income, and lower credit-related expenses.

Net interest income in the Ñrst quarter of 1998 increased 9 percent, compared with the Ñrst

quarter of 1997. The growth in net interest income was primarily a result of a 12 percent growth in

the average investment portfolio, which was partly oÅset by a 3 basis point decrease in the net interest

margin. Management expects that the net interest margin will continue to decline somewhat in 1998.

The following table presents an analysis of net interest income for the three months ended

March 31, 1998 and 1997.

Net Interest Income and Average Balances

(Dollars in millions)

Three Months Ended

March 31,

1998 1997

Interest income:

Mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,002 $ 5,484

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,023 845

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,025 6,329

Interest expense(1):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 965 839

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,024 4,540

Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,989 5,379

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,036 950

Tax equivalent adjustment(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72 67

Net interest income tax equivalent basis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,108 $ 1,017

Average balances:

Interest-earning assets(3): Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $319,888 $287,896

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70,488 60,085

Total interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $390,376 $347,981

Interest-bearing liabilities(1): Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 71,782 $ 64,545

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 301,083 267,458

Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 372,865 332,003

Interest-free funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,511 15,978

Total interest-bearing liabilities and interest-free funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $390,376 $347,981

Average interest rates(2):

Interest-earning assets:

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.55% 7.68%

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.84 5.68

Total interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.24 7.34

Interest-bearing liabilities(1):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.33 5.16

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.68 6.79

Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.42 6.48

Investment spread ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .82 .86

Interest-free return(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .32 .31

Net interest margin(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.14% 1.17%

(1) ClassiÑcation of interest expense and interest-bearing liabilities as short-term or long-term is based on eÅective

maturity or repricing date, taking into consideration the eÅect of interest rate swaps.

(2) ReÖects pro forma adjustments to permit comparison of yields on tax-advantaged and taxable assets.

(3) Includes average balance of nonperforming loans of $2.6 billion and $2.3 billion for the three months ended

March 31, 1998 and 1997, respectively.

(4) Consists primarily of the return on that portion of the investment portfolio funded by equity and non-interestbearing liabilities.

(5) Net interest income, on a tax equivalent basis, as a percentage of the average investment portfolio.

C-4
The following rate/volume analysis shows the relative contribution of asset and debt growth and

interest rate changes to changes in net interest income for the three months ended March 31, 1998

and 1997.

Rate/Volume Analysis

(Dollars in millions)

Attributable to

Changes in(1) Increase

First Quarter 1998 vs. First Quarter 1997 (Decrease) Volume Rate

Interest income:

Mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $518 $601 $(83)

Investments and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 178 15028

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 696 751 (55)

Interest expense:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 126 96 30

Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 484 562 (78)

Total interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 610658 (48)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 86 $ 93 $ (7)

(1) Combined rate/volume variances, a third element of the calculation, are allocated to the rate

and volume variances based on their relative size.

Guaranty fee income increased by $8 million, or 3 percent, to $321 million, compared with

$313 million in the Ñrst quarter of 1997. This change resulted from a 6 percent increase in average net

Mortgage-Backed Securities (""MBS'') outstanding which was partially oÅset by a .8 basis point

decrease in the eÅective average guaranty fee rate when compared with the Ñrst quarter of 1997. The

decrease in the eÅective average guaranty fee rate was due to repayments of loans backing MBS with

high fees, and an increase in the guaranty fees associated with MBS purchased for portfolio being

included in net interest income.

In the Ñrst three months of 1998, miscellaneous income increased 87 percent to $56 million versus

$30 million in the Ñrst three months of 1997. The increase in miscellaneous income was primarily the

result of higher technology and special transaction fees.

Administrative expenses for the quarter ended March 31, 1998 increased to $170 million from

$151 million during the same period in 1997, primarily due to higher compensation costs. Compensation expense was $107 million in the Ñrst quarter of 1998, compared with $94 million in the Ñrst

quarter of 1997. The ratio of administrative expenses to the average mortgage portfolio plus average

MBS outstanding was .075 percent in the Ñrst quarter of 1998 and .072 percent in the Ñrst quarter of

1997. The ratio of administrative expenses to revenues (net interest income, guaranty fees and

miscellaneous income) was 12.0 percent for the Ñrst quarter of 1998, compared with 11.6 percent for

the Ñrst quarter of 1997.

The eÅective federal income tax rate for the Ñrst three months of 1998 and 1997 was 29 percent.

The Corporation had extraordinary losses of $13 million ($8 million after tax) from the

repurchase or call of debt in the Ñrst quarter of 1998. The Corporation had less than $1 million in

extraordinary losses from the call or repurchase of debt in the Ñrst quarter of 1997.

C-5
Credit Data

The following table shows the Corporation's serious delinquencies for conventional loans in

portfolio and underlying MBS at March 31, 1998 and 1997, and conventional properties acquired and

total net recoveries or charge-oÅs for the three months ended March 31, 1998 and 1997.

Number of Net

Delinquency Properties (Recoveries)/

Rate(1) Acquired Charge-oÅs

March 31, March 31, March 31, March 31, March 31, March 31,

1998 1997 1998 1997 1998 1997

(Dollars in millions)

Single-family ÏÏÏ .61% .59% 5,658 5,431 $(7) $30

Multifamily ÏÏÏÏ .36 .58 4 8 3 1

Total ÏÏÏÏÏÏÏÏÏÏ $(4) $31

(1) Single-family serious delinquencies consist of those loans in the portfolio or underlying MBS

for which the Corporation has the primary risk of loss that are 90 or more days delinquent or

in foreclosure. Multifamily serious delinquencies are those loans in the portfolio or

underlying MBS that are 60 days or more delinquent for which the Corporation has primary

risk of loss. The single-family and multifamily percentages are based on the number of such

single-family loans and dollar amount of such multifamily loans, respectively, in the portfolio

and underlying MBS.

Total credit-related losses, which include loan charge-oÅs, net of recoveries, and foreclosed

property expenses, were $78 million for the three months ended March 31, 1998, compared with

$97 million for the same period in 1997. The change in credit-related losses was the result of a

decrease in charge-oÅs slightly oÅset by an increase in foreclosure expenses. The decrease in chargeoÅs was due to net recoveries on foreclosed properties in the Ñrst quarter of 1998 versus net chargeoÅs in the Ñrst quarter of 1997. In addition to the Corporation's loss mitigation eÅorts, a strong

economy, strong housing market, and deeper mortgage insurance requirements on higher loan-tovalue ratio loans have contributed to reducing credit-related losses.

The inventory of single-family properties was 9,614 as of March 31, 1998, compared with 9,582 as

of March 31, 1997. The inventory of multifamily properties was 17 as of March 31, 1998, compared

with 27 as of March 31, 1997.

Total credit-related expenses, which include foreclosed property expenses and the provision for

losses, were $77 million in the Ñrst quarter of 1998, compared with $106 million in the Ñrst quarter of

1997. This decrease was due to a negative $5 million provision recorded in the Ñrst quarter of 1998,

compared to a $40 million loss provision recorded in the Ñrst quarter of 1997.

The allowance for losses increased to $802 million at March 31, 1998 from $789 million at

December 31, 1997. Management anticipates that the provision for losses will be adjusted periodically

in line with its analysis of actual and expected loss experience.

Balance Sheet Analysis

Mortgage Portfolio

The Corporation purchased $28 billion of mortgages at an average yield of 6.79 percent in the Ñrst

quarter of 1998, compared with $13 billion of mortgages at an average yield of 7.58 percent in the Ñrst

quarter of 1997. The increase in mortgage purchases was primarily due to the availability of

mortgages oÅered for sale in the secondary market.

Mortgage loan repayments during the Ñrst quarter of 1998 totaled $17 billion, compared with

$7 billion in the Ñrst quarter of 1997. The increase in loan repayments was primarily due to an

C-6
increased level of reÑnance activity. Sales from portfolio were insigniÑcant for the Ñrst three months

of 1998 and 1997.

As of March 31, 1998, the net mortgage portfolio totaled $327 billion with a yield (before

deducting the allowance for losses) of 7.50 percent, compared with $316 billion at 7.60 percent at

December 31, 1997, and $291 billion at 7.68 percent at March 31, 1997. The decrease in yield was

primarily due to increased prepayments of higher coupon mortgages and a decrease in conventional

mortgage purchase yields as interest rates declined. The portfolio growth during the Ñrst quarter of

1998 was generated by the purchase of a combination of whole loans, MBS and REMICs. For the

remainder of 1998, the Corporation expects that a high level of Ñxed-rate mortgage originations will

lead to attractive portfolio investment opportunities and growth in the net mortgage portfolio.

At March 31, 1998, the Corporation had mandatory delivery commitments and lender option

commitments outstanding to purchase $12.6 billion and $1.6 billion of mortgage loans, respectively,

compared with $3.6 billion and $1.6 billion, respectively, of such commitments outstanding at

December 31, 1997.

Financing and Other Activities

During the Ñrst three months of 1998, the Corporation issued $218 billion of debt at an average

cost of 5.62 percent and redeemed $207 billion at an average cost of 5.75 percent. Debt issued in the

Ñrst three months of 1997 totaled $183 billion at an average cost of 5.48 percent, and debt redeemed

was $178 billion at an average cost of 5.45 percent. The average cost of debt outstanding at March 31,

1998, December 31, 1997, and March 31, 1997 was 6.38 percent, 6.46 percent and 6.50 percent,

respectively.

The following table presents the amount of callable debt and the notional amount of callable

swaps issued and outstanding at March 31, 1998 and March 31, 1997.

Three Months

Ended

March 31,

(Dollars in billions) 1998 1997

Issued during the period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 19 $ 7

Percentage of total long-term debt issued(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54% 55%

Outstanding at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $140$130

Percentage of total long-term debt outstanding(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46% 48%

(1) Includes the notional amount of callable swaps, and excludes long-term debt with a repricing

frequency of one year or less.

The following table summarizes the Corporation's interest rate swap activity, the notional

amount of, and weighted-average interest rates to be received and paid on, interest rate swaps

outstanding for the quarter ended March 31, 1998 together with the expected maturities and

weighted-average interest rates to be received and paid on swaps outstanding at March 31, 1998.

C-7
Interest Rate Swap Activity and Maturity Data

Generic-pay Ñxed/

receive variable(1)

Pay Receive Basis

Notional(2) Rate(3) Rate(3) Swaps Other(4) Total

(Dollars in millions)

Balance at December 31, 1997 ÏÏÏÏÏÏÏÏ $96,713 6.77% 5.82% $22,383 $29,653 $148,749

Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 3,585 7,436 11,021

Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,993 6.74 5.85 4,3705,351 16,714

Balance at March 31, 1998 ÏÏÏÏÏÏÏÏÏÏÏ $89,7206.77% 5.73% $21,598 $31,738 $143,056

Balance at March 31, 1997 ÏÏÏÏÏÏÏÏÏÏÏ $99,085 6.75% 5.59% $37,897 $21,176 $158,158

Future Maturities(5)

1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,780 5.30% 5.75% $11,007 $ 9,234 $ 27,021

1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,575 6.65 5.35 7,901 8,810 22,286

2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,817 6.08 5.78 1,300 5,000 10,117

2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,600 6.65 5.68 Ì 2,650 10,250

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,675 6.30 5.74 79 725 5,479

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,273 7.04 5.76 1,311 5,319 67,903

$89,7206.77% 5.73% $21,598 $31,738 $143,056

(1) Included in the notional amounts are callable swaps of $22 billion, $23 billion and $27 billion

with weighted-average pay rates of 6.60 percent, 6.58 percent and 6.68 percent and weightedaverage receive rates of 5.82 percent, 5.89 percent and 5.61 percent, as of March 31, 1998,

December 31, 1997 and March 31, 1997, respectively.

(2) The notional value indicates only the amount on which swap payments are being calculated

and does not represent the amount at risk of loss.

(3) The weighted-average interest rate receivable and payable is as of the date indicated. Where

the pay rate or receive rate is variable, the rate may change as prevailing interest rates

change.

(4) Amounts principally consist of generic-pay variable/receive Ñxed swaps.

(5) Based on the swap's stated maturity. Assumes that variable interest rates remain constant at

March 31, 1998 levels.

The contract amounts of other oÅ-balance-sheet Ñnancial instruments, which included futures

contracts and derivative instruments that simulate the short sale of Treasury securities to provide a

hedge against interest rate Öuctuations, credit enhancements and other guarantees, were $13.1 billion

at March 31, 1998 and $11.5 billion at December 31, 1997.

The exposure to credit loss for interest rate swaps and other oÅ-balance-sheet Ñnancial instruments was estimated by calculating the cost, on a present value basis, to replace at current market

rates all those oÅ-balance-sheet Ñnancial instruments outstanding for which the Corporation was in a

gain position. The Corporation's net exposure at March 31, 1998 was $42 million, compared with

$26 million at December 31, 1997. The exposure to credit loss can be expected to Öuctuate

signiÑcantly due to changes in interest rates.

Capital Resources

The Corporation's stockholders' equity at March 31, 1998 was $14.1 billion, compared with

$13.8 billion at December 31, 1997, and $13.2 billion at March 31, 1997. Pursuant, in part, to the

capital restructuring program described in the Information Statement under ""Management's Discussion and Analysis of Financial Condition and Results of OperationsÌBalance Sheet AnalyC-8
sisÌLiquidity and Capital Resources,'' the Corporation repurchased 6.1 million common shares at a

weighted-average cost of $62.32 per common share during the Ñrst quarter of 1998 and issued

3.2 million common shares for employee and other stock compensation plans. As of March 31, 1998,

there were approximately 1,034 million common shares outstanding.

On April 21, 1998, the Board of Directors approved a dividend for the quarter ended March 31,

1998 of $0.24 per common share, and dividends of $0.80125 per Series A preferred share, $0.81250 per

Series B preferred share and $0.80625 per Series C preferred share for the period from and including

March 31, 1998 to but excluding June 30, 1998.

As discussed in the Information Statement under ""Management's Discussion and Analysis of

Financial Condition and Results of OperationsÌBalance Sheet AnalysisÌRegulatory Capital Requirements,'' the Corporation is subject to capital standards. The Corporation met the applicable

capital standards as of March 31, 1998, and management expects that growth in retained earnings will

ensure continued compliance with the applicable standards.

Mortgage-Backed Securities

The Corporation issued $58 billion of MBS during the Ñrst three months of 1998, compared with

$31 billion in the Ñrst three months of 1997. The increase in MBS issued during the Ñrst quarter of

1998, compared with the Ñrst quarter of 1997, was primarily due to an increase in mortgage

origination and reÑnance activity in a lower interest rate environment. REMIC issuances decreased to

$16 billion in the Ñrst quarter of 1998 from $18 billion in the Ñrst quarter of 1997.

The following table summarizes MBS activity for the three months ended March 31, 1998 and

1997.

Summary of MBS Activity

(Dollars in millions)

Issued Outstanding(1)

Three Months Lender Originated(1)

Ended Lender Fannie Mae Fannie Mae Lender Fannie Mae

March 31, Risk Risk Originated Total Risk(2) Risk Total(3)

1998 ÏÏÏÏÏÏÏÏÏÏÏ $13,202 $44,771 $286 $58,259 $103,343 $627,489 $730,832

1997 ÏÏÏÏÏÏÏÏÏÏÏ 3,694 26,231 956 30,881 72,155 591,513 663,668

(1) This table classiÑes lender originated MBS issued and MBS outstanding based on primary

default risk category; however, Fannie Mae bears the ultimate risk of default on all MBS.

MBS outstanding includes MBS that have been pooled to back Megas, SMBS, or REMICs.

(2) Included in lender risk are $67 billion and $34 billion at March 31, 1998 and 1997,

respectively, on which the lender or a third party agreed to bear default risk limited to a

certain portion or percentage of the loans delivered and, in some cases, the lender has pledged

collateral to secure that obligation.

(3) Included are $138 billion and $110 billion at March 31, 1998 and 1997, respectively, of

Fannie Mae MBS held in portfolio.

C-9
INDEPENDENT ACCOUNTANTS' REVIEW REPORT

To the Board of Directors and Stockholders of Fannie Mae:

We have reviewed the accompanying condensed balance sheet of Fannie Mae as of March 31,

1998 and the related condensed statements of income, changes in stockholders' equity, and cash Öows

for the three-months ended March 31, 1998 and 1997. These condensed Ñnancial statements are the

responsibility of Fannie Mae's management.

We conducted our review in accordance with standards established by the American Institute of

CertiÑed Public Accountants. A review of interim Ñnancial information consists principally of

applying analytical procedures to Ñnancial data and making inquiries of persons responsible for

Ñnancial and accounting matters. It is substantially less in scope than an audit conducted in

accordance with generally accepted auditing standards, the objective of which is the expression of an

opinion regarding the Ñnancial statements taken as a whole. Accordingly, we do not express such an

opinion.

Based on our review, we are not aware of any material modiÑcations that should be made to the

condensed Ñnancial statements referred to above for them to be in conformity with generally accepted

accounting principles.

We have previously audited, in accordance with generally accepted auditing standards, the

balance sheet of Fannie Mae as of December 31, 1997 (presented herein in condensed form) and the

related statements of income, changes in stockholders' equity and cash Öows for the year then ended

(not presented herein); and in our report dated January 14, 1998, we expressed an unqualiÑed opinion

on those Ñnancial statements. In our opinion, the information set forth in the accompanying

condensed balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation

to the balance sheet from which it has been derived.

KPMG PEAT MARWICK LLP

Washington, D.C.

April 8, 1998

C-10
FANNIE MAE

INTERIM FINANCIAL STATEMENTS

CONDENSED STATEMENTS OF INCOME

(Unaudited)

Three Months Ended

March 31,

1998 1997

(Dollars in millions,

except

per share amounts)

Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $7,025 $6,329

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,989 5,379

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,036 950

Guaranty fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 321 313

Miscellaneous income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56 30

Credit-related expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (77) (106)

Administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (170) (151)

Income before federal income taxes and extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,166 1,036

Provision for federal income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (334) (302)

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 832 734

Extraordinary lossÌearly extinguishment of debt

(net of tax eÅect) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8) Ì

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 824 $ 734

Preferred dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16) (16)

Net income available to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 808 $ 718

Basic earnings per common share:

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .79 $ .68

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.01) Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .78 $ .68

Diluted earnings per common share:

Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .78 $ .67

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.01) Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .77 $ .67

CONDENSED BALANCE SHEETS

(Unaudited)

March 31, December 31,

1998 1997

(Dollars in millions)

Assets

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $326,909 $316,316

InvestmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67,209 64,596

Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,875 10,761

Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $403,993 $391,673

Liabilities

Debentures, notes, and bonds, net

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $168,919 $175,400

Due after one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 212,174 194,374

Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,829 8,106

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 389,922 377,880

Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,071 13,793

Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $403,993 $391,673

See Notes to Interim Financial Statements

C-11
FANNIE MAE

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

Number of Accumulated

Common Additional Other Total

Shares Preferred Common Paid-in Retained Comprehensive Treasury Stockholders'

Outstanding Stock Stock Capital Earnings Income Stock Equity

(Dollars and shares in millions)

Balance, December 31, 1996ÏÏ 1,061 $1,000 $593 $1,451 $11,215 $(1) $(1,485) $12,773

Comprehensive income:

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 734 Ì Ì 734

Other comprehensive income,

net of taxÌUnrealized losses

on securities, netÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì (3) Ì (3)

Total comprehensive income ÏÏÏÏÏ 731

Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (239) Ì Ì (239)

Shares repurchased ÏÏÏÏÏÏÏÏÏÏÏÏÏ (5) Ì Ì Ì Ì Ì (200) (200)

Treasury stock issued for stock

options and beneÑt plans ÏÏÏÏÏÏ 4 Ì Ì 35 Ì Ì 78 113

Balance, March 31, 1997 ÏÏÏÏÏ 1,060 $1,000 $593 $1,486 $11,710 $(4) $(1,607) $13,178

Balance, December 31, 1997ÏÏ 1,037 $1,000 $593 $1,495 $13,326 $(1) $(2,620) $13,793

Comprehensive income:

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 824 Ì Ì 824

Other comprehensive income,

net of taxÌUnrealized losses

on securities, netÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 2 Ì 2

Total comprehensive income ÏÏÏÏÏ 826

Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (265) Ì Ì (265)

Shares repurchased ÏÏÏÏÏÏÏÏÏÏÏÏÏ (6) Ì Ì Ì Ì Ì (377) (377)

Treasury shares issued for stock

option and beneÑt plans ÏÏÏÏÏÏÏ 3 Ì Ì 10Ì Ì 84 94

Balance, March 31, 1998 ÏÏÏÏÏ 1,034 $1,000 $593 $1,505 $13,885 $ 1 $(2,913) $14,071

C-12
FANNIE MAE

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months

Ended March 31,

1998 1997

(Dollars in millions)

Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,703 $ 2,131

Cash Öows from investing activities:

Purchases of mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (28,603) (13,079)

Proceeds from sales of mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 396 97

Mortgage principal repayments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,844 8,054

Net increase in investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,613) (511)

Net cash used by investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,976) (5,439)

Cash Öows from Ñnancing activities:

Cash proceeds from issuance of debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 216,462 178,980

Cash payments to retire debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (206,479) (175,182)

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (562) (354)

Net cash provided by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,421 3,444

Net (decrease) increase in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,852) 136

Cash and cash equivalents at beginning of periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,205 850

Cash and cash equivalents at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 353 $ 986

NOTES TO INTERIM FINANCIAL STATEMENTS

(Unaudited)

Basis of Presentation

The accompanying unaudited condensed Ñnancial statements have been prepared in accordance

with generally accepted accounting principles for interim Ñnancial information. Accordingly, they do

not include all of the information and footnotes required by generally accepted accounting principles

for complete Ñnancial statements. In the opinion of management, all adjustments (consisting of

normal recurring accruals) considered necessary for a fair presentation have been included. Certain

amounts in 1997 have been reclassiÑed to conform with the current presentation. Operating results

for the three months ended March 31, 1998 are not necessarily indicative of the results that may be

expected for the year ending December 31, 1998. The unaudited interim Ñnancial statements should

be read in conjunction with the audited Ñnancial statements and notes to Ñnancial statements that are

presented in the Information Statement dated March 31, 1998.

New Accounting Standard

Financial Accounting Standard No. 130, Reporting Comprehensive Income (""FAS 130'') became

eÅective in the Ñrst quarter of 1998. FAS 130 requires reporting of comprehensive income by its

components and in total in the Ñnancial statements. ""Comprehensive income'' is deÑned as the

change in equity of a business enterprise during a period from transactions and other events and

circumstances from nonowner sources. It includes all changes in equity during a period except those

resulting from investments by owners and distributions to owners. ""Other comprehensive income''

refers to revenues, expenses, gains, and losses that under generally accepted accounting policies are

C-13
included in comprehensive income but excluded from net income (e.g., unrealized gains and losses on

securities classiÑed as available-for-sale).

Line of Business Reporting

The following table sets forth the Corporation's Ñnancial information by line of business for the

three months ended March 31, 1998 and 1997. SigniÑcant changes from period to period were due to

the same factors discussed under ""Results of Operations.''

1998 1997

Portfolio Credit Portfolio Credit

Three Months Ended March 31, Investment Guaranty Total Investment Guaranty Total

(Dollars in millions)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 894 $ 142 $1,036 $ 848 $ 102 $ 950

Guaranty fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (197) 518 321 (189) 502 313

Miscellaneous, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 4056 8 22 30

Credit-related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (77) (77) Ì (106) (106)

Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (37) (133) (170) (36) (115) (151)

Federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (186) (148) (334) (177) (125) (302)

Extraordinary itemÌearly extinguishment of debtÏÏÏÏÏÏÏÏÏ (8) Ì (8) Ì Ì Ì

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 482 $ 342 $ 824 $ 454 $ 280$ 734

The Portfolio Investment business represented $389 billion, or 96 percent of total assets, at

March 31, 1998 and $346 billion, or 97 percent of total assets, at March 31, 1997.

Commitments and Contingencies

The Corporation had outstanding commitments to purchase mortgages and to issue MBS as

shown below:

March 31, 1998

(Dollars in billions)

Commitments to purchase mortgages:

Mandatory delivery ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12.6

Lender option(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.6

Average net yield on mandatory delivery ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.77%

Master commitments:

Mandatory delivery(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $39.6

Lender option ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56.9

(1) Excludes commitments attached to master commitments, which are included in the total for

master commitments.

(2) Under a mandatory master commitment, a lender must either deliver under an MBS contract

at a speciÑed guaranty fee or enter into a mandatory portfolio commitment with the yield

established upon executing the portfolio commitment.

The Corporation also guarantees timely payment of principal and interest on outstanding MBS

and provides credit enhancements or other guarantees as summarized below:

March 31, 1998

(Dollars in billions)

MBS outstanding(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $731

Amount for which the Corporation has primary foreclosure loss risk(2)ÏÏÏÏÏÏÏ 627

Credit enhancements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.1

Other guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.9

(1) Includes $138 billion of MBS held in portfolio.

(2) The Corporation, however, assumes the ultimate risk of loss on all MBS.

C-14
COMPUTATION OF EARNINGS PER COMMON SHARE

(Unaudited)

Three Months

Ended

March 31,

1998 1997

(In millions,

except

per share data)

Numerator:

Net income before extraordinary loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 832 $ 734

Extraordinary loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8) Ì

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16) (16)

Basic and diluted earnings per common share-income available to common

stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 808 $ 718

Denominator:

Basic earnings per common share-weighted-average common shares ÏÏÏÏÏÏÏÏÏÏÏÏ 1,037 1,062

Dilutive potential common shares(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 7

Diluted earnings per common share-adjusted weighted average common shares ÏÏ 1,045 1,069

Basic earnings per common share:

Earnings before extraordinary itemÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .79 $ .68

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .78 .68

Diluted earnings per common share:

Earnings before extraordinary itemÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .78 $ .67

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .77 .67

(1) Dilutive potential common shares consist primarily of the dilutive eÅect from employee stock options

and other stock compensation plans.

MANAGEMENT

At a Special Meeting of the Board of Directors on April 14, 1998, the Board of Directors

designated Franklin D. Raines as Chairman of the Board and Chief Executive OÇcer eÅective

January 1, 1999, subject to his election by the stockholders as a director at the Corporation's annual

meeting of stockholders on May 21, 1998, and nominated Kenneth M. Duberstein for election to its

Board of Directors. They have been nominated to Ñll the seats that will be vacated by Antonia Shusta

and Richard D. Parsons when Ms. Shusta's and Mr. Parsons' respective terms expire at the annual

meeting of stockholders. From May 21, 1998 to December 31, 1998, Mr. Raines will serve as

Chairman of the Board and Chief Executive OÇcerÌDesignate. Mr. Johnson will continue to serve

as Chairman of the Board and Chief Executive OÇcer through December 31, 1998, subject to his

election by the stockholders as a director at the annual meeting. Mr. Johnson will continue as

Chairman of the Executive Committee through December 31, 1999.

Mr. Raines, 49, has been Director of the OÇce of Management and Budget since September 1996

and was Vice-Chairman and a director of the Corporation from September 1991 to August 1996.

Mr. Duberstein, 54, has been Chairman and Chief Executive OÇcer of The Duberstein Group, an

independent strategic planning and consulting company, since July 1989. He served as Chief of StaÅ

to the President of the United States from 1988 to 1989. Mr. Duberstein also serves as a director of

The Boeing Company, Cinergy Corporation, and USF&G Corporation. He is serving his third term as

a member of the Board of Governors of the American Stock Exchange.

In April 1998, the Corporation announced that eleven directors currently on the Board of

Directors and whose terms expire at the annual meeting of stockholders on May 21, 1998 have been

nominated for reelection.

C-15
®THIS PAGE INTENTIONALLY LEFT BLANK©
APPENDIX D

Supplement dated August 13, 1998 to

Information Statement dated March 31, 1998

This Supplement describes the Ñnancial condition of the Federal National Mortgage Association (""Fannie Mae'' or the ""Corporation'') as of June 30, 1998 and contains unaudited Ñnancial

statements with respect to the Corporation for the quarter and six months ended June 30, 1998.

This Supplement should be read in conjunction with the Corporation's Information Statement

dated March 31, 1998 (the ""Information Statement'') and the Supplement dated May 15, 1998

thereto (the ""May 15 Supplement''), which are hereby incorporated by reference. The Information Statement describes the business and operations of the Corporation and contains Ñnancial

data as of December 31, 1997. The May 15 Supplement describes the Ñnancial condition of the

Corporation as of March 31, 1998 and contains unaudited Ñnancial statements with respect to

the Corporation for the quarter ended March 31, 1998. Fannie Mae also periodically makes

available statistical information on its mortgage purchase and mortgage-backed securities

volumes as well as other relevant information about Fannie Mae. Copies of the Corporation's

current Information Statement, any supplements thereto and other available information can be

obtained without charge from the OÇce of Investor Relations, Fannie Mae, 3900 Wisconsin

Avenue, N.W., Washington, D.C. 20016 (telephone: 202/752-7115).

In connection with its securities oÅerings, the Corporation may incorporate this Supplement

by reference in one or more other documents describing the securities oÅered thereby, the selling

arrangements therefor and other relevant information. Such other documents may be called an

OÅering Circular, a Prospectus or otherwise. This Supplement does not oÅer any securities for

sale.

Fannie Mae is a federally chartered corporation. Its principal oÇce is located at 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202/752-7000). Its Internal Revenue Service

employer identiÑcation number is 52-0883107.

The Corporation's securities are not required to be registered under the Securities Act of

1933. At the close of business on July 31, 1998, approximately 1,026 million shares of the

Corporation's common stock (without par value) were outstanding.

The delivery of this Supplement at any time shall not under any circumstances

create an implication that there has been no change in the aÅairs of the Corporation

since the date hereof or that the information contained herein is correct as of any time

subsequent to its date.

D-1
TABLE OF CONTENTS

Caption Page

Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3

Management's Discussion and Analysis of Financial Condition and Results of Operations for

the Three-Month and Six-Month Periods Ended June 30, 1998ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4

Matters Submitted to Stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13

Index to Interim Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13

ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19

D-2
SELECTED FINANCIAL DATA

The following selected Ñnancial data for the three- and six-month periods ended June 30, 1998

and 1997 are unaudited and include, in the opinion of management, all adjustments (consisting of

normal recurring accruals) necessary for a fair presentation. Certain amounts in 1997 have been

reclassiÑed to conform with the current presentation. Operating results for the periods ended June 30,

1998 are not necessarily indicative of the results expected for the entire year.

(Dollars in millions, except per common share amounts)

Three Months Six Months

Ended Ended

June 30, June 30,

1998 1997 1998 1997 Income Statement Data:

Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 7,351 $ 6,514 $14,376 $12,843

Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,320 5,544 12,309 10,923

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,031 970 2,067 1,920

Guaranty feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 323 317 644 630

Fee and other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79 32 135 62

Credit-related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (69) (101) (146) (207)

Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (174) (158) (344) (309)

Income before federal income taxes and extraordinary item 1,190 1,060 2,356 2,096

Provision for federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (339) (308) (673) (610)

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 851 752 1,683 1,486

Extraordinary gain/(loss), net of tax eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3) 1 (11) 1

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 848 $ 753 $ 1,672 $ 1,487

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16) (16) (32) (32)

Net income available to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏ $ 832 $ 737 $ 1,640$ 1,455

Basic earnings per common share(1): Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .81 $ .70$ 1.60$ 1.38

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (.01) Ì

Net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .81 $ .70$ 1.59 $ 1.38

Diluted earnings per common share(1): Earnings before extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .80$ .69 $ 1.59 $ 1.37

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (.01) Ì

Net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .80$ .69 $ 1.58 $ 1.37

Balance Sheet Data at June 30: 1998 1997

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $349,282 $296,799

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,643 59,282

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 429,448 365,997

Borrowings:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 174,942 167,682

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 231,220177,780

Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 415,263 352,733

Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,185 13,264

Capital(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,973 14,019

Three Months Six Months

Ended Ended

June 30, June 30,

Other Data: 1998 1997 1998 1997

Average net interest margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.07% 1.17% 1.10% 1.17%

Return on average common equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25.6 24.4 25.3 24.3

Dividend payout ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29.7 29.9 30.3 30.5

Average eÅective guaranty fee rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .215 .227 .217 .227

Credit loss ratio(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .030 .047 .032 .046

Ratio of earnings to combined Ñxed charges and preferred

stock dividends(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.19:1 1.19:1 1.19:1 1.19:1

Mortgage purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 44,007 $ 14,425 $ 72,379 $27,421

MBS issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83,88030,446 142,139 61,327

MBS outstanding at period end(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 761,359 673,931

Weighted-average diluted common shares outstanding, in

millions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,037 1,061 1,041 1,064

(1) Earnings per common share amounts for 1997 have been restated to comply with Statement of Financial Accounting

Standards No. 128, Earnings per Share.

(2) Stockholders' equity plus general allowance for losses.

(3) Charge-oÅs and foreclosure expense as a percentage of average net portfolio and net MBS outstanding.

(4) ""Earnings'' consists of (i) income before federal income taxes and extraordinary item and (ii) Ñxed charges. ""Fixed

charges'' represents interest expense.

(5) Includes $156 billion and $116 billion of MBS held in portfolio at June 30, 1998 and 1997, respectively.

D-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND

SIX-MONTH PERIODS ENDED JUNE 30, 1998

Results of Operations

In the second quarter of 1998, Fannie Mae again reported record earnings as net income increased

13 percent, or $95 million, to $848 million, compared with the results for the second quarter of 1997.

For the Ñrst six months of 1998, net income increased $185 million, or 12 percent, to $1.672 billion

compared with $1.487 billion for the Ñrst half of 1997. The growth in net income for the three- and

six-month periods ended June 30, 1998 was mainly attributable to increases in net interest income, fee

and other income, and lower credit-related expenses.

Net interest income in the second quarter of 1998 increased 6 percent compared with the second

quarter of 1997 as a result of 16 percent growth in the average investment portfolio, which was partly

oÅset by a ten basis point decrease in the average net interest margin. Net interest income in the Ñrst

six months of 1998 increased 8 percent compared with the Ñrst six months of 1997. This increase was

the result of a 14 percent growth in the average investment portfolio, which was partly oÅset by a

7 basis point decrease in the average net interest margin. The decline in the net interest margin

stemmed, in part, from an increase in the reÑnancing of high-coupon mortgages, growth in lower

spread liquid investments, a rise in tax advantaged investments, and an increase in common share

repurchases. Management expects that continued portfolio growth will have a positive impact on net

interest income and that the net interest margin will continue to decline somewhat over the remainder

of the year.

The following table presents an analysis of net interest income and average balances for the threeand six-month periods ended June 30, 1998 and 1997.

D-4
Net Interest Income and Average Balances

(Dollars in millions)

Three Months Six Months

Ended Ended

June 30, June 30,

1998 1997 1998 1997

Interest income:

Mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,222 $ 5,621 $ 12,224 $ 11,105

Investments and cash equivalents ÏÏÏÏÏÏÏ 1,129 893 2,152 1,738

Total interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,351 6,514 14,376 12,843

Interest expense(1):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,131 908 2,096 1,747

Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,189 4,636 10,213 9,176

Total interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,320 5,544 12,309 10,923

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,031 970 2,067 1,920

Tax equivalent adjustment(2) ÏÏÏÏÏÏÏÏÏÏÏÏ 76 72 148 138

Net interest income tax equivalent basis ÏÏÏ $ 1,107 $ 1,042 $ 2,215 $ 2,058

Average balances:

Interest-earning assets(3):

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $336,064 $294,953 $327,976 $291,425

Investments and cash equivalents ÏÏÏÏÏÏÏ 78,36061,978 74,424 61,031

Total interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏÏ $414,424 $356,931 $402,400 $352,456

Interest-bearing liabilities(1):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 83,455 $ 68,389 $ 77,619 $ 66,467

Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 313,083 272,522 307,082 269,990

Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏ 396,538 340,911 384,701 336,457

Interest-free funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,886 16,020 17,699 15,999

Total interest-bearing liabilities and

interest-free funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $414,424 $356,931 $402,400 $352,456

Average interest rates(2):

Interest-earning assets:

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.45% 7.68% 7.50% 7.68%

Investments and cash equivalents. ÏÏÏÏÏÏÏ 5.805.82 5.82 5.75

Total interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏÏ 7.14 7.36 7.19 7.35

Interest-bearing liabilities(1):

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.36 5.29 5.35 5.23

Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.63 6.806.66 6.80

Total interest-bearing liabilities ÏÏÏÏÏÏÏÏÏ 6.37 6.506.39 6.49

Investment spread ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .77 .86 .80.86

Interest-free return(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .30.31 .30.31

Net interest margin(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.07% 1.17% 1.10% 1.17%

(1) ClassiÑcation of interest expense and interest-bearing liabilities as short-term or long-term is

based on eÅective maturity or repricing date, taking into consideration the eÅect of interest

rate swaps.

(2) ReÖects pro forma adjustments to permit comparison of yields on tax-advantaged and

taxable assets.

(3) Includes average balance of nonperforming loans of $2.6 billion for the three- and six-month

periods ended June 30, 1998 and $2.2 billion for the three-month period ended June 30, 1997

and $2.3 billion for the six-month period ended June 30, 1997.

(4) Consists primarily of the return on that portion of the investment portfolio funded by equity

and non-interest-bearing liabilities.

(5) Net interest income, on a tax equivalent basis, as a percentage of the average investment

portfolio.

D-5
The following rate/volume analysis shows the relative contribution of asset and debt growth and

interest rate changes to changes in net interest income for the three- and six-month periods ended

June 30, 1998 and 1997.

Rate/Volume Analysis

(Dollars in millions)

Second Quarter 1998 vs. First Six Months 1998 vs.

Second Quarter 1997 First Six Months 1997

Attributable to Attributable to

Changes in(1) Changes in(1) Increase Increase

(Decrease) Volume Rate (Decrease) Volume Rate

Interest income:

Mortgage portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏ $601 $ 765 $(164) $1,119 $1,367 $(248)

Investments and cash equivalents 236 236 Ì 414 387 27

Total interest income ÏÏÏÏÏÏÏÏÏ 837 1,001 (164) 1,533 1,754 (221)

Interest expense:

Short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 223 204 19 349 300 49

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 553 675 (122) 1,037 1,237 (200)

Total interest expense ÏÏÏÏÏÏÏÏ 776 879 (103) 1,386 1,537 (151)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏ $ 61 $ 122 $ (61) $ 147 $ 217 $ (70)

(1) Combined rate/volume variances, a third element of the calculation, are allocated to the rate

and volume variances based on their relative size.

Guaranty fee income increased by $6 million, or 2 percent, to $323 million, compared with

$317 million in the second quarter of 1997. This change resulted from an 8 percent increase in average

net Mortgage-Backed Securities (""MBS'') outstanding, which was partially oÅset by a 1 basis point

decrease in the average eÅective guaranty fee rate when compared with the second quarter of 1997.

For the Ñrst half of 1998, guaranty fee income increased by $14 million to $644 million compared with

the Ñrst half of 1997. The increase was the result of an increase in average net MBS outstanding of

7 percent, partially oÅset by a 1 basis point decrease in the average eÅective guaranty fee rate. The

decrease in the average eÅective guaranty fee rate was due to repayments of loans backing MBS with

high fees, an increase in MBS purchased for portfolio for which the guaranty fees are included in net

interest income, and an increase in MBS issues incorporating loss sharing arrangements with lower fee

rates.

Fee and other income increased 147 percent to $79 million for the second quarter of 1998

compared with $32 million in the second quarter of 1997. For the Ñrst half of 1998, fee and other

income increased 118 percent to $135 million versus $62 million in the Ñrst half of 1997. The increase

in both periods was largely the result of increases in multifamily fees, structured transaction fees and

technology fees. Management expects fee and other income to be strong over the remainder of 1998,

but at levels somewhat lower than the second quarter of 1998.

Administrative expenses for the second quarter of 1998 were $174 million, compared with

$158 million during the same period in 1997. For the Ñrst half of 1998, administrative expenses were

$344 million, compared with $309 million for the same period in 1997. The increase was primarily due

to higher compensation costs, including costs associated with year 2000 conversion eÅorts. The ratio

of administrative expenses to the average mortgage portfolio plus average MBS outstanding was

.074 percent and .075 percent for the three- and six-month periods ended June 30, 1998, respectively,

compared with .075 percent and .073 percent for the comparable periods in 1997. The ratio of

administrative expenses to revenues (net interest income, guaranty fees and fee and other income)

was 12.2 percent for the second quarter of 1998, compared with 12.0 percent for the second quarter of

1997, and was 12.1 percent for the Ñrst half of 1998, compared with 11.8 percent for the Ñrst half of

1997.

D-6
The eÅective federal income tax rate was 29 percent for the three and six months ended June 30,

1998, and for the three and six months ended June 30, 1997.

In the second quarter of 1998, the Corporation had an extraordinary net loss of $4 million

($3 million after tax) from the repurchase or call of debt compared with a gain of $2 million

($1 million after tax) in the second quarter of 1997. An extraordinary net loss of $16 million

($11 million after tax) was reported in the Ñrst half of 1998 from the repurchase or call of debt

compared with a gain of $2 million ($1 million after tax) in the Ñrst half of 1997.

Credit Data

The following table shows the Corporation's serious delinquencies for conventional loans in

portfolio and underlying MBS at June 30, 1998 and 1997, and conventional properties acquired and

total net charge-oÅs for the three- and six-month periods ended June 30, 1998 and 1997.

Number of Net Charge-oÅs

Serious Properties Acquired (Dollars in millions)

Delinquency Three Months Six Months Three Months Six Months Rate(1) Ended Ended Ended Ended

June 30, June 30, June 30, June 30, June 30,

1998 1997 1998 1997 1998 1997 1998 1997 1998 1997

Single-family. ÏÏÏÏÏÏ .57% .58% 5,365 5,717 11,023 11,148 $(11) $34 $(18) $64

MultifamilyÏÏÏÏÏÏÏÏ .36 .47 1 105 18 1 5 4 6

Total. ÏÏÏÏÏÏÏÏÏÏÏÏÏ $(10) $39 $(14) $70

(1) Single-family serious delinquencies consist of those loans in the portfolio or underlying MBS

for which the Corporation has the primary risk of loss that are 90 or more days delinquent or

in foreclosure. Multifamily serious delinquencies are those loans in the portfolio or

underlying MBS that are 60 days or more delinquent for which the Corporation has primary

risk of loss. The single-family and multifamily percentages are based on the number of such

single-family loans and dollar amount of such multifamily loans, respectively, in the portfolio

and underlying MBS.

Total credit-related losses, which include loan charge-oÅs, net of recoveries, and foreclosed

property expenses, were $69 million for the three months ended June 30, 1998, compared with

$100 million for the same period in 1997. Total credit-related losses for the six months ended June 30,

1998 and 1997 were $147 million and $197 million, respectively. The change in credit-related losses

was the result of a decrease in charge-oÅs slightly oÅset by an increase in foreclosure expenses. The

decrease in charge-oÅs was due to net recoveries on foreclosed properties in the second quarter and

Ñrst half of 1998 versus net charge-oÅs in the second quarter and Ñrst half of 1997. In addition to the

Corporation's loss mitigation eÅorts, a strong economy, a strong housing market, particularly in

California, and deeper mortgage insurance requirements on higher loan-to-value ratio loans have

contributed to reducing credit-related losses.

The inventory of single-family properties was 9,408 as of June 30, 1998, compared with 9,514 as

of June 30, 1997. The inventory of multifamily properties was 13 as of June 30, 1998, compared with

19 as of June 30, 1997.

Total credit-related expenses, which include foreclosed property expenses and the provision for

losses, were $69 million in the second quarter of 1998, compared with $101 million in the second

quarter of 1997. Total credit-related expenses for the six months ended June 30, 1998 and 1997 were

$146 million and $207 million, respectively. The decreases were due to a negative $10 million and

negative $15 million loss provision recorded in the second quarter and Ñrst half of 1998, respectively,

compared with a $40 million and $80 million loss provision recorded in the second quarter and Ñrst

half of 1997, respectively.

D-7
The allowance for losses was $802 million at June 30, 1998, compared with $803 million at

December 31, 1997 and $790 million at June 30, 1997. Management anticipates that the provision for

losses will be adjusted periodically in line with its analysis of actual and expected loss experience.

Balance Sheet Analysis

Mortgage Portfolio

The Corporation purchased $44 billion of mortgages at an average yield of 6.73 percent in the

second quarter of 1998, compared with $14 billion of mortgages at an average yield of 7.71 percent in

the second quarter of 1997. During the Ñrst six months of 1998, mortgage purchases were $72 billion

at an average yield of 6.75 percent, compared with $27 billion at an average yield of 7.65 percent for

the Ñrst six months of 1997. The increase in mortgage purchases was due primarily to the increased

availability of mortgages oÅered for sale in the secondary market.

Mortgage loan repayments during the second quarter of 1998 totaled $21 billion, compared with

$8 billion in the second quarter of 1997. During the Ñrst half of 1998, mortgage loan repayments were

$38 billion compared with $16 billion in the Ñrst half of 1997.

As of June 30, 1998, the net mortgage portfolio totaled $349 billion with a yield (before deducting

the allowance for losses) of 7.41 percent, compared with $316 billion at 7.60 percent as of

December 31, 1997 and $297 billion at 7.68 percent as of June 30, 1997. The decrease in yield was due

primarily to increased prepayments of higher coupon mortgages and a decrease in conventional

mortgage purchase yields as interest rates declined. The portfolio growth during the second quarter

and Ñrst half of 1998 was generated by the purchase of a combination of whole loans, MBS and

REMICs. For the remainder of 1998, the Corporation expects that a high level of Ñxed-rate mortgage

originations will lead to attractive portfolio investment opportunities and growth in the net mortgage

portfolio.

At June 30, 1998, the Corporation had mandatory delivery commitments and lender option

commitments outstanding to purchase $14.1 billion and $1.6 billion of mortgage loans, respectively,

compared with $3.6 billion and $1.6 billion, respectively, of such commitments outstanding at

December 31, 1997.

Financing and Other Activities

During the second quarter of 1998, the Corporation issued $218 billion of debt at an average cost

of 5.63 percent and redeemed $193 billion at an average cost of 5.71 percent. Debt issued in the

second quarter of 1997 totaled $229 billion at an average cost of 5.64 percent and redeemed

$219 billion at an average cost of 5.58 percent. During the Ñrst six months of 1998, $437 billion of

debt was issued at an average cost of 5.63 percent and $400 billion was redeemed at an average cost of

5.73 percent. In the Ñrst six months of 1997, the Corporation issued $411 billion of debt at an average

cost of 5.57 percent and redeemed $397 billion at an average cost of 5.52 percent. The average cost of

debt outstanding at June 30, 1998, December 31, 1997 and June 30, 1997 was 6.33 percent,

6.46 percent and 6.50 percent, respectively.

D-8
The following table presents the amount of callable debt and the notional amount of callable

swaps issued and outstanding for the three- and six-month periods ended June 30, 1998 and June 30,

1997.

Three Months Six Months

Ended Ended

June 30, June 30,

(Dollars in billions) 1998 1997 1998 1997

Issued during the periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 23 $ 7 $42 $14

Percentage of total long-term debt issued(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67% 44% 60% 49%

Outstanding at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $149 $131

Percentage of total long-term debt outstanding(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 47% 48%

(1) Includes the notional amount of callable swaps, and excludes long-term debt with a repricing

frequency of one year or less.

The increase in the percentage of callable debt and callable swaps issued relative to long-term debt

issued for the three months ended June 30, 1998, compared with the three months ended June 30,

1997, is due to routine portfolio restructuring and the replacement of callable debt redeemed during

the quarter.

The following table summarizes the Corporation's interest rate swap activity, the notional

amount of, and weighted-average interest rates to be received and paid on, interest rate swaps

outstanding for the quarters ended March 31, 1998 and June 30, 1998, the balance outstanding at

June 30, 1997 and the expected maturities for the interest rate swaps outstanding at June 30, 1998.

D-9
Interest Rate Swap Activity Table

GenericÓpay Ñxed/

receive variable(1)

Pay Receive Basis

(Dollars in millions) Notional(2) Rate(3) Rate(3) Swaps Other(4) Total

Balance at December 31, 1997 $96,713 6.77% 5.82% $22,383 $29,653 $148,749

Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 3,585 7,436 11,021

Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,993 6.74 5.85 4,3705,351 16,714

Balance at March 31, 1998 ÏÏÏ 89,7206.77 5.73 21,598 31,738 143,056

Additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 675 6.04 5.83 4,450 12,653 17,778

Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,424 6.88 5.84 5,455 5,884 16,763

Balance at June 30, 1998ÏÏÏÏÏ $84,971 6.76% 5.70% $20,593 $38,507 $144,071

Balance at June 30, 1997ÏÏÏÏÏ $96,611 6.78% 5.82% $30,882 $25,521 $153,014

Future Maturities(5)

1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,2805.24% 5.66% $ 6,142 $ 5,475 $ 17,897

1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,4506.64 5.33 12,352 14,26032,062

2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,817 6.08 5.73 1,200 7,125 12,142

2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,300 6.62 5.70 Ì 3,893 11,193

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,950 6.28 5.70 79 400 5,429

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,174 7.04 5.74 820 7,354 65,348

$84,971 6.76% 5.70% $20,593 $38,507 $144,071

(1) Included in the notional amounts are callable swaps of $22 billion, $22 billion, and

$26 billion, with weighted-average pay rates of 6.00 percent, 6.60 percent and 6.67 percent,

and weighted-average receive rates of 5.79 percent, 5.82 percent and 5.82 percent at June 30,

1998, March 31, 1998, and June 30, 1997, respectively.

(2) The notional value only indicates the amount on which swap payments are being calculated

and does not represent the amount at risk of loss.

(3) The weighted-average interest rate receivable and payable is as of the date indicated. The

interest rates of the swaps may be Öoating rate, so these rates may change as prevailing

interest rates change.

(4) Amounts principally consist of generic-pay variable/receive Ñxed swaps, caps and swaptions.

(5) Assumes that variable interest rates remain constant at June 30, 1998 levels.

The contract amounts of other oÅ-balance-sheet Ñnancial instruments, which included futures

contracts and derivative instruments that simulate the short sale of Treasury securities to provide a

hedge against interest rate Öuctuations, credit enhancements and other guarantees, were $10.4 billion

at June 30, 1998, compared with $11.5 billion at December 31, 1997.

The exposure to credit loss for interest rate swaps and other oÅ-balance-sheet Ñnancial instruments can be estimated by calculating the cost, on a present value basis, to replace at current market

rates all of those oÅ-balance-sheet Ñnancial instruments outstanding for which the Corporation was in

a net gain position. The Corporation's net exposure at June 30, 1998 was $9 million, compared with

$26 million at December 31, 1997. The exposure to credit loss can be expected to Öuctuate

signiÑcantly due to changes in interest rates.

Capital Resources

The Corporation's stockholders' equity at June 30, 1998 was $14.2 billion, compared with

$13.8 billion at December 31, 1997, and $13.3 billion at June 30, 1997. Pursuant, in part, to the

D-10
capital restructuring program described in the Information Statement under ""Management's Discussion and Analysis of Financial Condition and Results of OperationsÌBalance Sheet AnalysisÌ

Liquidity and Capital Resources,'' the Corporation repurchased 8.6 million common shares at a

weighted-average cost of $60.11 per common share during the second quarter of 1998 and issued

.5 million common shares for employee and other stock compensation plans. At June 30, 1998, yearto-date common stock repurchases totaled 14.7 million shares at a weighted-average cost of $61.02 per

common share and common stock issuances totaled 3.7 million common shares for employee and

other stock compensation plans. As of June 30, 1998, there were 1,026 million common shares

outstanding.

On July 21, 1998, the Board of Directors approved a dividend for the quarter ended June 30, 1998

of $0.24 per common share, and dividends of $0.80125 per Series A preferred share, $0.81250 per

Series B preferred share and $0.80625 per Series C preferred share for the period from and including

June 30, 1998 to, but excluding, September 30, 1998.

As discussed in the Information Statement under ""Management's Discussion and Analysis of

Financial Condition and Results of OperationsÌBalance Sheet AnalysisÌRegulatory Capital Requirements,'' the Corporation is subject to capital standards. The Corporation met the applicable

capital standards as of June 30, 1998, and management expects that growth in retained earnings will

ensure continued compliance with the applicable standards.

Mortgage-Backed Securities

The Corporation issued $84 billion of MBS during the second quarter of 1998, compared with

$30 billion in the second quarter of 1997. MBS issued in the Ñrst half of 1998 totaled $142 billion,

compared with $61 billion in the Ñrst half of 1997. The increase in MBS issued during the Ñrst six

months of 1998 was primarily due to an increase in mortgage origination and reÑnance activity in a

lower interest rate environment. REMIC issuances were $25 billion in the second quarter of 1998 and

$42 billion in the Ñrst six months of 1998, compared with $17 billion and $35 billion, respectively, for

the comparable periods for 1997.

D-11
The following table summarizes MBS activity for the three-month and six-month periods ended

June 30, 1998 and 1997.

Summary of MBS Activity

(Dollars in millions)

Issued Outstanding(1)

Lender Originated(1)

Three Months Lender Fannie Mae Fannie Mae Lender Fannie Mae

Ended June 30, Risk Risk Originated Total Risk(2) Risk Total(3)

1998. ÏÏÏÏÏÏÏÏÏ $21,935 $ 61,945 $ Ì $ 83,880$118,451 $642,908 $761,359

1997. ÏÏÏÏÏÏÏÏÏ 6,983 22,479 984 30,446 76,859 597,072 673,931

Six Months

Ended June 30,

1998. ÏÏÏÏÏÏÏÏÏ $35,137 $106,716 $ 286 $142,139

1997. ÏÏÏÏÏÏÏÏÏ 10,677 48,710 1,940 61,327

(1) This table classiÑes lender originated MBS issued and MBS outstanding based on primary

default risk category; Fannie Mae, however, bears the ultimate risk of default on all MBS.

MBS outstanding includes MBS that have been pooled to back Megas, SMBS or REMICs.

(2) Included in lender risk are $82 billion and $40 billion at June 30, 1998 and 1997, respectively,

on which the lender or a third party agreed to bear default risk limited to a certain portion or

percentage of the loans delivered and, in some cases, the lender has pledged collateral to

secure that obligation.

(3) Included are $156 billion and $116 billion at June 30, 1998 and June 30, 1997, respectively, of

Fannie Mae MBS in portfolio.

New Accounting Standard

In the second quarter of 1998, the Financial Accounting Standards Board issued Financial

Accounting Standards No. 133 (""FAS 133''), Accounting for Derivative Instruments and Hedging

Activities, which becomes eÅective for Fannie Mae on January 1, 2000. FAS 133 requires all

derivatives to be recognized as either assets or liabilities on the balance sheet at fair value. Subject to

certain qualifying conditions, a derivative may be designated as either a hedge of the fair value of a

Ñxed-rate instrument (""fair value hedge'') or as a hedge of the cash Öows of a variable-rate instrument

or anticipated transaction (""cash Öow hedge''). For derivatives qualifying as a fair value hedge, fair

value gains or losses would be reported in earnings along with oÅsetting fair value gains or losses,

attributable to the risk being hedged. For derivatives qualifying as a cash Öow hedge, fair value gains

or losses associated with the risk being hedged would be reported in a separate component of

stockholders' equity and then amortized into earnings in the period(s) in which the hedged item

aÅects income. For a derivative instrument not qualifying as a hedge, fair value gains and losses would

be reported in earnings. Management currently is evaluating the impact that this standard will have

on its internal operations. If the Corporation continues with its current business strategies, this

standard will not have a signiÑcant eÅect on net income, although it may have a material eÅect on the

""other comprehensive income'' component of stockholders' equity.

D-12
MATTERS SUBMITTED TO STOCKHOLDERS

At the 1998 Annual Meeting of Stockholders of Fannie Mae held on May 21, 1998, the following

matters were presented for a vote: (i) election of 13 members to the Board of Directors, each for a

term ending on the date of the next Annual Meeting of Stockholders of the Corporation;

(ii) ratiÑcation of the appointment of KPMG Peat Marwick LLP as auditors of the Corporation for

1998; and (iii) a stockholder proposal to reinstate cumulative voting for directors. The Board of

Directors recommended that stockholders vote against the stockholder proposal for cumulative voting.

Under the stockholder proposal relating to cumulative voting, the Board of Directors would have been

requested to take the necessary steps to provide for cumulative voting in the election of directors,

which would mean that each stockholder would be entitled to as many votes as the number of common

shares the stockholder owns multiplied by the number of directors to be elected, and the stockholder

could cast all such votes for a single candidate or distribute them among several nominees.

Of the 1,034,195,738 shares of common stock outstanding on the record date for the meeting,

899,663,623 shares were present in person or by proxy at the meeting.

The following persons were elected as directors of Fannie Mae by the respective votes indicated

following their names: Stephen B. Ashley (895,751,750 votes for; 3,900,593 votes withheld); Roger E.

Birk (895,471,554 votes for; 4,180,789 votes withheld); Kenneth M. Duberstein (899,286,736 votes

for; 10,365,607 votes withheld); Stephen Friedman (895,717,483 votes for; 3,934,860 votes withheld);

Thomas P. Gerrity (895,623,106 votes for; 4,029,237 votes withheld); Jamie S. Gorelick

(895,614,338 votes for; 4,038,005 votes withheld); James A. Johnson (895,677,998 votes for;

3,974,345 votes withheld); Vincent A. Mai (895,746,669 votes for; 3,905,674 votes withheld); Ann

McLaughlin (895,168,618 votes for; 4,483,725 votes withheld); Joe K. Pickett (889,358,173 votes for;

10,294,170 votes withheld); Franklin D. Raines (895,597,336 votes for; 4,055,007 votes withheld);

Lawrence M. Small (895,693,099 votes for; 3,959,244 votes withheld); Karen Hastie Williams

(895,244,258 votes for; 4,408,085 votes withheld).

Messrs. Raines and Duberstein were the only new directors elected and Ñlled the seats vacated by

Antonia Shusta and Richard D. Parsons when their terms expired at the May 1998 Annual Meeting.

See the May 15 Supplement and the Proxy Statement for the May 1998 Annual Meeting for further

information regarding Messrs. Raines and Duberstein.

As noted under ""Management,'' the President of the United States has the authority to appoint

Ñve directors. The President has not Ñnalized the selection of these directors.

The ratiÑcation of KPMG Peat Marwick LLP as auditors was approved by a vote of 898,157,754

for ratiÑcation and 697,362 against ratiÑcation. The holders of 797,227 shares of common stock

abstained from voting on ratiÑcation.

The stockholder proposal relating to cumulative voting was defeated by a vote of 162,745,879 for

the proposal and 513,201,536 against the proposal. The holders of 127,788,273 shares abstained from

voting on this stockholder proposal and broker non-votes represented 95,916,655 shares of common

stock.

INDEX TO INTERIM FINANCIAL STATEMENTS

Caption Page

Independent Accountants' Review Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14

Condensed Statements of Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15

Condensed Balance Sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15

Condensed Statements of Changes in Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16

Condensed Statements of Cash Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16

Notes to Interim Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17

Computation of Earnings Per Common ShareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19

D-13
INDEPENDENT ACCOUNTANTS' REVIEW REPORT

To the Board of Directors and Stockholders of Fannie Mae:

We have reviewed the accompanying condensed balance sheet of Fannie Mae as of June 30, 1998

and the related condensed statements of income, changes in stockholders' equity, and cash Öows for

the three- and six-month periods ended June 30, 1998 and 1997. These condensed Ñnancial

statements are the responsibility of Fannie Mae's management.

We conducted our review in accordance with standards established by the American Institute of

CertiÑed Public Accountants. A review of interim Ñnancial information consists principally of

applying analytical procedures to Ñnancial data and making inquiries of persons responsible for

Ñnancial and accounting matters. It is substantially less in scope than an audit conducted in

accordance with generally accepted auditing standards, the objective of which is the expression of an

opinion regarding the Ñnancial statements taken as a whole. Accordingly, we do not express such an

opinion.

Based upon our review, we are not aware of any material modiÑcations that should be made to the

condensed Ñnancial statements referred to above for them to be in conformity with generally accepted

accounting principles.

We have previously audited, in accordance with generally accepted auditing standards, the

balance sheet of Fannie Mae as of December 31, 1997 (presented herein in condensed form) and the

related statements of income, changes in stockholders' equity, and cash Öows for the year then ended

(not presented herein); and in our report dated January 14, 1998, we expressed an unqualiÑed opinion

on those Ñnancial statements. In our opinion, the information set forth in the accompanying

condensed balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation

to the balance sheet from which it has been derived.

KPMG PEAT MARWICK LLP

Washington, DC

July 14, 1998

D-14
FANNIE MAE

INTERIM FINANCIAL STATEMENTS

CONDENSED STATEMENTS OF INCOME

(Unaudited)

Three Months Six Months

Ended Ended

June 30, June 30,

1998 1997 1998 1997

(Dollars in millions, except per common share amounts)

Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $7,351 $6,514 $14,376 $12,843

Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,320 5,544 12,309 10,923

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,031 970 2,067 1,920

Guaranty fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 323 317 644 630

Fee and other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79 32 135 62

Credit-related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (69) (101) (146) (207)

Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (174) (158) (344) (309)

Income before federal income taxes and

extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,190 1,060 2,356 2,096

Provision for federal income taxes ÏÏÏÏÏÏÏÏÏ (339) (308) (673) (610)

Income before extraordinary item ÏÏÏÏÏÏÏÏÏÏ 851 752 1,683 1,486

Extraordinary (loss) gainÌearly

extinguishment of debt (net of tax

eÅect) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3) 1 (11) 1

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 848 $ 753 $ 1,672 $ 1,487

Preferred dividendsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16) (16) (32) (32)

Net income available to common

stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 832 $ 737 $ 1,640$ 1,455

Basic earnings per common share:

Earnings before extraordinary item ÏÏÏÏÏÏ $ .81 $ .70$ 1.60$ 1.38

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (.01) Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .81 $ .70$ 1.59 $ 1.38

Diluted earnings per common share:

Earnings before extraordinary item ÏÏÏÏÏÏ $ .80$ .69 $ 1.59 $ 1.37

Extraordinary item ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (.01) Ì

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .80$ .69 $ 1.58 $ 1.37

CONDENSED BALANCE SHEETS

(Unaudited)

June 30, December 31,

1998 1997

(Dollars in millions)

Assets

Mortgage portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $349,282 $316,316

Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,643 64,596

Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,523 10,761

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $429,448 $391,673

Liabilities

Debentures, notes, and bonds, net:

Due within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $174,942 $175,400

Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 231,220194,374

Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,101 8,106

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 415,263 377,880

Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,185 13,793

Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $429,448 $391,673

See Notes to Interim Financial Statements

D-15
FANNIE MAE

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

Three Months Six Months

 Ended Ended

June 30, June 30,

1998 1997 1998 1997

(Dollars in millions)

Balance, beginning of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $14,071 $13,178 $13,793 $12,773

Comprehensive income:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 848 753 1,672 1,487

Other comprehensive income, net of taxÌUnrealized

gains/(losses) on securities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 2 (3)

Total comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 848 753 1,674 1,484

DividendsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (264) (237) (529) (476)

Shares repurchased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (518) (453) (895) (653)

Treasury stock issued for stock options and beneÑt

plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48 23 142 136

Balance, end of periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $14,185 $13,264 $14,185 $13,264

FANNIE MAE

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months Six Months

Ended Ended

June 30, June 30,

1998 1997 1998 1997

(Dollars in millions)

Net cash provided by operating activities. ÏÏÏÏ $ 1,937 $ 985 $ 3,641 $ 3,116

Cash Öows from investing activities:

Purchases of mortgagesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (44,152) (14,386) (72,755) (27,465)

Proceeds from sales of mortgages. ÏÏÏÏÏÏÏÏÏ Ì 34 396 131

Mortgage principal repayments. ÏÏÏÏÏÏÏÏÏÏÏ 22,013 9,249 39,857 17,303

Net increase in investments. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,434) (2,165) (5,047) (2,676)

Net cash used in investing activities ÏÏÏÏÏÏÏ (24,573) (7,268) (37,549) (12,707)

Cash Öows from Ñnancing activities:

Cash proceeds from issuance of debt ÏÏÏÏÏÏÏ 213,139 225,529 429,601 404,509

Cash payments to redeem debt ÏÏÏÏÏÏÏÏÏÏÏÏ (189,284) (217,644) (395,764) (392,826)

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (771) (667) (1,332) (1,021)

Net cash provided by Ñnancing activities ÏÏÏ 23,084 7,218 32,505 10,662

Net increase (decrease) in cash and cash

equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 448 935 (1,403) 1,071

Cash and cash equivalents at beginning of

period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 354 986 2,205 850

Cash and cash equivalents at end of period ÏÏÏ $ 802 $ 1,921 $ 802 $ 1,921

See Notes to Interim Financial Statements

D-16
NOTES TO INTERIM FINANCIAL STATEMENTS

(Unaudited)

Basis of Presentation

The accompanying unaudited condensed Ñnancial statements have been prepared in accordance

with generally accepted accounting principles for interim Ñnancial information. Accordingly, they do

not include all of the information and footnotes required by generally accepted accounting principles

for complete Ñnancial statements. In the opinion of management, all adjustments (consisting of

normal recurring accruals) considered necessary for a fair presentation have been included. Certain

amounts in 1997 have been reclassiÑed to conform with the current presentation. Operating results

for the three- and six-month periods ended June 30, 1998 are not necessarily indicative of the results

that may be expected for the year ending December 31, 1998. The unaudited interim Ñnancial

statements should be read in conjunction with the audited Ñnancial statements and notes to Ñnancial

statements that are presented in the Information Statement dated March 31, 1998.

Line of Business Reporting

The following tables set forth the Corporation's Ñnancial information by line of business for the

three and six months ended June 30, 1998 and 1997. SigniÑcant changes from period to period were

due to the same factors discussed under ""Results of Operations.''

1998 1997

Portfolio Credit Portfolio Credit

Three months ended June 30, Investment Guaranty Total Investment Guaranty Total

(Dollars in millions)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 862 $ 169 $1,031 $ 859 $ 111 $ 970

Guaranty fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (203) 526 323 (191) 508 317

Fee and other income, net ÏÏÏÏÏÏÏ 16 63 79 4 28 32

Credit-related expensesÏÏÏÏÏÏÏÏÏÏ Ì (69) (69) Ì (101) (101)

Administrative expensesÏÏÏÏÏÏÏÏÏ (38) (136) (174) (37) (121) (158)

Federal income taxesÏÏÏÏÏÏÏÏÏÏÏÏ (170) (169) (339) (176) (132) (308)

Extraordinary itemÌearly

extinguishment of debt ÏÏÏÏÏÏÏÏ (3) Ì (3) 1 Ì 1

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 464 $ 384 $ 848 $ 460$ 293 $ 753

1998 1997

Portfolio Credit Portfolio Credit

Six months ended June 30, Investment Guaranty Total Investment Guaranty Total

(Dollars in millions)

Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,755 $ 312 $2,067 $1,707 $ 213 $1,920

Guaranty fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (400) 1,044 644 (380) 1,010 630

Fee and other income, net ÏÏÏÏÏÏÏ 32 103 135 12 50 62

Credit-related expensesÏÏÏÏÏÏÏÏÏÏ Ì (146) (146) Ì (207) (207)

Administrative expensesÏÏÏÏÏÏÏÏÏ (74) (270) (344) (73) (236) (309)

Federal income taxesÏÏÏÏÏÏÏÏÏÏÏÏ (356) (317) (673) (353) (257) (610)

Extraordinary itemÌearly

extinguishment of debt ÏÏÏÏÏÏÏÏ (11) Ì (11) 1 Ì 1

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 946 $ 726 $1,672 $ 914 $ 573 $1,487

The Portfolio Investment business represented $419 billion, or 98 percent of total assets, at

June 30, 1998 and $351 billion, or 96 percent of total assets, at June 30, 1997.

D-17
NOTES TO INTERIM FINANCIAL STATEMENTS (Continued)

Commitments and Contingencies

The Corporation had outstanding commitments to purchase mortgages and to issue MBS as

shown below:

June 30, 1998

(Dollars in billions)

Commitments to purchase mortgages:

Mandatory delivery ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $14.1

Optional delivery(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.6

Average net yield on mandatory delivery ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.74%

Commitments to issue MBS:

Mandatory delivery(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì

Optional delivery(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .1

Master commitments:

Mandatory delivery(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45.3

Optional delivery ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69.7

(1) Excludes commitments attached to master commitments, which are included in the total for

master commitments.

(2) Under a mandatory master commitment, a lender must either deliver under an MBS contract

at a speciÑed guaranty fee or enter into a mandatory portfolio commitment with the yield

established upon executing the portfolio commitment.

The Corporation also guarantees timely payment of principal and interest on outstanding MBS

and provides credit enhancements or other guarantees as summarized below:

June 30, 1998

(Dollars in billions)

MBS(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $761

MBS for which the Corporation has primary foreclosure loss risk ÏÏÏÏÏÏÏÏÏÏÏÏ 643

Credit enhancements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.7

Other guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.8

(1) Includes $156 billion of MBS held in portfolio and net of $542 million in allowance for losses.

The Corporation assumes the ultimate risk of loss on all MBS.

D-18
COMPUTATION OF EARNINGS PER COMMON SHARE

(Unaudited)

Three Months Six Months

Ended Ended

June 30, June 30,

1998 1997 1998 1997

(In millions, except per common share data)

Numerator:

Net income before extraordinary loss ÏÏÏÏÏÏÏÏÏ $851 $752 $1,683 $1,486

Extraordinary gain (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3) 1 (11) 1

Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16) (16) (32) (32)

Basic and diluted earnings per common

share-income available to common

stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $832 $737 $1,640$1,455

Denominator:

Basic earnings per common

share-weighted-average common shares ÏÏÏÏÏ 1,029 1,051 1,033 1,056

Dilutive potential common shares(1)ÏÏÏÏÏÏÏÏÏ 8 108 8

Diluted earnings per common share-adjusted

weighted average common shares ÏÏÏÏÏÏÏÏÏÏ 1,037 1,061 1,041 1,064

Basic earnings per common share:

Earnings before extraordinary itemÏÏÏÏÏÏÏÏÏÏÏ $ .81 $ .70$ 1.60$ 1.38

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .81 .701.59 1.38

Diluted earnings per common share:

Earnings before extraordinary itemÏÏÏÏÏÏÏÏÏÏÏ $ .80$ .69 $ 1.59 $ 1.37

Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .80.69 1.58 1.37

(1) Dilutive potential common shares consist primarily of the dilutive eÅect from employee stock

options and other stock compensation plans.

MANAGEMENT

As discussed under ""Matters Submitted to Stockholders,'' at the Annual Meeting of Stockholders

in May 1998, thirteen directors, including two new directors, were elected to serve a one-year term

ending on the date of the May 1999 Annual Meeting. The President of the United States has the

authority to appoint Ñve directors. As of August 12, 1998, the President of the United States had not

Ñnalized the selection of these directors.

In June 1998, two executive vice presidents accepted new responsibilities. Robert Levin became

Executive Vice PresidentÌHousing and Community Development, a new position responsible for the

Corporation's National Housing Impact Division, multifamily lending, the American Communities

Fund, 31 Partnership OÇces and the Housing Impact Fund. Ann Logan became Executive Vice

PresidentÌSingle-Family Mortgage Business, responsible for the Corporation's single-family business, credit product development and management, pricing, the Corporation's sales force, credit loss

management and, in concert with the Corporation's Executive Vice President and Chief Information

OÇcer, technology products marketing.

In July 1998, the Board elected Adolfo Marzol Executive Vice President and Chief Credit OÇcer.

Mr. Marzol was Senior Vice PresidentÌSingle-Family Business from July 1996 and Senior Vice

PresidentÌCapital Markets from February 1996 to July 1996. Prior to joining the Corporation,

Mr. Marzol was Executive Vice President and Chief Financial OÇcer from July 1993 to January 1996

of Chase Manhattan Mortgage Corporation, a mortgage company. Management also announced that

Kenneth J. Bacon, Senior Vice PresidentÌNortheastern Regional OÇce since May 1993, will become

the head of the Community Development Capital Corporation which consists of the American

Communities Fund and the Housing Impact Fund.

IR059C08

D-19
CERTIFICATE OF DESIGNATION OF TERMS OF

% NON-CUMULATIVE PREFERRED STOCK, SERIES D

1. Designation, Par Value and Number of Shares.

The designation of the series of preferred stock of the Federal National Mortgage Association

(the ""Corporation'') created by this resolution shall be "" % Non-Cumulative Preferred Stock,

Series D'' (the ""Series D Preferred Stock''), and the number of shares constituting the Series D

Preferred Stock is Million ( ,000,000). Shares of Series D Preferred Stock will have no par

value and a stated value and liquidation preference of $50 per share. The Board of Directors of the

Corporation, or a duly authorized committee thereof, in its sole discretion, may reduce the number of

shares of Series D Preferred Stock, provided such reduction is not below the number of shares of

Series D Preferred Stock then outstanding.

2. Dividends.

(a) Holders of record of Series D Preferred Stock (each individually a ""Holder'', or collectively

the ""Holders'') will be entitled to receive, when, as and if declared by the Board of Directors of the

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

therefor, non-cumulative, quarterly cash dividends which will accrue from and including

, 1998, and will be payable on March 31, June 30, September 30 and December 31 of

each year (each, a ""Dividend Payment Date''), commencing December 31, 1998, at the annual rate of

$ per share or % of the stated value and liquidation preference of $50 per share (without

taking into account any adjustments referred to in clause (b) below). Dividends on the Series D

Preferred Stock will be payable to the Holders as they appear on the books and records of the

Corporation on the relevant record date Ñxed by the Board of Directors, or a duly authorized

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

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

including , 1998 to but excluding December 31, 1998, will be $. per share.

Thereafter, the dividend period relating to a Dividend Payment Date will be the period from and

including the preceding Dividend Payment Date to but excluding such Dividend Payment Date. If a

Dividend Payment Date is not a Business Day, dividends (if declared) on the Series D Preferred

Stock will be paid on the succeeding Business Day, without interest. A ""Business Day'' shall mean any

day other than a Saturday, Sunday or other day on which banking institutions in New York, New

York are authorized or required by law to close. Dividends payable on the Series D Preferred Stock for

any period greater or less than a full dividend period will be computed on the basis of a 360-day year

consisting of twelve 30-day months and the actual number of days elapsed in any period of less than

one month. Dividends payable on the Series D Preferred Stock for each full dividend period will be

computed by dividing the per annum dividend rate by four.

(b) No dividend (other than dividends or distributions paid in shares of, or options, warrants or

rights to subscribe for or purchase shares of, the common stock of the Corporation or any other stock

of the Corporation ranking, as to the payment of dividends and the distribution of assets upon

dissolution, liquidation or winding up of the Corporation, junior to the Series D Preferred Stock) may

be declared or paid or set apart for payment on the Corporation's common stock (or on any other

stock of the Corporation ranking, as to the payment of dividends, junior to the Series D Preferred

Stock) unless dividends have been declared and paid or set apart (or ordered to be set apart) on the

Series D Preferred Stock for the then-current quarterly dividend period; provided, however, that the

foregoing dividend preference shall not be cumulative and shall not in any way create any claim or

right in favor of the Holders of Series D Preferred Stock in the event that dividends have not been

declared or paid or set apart (or ordered to be set apart) on the Series D Preferred Stock in respect of

any prior dividend period. If the full dividend on the Series D Preferred Stock is not paid for any

quarterly dividend period, the Holders of Series D Preferred Stock will have no claim in respect of the

unpaid amount so long as no dividend (other than those referred to above) is paid on the

A-1
Corporation's common stock (or any other stock of the Corporation ranking, as to the payment of

dividends, junior to the Series D Preferred Stock) for such dividend period.

(c) The Board of Directors of the Corporation, or a duly authorized committee thereof, may, in

its discretion, choose to pay dividends on the Series D Preferred Stock without the payment of any

dividends on the Corporation's common stock (or any other stock of the Corporation ranking, as to

the payment of dividends, junior to the Series D Preferred Stock).

(d) No full dividends shall be declared or paid or set apart for payment on any stock of the

Corporation ranking, as to the payment of dividends, on a parity with the Series D Preferred Stock for

any period unless full dividends have been declared and paid or set apart for payment on the Series D

Preferred Stock for the then-current quarterly dividend period. When dividends are not paid in full

upon the Series D Preferred Stock and all other classes or series of stock of the Corporation, if any,

ranking, as to the payment of dividends, on a parity with the Series D Preferred Stock, all dividends

declared upon shares of Series D Preferred Stock and all such other stock of the Corporation will be

declared pro rata so that the amount of dividends declared per share of Series D Preferred Stock and

all such other stock will in all cases bear to each other the same ratio that accrued dividends per share

of Series D Preferred Stock but without accumulation of unpaid dividends on the Series D Preferred

Stock for prior dividend periods) and such other stock bear to each other.

(e) No dividends may be declared or paid or set apart for payment on any shares of Series D

Preferred Stock if at the same time any arrears exist or default exists in the payment of dividends on

any outstanding class or series of stock of the Corporation ranking, as to the payment of dividends,

prior to the Series D Preferred Stock.

(f) Holders of Series D Preferred Stock will not be entitled to any dividends, whether payable in

cash or property, other than as herein provided and will not be entitled to interest, or any sum in lieu

of interest, in respect of any dividend payment.

3. Optional Redemption.

(a) On or after , 1999, the Corporation, at its option, may redeem the Series D

Preferred Stock, in whole or in part, at any time or from time to time, out of funds legally available

therefor, at the redemption price of $50.00 per share plus an amount equal to the dividend (whether

or not declared) for the then-current quarterly dividend period accrued to but excluding the date of

such redemption, but without accumulation of unpaid dividends on the Series D Preferred Stock for

prior dividend periods. If less than all of the outstanding shares of Series D Preferred Stock are to be

redeemed, the Corporation will select the shares to be redeemed from the outstanding shares not

previously called for redemption by lot or pro rata (as nearly as possible) or by any other method that

the Board of Directors of the Corporation, or a duly authorized committee thereof, in its sole

discretion deems equitable.

(b) In the event the Corporation shall redeem any or all of the Series D Preferred Stock as

aforesaid, the Corporation will give notice of any such redemption to Holders of Series D Preferred

Stock not less than 30 days prior to the date Ñxed by the Board of Directors of the Corporation, or

duly authorized committee thereof, for such redemption. Each such notice will state: (1) the number

of shares of Series D Preferred Stock to be redeemed and, if fewer than all of the shares of Series D

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

Holder; (2) the redemption price; (3) the redemption date; and (4) the place at which a Holder's

certiÑcate(s) representing shares of Series D Preferred Stock must be presented upon such redemption. Failure to give notice, or any defect in the notice, to any Holder of Series D Preferred Stock shall

not aÅect the validity of the proceedings for the redemption of shares of any other Holder of Series D

Preferred Stock being redeemed.

(c) Notice having been given as herein provided, from and after the redemption date, dividends

on the Series D Preferred Stock called for redemption shall cease to accrue and such Series D

Preferred Stock called for redemption will no longer be deemed outstanding, and all rights of the

Holders thereof as registered holders of such shares of Series D Preferred Stock will cease. Upon

A-2
surrender in accordance with said notice of the certiÑcate(s) representing shares of Series D Preferred

Stock so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the

Corporation, or a duly authorized committee thereof, shall so require and the notice shall so state),

such shares shall be redeemed by the Corporation at the redemption price aforesaid. Any shares of

Series D Preferred Stock that shall at any time have been redeemed shall, after such redemption, be

cancelled and not reissued. In case fewer than all the shares represented by any such certiÑcate are

redeemed, a new certiÑcate shall be issued representing the unredeemed shares without cost to the

Holder thereof.

(d) The Series D Preferred Stock will not be subject to any mandatory redemption, sinking fund

or other similar provisions. In addition, Holders of Series D Preferred Stock will have no right to

require redemption of any shares of Series D Preferred Stock.

4. Liquidation Rights.

(a) Upon any voluntary or involuntary dissolution, liquidation or winding up of the Corporation,

after payment or provision for the liabilities of the Corporation and the expenses of such dissolution,

liquidation or winding up, the Holders of outstanding shares of the Series D Preferred Stock will be

entitled to receive out of the assets of the Corporation or proceeds thereof available for distribution to

stockholders, before any payment or distribution of assets is made to holders of the Corporation's

common stock (or any other stock of the Corporation ranking, as to the distribution of assets upon

dissolution, liquidation or winding up of the Corporation, junior to the Series D Preferred Stock), the

amount of $50.00 per share plus an amount equal to the dividend (whether or not declared) for the

then-current quarterly dividend period accrued to but excluding the date of such liquidation payment,

but without accumulation of unpaid dividends on the Series D Preferred Stock for prior dividend

periods.

(b) If the assets of the Corporation available for distribution in such event are insuÇcient to pay

in full the aggregate amount payable to Holders of Series D Preferred Stock and holders of all other

classes or series of stock of the Corporation, if any, ranking, as to the distribution of assets upon

dissolution, liquidation or winding up of the Corporation, on a parity with the Series D Preferred

Stock, the assets will be distributed to the Holders of Series D Preferred Stock and holders of all such

other stock pro rata, based on the full respective preferential amounts to which they are entitled, but

without accumulation of unpaid dividends on the Series D Preferred Stock for prior dividend periods.

(c) Notwithstanding the foregoing, Holders of Series D Preferred Stock will not be entitled to be

paid any amount in respect of a dissolution, liquidation or winding up of the Corporation until holders

of any classes or series of stock of the Corporation ranking, as to the distribution of assets upon

dissolution, liquidation or winding up of the Corporation, prior to the Series D Preferred Stock have

been paid all amounts to which such classes or series are entitled.

(d) Neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation, nor the merger,

consolidation or combination of the Corporation into or with any other corporation or the merger,

consolidation or combination of any other corporation into or with the Corporation, shall be deemed

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

Section 4.

(e) After payment of the full amount of the distribution of assets upon dissolution, liquidation or

winding up of the Corporation to which they are entitled pursuant to paragraphs (a), (b) and (c) of

this Section 4, the Holders of Series D Preferred Stock will not be entitled to any further participation

in any distribution of assets by the Corporation.

5. No Conversion or Exchange Rights.

The Holders of shares of Series D Preferred Stock will not have any rights to convert such shares

into or exchange such shares for shares of any other class or classes, or of any other series of any class

or classes, of stock or obligations of the Corporation.

A-3
6. No Pre-emptive Rights.

No Holder of Series D Preferred Stock shall be entitled as a matter of right to subscribe for or

purchase, or have any pre-emptive right with respect to, any part of any new or additional issue of

stock of any class whatsoever, or of securities convertible into any stock of any class whatsoever,

whether now or hereafter authorized and whether issued for cash or other consideration or by way of

dividend.

7. Voting Rights; Amendments.

(a) Except as provided below, the Holders of Series D Preferred Stock will not be entitled to any

voting rights, either general or special.

(b) Without the consent of the Holders of Series D Preferred Stock, the Corporation will have

the right to amend, alter, supplement or repeal any terms of the Series D Preferred Stock (i) to cure

any ambiguity, or to cure, correct or supplement any defective provision contained in this CertiÑcate

of Designation or (ii) to make any other provision with respect to matters or questions arising with

respect to the Series D Preferred Stock that is not inconsistent with the provisions of this CertiÑcate

of Designation so long as such action does not materially and adversely aÅect the interests of the

Holders of Series D Preferred Stock; provided, however, that any increase in the amount of authorized

or issued Series D Preferred Stock or the creation and issuance, or an increase in the authorized or

issued amount, of any other class or series of stock of the Corporation, whether ranking prior to, on a

parity with or junior to the Series D Preferred Stock, as to the payment of dividends or the

distribution of assets upon dissolution, liquidation or winding up of the Corporation, or otherwise, will

not be deemed to materially and adversely aÅect the interests of the Holders of Series D Preferred

Stock.

(c) Except as set forth in paragraph (b) of this Section 7, the terms of the Series D Preferred

Stock may be amended, altered, supplemented or repealed only with the consent of the Holders of at

least two-thirds of the shares of Series D Preferred Stock then outstanding, given in person or by

proxy, either in writing or at a meeting of stockholders at which the Holders of Series D Preferred

Stock shall vote separately as a class. On matters requiring their consent, Holders of Series D

Preferred Stock will be entitled to one vote per share.

(d) The rules and procedures for calling and conducting any meeting of Holders (including,

without limitation, the Ñxing of a record date in connection therewith), the solicitation and use of

proxies at such a meeting, the obtaining of written consents, and any other aspect or matter with

regard to such a meeting or such consents shall be governed by any rules that the Board of Directors of

the Corporation, or a duly authorized committee thereof, in its discretion, may adopt from time to

time, which rules and procedures shall conform to the requirements of any national securities

exchange on which the Series D Preferred Stock are listed at the time.

8. Additional Classes or Series of Stock.

The Board of Directors of the Corporation, or a duly authorized committee thereof, shall have the

right at any time in the future to authorize, create and issue, by resolution or resolutions, one or more

additional classes or series of stock of the Corporation, and to determine and Ñx the distinguishing

characteristics and the relative rights, preferences, privileges and other terms of the shares thereof.

Any such class or series of stock may rank prior to, on a parity with or junior to the Series D Preferred

Stock as to the payment of dividends or the distribution of assets upon dissolution, liquidation or

winding up of the Corporation, or otherwise.

9. Priority.

For purposes of this CertiÑcate of Designation, any stock of any class or series of the Corporation

shall be deemed to rank:

(a) Prior to the shares of Series D Preferred Stock, either as to the payment of dividends or the

distribution of assets upon dissolution, liquidation or winding up of the Corporation, if the holders of

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such class or series shall be entitled to the receipt of dividends or of amounts distributable upon

dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority

to the Holders of shares of Series D Preferred Stock.

(b) On a parity with shares of Series D Preferred Stock, either as to the payment of dividends or

the distribution of assets upon dissolution, liquidation or winding up of the Corporation, whether or

not the dividend rates or amounts, dividend payment dates or redemption or liquidation prices per

share, if any, be diÅerent from those of the Series D Preferred Stock, if the holders of such class or

series shall be entitled to the receipt of dividends or of amounts distributable upon dissolution,

liquidation or winding up of the Corporation, as the case may be, in proportion to their respective

dividend rates or amounts or liquidation prices, without preference or priority, one over the other, as

between the holders of such class or series and the Holders of shares of Series D Preferred Stock.

(c) Junior to shares of Series D Preferred Stock, either as to the payment of dividends or the

distribution of assets upon dissolution, liquidation or winding up of the Corporation, if such class shall

be common stock of the Corporation or if the Holders of shares of Series D Preferred Stock shall be

entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or

winding up of the Corporation, as the case may be, in preference or priority over the holders of such

class or series.

(d) The shares of Preferred Stock of the Corporation designated ""6.41% Non-Cumulative

Preferred Stock, Series A'' (the ""Series A Preferred Stock''), ""6.50% Non-Cumulative Preferred

Stock, Series B'' (the ""Series B Preferred Stock'') and the ""6.45% Non-Cumulative Preferred Stock,

Series C'' (""the Series C Preferred Stock'') shall be deemed to rank on a parity with shares of Series D

Preferred Stock as to the payment of dividends and the distribution of assets upon dissolution,

liquidation or winding up of the Corporation. Accordingly, the holders of record of Series A Preferred

Stock, the holders of record of Series B Preferred Stock, the Holders of Series C Preferred Stock, and

the Holders of Series D Preferred Stock shall be entitled to the receipt of dividends and of amounts

distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in

proportion to their respective dividend rates or amounts or liquidation prices, without preference or

priority, one over the other.

10. Transfer Agent, Dividend Disbursing Agent and Registrar.

The Corporation hereby appoints First Chicago Trust Company of New York as its initial

transfer agent, dividend disbursing agent and registrar for the Series D Preferred Stock. The

Corporation may at any time designate an additional or substitute transfer agent, dividend disbursing

agent and registrar for the Series D Preferred Stock.

11. Notices.

Any notice provided or permitted by this CertiÑcate of Designation to be made upon, or given or

furnished to, the Holders of Series D Preferred Stock by the Corporation shall be made by Ñrst-class

mail, postage prepaid, to the addresses of such Holders as they appear on the books and records of the

Corporation. Such notice shall be deemed to have been suÇciently made upon deposit thereof in the

United States mail. Notwithstanding anything to the contrary contained herein, in the case of the

suspension of regular mail service or by reason of any other cause it shall be impracticable, in the

Corporation's judgment, to give notice by mail, then such notiÑcation may be made, in the

Corporation's discretion, by publication in a newspaper of general circulation in The City of New York

or by hand delivery to the addresses of Holders as they appear on the books and records of the

Corporation.

RECEIPT AND ACCEPTANCE OF A SHARE OR SHARES OF THE SERIES D PREFERRED STOCK BY OR ON BEHALF OF A HOLDER SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE BY SUCH HOLDER (AND ALL OTHERS HAVING BENEFICIAL

OWNERSHIP OF SUCH SHARE OR SHARES) OF ALL OF THE TERMS AND PROVISIONS

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OF THIS CERTIFICATE OF DESIGNATION. NO SIGNATURE OR OTHER FURTHER MANIFESTATION OF ASSENT TO THE TERMS AND PROVISIONS OF THIS CERTIFICATE OF

DESIGNATION SHALL BE NECESSARY FOR ITS OPERATION OR EFFECT AS BETWEEN

THE CORPORATION AND THE HOLDER (AND ALL SUCH OTHERS).

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